Evolution Mining Ltd

ASX:EVN

Earnings Call Analysis

Company Posts Positive Earnings and Outlook

The company expects its mining hub to reach full production this December, adding to Mungari's output. With the planned expansion from 2 to 4.2 million tonnes per annum at Mungari and new high-grade discoveries at Cowal, the company anticipates growth. The September quarter's operating cash flow was $280 million, and the mine cash flow before capital was $245 million, marking significant increases from the prior quarter. Group AISC per ounce decreased to $1,612, and the company targets a full-year AISC of $1,370 per ounce. Major capital expenditure is guided at $450 million to $490 million, and sustaining capital at $190 million to $230 million. Debt has been restructured with no commitments until December 2024, and available liquidity stands at $504 million, with expectations to reduce net debt throughout FY '24.

Return to Strong Cash Generation and Operational Progress

The company finished its first quarter on solid footing with a clear trajectory for achieving its annual guidance—aiming to produce 770,000 ounces of gold at an All-in Sustaining Cost (AISC) of $1,370 per ounce, with an allowance of plus or minus 5%. Despite some early hurdles including a ramp-up at Ernest Henry, planned facility shutdowns, and the use of lower-grade materials, the company has pushed through to produce 158,000 ounces at an AISC of $1,612 per ounce. It's anticipated that production will climb and AISC will fall as higher-grade materials at Cowal and Red Lake become accessible. With a reported operating cash flow of $280 million, up 42% from the previous quarter, the company is on a path to exceed $1 billion in annual operating cash flow, assuming spot prices hold steady. Notably, Ernest Henry's resumption of operations and cash flow bolstered this financial growth, contributing significantly with a $110.6 million cash inflow for the quarter.

Investing in Growth While Advancing Production

The Mungari 4.2 Growth Project marks a strategic investment, on time and within budget, as the company looks to expand. Meanwhile, Cowal has made a notable comeback as a significant cash generator, with $112 million in operating cash flow and a reduction in capital expenditures. Benefiting from these cost efficiencies and improved operations, including the high-grade underground mine project, Cowal expects to continue this upward cash flow trend. Ernest Henry remains a reliable asset, exceeding production and cash flow expectations, while Red Lake rightsizes its workforce for a savings of $12 million annually and still meets its FY '24 production goals.

Operational Wins Across Key Sites

The company reports strong ongoing performance with all sites proving cash positive before major capital outlays. Mungari expects to hit full ore production soon, contributing to the quarter's heightened production, while Mt. Rawdon holds steady, continuing to contribute with an $8.2 million cash flow in the quarter. These consistent results keep the company aligned with its FY '24 production guidance and AISC targets, showing the adaptability and resilience of its various operations.

Exploration Breakthroughs Promise Future Growth

Not resting on its operational laurels, the company is also excited by drilling results that demonstrate the potential for extended high-grade mineralization at Mungari and Cowal. These promising discoveries are expected to support and possibly extend the life and scale of operations, especially as Mungari looks to double its throughput. At Cowal, the results have the potential to greatly enhance the underground mining opportunities. Collectively, these exploration achievements showcase the company's commitment to organic growth and the tangible success of its strategic direction.

Financial Stability with a Deleveraging Focus

Financial prudence remains a priority, indicated by a disciplined approach to cash flow, which saw a 42% increase quarter-over-quarter, and a 98% jump in mine cash flow before capital. The company's capital expenditure guidance is adjusted to be approximately $117 million lower than last year, reflecting reduced capital intensity. A recent debt restructuring complements the strategy to align debt profile with mine life extension, which, coupled with substantial liquidity, positions the company well to continue its path towards deleveraging its balance sheet. Looking forward, stronger cash generation and the abating need for capital expenditure will serve as enablers for further debt reduction and financial health.

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by. And welcome to the Evolution Mining Limited September 2023 Quarter Results Call. [Operator Instructions] 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. Peter O'Connor, General Manager, Investor Relations. Please go ahead.

[Peter O'connor, executive]

Thank you, Rachel. Good morning, ladies and gentlemen, and welcome to today's conference call with Evolution Mining. As Rachel said, my name is Peter O'Connor and I am General Manager of Investor Relations at Evolution Mining. Today, we have lodged 4 announcements with the ASX platform. Firstly, the September quarter FY '23 quarterly production update, an exploration update covering our Cowal, Mungari and Ernest Henry and also our annual report for FY '23 and our sustainability report for FY '23.We have 4 members of our leadership team from Evolution Mining attending the call today to talk to specifically the first 2 of those announcements, the quarterly update and also the exploration report. In attendance, we have our Chief Executive Officer and Managing Director, Lawrie Conway; our Chief Operating Officer, Bob Fulker; our Chief Financial Officer, Barrie van der Merwe; and our VP of Exploration Discovery, Glen Masterman.And with that Lawrie, over to you.

