Evolution Mining Ltd

ASX:EVN

Earnings Call Analysis

Strong performance and cash flow generation in Evolution Mining's September quarter.

In the September quarter, Evolution Mining produced nearly 194,000 ounces of gold and achieved cash flow of $108 million. The company remains on track to meet its production guidance of 710,000 to 780,000 ounces. All-in sustaining costs came in at $15.69 per ounce, leading to a robust margin of 57%. Notably, Cowal contributed $125 million to cash flow, potentially exceeding $350 million by year-end. Current gold prices suggest an additional upside of $105 million in cash flow this year. The company is well positioned to generate over $1.9 billion in operating cash flow, indicating strong financial health.

A Strong Start to FY '25

Evolution Mining commenced FY '25 on a high note, delivering solid operational performance in the September quarter. The company produced nearly 194,000 ounces of gold and 19,000 tonnes of copper, aligning production with its targets. This performance is not just a statistical success; it reflects a strategic foundation laid in the second half of FY '24, aimed at fostering safe and reliable operations. The team improved safety metrics, reducing the Total Recordable Injury Frequency (TRIF) by 7.5%, showcasing their commitment to operational discipline at all levels.

Production Guidance and Cash Flow Potential

Looking ahead, Evolution Mining has set ambitious production guidance, estimating the output for FY '25 to be between 710,000 and 780,000 ounces of gold and 70,000 to 80,000 tonnes of copper at an All-In Sustaining Cost (AISC) of $14.75 to $15.75 per ounce. The first quarter results indicate that approximately 26% of the targeted annual production was achieved, as were 24% of projected cash flows. The company identified a potential upside of more than $105 million in cash flow due to elevated gold prices, positioning it well financially.

Impressive Cash Flow and Balance Sheet Strength

In terms of financial performance, Evolution Mining reported a group cash flow of $108 million, reducing gearing by 1.5% to 23.8%. The cash balance has grown to $484 million, with the company boasting liquidity over $1 billion. This significant cash flow trajectory also stems from strong operating contributions, with total mine cash flows approximating $430 million. The company's future projections estimate a $1.9 billion operating mine cash flow for the year, suggesting a 24% increase compared to previous results, underlining Evolution's status as a cash-generating powerhouse within the sector.

Highlights from Key Mines and Projects

Key assets played a pivotal role in generating cash flow. Cowal mine stood out with its net cash flow of $125 million, forecasted to surpass the previously announced guidance range of $350 million. Red Lake achieved record quarterly cash flow under Evolution’s ownership at $27 million, showcasing its emerging consistency. Other projects, such as Mungari, faced slight setbacks due to weather, but there's optimism due to recent operational adjustments and the ramping up of the Rayjax mine.

Positive Exploration Results and Future Opportunities

Exploration remains a cornerstone of Evolution Mining's strategy. The recent updates revealed promising drilling results at multiple sites, including the Bert ore body at Ernest Henry, which returned high copper and gold grades, suggesting the potential for incremental production growth. Furthermore, the exploration efforts at Northparkes and Cowal are unfolding new opportunities, with the possibility of expanding resources significantly. Glen’s team forecasts positive evaluations leading to enhanced operational effectiveness and potential new mining fronts.

Looking Ahead: Strategic Actions and Market Position

With the current spot prices for gold and copper favorably aligned, Evolution Mining is intent on leveraging these dynamics to bolster its market position. The upcoming December quarter is expected to see increased production, driven by ongoing operational enhancements and the replenishment of stockpiles at Red Lake. However, the forecast notes a potential decrease due to lower grades at Mt Rawdon as the company transitions to stockpile processing. The focus on operational discipline ensures that all plans are realistic and trackable as the year progresses.

Commitment to Shareholder Returns and Gearing Reduction

Evolution Mining is also committed to increasing shareholder returns, aligning with its capital management strategies. With an objective to drive gearing levels down to around 20% by the end of FY '25 and closer to 15% in the medium term, the company plans to use this improved cash generation to fund operations and potentially augment dividends. These strategies indicate a balanced approach to maintaining operational growth while catering to return expectations from shareholders.

Earnings Call Transcript 2025-Q1

[Operator]

Thank you for standing by, and welcome to the Evolution Mining Limited September 2024 Quarter Results. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead.

[Lawrie Conway, executive]

Thank you, Kylie, and good morning, everyone. I'm joined on the call today by Barrie Van Der Merwe, our Chief Financial Officer; Matt O'Neill, our Chief Operating Officer; Glen Masterman, our VP; and Peter O'Connor, our GM Investor Relations. .

Today, we released our September quarterly report and an exploration update. We laid the foundations during the second half of FY '24 to enable safe and reliable delivery of our FY '25 plan and a continuation of high-margin cash flow generation. The September quarter delivered exactly that. It was very satisfying to start the year in a positive way with the first quarter on plan and an improved safety performance where our TRIF reduced to 7.2%, which was a 7.5% improvement.

