Aurelia Metals Ltd

ASX:AMI

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the Aurelia Metals Quarterly Investor Conference Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Andrew Graham, Interim Chief Executive Officer. Please go ahead.

[Andrew Graham, executive]

Thanks, Rachel, and thanks to everyone for joining the call. I'm joined today also by Peter Trout. Martin Cummings, who will talk to parts of the presentation as well as be available to answer questions when we get to that point.

For those who aren't aware, we'll talk to the presentation that's available on the ASX announcements platform today, and I'll reference slides as we go so that you can follow along.

We'll open up on Slide 3 for those with the presentation, and have chosen to open by talking about guidance. And part of the reason is you may have -- when you look to open our quarterly today, I think December quarter looks a lot like the September quarterly, and nothing's changed.

But I can assure you, a lot has changed and a lot continues to change, and our presentation today will take you through some of those things that we're working on.

Firstly, on guidance, we are on track to achieve our guidance, and I'll talk to that in some detail. On production, the fall graph to the right, give you a good snapshot of why we're confident. We're on track to achieve guidance with each of our major commodities sitting above the kind of halfway mark as we get to halfway through the year.

There is some split quarter-on-quarter and variation between copper and lead and zinc, and a lot of that has to do with flows through Peak and the sequence of material coming through Peak where as you know, we run batches of copper ore or lead and zinc ore. Also, we've had the lower lead zinc production out of Hera with the new mine plan, and we'll talk to that later in the pack.

In respect to all in sustaining, you'll see that our actual for the quarter sits above guidance. We are still very confident of achieving guidance for the year. You recall that we updated guidance on 19th of December, and that was announced.

And those -- the timing that we put that out, we took account of the first 5 months of the year. And as we look through the pack and talk through it, you'll see that December was an extremely strong outcome all in sustaining around $1,675. So on track to achieve our guidance for the year.

I'm not saying that we're going to stay at that level for the rest of the year, we had a lot of things go right through December, but we're still very confident in achieving the guidance that we set with the full knowledge in December of where we sat.

Turning on to Page 4, then you'll recall, those who attended the AGM, that Peter Botten and I spoke to you at the AGM on our near-term priorities. And I'm pleased to be able to report back positive progress against those priorities.

Now the slide titled as the CEO's priorities. I mean it's important to flag, priority is not my work, and it's great to see the team across the business stepping up and supporting the change process, and we'll talk through some of that as I talk through the slide.

Also, I'm only going to provide a summary here. Some of the detail that sits behind these activities and the work supporting those activities will be covered in a little bit more detail as we go through the presentation by both Martin and also Peter.

Starting with safety, then TRIFR remained stable for the quarter. Honestly, stable is not good enough. However, in a period of time where there's a lot of change going on, we were very pleased to see that didn't go backwards or materially backwards.

But as I say, it's not good enough, and there's quite a bit of focus in the business coming into our lead indicator program. doing the work to ensure these injuries don't occur rather than just counting them after the fact, including things like risk assessments and hazard identification. Now particularly in work that's not commonplace get out of the ordinary. And we've had a few incidents in that regard over the quarter.

The other piece of work we're doing is some early identification in the mental health space, recognizing we're going through quite a period of change, and some of that change as you heard on the call in relation to Hera materially impacts our employees. So we're being very conscious and ensuring we're on the front foot in that space.

Moving to operational delivery and cash management. Peter will cover a range of additional topics to this. But in this point, I'm going to focus on the Hera change we talked about in December. That change got implemented at the start of December. And pleased to say it really is delivering. We've got pretty strong results in December.

We mined about 36,000 -- a bit over 36,000 tonnes from underground, which is really the target rate we want to be feeding into that plant. I mean we said about 37,000 tonnes in the month of December, really helps us with fixed costs and help with a very strong all in sustaining.

For Hera for December all in sustaining at around the 1,400 mark, which was a strong contributor then to the overall December outcome for the business.

And the credit for that really sits with Rob Walker, our site General Manager, Mick [indiscernible], the mining manager on site, who both put a lot of work into coming up with a plan that was deliverable and took account of risk and then actually work through that in the period of the month of December and ongoing now.

It wasn't the smoothest of months. There never are in mining, but they had a plan and they had a backup plan, then they were able to work through that to achieve what was a very, very strong outcome.

Also credit to Justin Woodward in our planning department who really drove some of that early mine planning work.