[Lawrie Conway, executive]

Thank you, Peter. Good morning, everyone. We appreciate you joining us as we outline the results for the September quarter as released on the ASX this morning. Prior to discussing our performance for the quarter, I want to comment on the current gold price. We know that there are many drivers to the gold price and one of these is geopolitical unrest. That said, the ongoing situation in Israel, which is contributing to a higher gold price is one of the drivers that we're not comfortable with. The civil unrest and atrocities which is resulting in such devastation to so many people, including loss of life is deeply saddening and we sincerely hope the situation is able to be resolved promptly. For this reason, we're a bit more subdued about the benefits we are receiving from the higher spot gold price today.At the June quarterly and our full year financial results, I outlined that we work to finish FY '23, so as to set us up to deliver improved results and financial performance in FY '24 and beyond. The September quarter has seen us track to that plan. On the sustainability front, our recordable injury frequency reduced further to 8.3, continuing the trend of recent quarters. We also confirmed during the quarter that we had reduced our emissions in FY '23 by 11.2% over the FY '20 baseline. This places us well on track to achieve our commitment of a 30% reduction by 2030.At the end of the first quarter, we remain on track to deliver our guidance of 770,000 ounces at an All-in Sustaining Cost of $1,370 per ounce plus/minus 5%. We knew that the first quarter was going to be a low production and high-cost quarter due to a number of factors, including the ramp-up at Ernest Henry, the planned shutdowns at a number of our processing facilities and the utilization of lower-grade material, including some stockpile material, which carry higher noncash inventory values.For the quarter, we produced 158,000 ounces at an All-in Sustaining Cost of $1,612 per ounce. As we move through the year, we'll see production increase as we access more higher-grade material at Cowal and Red Lake and the AISC will trend down. Bob will go through our operational performance shortly. Financially, we generated an operating cash flow of $280 million at a rate of over $1,700 per ounce. This is a 42% increase over the June quarter. However, it reflects the benefits of Ernest Henry returning to the reliable cash contributor than it was before the impacts of the weather event in March.All operations were cash positive before major capital, generating a combined $245 million, which shows that the business is returning to an improved cash generation position. This will increase further as we move through the year and should push us well over the $1 billion annual rate. If the spot price is maintained, then cash flows will be materially higher again and contribute further to our deleveraging of the balance sheet.On the projects front, we made good progress at Mungari 4.2 project, previously known as the Future Growth Project with the main EPC contract awarded during the quarter. The contract locks away over 60% of the total project cost. However, more importantly, we've been able to confirm that construction will be within the original project schedule and budget while the required workforce has been secured as has the associated accommodation. The project team had a kickoff meeting with the contractor last week and activities will ramp up in the coming months.When we approved the project, we talked about the potential to grow the resource base, targeting underground opportunities to support the ability to sustain for longer the 200,000 ounces per annum post-expansion production rate. Today, we announced some excellent drilling results from 2 new structures within the Kundana Mining Center at Genesis and Solomon. These results give us confidence in the potential for longer periods of higher-grade material being fed to the expanded plant.Just as exciting are the results at Cowal in the underground mine with significant results between Dalwhinnie and Regal showing upside potential outside the existing mine resource. Glen will take you through these results soon, but what it does confirm is that the organic growth opportunities we outlined at our Investor Day have much more upside potential and we'll continue to work on these opportunities to further improve the financial returns of the projects and the assets.I'll now hand you over to Bob for an update on the operations.

[Robert Fulker, executive]

