Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2019-Q2

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

Thanks, Eddie. Good morning, and welcome to the Evolution Mining December 2018 Quarterly Conference Call. This morning on the call we have Jake Klein, Executive Chairman; Lawrie Conway, CFO and Finance Director; Bob Fulker, COO; and Glen Masterman, VP, Discovery and Business Development. Glen's dialing in this morning from an offshore conference.With the recent volatility in financial markets and a high Australian dollar gold price, there's been some renewed focus on the current environment being a good time to invest in gold mines. The reality is that Australian gold equities have provided excellent returns now for 5 consecutive years, with the Australian gold mine index outperforming the broader ASX 200 in each of the last 5 years, providing a compound return of over 23% per annum during that period. As a leading low-cost midtier gold producer, Evolution is well placed to continue to benefit from the increasing investor interest in gold mines.We've got a busy couple of months of investor engagement coming up with marketing in Sydney and Melbourne post today's results, marketing in the U.K. and Europe in mid-February and attending the BMO Metals & Mining Conference in the U.S. in late February.Thanks, and I'll hand you over to Jake.

[Jacob Klein, Executive Chairman]

Thanks, Bryan. Good morning, everyone. Thank you very much for joining us.At Evolution, we talk a lot about coming to a conversation with our pockets empty of excuses. So let me be upfront to say that operationally, this quarter was softer than we would have liked to have reported: a couple of unanticipated isolated production issues that occurred in December, which Bob will explain in more detail, meant that our production was lower and our costs higher than we expected.However, as we've indicated in the quarterly, our FY '19 year-to-date production and costs are in line with plan, and we expect to comfortably meet our full year production guidance and to come in at the top end of our cost guidance. The only caution to this is that the copper price assumption we used for this original guidance is higher than the copper price we realized over the last 6 months.We continue to focus our efforts on delivering our strategy over the long term and have consistently said that we want Evolution to be a gold company that will prosper through the cycle. We have made significant strides again this quarter to demonstrate that we are doing exactly that. Some of these include a AUD 973 an ounce or in U.S. dollars just under $700 an ounce. Our costs this quarter again reinforced our position as one of the lowest-cost gold producers in the world.There is no truer test of the strength of a business than cash flow. This last quarter, our mines generated net mine cash flow of $108.5 million, and that's after all sustaining and growth capital.Another important test for us as a gold company is how many ounces we are discovering. Glen and his team again showed this quarter that the exciting exploration and endowment at Cowal is a story that has many chapters to go.For some time, we've been saying that a real game changer at Mungari would be a high-grade discovery. At Scottish Archer, we definitely know we have high grade. The 7 meters at 127 grams a tonne is not a typo. What we don't know is how much there is of it, and we'll be answering that question in the next few months.At Cowal, this quarter we completed the construction of the Float Tails Leach plant that will improve recoveries by 4% to 6%, and we committed to a plant expansion to 8.7 million tonnes per annum. We also approved construction of an exploration decline that will allow us to drill out the GRE46 and Dalwhinnie areas into reserves. As both Bob and Glen will articulate, the building blocks for a long life, low cost, 300,000 ounce per annum operation at Cowal are fast being put in place.Ernest Henry continues to be a wonderful asset to be involved with. This quarter, it generated $54 million of cash for us. Importantly, we have now established the new reserves joint venture for any extraction of material below the 1,200 level, and Glencore has scheduled drilling for mine life extensions in this area for late 2019.Strategically, we are in a very favorable environment. The Australian dollar gold price is a very healthy $1,800 an ounce or just below that this morning. Our reserves are calculated at a very conservative AUD 1,350 an ounce, and all our assets are in Australia, a world-class mining jurisdiction.With that, I'll hand over to Bob.

