Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to the Evolution Mining Limited September 2022 Quarter Results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session [Operator Instructions] I would now like to hand the conference over to Mr. Jake Klein, Executive Chairman. Please go ahead.

[Jacob Klein, executive]

Thanks, Ashley, and good morning, everyone. Thank you for joining us. As always, we really do appreciate it. This morning, I'm joined by my colleagues, Bob Fulker, our Chief Operating Officer; Glen Masterman, our VP, Discovery; and Lawrie Conway, currently, our CFO and Finance Director, and he'll move into the newly created CEO role effective 1 January.

I'm sure you all feel as shocked as we do at Evolution at the sudden passing of Peter [indiscernible]. Peter was a person of integrity, humility and passion for our industry, and we pass on our deepest condolences to his family, his friends and his colleagues at IGO. Our industry has certainly lost a true leader.

Likewise, we were equally saddened by the two tragic deaths in the gold industry in Western Australia over the last couple of weeks, and the devastating impact we know this has had on these workers' families, friends and colleagues.

These events have made us at Evolution stop, pause and reflect. Our own safety performance improved in the quarter, but as a business and as an industry, we must remain vigilant and continue to ensure that we provide a safe space both physically and mentally for everyone who works with us.

Turning to our quarterly report. I have to say that we are very pleased with the start we've had to the year. This quarter's production of 161,000 ounces was in line with our plan, where major planned maintenance was completed across our cornerstone assets to set up the year.

Mt Rawdon was the only exception where the team dealt with heavy rain, which limited access to the pit and impacted its production by 6,500 ounces.

Our all-in sustaining costs of $1,513 an ounce, whilst elevated by $145 an ounce this quarter due to the achieved copper price being lower than planned, still positions us as one of the lowest-cost gold producers in the world, and we expect to see the AISC come down in the coming quarters.

Encouragingly, the copper price has also recovered late in the quarter and is now trading around $1,100 per tonne higher. We are on track to deliver FY '23 production and cost guidance with quarterly performance expected to improve in the coming periods.

Our portfolio generated very strong operating cash flow of $206 million, and its quality is reflected in the very high operating margin of 52% of every ounce we produced.

All capital, major and sustaining was funded by operational cash flow. This is particularly pleasing given the 2 major projects that we are currently investing in at Cowal and Red Lake, which both of these projects remain on schedule and budget.

With our investment grade credit rating reaffirmed and available liquidity of $923 million, our balance sheet is well positioned to support our growth in low cost reduction of 25% over the next 2 years.

Just before handing over to Bob, something we haven't today talked a lot about on our quarterly calls is the potential value opportunity for our pumped hydro project at Mt Rawdon.

Against the backdrop of the Queensland government's recent commitment for 70% of the state's energy supply to be from renewables by 2032, we are very pleased that the Queensland Coordinator-General recently declared our pump hydro project, a coordinated project, which confirms the strategic significance of the project in the states.

We are well advanced on a joint feasibility study with ICA Partners with the development of a project that has the potential to provide up to 20 gigawatt hours of renewable energy storage, which is a huge amount.

During the quarter, the geotechnical drilling program confirmed that the location for the upper reservoir is suitable and competent rock quality exists for the underground powerhouse chamber. The grid connection process commenced with an application made to Powerlink and discussions continued with potential interested off-take parties and infrastructure investors, which are exploring pathways to participate in the project. We are growing increasingly confident and excited about the potential to not only demonstrate this as a model mine closure, but an asset that has material value to our shareholders.

With that, I'll hand over to Bob.

[Robert Fulker, executive]

Thanks, Jake, and good morning, everyone. The September quarter has been strong operationally with some headwinds in the eastern states of Australia from the La Niña weather patterns. Pleasingly, our TRIF dropped slightly over the quarter to 10.15 with a 16% improvement at Red Lake over the same period.

All sites are generating a positive operating cash flow, and the year's guidance is sound, with a planned quarterly ounce increase over the year from Red Lake and the Cowal underground.

At Cowal, production is lower than the June quarter due to the planned biannual processing of Bland Shire. Our performance is in line with the year's guidance with first underground stoping ore during the June quarter '23.

Mine grade was 0.83 grams per tonne with processing grade at 1.03 grams per tonne. These will also increase through the year. The underground project is progressing well with the key call-out being the underground development has ramped up by 27% to 2.4 kilometers for the quarter, the pace plant construction has commenced, the combination of Village has significantly progressed, and the underground fixed infrastructure spend has also commenced.

Last month, we also locked in the long-term power supply agreement, securing future power and delivering a pathway to meet our emissions reduction target of 30% by 2030.

If we move on to Ernest Henry, copper and gold production were in line with budget, and we are seeing an improved cave draw after the scheduled infrastructure shut and draw point rehabilitation during the September quarter.

Operating mine cash flow remained strong at plus $100 million for the quarter. And the mine extension pre-feasibility study is progressing to plan and will be completed this quarter and incorporates the new resource model published in August. Ongoing drilling shows encouraging signs for further ore body and resource extensions, but I'll leave this to Glen.

Red Lake's turnaround has continued through the quarter with some key notable improvements being zero recordable injuries in September. This is a significant milestone in their safety journey. Mining processing grade increased by 13% to 5.8 grams per tonne, and the models continue to reconcile well.