We are well on track to deliver our production guidance of 710,000 to 780,000 ounces of gold and 70,000 to 80,000 tonnes of copper at an all-in sustaining cost of $14.75 to $15.75 per ounce.

The charts on Page 1 of our report, clearly demonstrates the solid start to the year, the material amount of cash we are generating and the opportunity ahead of us for even higher cash flow levels. Our first quarter production was around 26% of the midpoint of guidance while cash flows were about 24%.

Given the current spot prices are materially higher than the spot prices at the time we released our guidance, there is potentially in excess of $105 million of further upside in cash flow this year. We produced just under 194,000 ounces of gold and 19,000 tonnes of copper. Group production was in line with plan. A highlight for the quarter was for improvements at Red Lake to over 37,000 ounces. In addition, the Cowal underground mine achieved an annualized mining rate of 2 million tonnes.

Our all-in sustaining cost of $15.69 per ounce for continuing operations was better than planned even considering our achieved copper price was around $900 per tonne below our guidance assumption. It's a credit to the team to manage our operating costs and sustaining capital to deliver these low-cost ounces.

The all-in sustaining cost margin was an outstanding 57% or over $2,100 per ounce based on the September quarter achieved price. This increases by another $290 per ounce if the spot price is sustained.

Group cash flow of $108 million continued the downward trend for gearing, which reduced by 1.5% to 23.8%. Our cash balance at the end of the quarter was $484 million, giving us liquidity of over $1 billion. With the cash being generated and the profile of our debt repayments, we are very satisfied with where our balance sheet is placed. The group cash flow was on the back of strong operating and mine cash flow before major capital of around $430 million and $380 million, respectively.

As I mentioned earlier and as shown on the charts on Page 1, the September quarter gives us the platform to generate more than $1.9 billion of operating mine cash flow which would be around 24% higher than what we achieved in [indiscernible]. Considering this would be at a gold price only 18% higher than last year, it does demonstrate the cash-generating capacity of the portfolio and sector-leading cost position we have.

Some standouts in the cash flow include Cowal and $125 million net mine cash flow placing it well on track to be above the $350 million top end of our previously announced guidance range. Red Lake delivered a record quarterly cash flow under Evolution's ownership at [ $27 ] million. with consistency starting to materialize at Red Lake, it is now focused on building on the great start to the year. Mt Rawdon delivered $21 million of net cash in the last quarter of its mining operations.

Lastly, we also released our exploration update today with excellent results at Ernest Henry's Bert ore body, a potential new ore source at Cowal underground and further positive results at the major Tom target at Northparkes with healthy copper grades. All of these results give us confidence about additional production sources over and above the areas we are currently mining. These programs will continue during the year, and I'm sure Glen and the team will deliver further success in the coming quarters.

I'll now hand over to Matt to provide an update on the operations.

[Unknown Executive]

Thanks, Lawrie, and good morning to all. As this is my first full quarter in the role, I thought I'd start today by answering a question of most frequently asked, and that's what are my initial observations after some time in the job. .

So now having spent time at all the operations and not just in management forums, but also in less formal situations, such as shift changeovers, safety interactions, even breakfast or dinner conversations in the camps and local communities, one clear observation for me has been around the quality of both the people and the assets.

What I've seen is the willingness from people to work as part of a team but also for me, really importantly, is a strong desire to be part of a successful team which has made the start to the year really pleasing. In relation to the quality of the assets, this observation for me is based on what I've seen in the building blocks, so the ore bodies, the infrastructure and the life of mine plans which is a number of our operations is 15 years and beyond and includes optionality to either extend or to grow.

So bringing the conversation back to the first quarter's performance, we've seen an improvement in our lagging safety indicators, as shown in the reduction in the recordable injury frequency rate. Probably a key driver of the improved safety outcomes has been a focus or our focus on the leading indicators, indicators such as critical control verifications and material risk actions, and we'll continue this into the future.

As a group, we produced just under 194,000 ounces in the September quarter, which was in line with plan. And as noted, Cowal was a standout performer, delivering cash flow of $125 million for the quarter. For me, in terms of highlights, Cowal's performance was very closely followed by Red Lake, which, as Lawrie indicated, produced its highly highest quarterly cash flow under evolution ownership.

Cowal's production was in line with plan, and as noted, was the group's major cash flow contributor, and it's set to continue to deliver strong returns for the remainder of the year. Ernest Henry's production also in line with plan. The highlight here at Ernest Henry for me was the drilling results that Glen will talk to later. Northparkes had a solid quarter, completing a major shutdown in those shaft and it met plan for production. Northparkes' cash flow for the quarter was impacted, though through the timing of concentrate shipments, which will see the cash flow realized in the December quarter.