The other focus has been with Hera, we've implemented the plan, we're delivering the plan. Now we need to shift our focus to an efficient transition to care and maintenance. And you recall that the plan shortened the mine life focusing on higher-value materials, which you're seeing the benefits of now through cash flow. But there's quite a bit of work we need to do to ensure a smooth transition to care and maintenance.

The people part of that is very active, and we got going on that straight away, as we talked about on the call in December, ensuring that people have some certainty about their futures.

But the physical part of care and maintenance is our focus at the moment and really thinking about the sequence, the timing, the work. And then once it's in care and maintenance, what's needed to keep it in a reusable form when we're ready to turn it back on -- for federation.

Other key program, which is up and running and certainly kicking some goals is our Working Smarter program on continuous improvement and margin improvement. There's real credit there to sign [indiscernible] our team who has really been pushing that and spending a lot of time across the sites driving that program with the sites, and it's really great to see the whole team coming together and being part of this change program.

Shifting gears then to Federation. We'll talk firstly about the optimization work. There'll be more on this later in the pack. If we talked about further optimization of the feasibility study, that work's ongoing, there is a very active mine planning element to that, which we're doing currently as part of our life of mine planning process.

We're also looking at optimization of the capital to develop the project with the scope and schedule, all the usual elements that make up project delivery, recognizing that most of what's left is either mine development or brownfield and small in capital in relation to the existing plant.

The other piece of work is ongoing some further metallurgical test work. You recall the plans to take the early ore from Federation up to Peak. So we're doing some additional test work just to confirm that we will get the recoveries and the outcomes that we're expecting.

Federation funding was talked about in quite some detail in the past. And then obviously, everyone is waiting to see the outcome of that. Pleased to say that we're on track to come to a solution there for an efficient effective funding of Federation in this quarter. And Martin will talk in more detail about that later in the pack.

The other really key plus for us on Federation is regulatory approval, sitting certainly well ahead of where we had forecasted it to be, and I'll talk a bit more about that later. But yes, we're really looking at that development consent in place during this quarter.

Finally, just touching on the leadership renewal, which Peter particularly talked about at the AGM. A few changes and a couple of new faces in the business Obviously, I'm talking to you to you today as Interim CEO, I have got Martin Cummings from the call is our new CFO. [indiscernible] Rochelle has had her role broadened, I suppose, into a General Counsel and Company Secretary while taking on from Ian Poole, who was CFO and Company Secretary previously.

The other change, which we're really pleased to welcome him. Matt Nuttall has joined as General Manager of the Peak Mine. He started last week and he's really getting his feet under the desk very quickly.

Finally, and I won't talk to it because it's Peter Botten to talk to, but we are ongoing with the comprehensive search for a new CEO. And Peter will have something to announce on that once the search is complete.

Turning the page to Slide 5. And as mentioned earlier, we're particularly pleased with the strong result in December. And we're cautious to not get ahead of ourselves. We;re recognizing one swallow doesn't make a summer, but we're certainly pleased to see where December came out and getting some award for the hard work that's been done across the business.

Looking at production first down the right-hand column, the Peak was mainly mining copper ore out of Jubilee in December. Strong gold came with that, which resulted in good gold performance and good copper performance in a very strong all in sustaining in the order of $700 an ounce. So a great performance there at Peak.

Will it stay like that for the rest of the year? As you know, Peak moves between various ore bodies and various commodities. I think that was probably an exceptional month for what we have ahead, but we certainly see Peak being a strong contributor for the rest of the year.

Hera, and the graph speaks for itself. We talked about the change in the mine plan and that really resulted in a step-change performance in December. I think we're mining around 2.3, 2.4 grams gold. Not a whole lot of lead zinc credit with that, which is the one downfall relative to where we've been in the past. But certainly, the gold speaking for itself and contributing very, very strong cash.

In Dargues, we talk about it quite regularly. It's a good stable performer, delivers as it's supposed to, have the plans to and there's certainly no exception in the December month.

So if I flip across then to the left hand, graphs on the top line, first of all, you can see the result of that performance through December, $1,675 all-in sustaining, against the $2,300 guidance, it's certainly a very pleasing performance, did somewhat came to average up to average down the first 2 months in the quarter, having us come in very similar to how we came in the first quarter.

But obviously, we're hoping now to steady somewhere below that $2,300 to then achieve the all-in sustaining guidance for the year.

Turning to cash. And consistent with what we're talking about for December, it was a strong cash month for us in December, arrested that cash reduction that we've been seeing for a number of months. The other piece which makes us even more pleasing is you need to recall bank debt repayments, and there is a repayment each quarter, which occurred in December.