[Robert Stanley Fulker, Chief Operating Officer]

Thanks, Jake, and good morning, everyone. This morning, I'd like to give an operational update. Disappointingly, our injury frequency rate rose slightly during the quarter to 7.3. This was due to the slight increase in minor recordable injuries. Through December, we specifically targeted [ time on the field ] and quality discussions around thinking before we commenced all tasks. Pleasingly, even with the extreme heat in most of Australia over Christmas, we have seen a slight reduction in injuries.The December quarter production was just under 182,000 ounces of gold at an all-in sustaining cost of $973 an ounce, with the group mine operating cash flow of $191 million for the quarter. Production was lower than anticipated, and this has affected our costs slightly. The full year guidance still remains sound.If we turn to Page 5 for Cowal and Mungari results. Cowal delivered a sound quarter, producing 58,200 ounces at an all-in sustaining cost of $1,019 an ounce. It also processed over 2 million tonnes. This was despite a 5-day unplanned outage on the SAG mill following a lightning strike, which damaged the mill's data. This issue is now fully rectified.Cowal's operating mine cash flow increased to $59.2 million for the quarter. Highlights at Cowal for the quarter were: the commencement of all the building blocks for the exploration of 300,000 ounce per annum operation with 20-plus years of mine life are in place; the completion of the Float Tails Leach project in December with first gold pour anticipated this month. Recoveries are expected to improve during this quarter and increase by 5% in the June quarter. The Stage H cutback remains ahead of schedule. And lastly, we're very excited to have received regulatory approval to commence development of the GRE46 exploration decline. We expect the portal to be cut in the June quarter. This will give us the drilling platform to further explore the GRE and the Dalwhinnie zones, which we believe have the potential to host over 1 million ounces of mineral resource.Mungari had a poor quarter, delivering 30,000 ounces of gold at an all-in sustaining cost of $1,474 an ounce. The Frog's Leg Underground production was restricted due to rehabilitation post a seismic event. 101,000 tonnes at 4.4 grams were mined from the underground during the quarter. We have a plan to bring the Mist production back online this quarter safely.The Banjo exploration decline at Frog's Leg Underground was completed, and drill testing of the extensional target commenced in January. The Mungari team are replicating the Cracow's success and implementing the Azi aligner to help reduce dilution and give them access to narrower remnant ore.If we turn to Page 6 for Mt Carlton and Mt Rawdon results. Mt Carlton delivered 26,000 ounces at a reduced all-in sustaining cost of $715 an ounce and a mine operating cash flow of $31 million for the quarter. During January 2019, we experienced an extreme rain event with plus 400 mils falling over a 12-hour period. The site has recovered well from this event, and this will not affect guidance. Development of the underground mine is on schedule to fast track production from the high-grade link zone. Flotation efficiencies and plant recovery also continued to improve with recovering lifting to nearly 91%. Further plant improvements are planned this quarter.Mt Rawdon delivered a softer quarter producing 20,400 ounces at an all-in sustaining cost of $1,421. As raised in the September quarter, production and costs were impacted by the process of lower-grade stockpiles. Mt Rawdon remains on track to meet FY '19 guidance.If we turn to Page 7 for Cracow and Ernest Henry results. Cracow produced another consistent quarter with 22,400 ounces at an all-in sustaining cost of $1,181 an ounce. The operation celebrated a monthly plant throughput record in December of 51,000 tonnes and also set a 6-month throughput record for the December half of 292,000 tonnes.Ernest Henry produced 24,800 ounces at a negative all-in sustaining cost of $403 an ounce. Mine operating cash flow continues to be very strong at $58.7 million produced for the quarter. Mine and mill production were in line with the plan. As Jake mentioned, the quarter saw the nomination and formation of the new reserves joint venture below the 1,200 RL. This will allow mine life extension drilling to commence in late 2019.In summary, a softer quarter with production -- group production of 182,000 ounces at an all-in sustaining cost of $973 an ounce due to some unanticipated events. However, we remain on track to achieve the FY '19 production and cost guidance.Thank you for your time, and I'll hand over to Glen.

[Glenton J. Masterman]