At Mungari, we're slightly below our plan. This was due to some wet weather in July, which impacted some more movement between the Paradigm mine and the mill. I'm pleased to be able to report since then, we brought online the Rayjax mine as well as building up some buffer at the mill, so that should prevent that from occurring again. The expansion project is tracking well, running slightly ahead of schedule and on target for cost and the team on site are very much looking forward to the opportunity the new mill will unlock.

As I've already noted, Red Lake performed well with record cash flow on the back of a strong focus on cost control and the operation producing in line with plan. Of note for the quarter here was that we drew down on the surface stocks, which was in line with our land, and these surface stocks will be replenished over the course of the next quarter.

Mt Rawdon completed mining this quarter, and will continue to process stockpiles through into the final quarter of this financial year, where it will then move into care and maintenance.

So as a whole, the outlook for the operations for the remainder of the year is positive, and we're on target to achieve our full year plan.

I'll now hand over to Glen to report on the exploration results for the quarter.

[Glenton Masterman, analyst]

Thank you, Matt, and good morning, everyone. I'd like to turn your attention to the exploration announcement release, which highlights a number of very pleasing and significant exploration results delivered in the September quarter and which nicely complements the way in which our operations have started the year. .

As Lawrie alluded earlier, we received further exciting drilling results from Ernest Henry, Northparkes and Cowal, all of which confirm the geological endowment at each operation and the potential to deliver future incremental production from various alternative ore sources.

Firstly, at Bert, which as a reminder to everyone, is a separate footwall body at Ernest Henry, returned an impressive intercept in hold 1426 with copper and gold grades well in excess of average reserve metal grades. This result follows on from our Bert exploration announcement last quarter of the best gold intercept ever drilled at Ernest Henry in hole 1402. The 2 holes are highlighted in Figure 1 on Page 2, which clearly show the continuity of strong metal grades between them both.

The Bert drilling program will continue through the December quarter to further delineate the extent of mineralization. We will run an update of the Bert resource model end of March next year, which will include these latest holes and all others completed between now and then. The new results are expected to increase the size of the resource, which continues to shape the future potential incremental production target.

At Northparkes, drilling during the September quarter focused on extending zones of near surface copper mineralization at the major Tom and E51 targets. Both are located within a kilometer of each other and represent potential open pit resources only 3 kilometers from the processing plant. Results from Major Tom confirm the healthy copper grades in holes we previously reported and shared during our site investor visit back in June. For those of you who attended, you'll recall the entertaining experience that the [ core shed ] delivered by our geologist, [ Jonathan Ho ], as he described porphyry copper geology 101.

As we were looking over spectacular intervals abundant levy bornite mineralization, which is the driver of grade at Major Tom. I'm happy to report that we're seeing more of the same mineralization in holes drilled above and below the hole on display that day. The ongoing drilling program aims to expand the sale of copper mineralization along strike to the south, where it has the best opportunity to continue to grow.

Nearby at E51, we are closing in on having sufficient information to commence geologic modeling as the next stage of evaluation with the aim of moving towards estimation of maiden resources at either or both of these targets next year.

Moving west to Cowal. We are pleased to report our first result in a new exploration target situated between the open pit and the southern end of the underground mine. We originally budgeted to test this target later in the year. However, one of our underground brake control rigs was drilling from a platform at Del Wine South when our geologists decided to extend the hole, which hit the target at a pretty reasonable angle to return this very good result.

We are confident we have identified a repetition of the key geological contact relationship, which localizes high-grade mineralization in the underground. The contact zone is open along strike and down dip in an area that has not been previously explored. Assuming we're right, this area potentially represents a new future underground mining front at Cowal.

In other news, we commenced drilling during the quarter at our quarry Northern in JV located 10 kilometers northwest of Ernest Henry. We're drilling copper gold targets in rocks analogous to those hosting the Ernest Henry ore bodies. Although we're yet to get a hole into a new discovery, we're pleased with the visual indication that we've drilled in the early holes, which suggest we may be on the edge of a copper gold mineral system.

I look forward to being able to report back next quarter on the ongoing drilling progress we're making at Ernest Henry, Northparkes and Cowal. I'm confident we'll continue to grow and unlock resource potential at these exciting near-mine exploration opportunities.

With that, I'll hand over to Barrie.

[Barrie Van Der Merwe, executive]

Thank you, Glen, and good morning, everyone. This was a very pleasing quarter for me as the ones continues to generate strong cash flow, supporting our deleveraging plan. .

Net mine cash flow of $172 million for the quarter and group cash flow of $108 million, reduced gearing a further 1.5% to $23.9 million. Our cash balance increased by $81 million to $484 million, reducing net debt to $1.35 billion. We paid $21 million in stamp beauty in the quarter for the Kundana acquisition. The group now has available liquidity of $1 billion.