So on top of generating additional cash into our cash balance, we also included in that paid almost $10 million of repayments to the term loan and also cash backing of the closure facility.

The other thing that occurred, which post dates December but that was submitted in December was a tax refund of almost $10 million came in, in early January. So that certainly helped our cash balances.

I'm going to pass on now to Peter Trout, our COO, who's going to pick up from Slide 7, talking about our operational outcomes.

[Peter Trout, executive]

Thanks, Andrew. We've gained traction across several initiatives over the December quarter and a strong production result in December has really set us up and being sustained into the new calendar year.

If we look at our total recordable injury frequency rate slide on Page 7 of the ASX presentation, you'll see there that there's a slight uptick in the frequency rate, which is not a change in the number of recordable injuries but more so responding to fewer hours worked across the group in the December quarter.

As Andrew mentioned, we maintained high compliance with our proactive lead indicators and progressed our externally facilitated mental health program for our workforce.

In terms of environmental performance, we had no reportable environmental events over the quarter, and that led to the improvement in the frequency rate shown in the chart.

And that's a particularly impressive result given we had several intensity rainfall events in the Cobar sites. And water runoff resulting from those events was carefully managed to prevent any water discharge from the Peak and the Hera sites.

We turn to Slide 8 and look at the performance out of Hera. You'll see the impact there of the modified mine plan that was introduced at Hera to bring forward the higher-margin ore. The higher ore delivery and gold grade led to a doubling of gold production to 4,500 ounces and that directly flowed through to revenue, cash flow and all in sustaining costs.

Underpinning the strong ore delivery was having access to 3 stoping areas, including upper A zone, and that helped us get that 39% increase in mined ore tonnage relative to the prior quarter.

It's also significant that development mining reduced over the quarter, in line with the new mine plan and will actually finish this month, and that will further reduce the operating costs at the Hera site.

The process plant performed particularly well with good run time and metallurgical recoveries and the feed grades reflected the prioritization of the gold dominant ores at the expense of the lower grade base metal ores.

In terms of the changes that went through before for care and maintenance plan, we're well advanced now with our current maintenance planning and activities, looking at redeployment opportunities for our employees at Hera, and transferring into other roles that are [indiscernible] in the business.

We've already started removing some of the assets on the underground mine that are no longer required for its ongoing operation over the coming months.

At our Peak mine, activities progressed in accordance with the new operating strategy that was announced in the first quarter. Mining and milling operations over the first half of this financial year have achieved a 550,000 tonnes per annum rates that were targeted under the new operating strategy.

The other significant change was the continued staged transition to majority owner mining at Peak. We demobilized most of the contract mining workforce over the December quarter and have filled the majority of the new owner mining roles that have come about from that change.

As a result, the labor hours in the mining department reduced by 47% over the 6 months from June to December. Whilst mining expenditure fell by around 25% over the same period. And you can see in the chart on Slide 9, the downward trend during the contractor costs.

The mobile fleet transition is largely complete with the demobilization of higher equipment and the introduction of the first of the two haul trucks that are owned by Aurelia and delivering immediate productivity benefits.

We're confident that these and other initiatives provide us with a platform to drive further productivity and cost initiatives across the site over the coming months.

Now with reference to metal production, and the timing of ore campaigns led to the higher proportion of copper ore in the mill feed and hence, higher copper production with lower gold, lead and zinc production.

We also did take some adjustments to concentrate stocks following the clearing of high concentrate inventories that accumulated at the end of September.

Turning now to Slide 10 at Dargues. Our team [indiscernible] another consistent quarter result with gold production just below 8,800 ounces for the quarter.

In the underground mine, good development and ore production rates were sustained and the gold grade continued to reconcile well against the geological model. And that really highlights the value of the infill diamond drilling program that's been underway over the last 2 years or so.

Pleasingly, we received regulatory approval for Modification 5 of the Dargues mine development consent, and that was received on December 20. And what that does, amongst other things, is allow the processing rates to increase up to 415,000 tonnes per year.

Without that approval, we would have hit the previous limit in December and being required to suspend processing operations. So we saw an immediate benefit from that approval by being able to process an additional 2,000 tonnes of ore in the December month.

I am looking forward there, those higher ore processing rate will transfer the production bottleneck to the underground mine. So in anticipation of that change, we commenced to stope backfill optimization program that's designed to reduce our cement consumption, which will directly benefit costs and shorten the filling time for stopes, which allow us to cycle stopes more quickly and sustain higher production rates.