Thanks, Lawrie, and good morning, everyone. As Lawrie mentioned, our safety is trending nicely. All operations are currently dedicated to further improvements through their safety improvement plans and implementing an online critical control verification system. Production in the September quarter of 158,000 ounces was consistent with the previous quarter and we expect quarterly production to improve through FY '24. Notable highlights for the quarter were Ernest Henry back to normal operation, operating mine cash flow improved to $280 million for the quarter and the Mungari 4.2 Growth Project commenced and remains on schedule and budget.Turning to Cowal. Their cash flow improved significantly during the quarter and we expect this trend to continue through the remainder of the year. The high-grade underground mine project is now in ramp-up phase to circa 1 million tonnes this year and will underpin the 18% lift in production. Capital spend is also forecast to be significantly lower. The [ significant ] achievement for the quarter was on the scheduled completion of the planned processing plant maintenance, the accommodation village becoming fully operational and paste to delivered underground has commenced. In summary, Cowal has returned to a substantial cash generator for the group, generating $112 million in operating mine cash flow in the September quarter, combined with a reducing capital expenditure profile.Ernest Henry is on track to deliver production and cost guidance. They have successfully restored production to normal operating levels as guided with 20,000 ounces of gold and 13,500 tonnes of copper produced for the quarter. Operating mine cash flow improved significantly to $110.6 million for the quarter. They also delivered a record underground development, both under Evolution and prior ownership with an impressive 3,114 meters completed during the quarter. This is a testament to the site team's continued focus on improvement. The future growth plans continue to progress and the Life Extension Feasibility study remains on schedule for delivery in the March FY '25 quarter.Over to Red Lake, they remain on track to deliver our full year guidance. The September quarter production was in line with the previously guided range of 15% to 19% of the FY '24 production and the quarterly production is expected to improve as the year progresses. Workforce reductions were completed during the quarter to align headcount with the production fleet requirements. This represents an annual saving of approximately $12 million. Remediation work has progressed nicely to ensure the future or continuity from the Cochenour mine.The work program highlighted in the figure on Page 5 of the September quarter, outlines the immediate solution of the #3 PASS and the near-term solution of the raisebore #4 PASS. This PASS is scheduled for completion in the December quarter. In the longer term, the ramp breakthrough will provide an alternative for both ore haulage and mine access. Pleasingly, the All-in Sustaining Cost reduced by 16% compared to the previous quarter for an AISC of $2,552 per ounce, with the underlying cost trending to improve -- sorry, cost trend continuing to improve. We remain on track for the FY '24 AISC guidance of AUD 2,000 per ounce.A key highlight for the quarter was the significant improvement in the operating mine cash flow to AUD 27 million. This was the best operating mine cash flow in almost 3 years. In conclusion, Red Lake has rightsized the workforce, delivered positive operating mine cash flow, address the near-term haulage constraints and remains on track to meet FY '24 guidance in production and cost.Mungari's production is on track to meet this year's guidance. The September quarter was in line with expectations given the reduced ore availability during the ramp-up at the Paradigm mining hub. Mill throughput was maintained by the processing of stockpiled ore. In coming quarters, we will see improved production and a reduction of the stockpile ore processed, reversing a noncash inventory charge seen in the September quarter. The new Paradigm mining hub is expected to achieve full ore production during the December quarter and will contribute to the higher quarterly production at Mungari.Mt. Rawdon is on track to deliver FY '24 production guidance and delivered consistent production in the September quarter. They continue to make a valuable contribution to the group, generating $8.2 million in operating mine cash flow. In summary, we remain on track to achieve our FY '24 production and All-in Sustaining Cost guidance. The September quarter was in line with our expectations given the resumption of normal production at Ernest Henry and the planned maintenance activity at a number of the operations. Pleasingly, all operations were cash flow positive at the operating mine level before major capital with $245 million generated.Thank you for your time, and I'll pass it over to Glen for an exploration update.

[Glenton Masterman, executive]

Thank you, Bob, and good morning, everyone. I'd like to draw your attention to the exploration announcement we released this morning, describing exciting and high-grade drilling results at Mungari and Cowal. The results highlight potential for additional high-grade mineralization outside of non-mineral resources near active mining fronts at both sites. Mungari's results reinforce our approach of continuing to discover and delineate further high-grade underground ore to support the planning expansion from 2 million to 4.2 million tonnes per annum, which positions the site to further increase its mineral resources. The results at Cowal further expand the potential of the underground mine and underline our focus on delivering continued and reliable higher-grade underground production in the coming years.Turning firstly to Mungari, I refer you to Figure 1 of this morning's ASX announcement, which illustrates the relationship of the Genesis and Solomon veins relative to the Christmas vein, which is where most of our underground production at Kundana is currently situated. This morning's drilling results confirm that Genesis is the next high-grade discovery at the Kundana Mining Center. Pleasingly, we have already reported production from along the Genesis structure, including a stope that reconciled above 17 grams per tonne from the area we visited with those of you who were able to join our tour of Mungari during Diggers and Dealers in August.During that site visit, you will recall the ore drive where we walked and inspected the high-grade [indiscernible] exposed along the side walls and in the backs. We have progressed our geological understanding, which now confirms our interpretation from that time that we were standing at the very top of the vein structure, almost 500 to 600 meters below surface. This is one of the reasons why Genesis has remained hidden from our knowledge for so long, along with the fact that most of the previous drilling was completed from the footwall side of the mine and stop short of the Genesis position.Our site geology team has shifted their thinking away from the geopolitical dogma that assume the centenary and stress [ laking ] main vein structures were the only host of high-grade mineralization at Kundana. Our geological work illustrates there are other mineralized structures that were not previously known situated in new geological positions that have extensive strike and depth potential. We are excited about the growth and life of mine prospects at Kundana with further drilling planned this year, the aim of expanding mineralization at Genesis and Solomon, while continuing to lengthen the same drill holes to infill the Christmas resource for conversion to reserves.At Cowal, it is really pleasing to be able to report the new drilling results from underground, which very nicely follow along from the drilling update I spoke about at our Investor Day back in June. I refer you to Figure 2 in this morning's announcement highlighting the locations of these new results, which have expanded the Dalwhinnie and Regal ore bodies across the Gap Zone towards each other. The Gap Zone, which we will shortly rename along the lines of the [ St. SingleMalt ] theme as our other underground ore bodies is one of the areas in the underground that remains very under-drilled. There is strong potential to connect Dalwhinnie and Regal across this space as we expand our drilling coverage into this area.We are also seeing some very encouraging results from our close-based or definition drilling in the areas prioritized for early production in the underground mine schedule. Our best example is at Galway where we are generally seeing higher grades from slightly smaller ore volumes for overall higher metal reported entirely within the ore reserve. Lastly, I would like to mention that underground drilling recommenced at Ernest Henry during the September quarter. Two rigs are currently operating with initial drilling targeting the down-plunge extension of the Bert orebody, along with potential extensions to the Ernie Junior orebody. I look forward to being able to report new results to you after we complete the December quarter.With that, I will hand over to Barrie.