Cost performance for the quarter was also very pleasing with an AISC per ounce of $1.69, which was better than plan. This is for the continuing operations as Mt Rawdon is now processing stockpiles. We are well on track to achieve our full year cost guidance of $14.75 to $15.75. Our disciplined approach to capital expenditure continues by only spending capital on projects when it is acquired.

We remain focused on delivering multiyear projects like the Mungari 4.2 mill expansion to its overall business case. The Mungari 4.2 project is on budget and slightly ahead of schedule. We are on track to meet our capital guidance for all 3.

In addition to the upside driven by current gold spot price that is about $250 per ounce higher than that achieved in the first quarter, as explained by Lawrie, the December quarter will further benefit from cash receipts for 3 Northparkes concentrate shipments arriving at the port of delivery as scheduled.

The 1,500 tonnes of copper that was produced but not sold in the September quarter had a further cash benefit. We have only $75 million of debt to repay in FY '25, of which $15 million falls due in the December quarter and our 23rd consecutive dividend was paid on October. Considering the very good start to the financial year, and continuing cash generation momentum, we are on track to reduce gearing to around 20% by the end of FY '25 while at the same time investing in the business and increasing shareholder returns through dividends.

Kylie, will you please now open the line for questions? Thank you.

[Operator]

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

[Kate McCutcheon, analyst]

Well done on the quarter and the exploration results. Just your comments on Bert in the quarterly. You've said in the notes now that, that could take capacity closer to 8.5 million tonnes per annum. I thought you'd previously been talking to that as an incremental 1 million tonnes. So your comments today imply some more confidence in that potentially being bigger? Is that fair?

[Lawrie Conway, executive]

I'll hand that to Glen, Kate. I think Glen is saying it moves us there, but...

[Glenton Masterman, analyst]

Yes. It's -- well, we're moving towards sort of fully delineating a resource that will be studied. In terms of the quantum production rate, I think it's a bit premature to sort of make -- say too much about it until we do the study and understand how that's going to sort of be integrated into where we're mining at Ernest Henry. But it's certainly shaping at this point, Kate, as an opportunity for incremental production. .

[Kate McCutcheon, analyst]

Okay. It makes sense. It was just that you had that comment in there that you see a fee rate closer to 8.5%. I will look out for the updated results. And then Evolution was mentioned in the media today via an acquisition. Can I just confirm that you are still focused on the portfolio today and getting that gearing down towards your 20%? I think you've talked to at the next to -- for the 15% as in there's no plans to make any changes to the portfolio for now.

[Lawrie Conway, executive]

I think you answered the question yourself, Kate, I mean, it is true. I mean, our focus is on safely delivering the plan this year, maintaining the focus on the growth studies and execution projects we've got and the great results and the team keep delivering to give us further optionality. .

[Operator]

Your next question comes from Daniel Morgan with Barrenjoey.

[Daniel Morgan, analyst]

Can I just understand Mungari a little bit more? You indicated today, the project is slightly ahead of schedule, which I believe is March 26 for completion. You also say you're on budget and you disclosed you spent $60 million of the $250 million budget on the mill. .

So I appreciate spend can be lumpy. But how do we think about this? Like could the project be delivered ahead of schedule? Is it too early to make that call? Is it some work streams are maybe ahead but not the ones on the critical path? Maybe you could just expand a little bit?

[Lawrie Conway, executive]

Yes, thanks. I think, yes, if we look at it and for those who were able to make the site visit at Diggers, a lot of the surface infrastructure and getting things ready to connect into the new plant, they are the things that are progressing well and they're ahead of schedule. I mean, we're talking weeks, not months ahead of schedule here. But a lot of those works that need to be done in readiness for when the mill arrives and a number of other items that will get installed over the second half of the project, we're halfway through now. .

So that spend rate is on getting all of that installed and then when the big items come towards the back end of the project, that's when that capital will flow through. So that's where we see it. I mean, I think if we look at it, the project team has got the capital and the works programmed out for that 30-month period. It will move in between the months, but there's nothing that we would sort of say as to how to plan that out in the next couple of quarters. All we should work on is that through to the end of the project, at the end of the 30 months, we're tracking to the $250 million budget.

[Daniel Morgan, analyst]

Okay. And probably a more holistic simple question regarding the entire business. Looking to the December quarter, I would have thought you'd have a lift in production for both gold and copper, given you've got no major shuts, some reasonable grades still at Cowal and a bit better cash flow if the spot commodity prices hold. Is that a fair assessment? Or is there anything you'd like to flag about the quarter coming?

[Lawrie Conway, executive]

Yes. Look, I mean, it's true. I mean, at $39.70 today, that's, as I said, nearly $290 an ounce higher than what we achieved in the first quarter. So that is going to benefit the cash flows. When we look at it on a production standpoint, quarter-on-quarter, those shuts are done, you'll see an uplift. I think where you'll see the offset is a as Mt Rawdon now moves to stockpiles, they're lower grade than what we achieved in the first quarter as we were mining the last stage of the pit.