The underground infill and extensional diamond drilling program is now drawing to a close, and the latest results will come into the geological model, and we use them for mine planning work that will dominate the economic depth extent of the underground workings and potentially the inclusion of the Ruby [indiscernible] into the mine plan, and those results will be coming through in the coming month or 2.

I'll hand over now to Martin, who will cover the financial results for the group.

[Martin Cummings, executive]

Thanks, Peter. As you saw earlier, while our cash flow was lower this quarter at $23.7 million, it did grow from November to December. It is important to reiterate here that the cash balances we report exclude a further $41 million that we're holding as restricted cash to back our performance bonds.

And as Andrew mentioned earlier, this is after almost $10 million of payments to the banks in December to either reduce our term loan or to further cash our bonds.

You can see at the chart on the bottom right here, just the rapid repayment over the last 12 months of our performance bond and debt facility, and our term loan is now down to $12.7 million and we only have a gap of $16 million of performance bonds that we have in cash backed.

And as Andrew also said, again, this cash performance really does exclude the $9.8 million tax refund that we received in mid-January.

So I'll just work through some of the movements in cash for the quarter. Peak had a very strong quarter, as Peter mentioned, and $19.8 million of mine cash flow. Concentrate sales were higher this quarter, and it did include sale of production from September quarter. But pleasingly, mine operating costs were also lower.

Dargues was a solid contributor again. Cash flow was slightly lower than the prior quarter, but this is really due to the timing of shipments from Dargues around that Christmas New Year's period, which we will sell this quarter.

Hera was slightly negative, but it is a material improvement on the prior quarter, and that really is a result of the actions that we've taken at Hera to maximize remaining value and it resulted in a much improved cash flow in December of $6 million.

Our growth capital was lower this quarter with the suspension of development in Federation, and we expect that this will remain relatively low for the next quarter before we expect to restart development in the June quarter.

I've mentioned debt and cash backing [ sold ] just now move to the largest bar in this chart, which is working capital and just explain that unfavorable movement. There really are 2 main drivers to that.

The first one was about $13 million in higher trade payables paid during the quarter, and these were payables that were built up over the June and September period. And with our spend slightly lower in the December quarter, some of that working capital has unwound.

The second part is related to the revaluation of our shipments. So we actually value our shipments each month. Our shipments and our QP hedges, and we report that revenue within the operations. However, the cash for those movements isn't settled until the quotation period has completed. And therefore, we report those overs and unders through working capital during that period.

We'll talk about Federation a little bit later, but I'll just make a few comments on the balance sheet and the funding. Our existing bank syndicate have demonstrated they are keen to support the company through this funding process.

And during the quarter, they provided waivers of our covenants through to March, to give us some space to complete the financing. This also included an extension of $10 million working capital facility out to March.

The funding process is very active, as you can imagine, and we have noted in the pack, we've now received a number of term sheets. The funding package will incorporate a requirement for a performance bond facility, and that's going to be around the same level as the current facility, about $65 million.

The other limited facility will be funding for Federation -- for the Federation development, but noting that the $41 million we are currently holding is cash backing will be an important component of that funding requirement going forward. We're continuing to evaluate funding options across multiple forms, and we remain on track to finalize this by the end of this quarter.

So with that, I'll now hand back to Andrew.

[Andrew Graham, executive]

Thanks, Martin. Turn now to upside opportunities and opportunities to unlock further value, which the whole business is very much focused on. Turning to Slide 13 and the first thing. Just a little bit more detail about our Working Smarter program that I mentioned earlier. The program is ultimately a classic bottom-up business improving, continuous improvement program. We're running that in-house. All of us have had a lot of experience with those types of programs over many years.

So we certainly have the skill set within the business to run that without an extensive external consultant. And it's really delivering benefits, as you can see on the chart on the right. In my mind, one of the strong elements of these kind of programs is it's tapping the knowledge, the experience, the ideas of the entire organization. And we're certainly seeing that.

We haven't put it on this chart, but the initiatives that are being implemented, there's a 106 of those that make up in the partial circle there on the left. Of the initiatives in the pipeline, there's another 222 on top of that. So you can see that a lot of ideas being generated across the business.

The team has a very robust program of prioritizing those after an assessment and making sure we're putting our energy into those that will have the biggest bang for the business.

A little bit more detail then on what we have implemented to date. It's a mixture of cost deferral, one-off cost savings as well as ongoing savings. And probably half of what's in that left-hand partial circle is the cost deferral.