[Barrie Van Der Merwe, executive]

Thank you, Glen. [Technical Difficulty] generated strong cash flow for the quarter, underpinned by Ernest Henry's return to normal operations. All operations contributed positively to operating cash flow of $280 million and mine cash flow before capital of $245 million, which increased 42% and 98%, respectively, on the previous quarter. Net mine cash flow returned to positive territory, improving by $176 million from the last quarter of FY '23. Group cash flow improved by $69 million or 72%, an outflow of $26 million for the quarter.As outlined by Lawrie, our production will increase and our AISC per ounce reduced further as the year progresses. This will result in even stronger cash generation in the remaining quarters, putting us on track to reduce net debt in FY '24. We are very pleased that group AISC per ounce decreased by 16% to $1,612 per ounce quarter-on-quarter. This was driven by Ernest Henry being back at normal operations and Red Lake that was lower, resulting from higher ounces sold, partially offset by the impact of the Canadian dollar that was slightly stronger than Q4 of FY '23.Mungari increased quarter-on-quarter, driven by additional costs from noncash or stockpile drawdowns to mitigate the slower ramp-up at Paradigm. This is not expected to recur with Paradigm reaching full mining rates in the December quarter. Cost management remain a key focus area and our full year cost guidance of $1,370 per ounce remain unchanged. As Lawrie mentioned earlier, capital intensity is reducing and capital expenditure guidance is approximately $117 million lower than last year.For the quarter, capital expenditure was $60 million lower than the previous quarter due to reducing capital intensity and timing of expenditure at Cowal and earnest Ernest Henry in FY '24. As the Mungari 4.2 project ramps up over the coming months, capital expenditure will increase from current levels, which is well-matched with stronger cash flow expected later in the year. Our full year guidance of $450 million to $490 million for major capital and $190 million to $230 million for sustaining capital remain unchanged.During August, we completed the debt restructuring that was announced at our Investor Day in June. This was done to align our debt maturity profile with increasing mine lives and provide financial flexibility to provide shareholder returns. In August, we received USD 200 million from our latest U.S. Private Placement, which is repayable in equal parts in FY '34 and FY '36, respectively. The restructure did not change our gross debt position and we have no debt repayment commitments until the December 2024 quarter. Since issuing our USPP, 10-year U.S. treasury yields increased about 100 basis points to about 4.6%, excluding the spread on margin. At 4.8%, our average cost of debt with an average debt tenor of about 7 years is very favorable.We have available liquidity of $504 million and the committed $525 million revolving credit facility is available until October 2025. After payment of the interim dividend of $38 million in October and with a continuing ramp-up of production over the year, a strong gold price and reduced capital intensity, our expectation and commitment to deleverage the balance sheet remains well on track.I will now hand you back to Rachel to open the lines for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from David Radclyffe with Global Mining.

[David Radclyffe, analyst]

My first question is on the news that's just come out on Glencore's plans to reportedly shutting production at Mount Isa. I understand this doesn't affect the smelter, which maybe you guys could clarify and you've got a mine gate arrangement anyway. And it's all pretty new news. But to put you on the spot, I was wondering if you could comment on any potential impacts you might see for Ernest Henry or even opportunities. Maybe there's increased labor availability that could be a positive? Could there be anything on the tolling that you could see that could be an opportunity?

[Lawrie Conway, executive]

Thanks, David. Yes. Look, I mean the -- with regards to the Glencore's plans at Isa, in terms of the first one, our offtake agreement for the life of mine at Ernest Henry already has provisions in place for if the smelter does close, which basically still requires them to take the concentrate and place it into smelters with the freight rates and everything already agreed. In regards to the second part of it, obviously, there will be a redeployment of people there that Glencore will look at, but it does mean there will be people available if there's any of that, that fits in with our requirements at Ernest Henry, we certainly will look at that.And then the last piece, does it provide opportunities for us around toll treating and the like, we know we've got capacity at the plant. We do have some contracts that we have with Glencore that we do toll treat at the moment on campaign. But if it does provide that opportunity, which then would obviously help with the processing costs, that's something that we'd have a look at.

[David Radclyffe, analyst]

And then maybe as a follow-up, if you could just provide some -- a little bit more color maybe on the profile of the capital spending for the year. I know you're only one quarter in, so it's still early days, but you are tracking under it looks like on both growth and sustaining capital guidance on an annualized basis. Obviously, Mungari spending still to come, but everything else looks like it's under a bit as well. So, is that just a factor of managing spending to match expected stronger second half cash flows? Or in some cases, might you actually be running under anticipated run rates?

