Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining December 2017 Quarterly Results Teleconference. [Operator Instructions] Please know that this conference is being recorded today, Tuesday, January 30, 2018. I would now like to hand the conference over to your host today, Mr. Bryan O'Hara, General Manager, Investor Relations. Thank you, sir. Please go ahead.

[Bryan O'Hara, General Manager of Investor Relations]

Thanks, Eddie. Good morning, and welcome to the Evolution Mining December 2017 Quarterly Conference Call. This morning on the call, we have Jake Klein, Executive Chairman; Lawrie Conway, CFO and Finance Director; and Glen Masterman, VP Discovery and Chief Geologist. Lawrie Conway will provide comment on both the operating and financial results for the quarter ahead of Bob Fulker commencing in his new role as Chief Operating Officer in a fortnight's time. Investors in the commodity sector have generally enjoyed a good start to 2018. Synchronized global growth, a declining U.S. dollar and the apparent return of global inflation pressures have all contributed to higher commodity prices. Gold has also performed well since the mid-December fed rate hike, and the U.S. dollar gold price is currently trading within a few percent of 4-year highs. With this renewed interest in gold, it's timely that we have a busy month of investment engagement ahead with the release of our half-year financials on the 15th of February, followed by a road show in London and conferences in Sydney, Fremantle and Miami towards the end of February. Thank you. And I'll now hand you over to Jake.

[Jacob Klein, Executive Chairman & MD]

Thanks, Bryan, and good morning, everyone. Thank you very much for joining us. We know it is a busy morning today. This is a great quarterly, another one from Evolution. As most of you on the call know, since Evolution was formed in November 2011, we have had a very clear strategy of developing a low-cost, profitable, dividend-paying, globally relevant mid-tier gold company that will prosper through the gold cycle. I am very proud that, again, this quarter, we are clearly demonstrating that we are executing this strategy very successfully.This is the third consecutive quarter that we have delivered over $200 million in operating cash flow, noting that this is the first quarter without Edna May's production. Our all-in sustaining cost after all -- sorry, after all sustaining and major capital spend, we generated $134 million in net mine cash flow this quarter. Our all-in sustaining cost per ounce is sector-leading at $784 an ounce, and in U.S. dollars, $602 an ounce. These are very low-cost numbers that would ring favorably in any comparison.Very importantly, these low-cost numbers are being converted to cash on our balance sheet, which increased by $130 million in the 3 months under review. Lawrie, Glen and I were at Cowal 10 days ago, and it was fantastic to see that our $40 million Float Tails Leach Project that will improve recoveries by between 4% and 6%, is on budget and schedule. And at the Stage H cutback, which extends the mine life of this wonderful asset out to 2032, is also progressing on budget and schedule.It will be wrong not to highlight the formidable cash flow that Ernest Henry is generating for us, this quarter, $55 million. That's after all capital and other associated costs with the assets. Last quarter, this number was $53 million, and at current copper and gold prices, this annualizes to over $200 million. It's also worth bearing in mind that Ernest Henry has a 10-year reserve life and additional discovery potential beyond this. Likewise, Mt Carlton had another fantastic quarter and generated almost $34 million of net mine cash flow.If you're going to upgrade guidance on assets, then the one you most want to upgrade are your lowest cost, longest life assets. So it is great that, today, we are guiding at Cowal, Ernest Henry and Mt Carlton are all likely to achieve production at the upper end of their original FY '18 guidance and that these ounces will be delivered at or below the lower end of their cost guidance. This is a company in great shape, but at Evolution, we believe there is more: more efficiency gains, more productivity gains and more ounces to be discovered. Our new COO, Bob Fulker, who in his prior role led OZ Minerals to their operational success, will officially join Evolution on the 12th of February. Bob has a great platform to build on with our group of excellent general managers, and I know he's looking forward to this challenge. With that, I will hand over to Lawrie.