Mechanical Bolting saw good progress with the aviation zone fully transitioning, and the first stope ore from Upper Campbell was delivered with better-than-expected grades at 7.9 grams per tonne.

Processing tonnes were lower than the June quarter due to the scheduled upgrade of the Campbell Mill tertiary crushing circuit. This upgrade allows the team to continue to push the plant's limitations, and this coincides with the recent approval to lift the granted throughput to an average of 2,200 tonnes per day.

Costs are expected to trend down over the year as higher grade production from the Upper Campbell increases and cost and efficiency benefits from the new equipment are realized.

With the physicals now being delivered over the last quarter, I'm pleased with what I saw at Red Lake prior to the investor trip on grade improvements.

The mill optimization study remains on track to deliver a recommendation for go forward this quarter, and I'd like to thank you all for visiting Red Lake last month. I do appreciate the time and effort this takes and believe that we demonstrated a [ siting ] positive change.

Mungari had a strong production start to the year, and it's in line with plan. The AISC increased from last quarter due to the maintenance activity accelerated from future quarters and a higher portion of contract labor currently supporting the operation.

The site continues to focus on filling vacancies. It has been slower than we anticipated into the current market. This, along with a lower realized gold price versus last quarter, resulted in a lower operating mine cash flow, and the Mungari future project is on track.

At Mt Rawdon, as with most of the eastern side of Australia, it's been affected by the current La Nina weather systems. They have a water mitigation strategy in place and are progressively mining and the pit is dewatered.

During non-pit time, we're treating low-grade stockpiles, and this is affecting our ounce profile. Side has also been fast-tracking work that was planned for later in the year when there is spare mining capacity. As an example, the Southern TSF buttress is ahead of schedule.

In summary, a good start to the year, and I'd like to hand you now to Glen.

[Glenton Masterman, executive]

Thank you, Bob, and good morning, everyone. This morning, I'll provide a brief update on our exploration progress during the quarter. Our main highlight is from Ernest Henry where the surface drilling program has been returning excellent results that extend mineralization and will add to the recently updated mineral resource.

At our key joint venture in Western Australia, we received further impressive results, which continue to build on the existing mineralization footprint.

We also completed a small exploration deal, 20 kilometers south of Cowal, which gives us the ability to secure full and continuous tenement coverage across some highly prospective targets we want to explore.

Firstly, at Ernest Henry, we have started receiving assay results returning wide intervals of copper and gold mineralization from the surface drilling program, which commenced back in April.

Importantly, I'd like to clarify that none of the new surface results were available at the time to inform the mineral resource update we announced in August. However, we will incorporate these results when we rerun the numbers in the annual year-end update of our group mineral resources and ore reserves.

The drilling has carefully targeted gaps in the PFS extension area where no previous drilling existed. Pleasingly, we are realizing results that are better than expected. And what I'm really excited about is that the new drilling is connecting mineralization between [indiscernible] and the main ore body which will add metal to the mineral resource right where we want it for the PFS. At Cue, a significant mineralized footprint has been delineated by diamond drilling, which extends 1.6 kilometers along strike.

Geological modeling has identified at least 4 key lodes, which have been confirmed in the new drilling results. Further drilling and modeling in the December quarter, we'll evaluate the potential to domain these key lodes over mineable widths that all being well, can support estimation of the mine mineral resource.

Finally, the option to acquire 2 important exploration licenses need Cowal from strategic energy resources ensures our access to this high prospective ground without the requirement to purchase the tenements upfront.

Under the option agreement, we have 2 years to complete the necessary work to assess potential for a significant discovery while retaining the ability to acquire a 100% ownership interest in either or both licenses. The exercise price has been agreed at $1 million per tenement.

With that, I'll hand over to Lawrie.

[Lawrie Conway, executive]

Thank you, Glen, and good morning, everyone. This morning, I'll provide an update on our financial performance for the September quarter, as outlined on pages 6 and 7 of the report.

Operating mine cash flow of $206 million for the quarter, which is the equivalent of around $1,266 per ounce sold. Sustaining capital was below plan at $44.5 million while major capital was on plan at $151 million. Guidance for both sustaining and major capital remains unchanged at $190 million to $240 million and $530 million to $600 million, respectively.

All sites were cash flow positive before major capital investment with most investment being in our major underground growth projects at Cowal and Red Lake.

In terms of metal prices, the achieved copper price for the September quarter was in line with the previous quarter at $10,873 per tonne but was lower than the copper price used in our FY '23 all-in sustaining cost guidance of $12,500 per tonne.

The spot price of gold, however, is around $200 per ounce higher than the gold price achieved in the September quarter. This more than offsets the lower copper price in terms of our cash flow.

We ended the quarter with a cash balance of just under $400 million. We finalized the renegotiation of our revolver and performance bond facilities in early October for a further 3 years out to October 2025.

On the back of our reaffirmed investment-grade rating in the August annual review, our banking syndicate confirmed their view of the strength of the balance sheet with the facility being renewed on the same commercial terms as the expiring facility.

We took the opportunity to increase the size of the revolver facility to $525 million as this will provide further strength to balance sheet as well as increase our liquidity. The revolver is undrawn, and our liquidity is $923 million.