[Lawrie Conway, executive]

Yes. So, if we look at it, David, sustaining capital through the course of the year, it doesn't fluctuate too much, as you'd expect. So, it's rushed through in Q4 to get all of last year's done and therefore, has a slower start-up in Q1. As we go through Q2, Q3 and Q4, it will be higher than what we saw in Q1, but still within the range, as Barrie said, of the $190 million to $230 million. Then in terms of major capital, it really does come down to the expansion project at Mungari, where a lot of that activity comes into -- back end of Q3 and into Q4. So, you'll see Q2 similar to Q1, Q3 increased a little bit, and then Q4 will be the biggest quarter as the Mungari plant expansion works expand, which then also lines up to the hedging that was put in place that are in the second half of this year, leading into next year to cover for that capital as it comes on.

[Operator]

Your next question comes from Andrew Bowler with Macquarie.

[Andrew Bowler, analyst]

First one is probably for Barrie. I'm just noticing the $47 million in working capital move and part of that was accounts receivable related to Ernest Henry [ recon ]. Has that normalized now that Ernest Henry is back at full noise? Or is there still some normalization to happen next quarter? And also, have you just got an update on stamp-duty timing for Ernest Henry.

[Barrie Van Der Merwe, executive]

Yes. Sure, Andrew. So the components of that working capital outflow that you see a bit of Ernest Henry debtor, which -- and if that pipeline is full again, Ernest Henry back to normal operations. So that absorption of working capital has happened. The bulk of it was really creditors payments relating to CapEx we spent in the fourth quarter of last year. So, we had quite high capital expenditure in [Technical Difficulty] quarter that was paid. So that gives you the $47 million outflow. If you're going to just look at that over the year, as we get into that Mungari project and as Lawrie said, as CapEx ramp up, you'd see the working capital position pull back a bit again. And so we'd expect that $47 million to improve slightly as we go through the year.And then, I mean, with respect to stamp duties, we don't have timing on that. That will come through when it comes through. But as we stand, we've not been notified of any of that.

[Lawrie Conway, executive]

So Andrew, just to add a little bit on the Ernest Henry, the way that -- we have to think about it is that in the June quarter, there was essentially no production. So, the receivables were very low. As we come into this quarter, that's where it builds back up. So, there was over a $25 million increase in receivables because the earnest Henry cash flow, they don't hold working capital. They have a notional cash flow. So, the net of that is what would have happened in the quarter. But essentially, now that they're back to full production, the receivable will sort of level out depending on the copper price.But also, I'll add that the outflow in the working capital at the group level for the year -- for the quarter, the September quarter last year was around $30 million, $35 million outflow and the full working capital movement for the year was a positive $20 million. So that's what you should expect to see that the working capital move throughout each quarter up and down depending on where we're at. But over the course of the year, there's not a lot of material movement in working capital.

[Andrew Bowler, analyst]

And last one for me, just on the drilling results at Kundana. So obviously, some pretty handy results at Solomon and Genesis load. I think, Lawrie, you mentioned earlier that gives a bit more clarity on underground grades for longer. But is there any scope to sort of lift production level by level or should I say, lift output quarter-on-quarter over time as you start to head into those areas? Or are the Kundana mines sort of constrained in terms of haulage capacity and those extra loads will lead to mine life extensions as opposed to production uplift in the medium term?

[Robert Fulker, executive]

Andrew, if I could try to answer it. The Kundana production will remain probably stable, so it will give us extension of life because we have the mining sequence as well as the actual profile of the orebody, so the geometry of the orebody. So, I don't expect it to increase the actual instantaneous or the yearly production, but it will be for longer.

[Operator]

Your next question comes from Levi Spry with UBS.

[Levi Spry, analyst]

Maybe a question for Bob. Could you just give us a bit of an update on how things are progressing at Red Lake in 6 weeks or so in now? And what the profile, just remind us, I guess, of the profile you're expecting over the remainder of FY '24, tonnes and grade type stuff?

[Robert Fulker, executive]

Yes, Levi, as we said in the report, we've actually managed the alternative parts in for Cochenour. So that's brought the Cochenour ore flow security up. We have a second path that's actually in progress at the moment, which will further improve the actual security to the Cochenour ore flow. Both of those will actually secure the rest of the year and ensure that we actually increase our production going through the year. It is heavily weighted towards the back end of the year as we actually have previously announced.We also did a trial in the Upper Campbell area of our stoping area, as we said in the announcement as well. And it came through quite nicely. So that actually proves that theory of bulking at a bit of a lower grade mining block. So, those 2 actually went well. The development is starting to pick back up again. Generally speaking, I think we're on track.

[Levi Spry, analyst]

And maybe just one follow-up on the Glencore question, [indiscernible]. So, the mines are closing as we understand, is that right? Could there be any opportunity there for you picking up some assets, operating some assets that do have some life for a different operator, since it looks like you've got a good relationship based on what's happened in Ernest Henry.

[Lawrie Conway, executive]

Yes, Levi, I mean if I look at it, I think we've got the best mine in the region through Ernest Henry. And if it's closing because of grades and costs, I don't think there's much opportunity for us to refocus our attention away from Ernest Henry.