[Lawrence John Conway, Finance Director, CFO & Executive Director]

Thank you, Jake, and good morning, everyone. Today, I'll cover off on the operational and financial performance of the business for the December quarter. Next month, we will release our half-year financial result, at which point, we'll provide more detailed analysis on the financial performance.The summary of the operational performance is provided on Pages 5 to 7 of the quarterly report. Firstly, on safety. We've seen our lost time and total recordable injury frequency rate reduce in the last quarter to 0.4 and 6.2, respectively. A highlight is that Cracow has now passed 1,600 days or over 4 years without a lost time injury. Across the business, we are focusing heavily on improving the safety culture where individuals take more accountability for their safety and that of their colleagues. To complement this work on the cultural aspects, a major project implementing critical control plans for our top 10 principal hazards is underway. Operationally, the results for the December quarter were very pleasing and, again, highlights the benefit of having a diversified portfolio of assets. We delivered over 186,000 ounces at a record low all-in sustaining cost of $784 per ounce, generating $204.7 million in operating cash flow and net mine cash flow of $134.2 million. At Cowal, we produced over 62,000 ounces at an all-in sustaining cost of around $850 per ounce. Low planned rates from Stage G were offset by higher throughputs and recoveries. The improvement work in the processing area has delivered record throughput rates for the quarter and the half year. Mining activities in the second half of the year will continue in Stage G for ore, while Stage H waste stripping will be at full capacity. Processing improvements delivered over the last 6 to 9 months are expected to continue in the second half. Cowal is tracking to be at the top end of the production guidance.Ore project activities related to Stage H cutback and the Float Tails Leach Project remain on track in terms of cost and time. Capital investment on these projects will ramp up as per project plans in the second half of the year.Mungari produced 28,000 ounces at an all-in sustaining cost of $1,280 per ounce, $1,288 per ounce. The lower production was driven by lower grades at White Foil and lower plant throughput, which was impacted by weather and power interruptions. These were partially offset by higher grades at Frog's Leg and higher recoveries. The lower production and higher sustaining capital, more a timing effect between the September and December quarters, were the main drivers to the higher all-in sustaining cost. Higher grades and recoveries in the second half of the year are expected to see production back up to the 30,000 to 35,000-ounce range for the next 2 quarters. Mt Carlton had another outstanding quarter, delivering just under 30,000 ounces at an all-in sustaining cost of around $500 per ounce. Mining in the high-grade Western zone area saw strong positive grade reconciliation. In addition to the grade performance, the optimization process -- of the processed plant saw recoveries improve in the December quarter, with further improvements expected in the second half of the year. Pleasingly, the gravity circuit is generating higher volumes of doré, and the outlook is for this to increase again in the March quarter. If these improvements are achieved, the circuit will have repaid the $4 million project investment within 12 months.Processed grade in the second half of the year is expected to be at the 5 to 5.5 grams per tonne. With a good performance year-to-date and with the grade forecast to be above plan for the second half, Mt Carlton is expected to be at or above the top end of production guidance.Given this outlook, we have taken the opportunity to accelerate the capital waste to be mined in Stage 3b and mined lessor in the second half. Mt Rawdon had a difficult quarter with weather impacting on mining in the pit and a ball mill motor failure resulting in an unplanned 8-day plant shutdown. Despite these negative factors, Mt Rawdon's result was similar to the September quarter with 21,418 ounces produced at approximately $1,050 per ounce.In the March quarter, the mine will focus on the waste stripping in the Western area while higher grade ore will be accessed from Stage 4 Western and Northern lower benches. Performance is expected to improve in the second half of the year with production to be in excess of 25,000 ounces in each of the next 2 quarters.Cracow's production, while lower than the last quarter, was in line with plan at 20,215 ounces at an all-in sustaining cost of $1,237 per ounce. Grades in the March quarter are expected to increase with the commencement of production from the Coronation ore body and Kilkenny and Empire stopes. Importantly, for Cracow, we have seen successful drilling results which should be able to deliver extensions to the mine life. Ernest Henry had another excellent quarter with just under 25,000 ounces of gold and over 5,400 tonnes of copper produced at a record low all-in sustaining cost of negative $627 per ounce. The asset is now expected to deliver at the top end of production guidance, and should current copper price levels be sustained, unit costs will be well below the bottom end of guidance.Turning now to the financial performance on Pages 8 and 9 of the report. On the back of the excellent operational performance, the financial performance of the company continues to strengthen. On a like-for-like basis, excluding Edna May, the $204.7 million of operating cash flow was in line with the September quarter. Revenue from lower production, which was down 6.5%, was offset by higher metal prices, with gold up 2% and copper up around 15%. On an operating cost basis, our EBITDA margin, excluding Edna May, now sits around 53%, which is up from 49% in FY '17. Ore operations were again cash flow-positive after meeting their capital investment commitments. We invested over $70 million, with the majority of the investment being in major projects and capital development or stripping. Our capital investment programs remain on plan and guidance. This resulted in $134.2 million of net mine cash flow. Ernest Henry delivered a record $55 million and is on track for a full year cash flow of over $200 million at current metal prices. Mt Carlton was another major contributor at $33.7 million, which means that during the December quarter, it achieved a milestone of having repaid all initial and subsequent capital and exploration investment at that asset.Our group cash flow, before the proceeds from the sale of Edna May, was $75.4 million, and this was after our payment of $36.2 million for income tax related to the 2017 financial year. Including the proceeds from the sale of Edna May, our cash balance increased by $113.4 million to $163.5 million. The cash flow generated in the quarter reduced our net bank debt by 32% to $231.5 million. Our remaining debt repayment commitment this financial year is $30 million due in the June quarter. Gearing is now very comfortable at 9.5% and reflects the continued strengthening of the balance sheet. With that, I'll now hand over to Glen.