This liquidity and the fact that our first quarter was [indiscernible] gives us confidence that we're able to fund the 2 major projects in execution during FY '23. When these come into production at the end of the year, our cash generation will increase.

I think it is worthwhile touching on our gearing level. We ended FY '22 at 27% gearing. And with this year being a capital-intensive year and our most capital-intensive year in this plan period, where we expect the gearing to increase.

This is why we did the U.S. private placement last year to increase our cash and to align the debt profile to the cash flows. We also knew our revolver facility was to be renewed, and we have now done that. What does seem to be missed in the analysis of the balance sheet and the gearing is that nearly 60% of our debt is due in 7 to 9 years from now.

Therefore, if we look at our gearing from a perspective of how we service our term lines over the next few years, our gearing would be between 16% and 18%, even allowing for the final payment to Glencore in January.

All this said, we continue to proactively manage our balance sheet through disciplined operating and capital cost control during this capital-intensive period and in a volatile metal price environment.

Thank you for your time this morning, and I'll now ask Ashley to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Kate McCutcheon with Citi.

[Kate McCutcheon, analyst]

A question on copper prices at EHM through realization of $10,873 for the quarter. [indiscernible]Bloomberg is telling me the prices were $11,300 or so. Can you just remind me on the timing there? How often are you paid? And I guess the QP and the terms with Glencore in terms of the realization to copper prices. Is it average over the month or at the time the [indiscernible], et cetera?

[Jacob Klein, executive]

Thanks, Kate. That's definitely a question for Lawrie, who's been educating us all on QP periods and provisional payments for some time.

[Lawrie Conway, executive]

Thanks, Kate. Yes. So the average, if you take the spot LME price was, as you said. So we have, at any point in time, 4 months' worth of shipments that are open to quotational period pricing.

They are priced at the moment on a 4-month moving average, and that average is generally the 5-day price at the end of every month, except for the final month when it is the full 30 days of that month.

So what we would -- what we saw is in July you have the repricing of the previous 3 months of shipments and the July shipment priced. And then -- so that's probably what reduced the realized price for the first quarter because what we saw in August, and what we saw in September is that the spot price was sitting around that $11,600, $11,800 a tonne.

And therefore, for those 2 months of shipments, plus July, there wasn't as much an impact. So that really relates to the last 3 months of shipments in the FY '22 year that reduced the achieved price for this quarter.

[Kate McCutcheon, analyst]

Yes. Okay. That was clear. And then maybe a question for...

[Lawrie Conway, executive]

I was just going to add, if you want to look at then the June quarter, so we finished the year at $12,200 thereabouts. So in the June quarter, those previous 3 to 4 months of shipments were revalued down from about $14,000, and that's how you ended up with about $10,800 in the June quarter.

[Jacob Klein, executive]

Yes. I think, Kate, the easiest way for me to try and understand it is that it's both an adjustment and the price of the shipment that you're getting. So it can be up or down that adjustment depending on -- but you are going to have an adjustment each quarter.

[Hayden Bairstow, analyst]

Yes. Okay. That's clear. And then maybe a question for Bob here. So at Cowal,, on prior site visits, we were talking about recoveries from the float tail leach giving you another 4-plus percent, and the site was talking about 86% plus the aspirations.

We've been tracking at 82%. What's changed here? And how should we think about recoveries at Cowal moving forward?

[Robert Fulker, executive]

Thanks, Kate. Cowal's recovery at the moment is in line with the metallurgical algorithm. And that actually goes from tonnage as well as the mineral type and the throughput.

The current increase over the current year, we're looking at from a yearly perspective around that 82-ish to 84-ish mark for Cowal. So that is what we are planning and it changes on a monthly and a quarterly basis depending on the feed grade.

And as the year goes on, so each quarter at Cowal our fleet grade does actually increase through the year. And we've said that previously. So that's the basic why you look at it. I don't know if I've answered the question.

[Kate McCutcheon, analyst]

Okay. We might come back. But just on guidance for '23 how -- what kind of head grades and tonnes are planned for the rest of the year? So I guess you'd have to mill record quarterly tonnes at [indiscernible] get a better grade from here. So I tend to understand if that's the plan to hit those guidance numbers.

[Jacob Klein, executive]

Kate, Lawrie is pulling out the plan now he's best placed to items of that.

[Matthew Greene, analyst]

So I get QPs and [indiscernible].

[Lawrie Conway, executive]

If we look at it on a grade profile, grade mine this quarter was very much in line with the June quarter and is starting to increase the grade process similarly at 1.03. What we see as we move into stage [indiscernible] Q2, you get up over 1.1 to 1.15. And then Q3, Q4, you're averaging 1.2 grams per tonne, but that's processed.

And what we see in terms of the tonnage through the mill you'd be getting between 2.1 million tonnes and 2.3 million tonnes in each of the quarters depending on the shut. So we've got 2 shuts -- major shuts at Cowal in the year.

We've done one, you'll have one more in probably the third quarter is when it's scheduled, it may overlap between the third and fourth quarter, actually. And that's what we'd see for the year to get those, and Bob talked about the recoveries we're expecting for the year.

[Jacob Klein, executive]

I guess Lowrie said a [ flag ] and remember that we are going to -- planning to get 500,000 tonnes from the mostly in terms of development over this year, and there's only 74,000 ounces this last quarter. So that will add to the grade as well.