So you'll see some drop off in production there, and that's probably the only sort of main variant we would see in Q2 versus Q1 across the assets. I think in terms of the other one would be Red Lake will be slightly lower as they'll have some shuts in December that weren't in the September quarter. But overall, you'll see an uplift in production in the December quarter.

[Operator]

Your next question comes from Hugo Nicolaci with Goldman Sachs.

[Hugo Nicolaci, analyst]

My first one is just around Northparkes Subsequent to that site visit back in June. Can you just give us an update on how the sublevel is work is progressing? And then maybe also just talk around the significant uplift in material from the open pit quarter-on-quarter and, I guess, how you're thinking about that increased material movement relative to the stockpile drawdowns you'd previously talked to for the year.

[Lawrie Conway, executive]

Yes. Thank, Hugo. I'll hand that one over to Matt.

[Unknown Executive]

Yes. Thanks. In terms of the work that we'd outlined for the rest of the year at Northparkes, we're pretty much on schedule. So if you're talking through the pre-fees work for E48, there's some development work that's in line with where we needed to be. The drilling is progressing quite well. We're sort of in line with expectations area. .

In terms of the open pits and the movements coming through there, pretty comfortable with where that sits. We've got some pretty significant stockpiles between the mine and the mill at Northparkes. So the only movement that we would see there is what material we put through the mill. So we're doing a little bit of work in that area with the team on site.

But at this stage, all the works at Northparkes are progressing well. Probably the main one that helped -- I think, will help us be more reliable there or continue to be reliable as works in the shaft. All those structural work to the bottom of the shaft have been completed, which was sort of no small feat from the team, and that should see us going well into the future with that asset.

[Hugo Nicolaci, analyst]

Great. And then just a second one around the TCRCs across the copper producing assets. I appreciate your own agreements in place there, so you don't necessarily see the full pass-through, but you have to just give any additional color around the magnitude of the cost reduction you're expecting at Ernest Henry and Northparkes kind of in the quarter just gone and then for the rest of FY '25?

[Lawrie Conway, executive]

Yes. So Hugo, those TCRCs in our offtake agreements that are on a calendar year basis. So as we go, that's where we then set the prices for calendar year 2025, which will have an impact on our FY '25 costs in the second half of the year. We had allowed in our guidance for some shift from '24 to '25. So what we would see is when we get the benchmark prices for '25, we'll inform the market if there's any material shift, but we have allowed for the those TCRCs for both operations to reduce.

[Operator]

Your next question comes from Matthew Frydman with MST Financial.

[Matthew Frydman, analyst]

A couple for me. Maybe the first one on Red Lake, probably Matt's first position to field this one. But can you please expand on the improvements that have been made at that asset, and I guess, the sort of consistency that we can expect going forward? Clearly, in the September quarter, you've milled more than your mind as you talked about, but you expect those stockpiles will be rebuilt in the December quarter. .

Just trying to understand, I guess, what's driving that view? Is that because of improved mining rates and availability of lasted stocks? Or is that more the shuts in December that Lawrie alluded to? So yes, I guess, talking to the mining consistency. And then secondly, the consistency of the grade profile, do we expect that, that should continue to lift over the course of the year?

[Lawrie Conway, executive]

I'll just make a couple of comments before handing it over to Matt where he can claim that since he started, the consistencies arrived at Red Lake. But I think it is on the back of the work that John and the team did in the second half of FY '24, which was to get into a lot better sequence around the shutdowns and planned maintenance and aligning the mining and the processing schedules to those, getting that stockpile in front so that they've actually got some contingency in the system.

I think the other thing is that we've been sticking more to the mine plan which is then making a lot easier for the entire workforce to know where we're going in day out and month in, month out. So I think as we look at it going forward, that's the type of thing that we want to see in there. And I think what it also did as we started this year is that it demonstrated to the workforce that through this appropriate planning and having some contingency there, it gives them the capacity to do their job a lot better. Matt?

[Unknown Executive]

I'm still going with your first answer, Lawrie -- but in terms of -- I think Lawrie's covered what I was going to talk about. So the key for there is the operational discipline, starting to see that really hit home and become more repeatable. And then the second part is the contingency. So there's more than one way to move the ore around in the mine now. but also you're seeing that the plant has some contingency built into it.

You will still see segmenting issues, as any normal underground operation has, in terms of once you stick to the plan, you're not going to take stopes out of order. So there will be some variation, but only minor and as per the plan. So yes, really quite comfortable from the operational discipline side that that's what's driven it.

[Matthew Frydman, analyst]

Yes. Okay. And maybe just...