[Daniel Morgan, analyst]

Your next question comes from Daniel Morgan with Barrenjoey. Team, just first question on Cowal and the paste plant commissioning appears to be a little bit slower than I had thought. Can you just outline any issues that you might have had during the quarter? And whether these have now been resolved? And are you reliably delivering paste?

[Lawrie Conway, executive]

Yes. Thanks, Dan. I'll hand this to Bob. We did commission it through the quarter and with these sorts of plants, you've got to go through that commissioning and some teething problems which we have. But where we look at it for the year, it's still going to ramp up in line with the production ramp up. But Bob, maybe you want to just talk about the plant?

[Robert Fulker, executive]

Thanks, Lawrie. Dan, as Lawrie said, we did put first paste underground during the quarter. We have been going through the commissioning. As you get with Paste plants, we have had some issues with quality and throughput [ both ore ] fixed now. We're getting good quality paste underground or the actual UCS sampling it's coming back well. So, paste is continually based.

[Lawrie Conway, executive]

And over the course of the year, we still expect to get to the 1 million tonnes out of the underground as further planned.

[Daniel Morgan, analyst]

And Red Lake, when we're at site, there was a seismic event, which you did call out in the quarter. Can I just check that there's no ongoing impacts to production from that event? Is it quite discrete?

[Robert Fulker, executive]

The seismic event that happened when you were there has still got one section of the R Zone with an exclusion around it or we expect to get that lifted during this month, if not beginning of next month there. That was a fairly big event. So, it's taken us time to get back in there. With all these things, we prefer to be conservative and get back into them slowly and we're working around that. So, John and the team have actually got plans to work around it and that's what they're doing.

[Daniel Morgan, analyst]

Mungari, you're opening up the Paradigm open cut. Can you just expand on what the grade looks like coming out of that over the course of the year?

[Robert Fulker, executive]

Paradigm is a bit further away from the processing hub. So, the average grade of the pit is higher than what we have had before. I'm trying to remember been exactly what the -- do you remember what the resource grade was, Glen? 1.5 -- my memory was 1.5 or 2 grams, something like that Dan, was the actual resource growth that we were mining. We are seeing nice grades coming out of it at the moment.

[Daniel Morgan, analyst]

So, suffice to say, at Mungari, we should be thinking about higher grades in the quarters ahead, which will lift the production profile through the year?

[Robert Fulker, executive]

Yes.

[Lawrie Conway, executive]

Yes. Dan, you should expect the Paradigm grade to sort of be about the 1.8 over the remaining quarters of the year.

[Robert Fulker, executive]

And you got to remember, Dan, that we did process low grade stockpiles during last quarter.

[Daniel Morgan, analyst]

And just sorry, going back to that Glencore issue, can you just remind us of how the offtake works with your treatment charges? Are you currently like does the mechanics of it or the financials of it work that it would not be an impasse if the smelter were to shut or does it work that you send it to, I guess, implicitly to Asia already financially, I guess I'm trying to ask.

[Lawrie Conway, executive]

Yes. Good question, Dan, in that the way the offtake does work is that you don't get the full benefit of not shipping into Asia. So, your rates for treating and refining are set on a basically a hybrid between Australia and Asia. So, there's not a material change. And the other thing that would change is you actually through the government do get a benefit on royalty because it's treated and refined in Australia. So, your royalty would increase. But those 2 items are not material. And from my understanding of the announcement is that there's a commitment for that smelter to be open until 2030 is our understanding.

[Operator]

Your next question comes from Matthew Frydman with MST Financial.

[Matthew Frydman, analyst]

Lawrie and team, maybe just continuing on the questions on MIM. I think it was Levi asked about, I guess, the mines themselves, whether there'd be any interest there. But maybe more broadly, are there any tenements or assets, infrastructure assets or otherwise that could potentially be interesting to you in time? Maybe anything that might help to derisk Ernest Henry's future or, I guess, give you further options at Ernest Henry specifically?

[Lawrie Conway, executive]

Yes. Matt, I almost would say it's a bit early to be getting down into that detail. I mean, as I said earlier, we think Ernest Henry is the best of it for us. If there's any of those sorts of things at an asset level, there's nothing that would interest us in terms of some other infrastructure and the like. I think we'll just see how that pans out, but there's nothing that's front of mind at the moment.

[Matthew Frydman, analyst]

Maybe moving back on to Red Lake. And obviously, you cited the ore pass issues over the quarter. And as Bob's talked through, you've got a pretty clear plan to resolve them in Cochenour. Obviously, Cochenour is a bit of, maybe a bit of a deeper and older area of the various production fronts you've got. Are there any other areas where you're conscious that these sorts of issues may appear over time, perhaps the deeper areas of Red Lake and I guess, how are you thinking about that?And then if we think about Upper Campbell, which is obviously going to be a bigger contributor to your production as the year goes on, clearly, that's a shallower production phase. It's a new mine design, new mine development and obviously, brand new materials handling infrastructure. So, should we expect that, that area of the mine won't have -- or won't be impacted by any of these sorts of issues, whether it's seismic or sort of ore pass issues. Is that a fair assumption?