Thank you, Bob, and good morning, everyone. This morning we released several standout results from Cowal, along with an extremely high-grade result from Mungari.Firstly, at Cowal. New results of step-out drilling returned a wide zone of mineralization in the Dalwhinnie position, including a 12-meter true thickness interval grading 6.7 grams per tonne. The hole hit the structure 80 meters away from the wide intercept we reported at our AGM in November, which assayed 7.8 grams per tonne over 27 meters. Both results are believed to be in the same south plunging mineralized shoot, which extends well beyond the underground resource shapes.Geological studies completed in recent months have greatly elevated our technical understanding of GRE46 and Dalwhinnie. At least 2 shoots are developing, based on results to hand, with both remaining open up and down plunge. We believe there is strong potential to identify new shoots along strike with additional drilling. As a result, an aggressive surface drilling program is under design to accelerate delineation of the full potential of the underground mineralization. The new results will inform and help prioritize the underground drilling plan.At Mungari, drilling at Scottish Archer in the Ora Banda camp returned a spectacular intercept down plunge at previously reported high-grade results. The interval graded 127 grams per tonne over 7 meters and remains open down-dip. Drilling is confirming we have a strong grade opportunity at Scottish Archer, but we don't yet know how big it may grow. A follow-up program recently commenced to answer the all-important size question whereby we will spread the drilling pattern laterally as well as down plunge to test beyond the existing tightly drilled footprint. An encouraging element of the geology is its similarity to that which hosts high-grade veins at Frog's Leg. And for this reason, we believe there is value in persevering at Scottish Archer. As Bob mentioned earlier, an 8-hole program commenced from the Banjo decline early in the month to drill plunge extensions at the Rocket and Mist lodes at Frog's Leg. We expect the program will take 5 to 6 weeks to complete.Overall, our discovery program had a very successful December quarter. Results from GRE46 and the Dalwhinnie discovery are better than we expected. We're also putting runs on the board at Mungari with a positive result from Scottish Archer, and soon we will know how deep the Frog's Leg mineralization potentially extends.With that, I will hand over to Lawrie.

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

Thank you, Glen, and good morning, everyone. Today, I'll briefly cover off on the financial performance for the December quarter, whereas next month we'll release our half year results and provide more detailed analysis.The summary of the financials is on Pages 8 and 9 of the report. We had a soft operational performance for the quarter as outlined by Jake and Bob, but remain on track for full year guidance. We expect similar production in the March quarter, while the all-in sustaining costs will reduce slightly as we are forecasting lower sustaining capital. Meanwhile, a material improvement in the June quarter is planned with higher production at Cowal via the benefits of the Float Tails Leach system as well as higher grades at Mt Rawdon and Mungari. This, matched with even lower sustaining capital in the June quarter, will be the drivers to the lower all-in sustaining cost.Despite the performance in the December quarter, we still generated solid levels of cash flow with $191 million of operating cash flow and $109 million of net mine cash flow. This was driven by higher metal prices offset by lower metal sales and higher planned capital. The achieved gold price of $1,730 per ounce was 4% higher than last quarter.Our capital investment programs for mine life extensions and production growth ramped up as planned during the quarter. We invested nearly $83 million with over $50 million in major projects and approximately $32 million in sustaining capital. We remain on track to achieve guidance for both sustaining and major capital. Pleasingly, all sites continue to be cash positive after all sustaining and major capital investments. In addition to this, we maintained our commitment to exploration with over $10 million invested, and this will increase further in the second half of the year.Our group cash flow before tax payments and debt repayments was $91 million. We made our final FY '18 income tax installment of $45 million and $8.3 million of FY '19 tax installment payments. We repaid $20 million of our debt facility, reducing bank debt to $355 million. The net effect was that our cash balance built by $17 million to $336 million -- $313.6 million and net debt reduced to $41.4 million.With the spot gold price around $1,800 per ounce, which is over $100 an ounce or 6% higher than we have achieved in the first half of the year, we are in a great position to generate materially more cash in the second half of the year as our all-in sustaining cost and major capital investment reduces. Even though we will move to a net cash position in the coming months, we want to protect the balance sheet and have financial flexibility, especially during the periods of major capital investments we are undertaking over the next few years. Therefore, we took advantage of the higher Aussie dollar gold price to hedge 300,000 ounces of gold at an average price of AUD 1,871 per ounce for the quarterly deliveries between July 2020 and June 2023. However, we have left the majority of our production during this period unhedged.I look forward to updating you next month with the half year financial results. With that, I'll now hand back to Jake.

[Jacob Klein, Executive Chairman]

Thanks, Lawrie. Just before opening the lines for questions, I just want to take this opportunity to remind you that our business strategy and approach remains the same as it has been since we set out on the journey of building this business a little over 8 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. We want to continue to deliver as a highly profitable, dividend-paying, globally relevant, low-cost midtier gold company.Eddie, can you please open the lines for questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Slifirski from Crédit Suisse.