[Lawrie Conway, executive]

I was just going to hand it back to -- you also asked about the grade. And I think the consistency of mine compliance is helping in the grade. .

[Unknown Executive]

Sorry, not sure which Matt you're talking. But yes, that's right. It will be as per the plan, which does vary. It's not a trend that will go upwards and upwards exponentially, but it will continue throughout the year in line with plan.

[Matthew Frydman, analyst]

Okay. I understand. Secondly, on the exploration success and I guess trying to understand where that goes from here. And obviously, Glen has made some comments on this already. Would it be fair to say, obviously, the near-term goal is to incorporate that drilling presumably into the next resource and reserve update. But just trying to understand longer term, how that how these various successes feed into the mine plans at 3 assets.

So maybe thinking specifically, so we've talked a little bit about Bert. Clearly, Ernest Henry got the extension feasibility study that's due in early 2025. And then over at Northparkes, you've highlighted Major Tom, but again, there's some prefeasibility studies and feasibility studies there underway, including, I guess, taking about underground materials handling and those sorts of things.

So the question is really this exploration success that you've highlighted, do these key studies at the assets get reframed to incorporate this exploration's success or divert in Major Tom from, I guess, supplementary pieces of work that sit on top of those core studies that are expected to be delivered in early 2021?

[Lawrie Conway, executive]

Thanks, Matt. I'll take the second part first, where this goes in terms of the resource and reserves. I mean, thing that we see from this exploration results and the programs that Glen and the team are running is really -- it's in areas that gives us further production opportunities because if you look at it at Ernest Henry and Northparkes, we've got up to 1.5 million to 2 million tonnes of latent capacity already existing in our processing and concentrators. .

So how can we do those noting that our materials handling systems [indiscernible]. And then when we look at Cowal, the underground with grades more than double the open pit being able to displace that open pit material and particularly as we go into Stage I and you go back to processing some stockpiles, that's what we see as the real benefit. So that's where those programs are targeted at to say that you can increase the production rate without needing to invest the capital in the processing plants' capacity while those other studies continue.

Those other studies are the ones that would feed straight into the materials handling system and the existing baseload in the production. So it's really great to have these programs going because they provide further upside that don't disrupt the plans of the other extensions.

[Glenton Masterman, analyst]

Yes. And just to build off Lawrie's answer, Matt, I think what we're looking at is with all of the 3 opportunities I described this morning, they're supplementary or they're going to augment and complement the existing studies at the operations that you mentioned. I think -- and that's been the strategy at particularly at Northparkes and to a certain extent, in Ernest Henry and Cowal, which is how can we unlock value, which is not just building resource at the end of mine life and creating sort of a production target.

So are there opportunities to bring particular targets forward and utilize that latent capacity that we have in the plants. And so starting at Northparkes, the open pit targets. We've started -- we've focused pretty heavily on those throughout the year mainly because logically, they will not compete with the underground materials handling system and we'll be able to lever that incremental production growth into the future.

Now we're still at a pretty early stage. We're delineating sort of really the extent of mineralization. We're still doing the pre-resource drilling at the moment. We'll move into the modeling and estimation phase into the new year when we're comfortable we have sufficient drilling that will give us some meaningful results there to understand.

Similarly, at Bert, we'll run , as I mentioned, a resource update which will be rounded out into the June quarter of next year. And that will then position Bert in a way where we can start to think or study more seriously where exactly that potential supplementary production fits into the line.

At Cowal , as Lawrie mentioned, this is a -- it's an opportunity in the future to potentially displace some of the lower-grade production from either stockpiles or the stage at E42. And it's with early days. It's one hole into it. But we found a repeat of the same geology that controls grade in the adjacent underground mine.

And so it's a new area. A lot of space to grow, but a lot of work ahead of us to understand it and ultimately, develop it.

[Matthew Frydman, analyst]

I guess, maybe just to summarize that at a really high level. It seems like the sort of blue sky opportunity for all 3 of these exploration targets, if we call them that, is really a bit more about the potential incremental production opportunities in time rather than sort of just added resource and reserve and life extension. Is that kind of, at a high level, how you're viewing all 3 of these opportunities? .

[Lawrie Conway, executive]

I think you've summarized it well, Matt. That's exactly what we're trying to do. .

[Operator]

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

[David Radclyffe, analyst]

So I just have a couple of follow-ups on North Park. So on the comments of open pit mining, obviously, a really big quarter. So does that now mean that the E31 North pits are now finished? Or was there additional material taken? And does that mean that it's now by open pit mining at this time at Northparkes? Or have you sort of thought about E28 in a bit more detail. .

[Lawrie Conway, executive]

No, I mean, the short answer is that as we had the shaft works maintenance going on, we were feeding from the underground. And so they were one of the prime resources during that period. The open pits will continue through to the end of this financial year. And then in terms of E28, work continues on that in terms of where it sequences in the life of mine plan as well as we're kicking off our life of mine planning right now.