[Lawrie Conway, executive]

I'll hand it to Bob, Matt. But I think it's fair to say that when we look at the ore pass at Cochenour, the real positive is the way that John and the team have addressed that in putting the contingencies in but also the demonstration, as Bob talked about the trial that we did with the low-grade stope to keep the plant filled with ore that actually makes money is sort of showing the shift at the asset about how to operate this better. And also, Bob will touch on the Upper Campbell.

[Robert Fulker, executive]

Thanks, Lawrie. Matt, I think there's 3 questions in the one there. I'll try and answer them but don't just reask it. The difference between Cochenour ore pass and the Red Lake ore pass is the geology and the rocks in the different areas. The Cochenour system were built future redundancy into it with the raisebore and the decline will give us further redundancy when a break through and we'll continue to actually have that forward look to ensure that it doesn't affect us in the future. If we go after Red Lake, Red Lake is actually deeper. We aren't having the same issues with the ore passes there, although we do have a series of raisebores to go in.If you go back probably 6 to 9 months ago, we talked about our ore pass issue at [ Bama ], and we have that all designed with a bypass to going to make that flow better to improve the actual material handling. And we've got a second ore pass, which will actually be the waste pass design that will improve the waste transfer as well. So, we've got multiple improvements going on at one time. The main priority at the moment is the Cochenour one, purely because we need to get redundancy in that system and the Bama ones are actually working as we speak. We would just like them to work better.To do with Campbell, Campbell will be a truck operation. So, we've got a 62 tonne truck in there, which can hoist through the decline, a significant amount of dirt. So, it is derisked purely from the fact that it's a -- I'm going to call it a traditional decline operation as we would know it in Australia with the ability to move equipment around and to improve production flow as we move it.

[Matthew Frydman, analyst]

Thanks, Bob, I think you covered off on everything there. So, thank you for that. Maybe just finally, and maybe just one for Glen, but perhaps more broadly, the drilling at the Cowal underground in the Gap Zone where you've identified some early successes, how do you think about the development of that underground over time in terms of whether linking up all of these various signs and I guess, giving you a more fulsome resource? How does that affect how you think about the mining methods that you use and whether over time you might look to move to a more bulk underground mining method? I mean obviously, you've got a pit and a lake on top, which does somewhat restrict things, but is that an option as you continue to explore the underground areas? And also, can you remind me of the timing of the open pit continuation study as well and where we're at with that, please?

[Glenton Masterman, executive]

So Matt, I'll pick up on the exploration piece in the underground. I think at the moment, we're feeling really excited that we're going to be able to close that Gap and hopefully fill it with ore as we increase the drilling coverage into that area. In terms of how we approach it from a mining point of view, I think all of the above that you mentioned is on the table in terms of how we integrate this into sort of the existing mine design and what we need to sort of change to optimize the ore body. So firstly, it's understanding kind of what the resource upside is going to be defining that and then putting a design around and how we sort of optimize it into the plan. So, I think there's a fair bit of work to come on.But I think there are also going to be opportunities as we drill this to sort of sequence things that optimize grade and production around those types of opportunities and whether we come at it from the Regal side or the Dalwhinnie side, we need to do the work firstly to understand that aspect of the underground. But I think what we're seeing is strong growth potential, which is going to extend that mine life for longer than we in the plan at the moment.And I'll hand to Bob on the OPC.

[Robert Fulker, executive]

So, just finishing on the Cowal underground. I agree with everything Glen said. And I think the opportunity here is the potential to increase in the short term, the grade and to increase the actual life of the mine is really exciting from our perspective from the drill results that we're getting. So, the actual underground is looking really good. Mining methods, as Glen said, all of the above, we're going to take into consideration the constraints of the open pits on the top and as well as the actual the lake protection bund and all the environment and social aspects that go with it. So, all those things need to come into thinking process.OPC is tracking to plan. I'm just trying to remember, it was 2 years still, what 20...

[Lawrie Conway, executive]

Yes. I think, Matt, the main status of the project at the moment is that all of the public display comments and feedback have been received and the team is going through the responses, and we'll put our responses back to that in the next couple of months in this quarter. And then we'll basically then be in the hands of the regulator, we've allowed at least 12 months for us to go through the regulatory process. But it's as Bob said, it's at least 2 years before we have that decision point on the project.There obviously will be some decisions for parts of the infrastructure and the like over the next 12 months, but it all does [Technical Difficulty] and the only other thing is that given what Glen is finding, it's going to have to be a high-quality single [Technical Difficulty].

[Glenton Masterman, executive]

Might be a blend Lawrie.

[Matthew Frydman, analyst]

Maybe a bit of [indiscernible] or something.

[Operator]

Your next question comes from Alex Barkley with RBC.

[Alexander Barkley, analyst]

A question on the $63 million of restructure and nonoperating costs that was mostly capitalization at Cowal, is that beyond FY '24 major CapEx guidance? And what might that number be in the coming quarters?