In some ways, those are the easy early low-hanging fruit. I'd say easy, but the reality is the business has those in the plan for a reason to bring in those things pushing them into the future often requires a fair bit of work and some thinking and making [ move ] with what you have.

And then largely the other half of implemented initiatives at the moment are made up of those one-off savings and also then the ongoing recurring year-on-year type savings.

So -- and the program hasn't been running for too long to have achieve this level already. We're very, very confident that our $24 million target will be blowing out this quarter, especially with those 222 initiatives and $20 million worth of value in the pipeline. And we're certainly looking forward, and the team is working very hard to bring some of those savings to bear in the near term.

Turning then to Slide 14, a little bit more information on Federation. I touched on all of these items, and Martin has certainly touched on funding. But I'll talk firstly about approvals because in the last month, it's been a very, very pleasing development in relation to Federation approval. We were tracking well through the approval process.

I suppose the mine and what we're trying to permit has all the attributes of something that the world needs, and is a good corporate citizen. That's a low impact development. It's largely brownfield. I guess, critical minerals, copper, zinc, lead that the world needs to move forward.

So it's sort of no surprise really that has progressed quite quickly, the other bit there is the team -- really the team has done a very good job of thinking about what's the impact on the business, minimizing that impact and ensuring we have something that's in some ways easier to approve.

The other piece to all of that is we've had great support from the New South Wales government and particularly the Department of Planning and Environment who've been working diligently through their side of the approval process.

And really, that's a combination of our effort in our projects and our work and the efforts and the work of the New South Wales government has allowed us to come together quickly. So we're certainly expecting development consent within this quarter, which is earlier than the midyear we were guiding people to previously.

For those who aren't familiar with the process, the development consent is effectively the key consent to project to move forward. It doesn't end there, though. So we'll then get a mining license in the mill, which will -- which can take in the order of kind of 2 months and any other part of the various management plans that are required under development consent, which we will be working up in parallel through that process.

But really development consent is the key [indiscernible] in relation to the project moving forward. And we're certainly very pleased with where we find ourselves on that in the moment.

I don't want to talk about Federation funding any further. I think Martin covered that extremely well early in the call and also on optimization. I've touched on a few things that we're working on refinement of the mine plan, especially thinking about how we get early tonnes from the mine, upgrade to Peak for processing and being turned into revenue. I mentioned the lead testing we were doing.

One thing to think about and to keep in mind is as the photo suggests on the right there, this is -- have all the look, if you go to the site, you'll see a mine. Ultimately, we've got surface workshop facilities. We've got change houses. We've got equipment park areas.

We've got, as you can see in the photo, fully developed box cut and about 90 meters of underground development in the face of which is sitting 80 meters above the ore body now. So when we're ready to go again, it's a very, very quick process for us to get underground and start developing a mine.

The other thing, and this is a kind of crossing fingers and hope that scheduling the work that we have Redpath at Hera. We have Redpath also on the contract to develop Federation. And with the changes scheduled at Hera, it is possible that the crew is coming out of Hera may be able to be redeployed to Federation if our funding timing allows.

Moving then to Slide 15. Those you may have missed it. 18th of January, we put out some very exciting geophysical results. All of the results were around what we call Nymagee District, which is the area, the exploration ground that we hold around the Hera Mine and the Federation Mine.

And we did 4 IP surveys as part of that program in the back end of last year, finalizing that at the start of this year. And also delivered what are very, very exciting results.

We strongly believe we've got the best land package in the Cobar Basin, and certainly one of the most respective base metal packages in Australia. So to be able to allocate funds to do this kind of early work to get good results from it and to really focus our energy now in chasing some of these targets is a really good outcome for the exploration team.

I did get one question after the announcement went out on the geophysical results and why we went to do IP first and didn't do things like soils. The reality is we've got a very, very strong database in soils, magnetics, other forms of survey which we use to target this IP work.

So soils have been done. So when we said the next step is to do finally space soil. So that's exactly what it is. So we'll do additional soil work around these IP results before we then target our drilling to ensure we're making most opportunity from our drilling spend.

Now turning then to Slide 16. I'll start this, and then I'll let Martin add a bit more color. But anyone following our commodity mix or commodity prices relative to the commodities we have, we know that we are in the right commodities at the moment where we're seeing gold up, we're seeing copper up, we're seeing zinc up and certainly very strong.

We did have a question, I think, on an earlier call about our hedging. So it's probably useful just to give you some additional detail on that so that you can see that we are very much exposed to this attractive runoff in commodity prices.