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

Thank you, Lawrie, and good morning. During the quarter, we continued our aggressive drilling programs, completing over 76,000 meters across Discovery and resource definition categories. The work focused on advancing targets at Cowal, Mungari and Cracow. Recent results from Cowal continue to reinforce our belief in this highly prospective gold camp, and dare I say, a camp also prospective for copper-gold mineralization. Step-out results released in November 2017 extended the new zone of mineralization at E41 West, southward and at depth, highlighted by strong intercepts in hole 2804, as shown on Pages 10 and 11 in this morning's results. Additional drilling is underway to test potential extensions of this zone in directions that continue to be open. We also shared 2 new and encouraging copper-gold intercepts in this morning's quarterly. Both results are illustrated on Page -- on Figure -- in Figure 2 on Page 11 and return modest intervals of copper-gold mineralization. What is interesting about the results is they are vein styles typically associated with porphyry copper-gold mineralization. We have always known that the regional geological setting hosting the E42 ore body and various satellite deposits should also be prospective for porphyry mineralization. For example, Evolution's Marsden copper-gold porphyry deposit is located only 20 kilometers southeast of Cowal and occurs in similar geology. We believe the new copper-gold results confirm that we indeed do have a new style of mineralization to explore on the district. As a result, we have designed a program that will enable further delineation of the gold-only mineralization at E41 West, along with developing a better understanding of the potential to discover a nearby porphyry copper-gold resource.At Mungari, we approached completion of the first phase of infill drilling designed to test continuity of mineralization beneath the north end of the White Foil pit. We are still waiting on the majority of results. However, the early indicators are in line with expectations. A decision to move to a second phase of closer-spaced drilling will be made when we receive full results for the program. At Cracow, underground drilling continued to produce strong results along the Coronation-Imperial-Empire corridor. Several new learnings have been developed, which emphasize the importance for close-spaced drilling across untested gaps on the main endowed structural corridors. Figure 8 on Page 15 nicely illustrates this point where significant areas of the mineralized epithermal profile have not been effectively tested along stride from Kilkenny. A program of work is being implemented to address this knowledge gap.Lastly, we announced this morning that Evolution's recent work on the Tennant Creek joint venture took our total aggregate expenditure on the project up to $15 million. This satisfies the Stage 1 earn-in condition, enabling Evolution to vest a 65% interest in the Tennant Creek project. With that, I would like to hand back to Jake.

[Jacob Klein, Executive Chairman & MD]

Thanks, Glen. Our business strategy and approach remains the same, as it has been since we set out on this journey of building this business 7 years ago. We want to build a gold company that prospers not only when the gold price is going up but one that prospers through the cycle, a consistent and focused strategy that has been rigorously implemented and which we are not going to deviate from. Today, we are highly profitable, dividend-paying, globally relevant, low-cost mid-tier gold company. Eddie, can you please now open the lines for questions?