[Michael Slifirski, Managing Director]

Just 2 very simple questions for me, one out of laziness, I guess. Scottish Archer, can you sort of describe what the extent is defined currently between -- how many holes you've gotten? How big it actually is with what you defined? I recognized there's down-dip, down plunge extension and potentially along strike, but just want to understand how much -- what sort of volume you know about at this stage.

[Glenton J. Masterman]

Michael, we have about, I would say, 12 to 20 holes in testing the entire target at present. The main direction of continuity is down plunge. It's a fairly steeply plunging body as we currently know it. It -- the mineralization occurs on the contact of 2 basalt units separated by a black shale, and that's the similarity or the analogy with Frog's Leg. So that position tends to, at Frog's Leg at least, tends to develop quartz veins quite well. So that's essentially the setting. We have a fairly short strike length delineated in the area of sort of shallow testing at the moment. But the Frog's Leg body -- ore body is quite irregular in the top areas of that resource. So we're looking at not only get -- following the plunge down-dip, but also stepping out more laterally to see if we can pick up any more of these sort of steeply plunging bodies. At this point in time, it's a fairly small footprint. It's tightly drilled. And the purpose of the follow-up drilling is to really spread the pattern to understand how extensively mineralized this contact can be.

[Michael Slifirski, Managing Director]

Great. Glen, that's helpful. So given the complexity of this postulated model, how long will it take you to know whether it's -- whether there might be something commercial there? I guess, the next couple holes could seem to condemn it and then the couple of holes after that could enliven again. So how do you think about the time to delineate something or to determine whether there is something to be delineated?

[Glenton J. Masterman]

I would -- as Jake mentioned, Michael, I'd say that over the next couple of months, we'll basically have an answer on whether or not we have a commercial opportunity that we'll really throw a lot more drilling at.

[Michael Slifirski, Managing Director]

Okay. Terrific. And on the Ernest Henry decision to drill below 1,200 meters, that JV -- am I right in understanding that's where you revert to 50-50? Is that the scope of that?

[Jacob Klein, Executive Chairman]

51-49, Michael. We're 49%.

[Operator]

Your next question comes from the line of Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

So earlier in the call we were just talking about you've got a reserve grade of AUD 1,350. You've -- clearly, the price is about $1,800 at the moment, and you've had -- you put in some opportunistic hedging. Just wondering if there's been any thoughts at all to -- using the combination of the gold price and hedging and maybe chasing some of your underground opportunities, just some lower-grade stopes at all? Or is it very much gold price up, let that all flow to the bottom line through higher margins?

[Jacob Klein, Executive Chairman]

The short answer to that, Daniel, is yes. We're not going to deviate our mine plan for a higher gold price. So $1,800 gold price, we should make more money.

[Operator]

Our next question comes from the line of the Sophie Spartalis from Merrill Lynch.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Just following up on the new reserves JV at Ernest Henry. Can you just go into a little bit more detail in regards to the CapEx spend, how that's split between yourself and Glencore and then also production post successful finding, please?

[Jacob Klein, Executive Chairman]

Sure. So above the 1,200 RL, we get 100% of the gold and 30% of the copper, and we pay 30% of the capital and operating costs and of course, we made the $880 million payment upfront a couple of years ago. Below the 1,200 RL, it's really a traditional joint venture, 51%, 49%, where we would get 49% of the copper and gold and we would be up for 49% of the operating and capital costs.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And is that all set in stone now given this new JV arrangement that's in place, that 49% ownership? Or there is still discussions to be had as to whether you could increase that gold portion back up to 100%?

[Jacob Klein, Executive Chairman]

That was what was established when we actually signed the joint venture -- or the agreements with Glencore in 2016, and this is really the implementation of that agreement and the formalization and establishment of the joint venture. So we haven't had any commercial discussions about changing that arrangement with Glencore.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. Would you be open to having those discussions? And would they be open to having those discussions, do you think? Or is -- once it's set in stone, that's it?