So Martin, I might just pass to you for some additional detail on that.

[Martin Cummings, executive]

Yes. Thanks, Andrew. Just the additional detail to add here is, as Andrew mentioned earlier, we are actively managing our cash during this period while we complete the refinance.

So in the short term, we do have some hedging in place for shipments, and we have a very modest hedge book for gold as noted there. But really beyond this refinance window, we are well positioned to provide an exposure to these price moves. The gold hedge book will be fully delivered by the end of October.

And probably the other point to note that as was contained in the Federation feasibility study release, over the next few years, we are going to transition away from what really at the moment is an equal mix of precious metal and base metal to much more dominant exposure to these future-facing metals with around 80% of our revenue coming from base metals.

So once the balance sheet is in place and the funding for Federation, we're well positioned to take advantage of this favorable outcome.

So I might just finish there and hand back to Rachel to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Adam Baker with Macquarie.

[Adam Baker, analyst]

Just wondering on the drought conditions for the development on Federation, good news there that it's still ticking along nicely. Just wondering if you could add a bit more color to what those conditions are?

[Andrew Graham, executive]

Yes, Adam, I'll just touch on that, Andrew here. Look, I won't go through the conditions as you would appreciate, it's a lengthy document. I think it's fair to say, though, there was nothing in there that necessarily surprised us.

It was all largely in line with the conditions under which we operate, so the likes of Peak asset and the Cobar approval that we got earlier. So as we worked it through, there was nothing in there that's going to materially change or impact the way we had planned on running the business.

We had planned and we had designed and we had submitted something that was a world-class kind of an operation. And therefore, it aligns nicely with what the New South Wales government expects.

[Adam Baker, analyst]

Yes, sure. Great. And for Federation funding, have you've been seeing much more inbound interest given the strong start to the year that we've had with base metals prices along with gold as well? Anything you could add to that?

[Andrew Graham, executive]

I will just pass that on to Martin, who's been doing an excellent job in running that funding process for us internally.

[Martin Cummings, executive]

Adam, look, I wouldn't say we've seen any more, there is significant interest in this opportunity. And I think there is a valuation gap at the moment. So I wouldn't put any of the interest down to necessarily strong link to commodity prices.

Obviously, appetite for the metals that we produce is improving. I think there's equally an investment opportunity here, which is generating interest. Andrew, anything to add to that?

[Andrew Graham, executive]

No, I think it sums up well, Martin. It's certainly been quite a bit of interest in what we have to offer. And I don't necessarily think anything's materially changed based on the commodity price, as Martin says.

[Adam Baker, analyst]

Yes, sure. And guidance production for metals looks pretty achievable this financial year, around a bit over 50% for most year metals, which is good. Just wondering where we sit on costs?

You're likely expecting a better second half of the financial year for all-in sustaining costs, and you're still comfortable with that $2,300 from all in sustaining cost level. Obviously, higher base metals prices will help bring that down, but anything operationally, we should be thinking about for lower cost to these operations?

[Peter Trout, executive]

Adam, It's Peter here. Yes, as you said, metal production, we're tracking well for guidance. As Andrew pointed out previously, we do see some ups and downs at Peak depending on the timing of ore processing campaigns. So that does lead to quarter-on-quarter fluctuations.

On to costs, there's a couple of things coming up where we're seeing lower expenditure in the business, which will flow through into all-in sustaining costs. If we look, say, at Hera, for example, it's really about mining for cash there. So we're winding back development and other activities, which will bring down the spend at Hera. We're already seeing that come through.

At Dargues, there's a number of initiatives underway from the Working Smarter program, which will see some costs come out of the business. It's also worth knowing that at the back end of this half, we will see development rates come off at Dargues.

We're already at the next to last final level in the mine based on the current mine plan. And with this development, obviously, we'll see less costs coming through there.

It's initiatives around the backfilling campaigns, competitive tendering for some of our consumers that we use across all sites is leading some benefits over what we currently pay outside of contract.

And coming to Peak, which is our largest cost center. I think that chart in the presentation showing a reduction in contractor spend is really a good analog for what we're seeing for the mining expenditure spend at Peak as we remove some of the duplication we carried through the first quarter just to make sure we didn't have a production hiccup with the change to owner mining but also off-hiring the equipment and be able to do things more productively ourselves.

A good example of that is multi-skilling our operators so that one day, they might be operating one piece of equipment on one task. But the next day, they can go over and perform an alternate task, which they're equally well skilled and qualified.