[Robert Fulker, executive]

We have our biannual shut [indiscernible] in February, as Q3. And we do have another one in May, but the May is a smaller one, and it's just a planned maintenance replacement.

[Kate McCutcheon, analyst]

Okay. But that kind of 1.2 target you said in Q4, that includes the underground feed grade, that was a head grade number?

[Jacob Klein, executive]

Yes.

[Kate McCutcheon, analyst]

Okay's. Cool. Can I take in one final quick one, just your comments on the rationale for lifting the revolver capacity?

[Jacob Klein, executive]

That one is definitely one for Lawrie again.

[Lawrie Conway, executive]

Kate, look, I mean, the view there for us in looking at the balance sheet is saying that we know through the course of this year, the production comes at the back end of the year, the capital is invested in the front end of the year.

We've seen volatile metal prices. We are seeing gold above our plan, copper a bit below the plan. And so our view over the course of the next 3 years, making sure that the balance sheet has added liquidity for any unforeseen circumstances. That's the rationale behind it.

At this point, it's undrawn, if we deliver the plan and metal prices stay where they are through the year, we expect that we can finish the year without needing to use it. But at the same time, we have a revolver for the reason that if you do need it, you can draw on it.

[Operator]

Your next question comes from Matt Greene with Credit Suisse.

[Matthew Greene, analyst]

I hope you're all well. Bob, first question for you, perhaps, just on Red Lake, the Campbell Mill with the new tertiary crusher.

If I recall from the slide is that you're also looking to expand the leach capacity there to support the recovery levels at the increased throughput. But just look at the quarter, I mean, recoveries are pretty good. So are you still thinking [indiscernible]?

[Robert Fulker, executive]

Yes. So what you saw when there was the crusher and screening circuit on the tertiary. That is -- we did that first -- we've done that and completed that first to now push the plan again. The leach and the other optimization of Campbell are actually part of the optimization study that's going on.

And that really is, as you say, we're pushing the plan to see where the next constraint is, and we've got contingencies for where we find that constraint.

You'd probably say we don't need it, but we're pushing the crusher in the air upwards. We've got the ability through the license to treat 2,200 tonnes per day for the full year at Campbell now, so we're going to trust that seeing where the next constraint is.

[Matthew Greene, analyst]

That's great. And then just on the mill optimization study, can you just provide some high-level context on the scope of the study and what this might involve? And then also just on the timing, when do you expect to release this to the market.

[Robert Fulker, executive]

Yes. So the high-level options that the guys are looking at include when do we bring back Bateman in how do we actually optimize the processing plants? Is it better to actually do a grinding upgrade with that leach upgrade we just talked about at Campbell before we bring Bateman in from a cost and a margin perspective?

Or is it better to bring Campbell and run the 3 plants? Philosophically, the more we can get out of the fewer plants, the better from a cost perspective, it will be. And they're all the permutations that the team is looking at to see how we actually bring it in.

We're currently just looking at our -- is it pre-feas? We're in pre-feas at the moment. So that will be finished this financial year, and then we'll go into the next stage.

[Matthew Greene, analyst]

Okay. Great. And then just on the power contracts. Firstly, congrats on the Cowal contract renewal. I was just wondering, I mean, you've got Rawdon and Henry left.

How have your negotiations gone there, are you seeing signs that those could come in line with budget as well?

[Robert Fulker, executive]

Yes, that's a Lawrie question. I just talk [indiscernible]. I'll hand it over to Lawrie.

[Lawrie Conway, executive]

Matt, all sites are contracted. Ernest Henry was in place with Glencore on a back-to-back, and we're working through the stages of transitioning that across to our own contract.

So we're not seeing any change in our cost structure there to what we guided in the June 27 outlook and the guidance in August. Mt Rawdon has probably been the most problematic one for us to put a contract in place because of 2 years of mine life left in terms of mining and then the processing of the stockpiles.

So that's been a contract that's now in place for 4 years. And given the markets, it's a bit higher than we would have expected or would have liked -- sorry, not expected. But it's still within the plus/minus range that we'd expect from a group level on our total operating costs.

And then Mungari, the market, which isn't linked into the national energy market, those -- that contract for the next 2 years has been put in place with minor movement in costs from the expiry but within the FY '23 guidance and FY '24 outlook numbers that we provided for the group.

[Jacob Klein, executive]

I think Lawrie understates a little bit what he and his team have been able to achieve there because the Cowal 8-year contract is a fixed price contract, and in the current conditions is a very, very good outcome for us, both in securing power and the competitiveness of the pricing for an 8-year period.

[Matthew Greene, analyst]

That's helpful. And I'll just squeeze one last one in. Just on the cap on the group free cash flow in the quarter. if we were to achieve flat commodity prices over the next few quarters. You've commented on the available liquidity. But are there any levers you can pull across the business to lower spend?

[Lawrie Conway, executive]

Yes, Matt. I mean if the metal prices are flat from where they are today. I mean, we achieved $2,414 an ounce in the September quarter. Gold is $2,600 an ounce today. So that would mean that our group cash flow quarter-on-quarter would actually increase. We also see that as we go into Q3, Q4, the capital profile reduces and we should be getting more production to get to that 720,000 ounces.