[Operator]

[Operator Instructions] Your first question is from Ranjeet from Bloomberg News.

[Ranjeetha Pakiam]

This is Ranjeetha here from Bloomberg News. Actually, I had a question -- a couple of questions, really, which were a bit separate from Evolution. But I just wanted to get your thoughts on global gold prices and demand, if that's all right. Firstly, on prices, we've seen the gold price in U.S. dollars jump to the highest since 2016 last week. And do you think that gold can continue this rally and possibly hit $1,400? And secondly, do you see physical gold demand picking up ahead of the lunar new year festival this year

[Jacob Klein, Executive Chairman & MD]

I think I can answer the first question better than the second one. And I suppose just as -- to preface my answer, Evolution is really building a gold company that is somewhat independent of the gold price in that we recognize the cyclicality of the gold price and we want to build a business that prospers through the cycle. That said, it's fair to say that there's been little interest in gold over the last couple of years as other assets and property values and stock markets have gone up materially globally. And we do see in the last few months an increasing interest in gold from people who previously may not have shown a lot of interest. And there is definitely a reemergence of interest in the gold space. And whether that's because of inflation fears starting to come back, whether it's because of geopolitical concerns, gold as a safe haven is starting to be looked at again as an inflation hedge. So I'm optimistic about the gold price but certainly not planning the future of our business on a higher gold price.

[Ranjeetha Pakiam]

And you're not answering the question on the demand in the lunar new year, physical demand?

[Jacob Klein, Executive Chairman & MD]

I think there are better experts than me to answer it. Other than that, there is always a pickup into the lunar new year, and you probably are seeing some evidence of that occurring again. But I think that relates again to this sense that gold as an asset class is being relooked at by people who, in the last couple of years, have not really been looking at gold as part of their portfolio or a material part of their portfolio.

[Operator]

Your next question is from the line of Sophie Spartalis of Bank of America Merrill Lynch.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

A quick question on Mungari drilling. I appreciate your comments on the call. I just noted that the Lady Agnes drilling was below expectations. You've always mentioned that it's a complete rebuild of the logbook, so to speak, and its sort of expected time frame would be around 12 month. Can you maybe just update us on how things are going? And do you still expect sort of that work to be completed or much better [indiscernible] of what's happening out there sort of by -- sort of maybe the third quarter of this year? Can you just provide an update on sort of where you're at for Mungari exploration drilling?

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

Sure, Sophie. It's Glen here. So I'll answer those questions. And firstly, it's probably a good place to start with where we're at on our resource definition drilling. I think it's -- we're pleased with the outcomes that we're delivering there. So that program is ticking along as we would like. Turning to Discovery, I think it'll be fair to say that, sometimes, it takes a little bit longer than we're -- than you would like things to unfold. It's worth noting that, on previous calls, I've mentioned that our search window is now 100 to 200 meters below surface, where we're starting at a very sort of low knowledge base given the sort of large historically -- historically all of the drilling has been shallow. So I think that, that's -- as we sort of continue to put together the information, we're stitching together the sort of subsurface geology, which is enabling us to target. What's rattled out over the last couple of years as we've been exploring on the Mungari corridor is that we've developed over 200-plus new targets. We've ranked and prioritized these. And we've completed drilling on 22 of those 200 targets in the last 6 months. And it's a process by which when we cycle through each target, the goal is either to advance it to the next phase of exploration, and that's all based on the results we're receiving, and/or we kill the target and we walk away. And so we're in that process of advancing each of these targets. And what is -- what we're impressed by is that we still have a target-rich environment to be exploring. So what I'm saying is it's -- to bear with us, it's taking time, but we still remain encouraged by the target list.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

And so on the 22 targets that you completed, how many are advancing to the next stage versus those that you've had to knock back or walk away from?

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

About 1/3 of those have advanced to the next stage. Then there's about 1/3 that we're still sort of assessing the -- our position on those. And then 1/3 have fallen away.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And then just remind me what the mine life -- current mine life at Mungari is at the moment.