And then there's a Working Smarter program. There's a whole host of initiatives there we haven't got to yet. We've got traction on several of those, but there's a lot more in the pipeline we need to work our way through. And that's, at the moment, a matter of prioritizing the ones that give us the biggest impact for the lowest up-front investment.

[Operator]

Your next question comes from Anthony Wallace, a Private Investor.

[Unknown Attendee]

My question relates to last -- well, this month's announcements for IP surveys around the Nymagee area. And I was wondering with the effort that's been put around there at the moment, what's happening with Great Cobar?

[Andrew Graham, executive]

Anthony, thanks for joining the call, and thanks for your question. In relation to, great Cobar, ultimately, it leaves capital to develop it. And when we look at where our near-term cash is best spent and the margin, the very, very high margin we get out of Federation and the small amount of capital needed to get up and running now that we've done a lot of the work. It's certainly a priority to get Federation up and running.

The Great Cobar is definitely not forgotten. And the world going forward will be desperate for copper. We're sitting on a very, very large resource at Peak, including, Great Cobar. So it will see its time in the sun. What we're ultimately and with our plan to put Federation or through our existing mills, we get to a place where the ore effectively has to compete for space in the mill.

And so as I mentioned, Federation, very, very high-margin material will compete well for space in the mill. We have some additional high-margin high-grade material at Peak that we're working through as part of our mine plan at the moment. And we get to a point where, Great Cobar then will have its time in the sun.

Ultimately, it becomes a bit of a lever for us as to when we choose to do that, but we expect it to follow soon after Federation is up and running and ramped up, it will ultimately be filling the mill with original Peak inventory. And then thereafter has some of that higher-grade Peak inventory is depleted, Great Cobar will then come in and fill the Peak mill.

[Operator]

Next question comes from Michael Evans with Acova Capital.

[Michael Evans, analyst]

I've got a few questions. I might start with simple one. In your report at the back end in the appendix, which we've got lots of thoughtful information, you split out Peak copper and Peak lead, zinc. Have you done it in the past? Is that the plan to continue doing that going forward?

[Peter Trout, executive]

Michael, it's Peter Trout, I'll take your question there. And the answer to your question is no, we haven't done that in the past. But given the quarter-on-quarter movements, we thought providing that information as part of the quarterly would give a bit more transparency about what's driving our reported metal production.

So we've got that listed there for both the December quarter but also year-to-date, and the intention is to carry that forward, especially, I guess, as we get more base metals in our portfolio with the introduction of Federation down the track.

[Michael Evans, analyst]

Yes. That's really helpful, Peter. Just more numbers to crunch. And just switching over to Federation. One of the funding options on the table mentioned at one point was the sell-down of the project. Is that option still on the table? Or is more conventional sort of equity debt considerations being prioritized?

[Andrew Graham, executive]

Martin, did you want to comment on that, so I'm happy to then follow up.

[Martin Cummings, executive]

Yes, Michael. Look, certainly, more conventional funding is the priority right now. So I'm actively involved in Aurelia funding that project.

[Andrew Graham, executive]

I think I could just add to that. Ultimately, Federation is the highest grade, highest margin, highest value inventory in our business. We can bring it on as effectively a brownfield development using our existing plants, that sets a cornerstone of our business going forward.

So we're really quite keen to find a conventional source of funding for that and then bring it on and realize the value for shareholders.

[Michael Evans, analyst]

And whilst I've got you on Federation, the -- all right. Can you -- just the ability to get in the project. You've got about -- correct me if I'm wrong, but there's about 2.2 million tonnes of reserves and about 4 million tonnes in the mine plan. How does that impact the, I mean, the quantum of debt you can allocate to the project?

And just secondly, the second question which is separate. Can you just remind me how you're putting the higher grade stuff to Peak and the lower grade stuff to the Hera mill. How do you split those ores at the mine simplistically?

[Andrew Graham, executive]

I'll let Martin have a go at the first one first, and then I can talk a little bit about our plan for selectively mining that.

[Martin Cummings, executive]

I guess the one point I'd stress here is that we're not actually looking for a project finance facility here. We are implementing a corporate facility, so the reason is that we're going on at the moment will consider cash flows from all the operations, bonding requirements of all the operations with the intent to refinance the existing term loan and performance bond facilities.

So we're not looking at the refinancing terms of the level of debt that Federation can carry on its own, would be probably the important point there.