[Lawrie Conway, executive]

Yes. So Alex, basically, what you have at the moment is underground as it ramps up, it's not a commercial production. So, under the accounting standards, which have changed over the last couple of years, you basically capitalize the costs. You don't net them off against revenue anymore. So, the revenue from the underground still will flow to the P&L and you must move the cost to the balance sheet. So, as we guided at the start of the year, we expect commercial production to commence in the second half of the year. So, you should expect another quarter whereby the costs of the underground go to the balance sheet and goes to the P&L. And then from the -- and at December, Barrie and the team have to make an assessment whether we have hit commercial production or not, and then we'll inform the market based on where we're at December.

[Alexander Barkley, analyst]

And just a quick one on Red Lake. I think there was a whole of site milling and mining study that was progressing. Do you have an expected date for that, maybe something tentative?

[Lawrie Conway, executive]

Sorry, just want to say that again.

[Alexander Barkley, analyst]

At Red Lake, I think there's a whole of site milling and mining study that's been progressing. Do you have an expected date for that one?

[Lawrie Conway, executive]

Yes. So on that one, we finished what options would be if we were to go above the 1.1 million tonne processing rate at the end of FY '23. But as we've made the decision to keep Red Lake at the 200,000 ounces, 1.1 million tonne per annum rate for the foreseeable future, we're actually not doing anything on that study because it's likely at least 3 years before we have to make a decision on that and we'll revisit the study at that point. But what it was at the end, it identified a number of options to take it from the [ 1.1 million to 1.8 million ] what the capital would be and how we would go about doing that. But at the moment, we're not moving forward with it.

[Operator]

[Operator Instructions] Your next question comes from Al Harvey with JPMorgan.

[Alistair Harvey, analyst]

Just wanted to clarify at Red Lake, those ore pass issues are related to the seismicity, is seismicity is the cause of those issues. Just wanted to double check that. And if it is, what are the risks for PASS 3 and PASS 4 or also having difficulties?

[Robert Fulker, executive]

Al, there's multiple issues that were coming into the effect. One is the ground that the ore pass went through. We did have some activity in the wall of that ore pass, but that was not the same activity that I was talking about at Bama. It was totally isolated and separate. The ore pass that we're using now are #3, the bottom half has actually been ground supported. So, it's an old [ almanac rise ], so it was actually ground supported when it was put in. And we've put a small hole, which is just a small raisebore equivalent hole into the top of it to keep that circular integrity in place.I don't expect that ore passes at Cochenour will last for 10, 15 years, I think that they're going to last for a shorter period of time than Bama purely because of the rock type and the geology. But if we can actually -- or when we actually get a raise in the intent is to not to touch the integrity of that circular opening and to just tip at the top and pull at the bottom and not break into it anywhere in the middle of the ore pass, which is a different strategy to the past.

[Alistair Harvey, analyst]

And maybe just one quick one, very brief mention of drilling at Ernest Henry in the exploration release. Drilling down depth of Ernie Junior and Bert and looking for results in December quarter. Are we likely to get those results separately or we probably see them with the December quarterly next year? And I guess just wondering if you can remind us what's in scope for the Ernest Henry expansion feasibility study, if there is any potential for that to slip in there as an option?

[Lawrie Conway, executive]

Thanks, Al. I'll take that one. Look, I think what we will do with the sort of the current drilling program is just report results update in January, sort of in line with our sort of December quarter reporting schedule. The reason I want to kind of hold back on those numbers is to give us the most amount of time we can to sort of understand with the drilling program, how things are evolving. So that's the strategy in terms of the drilling program. In terms of the feasibility, we're looking at mainly the sort of mine extension project that we've previously spoken about between the 1,125 and the 775. So that's where the FS is focused on. We're obviously in parallel with that sort of starting to develop [Technical Difficulty] FS will be predominantly focused on that mine extension that I spoke about.

[Operator]

There are no further questions at this time. And I'll hand back to Lawrie Conway, Managing Director and CEO, for closing remarks.

[Lawrie Conway, executive]

Thank you, Rachel, and thank you, everyone, for your time today. We really appreciate you making the effort to join the call. Before closing out, I do want to reaffirm my opening comments around the current spot price and the impact that -- of what's going on in Israel and the real difficult time and really the atrocities that are happening there and it is affecting a lot of people, including a lot of friends and colleagues of ours in Australia. So we do hope that, that can get resolved sooner rather than later.We have started the year well. We are on track to deliver 770,000 ounces and at $1,370 an ounce, our capital intensity is [Technical Difficulty] as Barrie mentioned, $117 million lower than last year. And when we take the combination of those plus the higher gold price than what we actually achieved last year, it does position us as we move through the remaining quarters to deliver stronger cash generation and continue our efforts to deleverage the balance sheet this year. Thank you, [Technical Difficulty].

[Operator]

[Technical Difficulty] This does conclude our conference for today. Thank you for participating. You may now disconnect.