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

It's about 5 to 6 years.

[Jacob Klein, Executive Chairman & MD]

I would just add to that, Sophie, it's Jake, that I always reflect on the comment that one of our board members, Tommy McKeith, who's had a lot of experience in the region, always says, he says, you've got to have a pipeline of prospects, which, clearly, Glen and his team have delivered, and you've got to be persistent and keep drilling. And we certainly feel that we're in the early stage of this whole process.

[Operator]

Your next question comes from line of Darren Gray from Fairfax Media.

[Darren Gray]

Look, I've just got one simple question. A quick look at your financials on Page 1 clearly demonstrates that you've been very successful at reducing your C1 cash costs and your all-in sustaining costs, which you've been able to reduce quarter after quarter after quarter. I'd love to be able to do that myself in my house, but I can't. So how have you done it? What are the key things here? What are the key contributors to this performance?

[Jacob Klein, Executive Chairman & MD]

Darren, I think it really goes back to the strategy which we've implemented. As I said, for the last 7 years, this was a company that was -- has always had a strategy that we want a portfolio of assets, but we're going to continue to improve the quality of the portfolio of assets. We're going to be kind of cyclical when there are opportunities to acquire things, and clearly, the Cowal and Ernest Henry acquisitions, which were acquired a couple of years ago, have had a transformative impact on our cost base and our cash generation. And we have had the tailwind of our higher copper price, which has been particularly beneficial with the Ernest Henry economic interest. But we have changed the quality of our portfolio that, now, we would be, if not the lowest-cost gold producer in the world, definitely near the bottom. So I guess the analogy I'd use is we've upgraded the properties in our portfolios that we now have some of the best houses in the street -- in the best street.

[Operator]

[Operator Instructions] Your next question comes from the line of David Cotterell from Global Mining Research.

[David Cotterell]

I've got a couple of questions really on the porphyry, I guess, mineralization that Glen [indiscernible] before. So can we perhaps elaborate on what you've got there and what potential is, especially the step further to the south of Marsden? And then how do you think about that longer term?

[Jacob Klein, Executive Chairman & MD]

I was hoping someone is going to ask that question. Thank you, David. Here's Glen.

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

Good morning, David. I think, yes, let's sort of start by saying that it was a bit of an accidental encounter. We were stepping out on E41 West, expanding the zone mineralization to the south. And in doing so, in a number of holes, we've come across M and C style veins with intermineral porphyries. And so this has obviously changed the flavor somewhat on the target. Now the intervals are low-ish grade. They're -- and they're generally pretty narrow. But what it has really emphasized to us is that there is this other style that we need to be paying attention to, other style of mineralization. So what we're doing is we've actually gone back to the drawing books and assessed the geophysics that -- the sort of near-surface geochem from the Red drilling and put together a program that would target a source for the sort of porphyry-style mineralization. So what we think we need to find is really a center of gravity, and right now, it doesn't appear to be that. So the program, we'll just keep following on from the results as they come into really assess the full potential for what we might have there.

[David Cotterell]

Okay. Because I think your [ memory ] north did a lot of drilling to the south that had the porphyry mineralization, but I'm not sure how much of that data you guys still have. How much -- I mean, in terms of -- when you say the next phase of drilling, what are you thinking about in terms of program?

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

Well, we've just approved additional budget to Cowal to actually expand the drilling program. So part of that is allocated to similar resource definition work. But the other piece is related to stepping out on not just the gold mineralization but exploring further copper, gold as well. We have access to all of that previous information from north, sort of to the south, and that's more -- we're talking more along the lines of regional prospects here. We haven't really done much to develop those since we've -- since we were handed the keys of Cowal, our focus has largely been on expanding the reserve and extending mine life. But we're now turning to the district, and we're going to really apply what we're learning close to Cowal, including this porphyry style, to enable us to be more effective in the district. And that'll start with really an assessment of some of the targets prioritizing -- we'll rank and prioritize those, and we'll explore them in the coming year or 2. One of the things that we've done is we've actually split the geology department at Cowal and dedicated a small Discovery team with its own manager to drive this program so that we can actually build some momentum in the next couple of years to really deliver in the space.