So we don't see that Q2 to Q4 is the same as Q1 from a cash generation perspective. So from ours -- then the levers we have around that, if we were to see metal prices move against us or cost change materially. But when we look at costs, our labor reviews for the year have been done.

They came in line with the 5% to 6% increase that we talked about in the August results. So there's nearly 50% of our costs there. I think that we're dealing with turnover that probably gives us the greater issue around productivity rather than cost power, as I said, have now been put in place or in line with the guidance and outlook we've provided.

So the other levers we really have comes down to discretionary activities but sustaining capital $190 million to $240 million. We've got some flexibility if we need to defer canceled capital there. Glen knows that it is a discretionary area that may have to give up some of his drilling if we need to. And we also obviously have a number of other things at each of the sites that we look at in terms of discretionary spend that we can pull back.

But when we look at it from the balance sheet perspective, as I said earlier on the call, we're servicing our debt, our debt in the near term is matched to our cash flow, metal prices are volatile. But if we see them stay where they are, today for the rest of the year, we actually end up with a better cash position if they go back to what we achieved in the first quarter of the year, then we still come out of FY '23 in a good position.

[Matthew Greene, analyst]

Thanks for the context there, Lawrie. And that's all for me.

[Operator]

Your next question comes from Daniel Morgan with Barrenjoey.

[Daniel Morgan, analyst]

First question is just what are some of the obligations you've got from a cash flow perspective outside of project spend. So is stamp duty still payable on the Glencore payment?

[Jacob Klein, executive]

Yes. I think as we flagged, Dan, there's $200 million due to Glencore and there's approximately $100 million of stamp duty payable. All of that is built into those numbers, which Lawrie was quoting the 16% to 18% short-term end or full year-end of the gearing levels, which is referring to. And it's all taken into account in those numbers here is quoting in terms of our view as to the need to draw on that revolver. If we needed it, which based on current prices and our plans, we don't think we need to draw that revolver.

[Daniel Morgan, analyst]

Yes, sure. And is there an inventory unwind due at all? I mean last quarter, you sold less than you produced. Is there an unwind coming in terms of gold sales that might benefit the cash flow?

[Lawrie Conway, executive]

I mean, really, Daniel, it comes down to when the -- is the last day of the quarter determines a lot of our inventory. So we balance with when we pour and when we ship. We've got some arrangements now in place at Red Lake that actually has improved the upturn times to what it used to be. So imagery drawdowns are really going to depend on the concentrate shipments of when they get shipped to Glencore at Ernest Henry and certainly some concentrate, which will build up through the first half of the year at Red Lake. And when we get a salable quantity in parcel, that's when we would draw down into the, probably right into Q4 more than anything, but they're the only ones that are really around rather than when the last day of the quarter is.

If you look at December, my rough remembrance is that 30, 31 is a Saturday and a Sunday, so the sites who want to pour as close as they can on that weekend, but they'll do their last shipment in the last week in December, so you'd see an inventory buildup. And I haven't looked at what the March quarter end would be.

[Jacob Klein, executive]

And Dan, looking at the -- at your old numbers from Visible Alpha, it looks like you've got our AISC at $1,480, so that's pretty close to where we achieved this quarter in a quarter which we think will improve pretty materially over the next 3 quarters.

[Daniel Morgan, analyst]

Yes, sure. And on the cash flow, I mean, you expect the business performance to improve in the next few quarters. But are we going to be getting net cash inflow? When is the balance sheet going to improve in terms of a quarterly basis? Like we're still going to have cash burn for the next couple of quarters that we know?

[Jacob Klein, executive]

Well, I mean I'll let Lawrie answer that. But bear in mind, you had a $55 million dividend payment and a debt repayment of $45 million this quarter and a working capital shift of about $100 million in terms of changes to the cash flow. So Lawrie?

[Lawrie Conway, executive]

Answered most of it. But I think yes, when we look at the cash flows before major capital, you'll start to see that increase quarter-on-quarter depending on where metal prices land. And then when you look at it after major capital, then it actually, that gap narrows because most of the capital needs to be spent certainly for Cowal coming into the start of the fourth quarter as we move into production. And similarly, at Red Lake as we come into increased production at Upper Campbell. So it does build, but that's as I said, we finished the year $575 million of cash. We put that in place knowing what we needed to draw in the year.

I mean I struggle with people's rationale that you cannot build 2 new mines in a capital intense year to bring them on to production without actually drawing on cash. That is how you actually build the mines.

[Daniel Morgan, analyst]

I understand that. And just last question is just on Red Lake. So it looks like you put your first stope up in the Upper Campbell. Looks like a pretty good grade. I mean was that in line with your expectations? Just wondering how that went in the dilution management of that stope. I know it's only one stope...

[Jacob Klein, executive]

Yes. I mean, I think it's early days. It was in line with our expectations. And obviously, Upper Campbell, the highest-grade reserve grade, it's 7-gram reserve. We're excited to be getting into it, but it's too early to make upside predictions on the grade.

[Daniel Morgan, analyst]

Thanks for your answers.

[Operator]

Your next question comes from Levi Spry with UBS.

[Levi Spry, analyst]

Thank you for your time in the call. Just a couple studies due this quarter, particularly the PFS for the Mungari. Can you just remind us, I guess, firstly on timing when this quarter and also what the scope was that we can expect for the project?