[Andrew Graham, executive]

Michael, just to talk to your other question on the split of material. So the Peak Mill is very suitable for Federation ore in that it can make a zinc concentrate, a separate lead concentrate. It can capture the copper into the lead concentrate and then we have the gravity gold as well as the gold lead circuit which then allow us to maximize recovery of gold. So we really wanted to exploit those features of that plant.

So with the full tailings [ leads ], so ultimate hold of our [ lead ] outcome on gold, makes sense for high gold material to make its way to Peak. Similarly, high-grade zinc and high-grade lead material goes well through Peak and get maximum payability for us as individual products.

And the other one, which is a little bit more nuanced, I suppose, in the other 2 being straight grade is the copper-lead ratio. So that if we are getting a lot of sort of copper material. It makes sense for it to go up to Peak and end up in the lead concentrate as opposed to going through Hera, where it ends up in a bulk concentrate in which it doesn't get paid.

Now the planning group have come up with a split based on stope grades. So [indiscernible] stope scale as opposed to sort of a block scale or something similar, which then gives us some confidence in that kind of split should be potentially achievable at the sort of levels that we've modeled it.

[Michael Evans, analyst]

Okay, Andrew, that's great. And so to be clear, because you're sending different materials to Peak and Hera. How does that affect your rate of development in terms of do you have more development earlier in the mine life because you need more faces open to give you flexibility to send the right grades to the right mill, as opposed to if you were just sending it all to one mill with a conventional process. Do you need more development up-front in the mine life?

[Andrew Graham, executive]

I think I'll start answering that, and Peter may want to jump in with a little bit more detail. But just on development, and one of the key pieces for Federation is the ramp-up, and the ramp-up comes from having more faces open as you would know. So part of having the exploration decline according to the original plan as is pushing that down under the exploration decline permit.

And then once we got development consent, we're able to push laterally and start mining stope material. We're now going to -- it would appear to have development consent a lot earlier in the development of the underground workings.

So we are -- and that life of mine planning piece that I mentioned, the team is very active on that at the moment, thinking about how do we effectively ramp up more output sooner. And part of that is ensuring we have sufficient faces. And the other bit is really just around where do we prioritize our development.

So instead of pushing all the way down on the decline because we didn't have the permit to start mining, it allows them to put some of that development out actually and start bringing on stope blocks.

So it's more around getting a ramp up, getting a sooner ramp-up as opposed to necessarily trying to do more development to chase a good mix of materials because both are up and running, we have enough face in order to manage that.

And that's been, the feasibility scheduled that out in some detail to give us some confidence. So this is ups and downs in that is constant to the number sort of feed goes up the road, but that was part of the feasibility work.

Peter, I'm not sure if you have anything else in relation to the developments and the mine planning work going on in Federation.

[Peter Trout, executive]

I might just add, Andrew, that there's 2 phases here. One is the ramp-up phase for ore production out of Federation, and the second one is steady state. So essentially, what the feasibility study looked at and you have to go back 12 months or so for the shaping and assumptions were into that, we anticipated that both Hera and Peak mills will be operating concurrently.

So clearly, there's a change in that, whereby the Hera Mill is going on to care and maintenance, and all ore initially will go up the road to Peak. So the mine scheduling work that Andrew referred to there will be considering that particular change. So then once we get into steady-state operations, it's a bit more of a straightforward exercise. As in the development will be established.

We'll have the stoping cycles and routines established. And when the ore comes to the surface, we'll probably take a similar approach to what we do at Dargues, where each stope actually is on to its own dedicated stockpile on the ROM pad. And as Andrew mentioned, the grades -- we will have the grades for those stopes.

And then when we crush them, we can segregate the material to go into a truck that either goes to Peak or to Hera based on the value of that material. So it's a well-established process we have from our Dargues operation that we envisage transferring across over to Federation.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Graham for closing remarks.

[Andrew Graham, executive]

Thank you, Rachel. So I haven't got a lot more to say. Thank you for joining the call and for giving us your valuable time.

Just to summarize really the key messages from us. Firstly, look, we remain on track to achieve guidance that we said in December. December has definitely given us confidence in that December was a very strong month with our various initiatives starting to have an impact, especially that change for Hera -- the Hera Mine plan, which clearly resulted in quite a change for December versus where we were tracking.

Federation permitting and funding are both going well. And as I mentioned, we expect that development consent significantly earlier than the mid-year target that we were working to.

And really, just to summarize, the whole team is really looking forward to getting on with developing Federation, what is really one of Australia's best undeveloped base metals projects and looking forward to bringing the product from that to market. So thank you again for your time.