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Tumbling gold price could force Endeavour to rethink Houndé build

19th November 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Against the backdrop of gold tumbling to a near six-year low of $1 064/oz this week, West Africa-focused gold producer Endeavour Gold might be forced back to the drawing board to rethink how it will turn a profit from the new-build Houndé project, in Burkina Faso, should the lower-price environment persist.

Industry observers feared that the mooted raising of US interest rates in December could knock gold back to a level of $1 000/oz, ringing the death knell for many projects and existing operations struggling to eke out an existence at current prices.

“We’ve always said that above $1 200/oz it is a no-brainer to start the Houndé project. Below $1 100/oz, we’ve been telling people that it would also be a no-brainer, except that we wouldn’t start it as envisioned,” Endeavour CFO Ota Hally said in an interview with Mining Weekly Online from Europe.

He stated that if the low gold price persisted into the New Year, Endeavour would probably be forced to delay a construction decision for Houndé and investigate opportunities to optimise it for a lower gold price environment. “We have lots of leeway to make the construction decision and below $1 100/oz we’ll have to delay and optimise it.”

Should this be the case, future production could be impacted somewhat, as the grades were declining at certain of its older operations, such as Youga, also in Burkina Faso. Houndé was expected to produce about 180 000 oz/y of gold over eight years. Endeavour expected to grow the company's output to about 800 000 oz/y in 2018, with construction of the Houndé project.

Hally was quick to point out that the production decline would be offset somewhat with the addition of La Mancha’s Ity mine, in Côte d'Ivoire, and its carbon-in-leach expansion project. “We’ll look at what that can do for us. Currently, that is not in our future guidance,” he said.

Egyptian billionaire Naguib Sawiris was spending about $80-million through his company La Mancha Holding to acquire 30% of Vancouver-based Endeavour Mining. In return, Endeavour would receive a majority stake in the Ity gold mine and up to $138-million in financial commitments.

The La Mancha transaction was a strategic long-term partnership that would see La Mancha CEO Sebastien de Montessus relinquish his current position to join Endeavour as president, where he would be groomed to take over as CEO within 24 months, when Endeavour CEO Neil Woodyer assumed the role of Endeavour executive chairperson.

Sawiris was also nominated to Endeavour’s board.

While the La Mancha transaction had not yet closed, Hally stressed that it would close soon, after which Endeavour could sit down and see how everything would fit in the future production pipeline. “Houndé is our number one growth project on the horizon,” he assured.

During the third quarter, Endeavour had spent just more than $3-million to increase its presence at Houndé, placing senior management there and engaging with government and communities to start sensitising them, in anticipation of making a construction decision for Houndé early in 2016. Hally noted that the company had spent about four years at Agbaou, in Côte d'Ivoire, before starting the project.

“Despite it always being a challenge to start a new mine, our experience in building mines in the region would help us successfully undertake this project. We do not foresee anything extraordinarily difficult getting in the way of the project, but we have to do it right from the start. We also have very experienced management with decades of know-how,” he emphasised.

SHIFTING GEARS
In 2015, Endeavour had shifted from two years of executing a capital-intensive strategy of optimising its existing mines and building a new, longer life and higher-margin operation, to maximising cash flow and reducing net debt on the balance sheet.

Endeavour had been making voluntary debt repayments on the $260-million drawn on its $350-million revolving debt facility. Hally noted that, where appropriate, excess cash from operations would continue to be used to make voluntary debt repayments. This would not necessarily continue, should Endeavour decide to start funding the new-build project.

Woodyer had recently stated that the additional operating cash flows generated at the Ity mine and the $63-million La Mancha cash contribution would improve Endeavour’s balance sheet and would position the company to pursue further growth and continue its “build and acquire” strategy at this low point in the gold price cycle.

Being in the market for mergers and acquisitions, Hally advised that Endeavour would remain West Africa-focused. “If the right thing outside of the region would arise, we would look at it, but West Africa is where we feel comfortable,” he said.

He pointed out that, following closure of the La Mancha deal, Endeavour would be one of the largest landholders in Côte d'Ivoire, in a significantly underexplored area of the country.

Further, Endeavour was looking at driving organic growth mostly from exploration efforts at the Agbaou mine. “You can’t beat Agbaou. While Houndé can also add more upside in the future, right now we’re mining and exploring around Agbaou and we published some good results some months ago. Agbaou is our reserve and resource replacement story for sure, and that’s exciting,” he said.

Looking at the current quarter, Hally noted that, so far, the gold price was below what the company averaged in the third quarter. “We’re doing everything we can to optimise our operations and reduce costs. But it’s a challenging environment. Margins are decreasing, but our goal is to have all-in costs, including capital,” he noted.

Lower fuel prices and other benefits were helping the company to aim at coming in below the all-in sustaining costs guidance of $930/oz to $980/oz of gold sold for the year. “We are trying to squeeze the lowest all-in costs from our mines, as this is our protection against low gold prices,” he said.

During the three months ended September 30, Endeavour reported net earnings attributable to shareholders of $3.5-million, or $0.01 a share, compared with net earnings of $1.9-million, or nil per share for the comparable period in 2014. Revenues fell to $137.9-million, down from $145.2-million a year earlier, as an 8% increase in ounces sold was offset by a 12% year-on-year decline in the average realised gold price.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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