[Jacob Klein, executive]

Yes. So Levi, it's a plant expansion study, which we're finishing off the feasibility study by the end of this year. The NPV analysis suggests that it's positive and it helps bring in a lot of material from the surrounding areas given the very large inventory base.

And -- but noting Lawrie's comments that the only 2 projects that we have actually committed to are the Red Lake, Upper Campbell mine and the underground mine at Cowal, we need to assess it with respect to our capital allocation over the next couple of years.

[Levi Spry, analyst]

Yes. And just with the, your last update, I think you'd sort of delayed the effectively the FID on that because on the back of market as much as the balance sheet. Is that -- just trying to recall -- something on the budget.

[Jacob Klein, executive]

It was based on the capital cost and the ability to deliver, but obviously, it does need to be matched with our balance sheet and our requirements. And clearly, we understand the focus and the scrutiny of the balance sheet. We feel very confident about it. We feel very confident in the robustness of the balance sheet, particularly the timing of the debt repayments, but it is a big capital year this year, and we need to deliver those 2 big projects. That gives us the growth, the organic growth. And then Mungari potentially adds to that. But we also have the increasingly exciting Ernest Henry study, which is evolving as well.

[Operator]

Your next question comes from Andrew Bowler with Macquarie.

[Andrew Bowler, analyst]

I guess just staying on Mungari. I just read in the quarterly comment about contract later being used and the tightness in the labor market. Just as a bit of an update on your thoughts about how the labor market in WA is looking. We're hearing a bit of mixed messages from WA-based miners over this side of Australia.

And I guess how it compares to East Coast is where we're seeing tightness emerge or is labor markets easing in the East Coast? Just some thoughts on that.

[Jacob Klein, executive]

I think it's definitely more challenging in Western Australia for us. I just looked at an update on Mungari. Certainly, the March to June period was a period where we lost employees. In the last 3 months, we've had net gains. So we've added to it.

We've actually been able to reduce the workforce by 5% and still deliver, but that's through efficiencies. But yes, I mean, we are using too much contract labor hire and would prefer to get those into permanent positions and recruit, but it is challenging.

[Andrew Bowler, analyst]

All right. And just a question on rainfalls, probably better asked to the bureau. But I mean, obviously, we're after, we're looking like we're going to another wet summer in the East Coast of Australia. Obviously, Mt Rawdon seems to be dampened by heavy rainfall. But have you got any comments or indications of how that might affect the Cowal Open pit and where it is in the Stage H cutback and how that might affect movements over the summer period? Or are you pretty confident of a consistent performance there despite predictions of heavy rainfall?

[Jacob Klein, executive]

I'm glad you called it a summer because it doesn't quite feel like it at the moment. But yes, I mean, it clearly is something that we're very focused on. Safety is our priority in terms of our people and everything, but we're preparing. We have plans in place. Cowal does benefit from having a very large stockpile. And therefore, the risk is really the ability to get into the pit and mine higher-grade material versus the stockpile material. But Bob and his team and the site team are putting in place everything they can to ensure that we are well prepared for any incoming weather. But it does present a risk that we're well aware of and focused on.

[Andrew Bowler, analyst]

Last one for me. Just on the Mt Rawdon Pumped Hydro Project. Clearly, shaping up to be quite an interesting project. I'm just wondering, as you're working through the studies there. Have you got any updated thoughts about how you might monetize that or sell or JV it, keep it for ESG reasons for that sort of stuff? Or any updated thoughts on that?

[Jacob Klein, executive]

So I think it's evolving. And as we're kind of getting in [indiscernible] to potential investors who want to participate in the project, we're trying to figure out the best pathway to value creation for Evolution. It will not be a draw on Evolution's capital base beyond the feasibility study. So we've committed to fund the feasibility study. But I think there's a value crystallization point there. Whether that is a sell-down by [indiscernible], whether it's an exit from the asset or whether it's an in-specie distribution to shareholders in some way so that you can decide whether to participate or not on the upside of the project is yet to be determined. But I think some of the important sort of points of crystallization of value is clearly an offtake party, and we have several who are interested. And then an investor group and how to marry that up with the offtake party as well.

[Operator]

Your next question comes from Alex Barkley with RBC.

[Alexander Barkley, analyst]

Just one quick question from me. I saw the mill shut time for Ernest Henry in the release, but not Cowal or Red Lake. Forgive me if I missed those. But how long was the shut for those sites during the quarter?

[Jacob Klein, executive]

So the Red Lake on I think we had about 2 weeks of production of the Campbell mill, which was out as we're doing the times of that new crusher. And Bob, the Cowal shut?

[Robert Fulker, executive]

I'm trying to remember. That's 4, 5 days, 5, 6 days.

[Jacob Klein, executive]

5 or 6 days at Cowal.

[Operator]

Your next question comes from Al Harvey with JPMorgan.

[Alistair Harvey, analyst]

Just wanted to get a bit of clarity around the Ernest Henry resource drilling site. You mentioned you're looking at extensions to the PFS region. Is this going to be factoring into the study that we're expecting this quarter? And then beyond that, how much more drilling is planned before the cutoff date to the next resource and reserve update early next year?