[David Cotterell]

Right. Okay. And is that separate to what you've -- you haven't done that in any of the other operations in terms of splitting the team?

[Glenton J. Masterman, VP of Discovery & Chief Geologist]

Well, it's actually a model that we replicated from Mungari.

[Jacob Klein, Executive Chairman & MD]

I mean, the one thing, David, that still astounds me is that since North left the asset, I think, or sold the asset in 1992, the very little exploration work that has been done in the district is quite astounding.

[David Cotterell]

I guess the thing is that you -- I mean, what Barrick effectively build Cowal and then concentrated on solely running it. So yes, I guess I can kind of understand their thought process maybe, but some different hands you guys have the opportunity, I suppose, which is growth?

[Jacob Klein, Executive Chairman & MD]

Yes. And it's all carabiner, a very pleasant surprise to us, because, to be honest, when we acquired the asset, we kind of thought that it had been well explored. And then when Glen started putting in these framework holes around the 41 West and we started to identify new mineralization, it was well, maybe we better recheck our previous assumption that it has been well explored. And to our surprise, a very pleasant surprise, it is clear that the district has not been well explored at all.

[David Cotterell]

So in terms of Marsden that you guys had -- they put -- they wrapped a resource around that, but in terms of where you guys see that, that's obviously a much longer-term option post-Cowal potentially?

[Jacob Klein, Executive Chairman & MD]

So we're doing some work at relogging the Marsden core, and we are looking at it, but it is an option for Cowal. We're looking at it in this next reserve update that we do and resource update to see whether it fits. But it clearly adds mineral inventory to the Cowal district.

[Operator]

Your next question comes from the line of Peter Ker from The Australian Financial Review.

[Peter Ker]

Just trying to get your view on how the M&A market is looking in the gold sector at the moment. Does it feel like there's more or less assets being shopped around at the moment compared to, say, a couple of years ago?

[Jacob Klein, Executive Chairman & MD]

Good morning, Peter. That's a good question. I mean, my sense is, and/or certainly from an Evolution perspective, we've said that we'll look at assets which are accretive to our shareholders and improve the quality of our portfolio. And improving the quality of our portfolio means mine life and cost of production. We've also said that, really, to find those assets which are going to be accretive to our shareholders, you need 1 of 2 elements. One is a distressed seller, and we found that in Cowal and -- in Barrick and Glencore, who were deleveraging their balance sheets and selling assets; or you need a geological call by Glen and his team that there are additional discoveries to be made over and above the mineral inventory that you're acquiring at the time of the transaction. In terms of the former, stressed balance sheets and people selling assets, that's -- we don't see that in the sector at the moment. Most companies have repaired their balance sheets and, in fact, are looking for growth options. In terms of geological calls, my door's always open for Glen to come in and tell us that there is one that he wants to make. But I think the reality is that the opportunity in the M&A space, in our view, is less than it was a couple of years ago when we were very kind of cyclical and we were very aggressive in spending over $1.5 billion in acquiring assets and changing our portfolio. And in fact, last quarter, you saw us divest of an asset, Edna May, which we thought was an opportune time to put it in the hands of a smaller company and get good value for it.

[Peter Ker]

Okay. And is there any particular interest in the sector coming from any particular nation? Obviously, the North American guys went through that phase 3, 4 years ago when they left and you guys at [ northern staff ] picking up a lot of assets. Do you sense that North American miners have no interest in Australia? Or are they looking back here at what China's buyers are particularly interested? Or...

[Jacob Klein, Executive Chairman & MD]

I think they'd be looking back here and with a little bit of remorse, but with too much scar tissue still evident to be interested in engaging again.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue, gentlemen.

[Jacob Klein, Executive Chairman & MD]

Thanks, Eddie. Thanks, everyone, for joining us. Obviously, with the last 2 quarters of results, we're looking very forward to speaking to you again on the 15th of February when we release our half-year results. Thanks for joining the call. We know it's busy, and appreciate your interest. Thank you.