[David Radclyffe, analyst]

Okay, cool. And then as you said, you've got lots of stocks ahead of the mill now. So is there any more maintenance sort of planned for the year? Or do you feel confident that you could actually sort of fill the mill for the balance of the year and maybe even test the upside potential to that sort of 7.5 million tonne rate?

[Unknown Executive]

It's Matt here. Yes, at this point, we've still had a little bit of work to do in the 180 area in terms of the crushing. So we haven't completely opened up the feed from open pits to flood the mill. That said, we do have the opportunity to investigate how hard we can run that area. So we'll be looking at that. But at this point, we're still in line with plan. We're not planning on sort of swamping it at this stage.

[David Radclyffe, analyst]

And then maybe just if I can squeeze one last one in on the exploration there. So maybe just on E51, obviously, some more good results. It looks like Major Tom has been put to the south. So have you rolled out that they could potentially join?

And then on the resource side, obviously, you're great to get that maiden sort of number, but it looks like the drill spacing is still quite wide, so you need some infill. So is it fair to say you're still going to be well into sort of FY '26 before you're sort of close to thinking about whether these could be a new -- I think they hang together and could be a new ore source.

[Glenton Masterman, analyst]

It's -- that's probably a fair assumption. What I would say, though, the reason we would advance to targets. And as you correctly point out, the drilling space is quite wide. But in porphyry systems, it can be as the grade variability is so much lower than what we see in gold systems. So the wide spacing as we have today will enable us to move to classify and inferred resource. So we're reasonably confident about that. .

And then obviously, depending on the scale and where we think the opportunity fits into the life of mine plan, we can accelerate the drill program to bring that forward and sooner than FY '26 to sort of advance the mining studies in parallel with that.

The other -- to go back to your earlier question on whether the 2 join up, that's actually the $1 million dollar geology question. What we're doing at the moment is we're delineating -- we think they are discrete resources because these pencil porphyries tend to be as discrete, if you like. But what we do understand, and if you go to the Figure 2 in the exploration announcement this morning, you'll see where both of these targets are located with respect to a pink unit that we've outlined there or delineated, which is one of the monzonite intrusions.

What we're seeing is that these pencil coffees are coming up around the edges of this or the shoulders of this intrusion. And that contact there, which is up against the host volcanic has been relatively underexplored around the edge, particularly as it comes south and then move back further to the East and Northeast.

So there's a fair bit of opportunity for us. We're going to get to that in the future, but the first step is to understand sort of what we've got with these 2 targets.

[Operator]

Your next question comes from Jon Sharp with CLSA.

[Jonathon Sharp, analyst]

Just continuing on with Matt Frydman's question on Red Lake. Matt O'Neill, that is. I'm sure you've had a real good look at the operation now. But maybe more specific than operational discipline, which is obviously very important. But what are the key areas of focus that you see there, maybe over the next 12, 24, 36 months what are the low-hanging fruit, what are the longer-term targets there that you see?

[Unknown Executive]

Yes. So for me, the key focus in the next 12 to 24 months, is around drilling in terms of making sure that we continue with the consistency of what we've been able to deliver by getting in front of ourselves in terms of the grade control drilling. So that's probably the key focus to ensure the consistency that we've seen. And then from there is around what the life of mine tells us to do.

So we're doing some work through this life of mine process of, I think, the operational discipline and the basics of operating a mine are in place now and starting to show some benefit. We now talk about what are the strategic decisions you make with ore bodies to get step-in performance out of that business. And for me, that focus is around cash and making money and margin. So what that looks like we'll work through over this life of mine process is probably where I'm at.

So without saying this is the direction we would go through that process and we'll be in a better place towards the end of this year to give you a proper answer on what that next step is.

[Jonathon Sharp, analyst]

Okay. And just given the recent strength in the gold price, if we see you continue in this and throughout FY '25, should we expect to see a bit of an upward pressure on the all-in sustaining cost guidance? What are your expectations there?

[Lawrie Conway, executive]

I think, Jon, any link I draw there is if the gold price continues at where it's at and goes higher, is the impact of royalties on our all-in sustaining costs. That's the only sort of thing we'd see there. I think where we sit in terms of our other input costs in the market, the higher gold price is being predicated on reducing interest rates and inflation stabilizing more and trending down which would then see that input costs don't move as they had in the last 2 to 3 years.

[Operator]

Your next question comes from Tom Prendiville with Canaccord Genuity.

[Tom Prendiville, analyst]

Just a question or a bit more detail on the balance sheet and gearing. So maybe a question for you, Barry. Clearly, the portfolio is benefiting from strong gold and copper prices. You're seeing strong quick deal gearing and you're spinning out some decent free cash flow. Gearing is now below 24%, you degeared by 1.5% in the quarter, which is a great result.