[Jacob Klein, executive]

Glen is excited to finally get a question and he is disappointed that his great drilling results have been put into, on Page 8 and 9 of the quarterly, but I encourage everyone to look at them because they're pretty good.

[Glenton Masterman, executive]

I thought I was going to [indiscernible] with that and I see put to the fire. But Al, thanks for the question. So these new drilling results will be incorporated in our annual MROR update, and they will inform the PFS study in terms of some of the extension areas that we can incorporate in that profile between the 1,175 and -- sorry, 1,125 and 775, which is the vertical profile that is the subject of the PFS.

The -- in terms of cutoff dates for drilling, we'll take everything up to around about the end of November as we start to then work through the MROR update. The beauty of a copper deposit is that we can actually use information based on the drilling observations to model domains, obviously, not grade, but that can inform the estimate as well. So that will be built into the assessment at the end of the year. And there is some additional drilling that will be planned in the future that will support the feasibility study, presuming we're gated through to that. So that's the sort of plan for the moment in the drill program.

[Jacob Klein, executive]

And just to remind you that the MROR update comes out in February. So cutoff is December, but we will release it in February.

[Alistair Harvey, analyst]

Maybe another one for Glen, since he's been neglected. Just wondering about, you did mention the, did you mention that the JV could be looking to do a resource there? I just wanted to kind of get my head around timing and how you're thinking about scale there.

[Glenton Masterman, executive]

Yes. Look, I think it's shaping up that way. There's a couple of key targets there. There's best time where a lot of the diamond drilling of late has been focused. And I'd like to see us drive in that direction. But the area where I think we have a higher probability is what we call the A zone. And that's a target that was drilled early on during the earning phase.

So look, all things being equal, we are not that far from sort of hearing the earning milestone which will then enable us to claim the 75% interest that we've been investing in. And so I'm aiming to be able to coincide some form of resource update with that timing. So that's the plan. And I expect it will be modest with obviously, the ability to grow.

[Alistair Harvey, analyst]

Glen. Maybe just a quick follow-up there. Then like once you hit that earning milestone. Is there any potential to monetize that stake and kind of thinking as well? Obviously, you guys have still got the stake in Navarre. Like how are you thinking about these things as core parts of the portfolio?

[Jacob Klein, executive]

We continue to assess them. I mean, [indiscernible] invested in because we thought it had real geological potential, and Glen will make that call once we've earned in the 75%. But I think it's certainly encouraged us whether it is of a scale that we should pursue or not, but it definitely looks like it's created value.

[Alistair Harvey, analyst]

And just one more quick one. Did you guys have a timing for the study at the Pumped Hydro? Sorry if I missed that before.

[Jacob Klein, executive]

Yes, middle of next year, so June next year.

[Operator]

Your next question comes from David Radclyffe with Global Mining Research.

[David Radclyffe, analyst]

So I just had a follow-up question on the Pumped Hydro. Obviously, you guys see hidden value there, but does that mean internally now you've actually got a view on what the project value might be and maybe when you can start to share that with us?

And then in terms of new potential investors, is it really the feasibility study that's the key there next year to help sort of frame that or the indications that investors are sort of not as focused on the feasibility study. That's my first one.

[Jacob Klein, executive]

Yes. Thanks, Dave. I mean the challenge with being in a project like this is that it's difficult for us to articulate a value right now because a lot depends on the offtake whether it's a 1 gigawatt or a 2 gigawatt and the length of the offtake contract. And then those are really the drivers and then what the mix is between locking in the offtake and leaving some of it variable and that depends somewhat on the investor base. It's difficult to put a value on it because I'd be quoting numbers of a spreadsheet, which is too early to do. But it has got me excited and enthusiastic, and we are -- we're going to take this to maximum value for Evolution shareholders. That will be June next year.

Certainly, the feasibility study work to date has not identified any red flags with respect to the potential of this Pumped Hydro to be developed. But there is -- the main drivers are going to be the offtake and the Powerlink connection to the main grid seems fine, and we've started that application. And yes, I think the Pumped Hydro is a really hidden option within Evolution's portfolio. Difficult to value, though, I'll leave that to you. You're the expert, aren't you? On that.

[David Radclyffe, analyst]

Then maybe just to focus a follow-up there. I mean, obviously, the market is very much focused on the balance sheet. So that's just take that to another level. In terms of the -- your listed and unlisted investment portfolio, does that holding -- does investments still makes sense today or is there potentially some hidden value there that we're not seeing?

[Lawrie Conway, executive]

Yes, Dave, I mean, there for us in terms of what we saw as potential investment in particular projects. Over time, we assess when is the right time to exit like any other asset. So yes, there is option for us on those. But right at the moment, we haven't gotten any plans around them.

[Jacob Klein, executive]

And I think just, Dave, to reiterate, I mean, Lawrie and I have this conversation on a daily basis because we obviously see and hear the scrutiny on our balance sheet, and we talk about it a lot. But from our perspective and based on our plans and based on our commitments and without -- and based on our planned gold price, which is $2,400 an ounce, we feel very confident that we shouldn't be starting to potentially impact opportunities ahead of us by pulling levers to reduce cash outflow. We knew we were going to spend $600 million this year. Lawrie told us a year ago that this is going to be a big capital year, we prepared the balance sheet for that.