I know you sort of touched on this in your presentation, but maybe you can just talk in a bit more detail around the optimal gearing level for AV over the short to medium term. And the reason I asked is I'm just thinking about it in the context of capital management optionality or capital management upside over the near term.

[Barrie Van Der Merwe, executive]

That's great, Tom. Thanks for the question. I mean so as Lawrie outlined, when he presented, we've got very good momentum in cash generation and expect that to continue throughout the year. We've seen the impact on gearing just in the quarter coming down 1.5%. And we've been quite transparent saying we're pushing towards that 20% level by the end of this year.

And then in the medium term, 15%. So we're quite comfortable when we get to that 15% level. On the way, gearing there, what's important to us is to continue investing in the business and in the great CapEx opportunities and project opportunities we've got. But together with that, as we said at the full year financial results in August, as gearing comes down, we'd look to increase share returns through dividends.

And if you look back at that, we had a chart in the full year financial results that clearly shows that in the past, we've got the gearing coming down, you see dividends going up. So if we put all of that together, now that's the intention with a capital management strategy going forward. It is generate the cash, continue investing in the business. And as the debt comes down, increase the shareholder returns through dividends.

[Operator]

SP1 Your next question comes from Kate McCutcheon with Citi. .

[Kate McCutcheon, analyst]

And just a quick follow-up. Cowal OPC approval? Is it still fair to expect this way? And just remind me what your assumptions were in the outlook for Cowal, that were outlined in the shape visit back around the approval timing?

[Lawrie Conway, executive]

Yes, Kate, so the OPC approvals, we were expecting in this quarter, the December quarter, to get the consent conditions and then respond to those and then pend the formal approval from the regulator. That continues on track. We've had really good in [indiscernible] providing that and positive responses from the different departments. So that is continuing.

What we had included for in this year was no commencement of Stage I. We had allowed for approvals of the OPC from the regulator and then take that final fee study to the Board and maybe in the back end of the year, some costs associated with the consent conditions around permitting and the like. That's sort of what we've allowed for.

And essentially, into FY '26 is when we would start moving into Stage I cut back and the other works associated with the continuation of the open pit mining.

[Kate McCutcheon, analyst]

Okay. Got it. So all on track at the moment.

[Lawrie Conway, executive]

Yes, it is thankfully.

[Operator]

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

[Alistair Harvey, analyst]

Maybe one, just stepping back at Red Lake thinking about the Canada opportunity longer term. I guess, you guys noted that there was some expression done at Lake and Joseph and the October greenfields project. So just kind of wanted to get a sense of the [indiscernible] to Red Lake, what works are going on there and target scale and, I guess, how you're thinking about opportunities longer term in North America?

[Lawrie Conway, executive]

Yes. That one is for Glen. And our view there is really those opportunities that Glen and the team are identifying that could give us new production fronts in Canada, but you want to outline where we're at with [indiscernible]?

[Glenton Masterman, analyst]

Yes, absolutely. Thanks. Yes, as Lawrie mentioned. It's really looking at that sort of 7-plus, 10-plus-year time line as to sort of what comes into the portfolio from a production perspective. So sort of rounding out on Lake Saint Joe and October. So they're to fairly early stage projects. We've sort of completed some field programs, which largely comprised of geochemical sampling. So we're looking at using sort of the old methodologies in areas that haven't really been tested previously.

And we're showing up some actually pretty exciting targets at Lake St. Gal. I haven't seen the data for October, although the field season has been completed. There's a little bit of work ongoing, but we'll have a look at that data and when it comes in. And essentially, what we have is we'll come to a decision point on both of those projects. If there's a compelling opportunity and the next step would be moving to drilling.

If there's a compelling opportunity, I'll have a conversation with Lawrie Larry and Barrie about how we -- whether or not it's going to justify warrants some investment to drill it. While I've got the mic though, we have been doing a fair bit of similar regional work at Red Lake, and we're starting to see some really exciting developments there in terms of that.

So I think in terms of the geochem we're getting there. So it's -- we're doing the work, not just on greenfields, but around our mine sites as well. And obviously, the mine site works. And we generate those targets, we'll be first in line for whatever investment we are able to attract to them.

[Operator]

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

[Lawrie Conway, executive]

Thank you, Kylie, and thank you, everyone. The September quarter was a very good start for FY '25, and it did build on what we have set out to do at the end of FY '24. So it puts us on track to deliver guidance, which ultimately gives us materially higher cash flows and where the copper prices are today, that gives us even further upside and opportunity if we can deliver and do deliver to that plan.

And on top of that, seeing some really good exploration successes that gives us new opportunities for mining fronts and puts us in a spot going into the second quarter and also with the balance sheet in good shape.

So thank you for your time today, and we look forward to update you again soon.

[Operator]

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