The operations are going well. We're kind of, I suppose, a bit on a different crack in terms of the scrutiny which the balance sheet is getting, particularly given the long-dated nature and the 3.5% cost of that debt than other people have. But yes, we will continue to assess it and continue to look at it. But right at this point, we feel very comfortable with the balance sheet and actually pleased that we put in place a large capital component of it at such low cost and long dated.

[Operator]

Your next question comes from Peter O'Connor with Shaw and Partners.

[Peter O'Connor, analyst]

Just further to that, the revolver feels like insurance, which is a pragmatic and prudent thing to do. What is the cost of that insurance, Lawrie? Is it material?

[Lawrie Conway, executive]

No, Peter. I mean, when you look at it, when it's undrawn, it's half of -- half year margin at best. And when it's drawn, you're obviously paying similar interest rates to the 2 term loan facilities that we've got in place. So it is insurance.

[Peter O'Connor, analyst]

Okay. And to your comment about levers, a few questions ago? You talked about exploration. I was just surprised using the word exploration and discretion in the same sentence. But how much of exploration spend is actually discretionary?

[Lawrie Conway, executive]

Glen, I got me none. But Peter, it was in the context of saying that we know where all of our expenditure goes be that in group overheads, in discovery, in operating costs at our operations in capital costs at our operations and knowing which one you can and can't do.

Yes. Glen is right. It's not discretionary. But if we look at the around $60 million that we we've committed to in the plan this year in Discovery, yes, you are not talking in the tens of millions when you're spending $1.3 billion elsewhere. So it is an item though that we can always look at and Glen is aware of it.

[Peter O'Connor, analyst]

Jake or Lawrie, just a question on the labor. Again, it's been a focus of a lot of calls in the last week, particularly regional issues out of WA. So first, you get asked the question, how regional is labor pressure both availability, skills, et cetera. Is it West Coast versus East Coast and Canada?

And then secondly, it feels like it's not as much bumps on seats as an issue anymore, it's about skills. And if that is correct, how long does it take? And how much does it cost? And how much you forgo productivity to get those skill sets up?

[Jacob Klein, executive]

Yes. I mean I think it is a case of different regions. So West Australia is definitely challenging, we're getting feedback [indiscernible]. Where the West Coast has been a challenging area for a while, and it remains that.

So as I said, in the last 3 months, we've seen net gains as opposed to outflows of people in the 3 months prior. But there are a number of projects being built in WA, and that continues to be stressful.

The East Coast, maybe it's because of our sites are more residential, particularly Cowal and Rawdon, maybe it's because there's slightly fewer opportunities for people to move easily without relocating their family, but turnover rates are much lower.

And likewise, in Canada, turnover rates are low. And the town is residential and has a large workforce, which is committed and available to the site. Peter, did that answer your question?

[Peter O'Connor, analyst]

Yes. Sure. Just on skills, Jake, it seems like there's a drag on skills more than bumps. What's the issue with, how does that, how do you address that? How long does it take? And I'm thinking as much from an industry perspective as Evolution because it feels like it's a safety issue and it's a productivity headwind?

[Robert Fulker, executive]

Peter, it's Bob speaking. As Jake said, it really is regionally discrete, if we look at West Australia and Kalgoorlie. We are succeeding better than we were in past quarters, getting actually skilled people into the business. If we go back 3 to 4 months ago, getting a loader operator wasn't a problem, but getting a tele-remote or a production driller. It was really seriously challenging. We seem to be picking them up now. We did have a period of time when we lost [indiscernible] fitters and electricity, but we seem to be picking them back up again now.

The ones that we've shifted with is -- and I'm talking about Kalgoorlie again, where we've shifted some of the focus from the local to the Perth market with those higher skill levels. But we've still got 85% of our people living in Kalgoorlie. So we just did some sort of slight shifts in where we're looking. If we have to get a green person to get them up to a loader remote or drilling, that's not weeks or months. That's a long period. But it's a lot easier, and we've been doing this as well is moving our current internal people up through the ranks and then bringing people in at that lower truck driver and [indiscernible] level.

If you look at the eastern states, we do have a significantly lower turnover. And Ernest Henry, even though it's FIFO has a lower turnover than those FIFOs I've seen. The team up there is pretty stable. And it's actually, it's not really a major issue from a skills perspective. We haven't had a problem at Cowal getting tractor over the mic and the underground with Barminco, they seem to be getting their skill levels okay.

[Operator]

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

[Jacob Klein, executive]

Thanks, Ashley. Look, I appreciate everyone participating on the call and all the questions we did get and encourage you to ring in if you do have further questions that you want answered.

Just before we close the call, I do want to recognize Martin Cummings. It is his last quarterly reports with Evolution. Martin, I'm sure it's something you will miss enormously this part of it, but there is a huge amount of work that goes into this court lease.

Martin has been with the company for 9 years. The last 6 he has been commuting for Brisbane and has made a decision that he really wants to spend more time with his family, and that's very understandable but sad for Evolution. So he's done an enormous amount of great work for Evolution as the General Manager of Commercial and most recently, Investor Relations.

We wish you all the best. We'll have the opportunity at the AGM, which we hope everyone will come to, and it is sad to see you leave, but we understand the reasons. Thanks, everyone. Appreciate it.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.