[Jacob Klein, Executive Chairman]

I think it's better to wait until the drilling's done at the end of this year and see what we're dealing with. But there is drilling information below that level that indicates that it is mineralized. This drilling is to confirm that. And once we have a plan as to what is going to be developed down there, then I think there's an opportunity to have a commercial discussion. But at this stage, it's too early to consider that.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. Great. And then just quickly at Mt Rawdon. I noticed that the soft result was due to the lower-grade stockpiles, but you're still comfortable to keep FY '19 production guidance. Does that suggest that your grade should recover back in the second half of the year?

[Robert Stanley Fulker, Chief Operating Officer]

Yes, Sophie, it's Bob speaking. Simple answer is yes. When we come back into mining of the areas down to the west wall in the bottom of the pit, we do expect the grade to rise back up over that 1 gram to 1.1 grams towards the end of the year.

[Operator]

Your next question comes from the line of David Radclyffe from Global Mining Research.

[David Radclyffe, Managing Director]

So just my questions are -- and I've got 2, just -- first one's a bit of a follow-up. So you're sort of saying at AUD 1,800, you're not going to rush out and change the mine plans -- or the mine plans. But should we be thinking of any of the old projects that are sort of sitting there or have been sitting on the shelf that would now start to bubble up given that you do have such a large inventory? Surely there's something that now starts a little bit more -- looks a bit more attractive and we should be thinking about it?

[Jacob Klein, Executive Chairman]

I think if it meets the capital hurdle rates that Lawrie and his team have clearly set, and they're high, then they could make it into future plans. But I guess we're wary about effectively mining lower-grade material or reducing our cutoff grades or changing our reserve price assumption when the gold price is high rather than just sticking to plan and finding more ounces at a $1,350 reserve gold price.

[David Radclyffe, Managing Director]

Sure. So -- then I guess a follow-up, and look, no one's obviously going to criticize you for locking in hedging at $1,800-plus an ounce. But could you just remind us what is the hedging strategy? And so if the opportunity does present itself again to lock in at prices you have, what sort of volume would you be happy locking in?

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

Yes, David, our strategy's always been that hedging is an instrument that we'll use to protect the balance sheet, and we look at it either when we make major project commitments or major cutbacks at mines, or also when there is elevated gold pricing or spikes in the gold pricing. But what we've said is we're comfortable with up to 20% of our production in any one year being hedged is something that we're willing to do but leaving the majority of production unhedged. So if we sort of look at it, we did 300,000 ounces, 100,000 ounces a year for FY '21, '22 and '23, which is on average about 14% to 15% of that production in those years, and that's what we've put in place. Looking at our capital programs that we're going to do now with the Cowal expansion, the undergrounds at Mt Carlton, the GRE46 at Cowal and still doing Stage H, we want opportunities to be able to invest elsewhere if other opportunities do arise.

[Jacob Klein, Executive Chairman]

And just to add to that, David, it really goes to the strategy of building a company that can prosper through the gold cycle. So conservative price in terms of reserve calculations, AUD 1,350, up to 20% of our production hedged at these elevated prices, a conservative balance sheet of, we've previously said, up to 15% gearing levels, it gives us both the opportunity to do things and an ability to prosper whatever the gold price is.

[Operator]

Your next question comes from the line of the Jim Pollock of Surbiton Associates.

[Jim Pollock]

Jake, a couple questions. You mentioned that the Cowal Float Tails Leach project will improve recoveries by 4% to 6%. Is that 4% to 6%? Or is that 4 to 6 percentage points, bearing in mind there's quite a difference?

[Jacob Klein, Executive Chairman]

It will go from around 4 to 6 percentage points.

[Jim Pollock]

Good. Fine. Okay. Just looking at the grades at -- for the last quarter, at all of the gold mining operations. They all declined with the exception of Cracow, which was a very minor increase. Bearing in mind the answer you gave to a question just a little earlier, was that -- were those reductions just fortuitous? Or was that part of a deliberate policy to cut the grade a bit and throw in a bit more low-grade stockpile?

[Jacob Klein, Executive Chairman]

So I think, Jim, I made it -- I thought I made it clear, but let me clarify. We don't have a deliberate policy of reducing the grade when the gold price is elevated. We -- yes, as I said, from our perspective, this is a quarter that we would have liked to have been better. And right up until early December, it looked like it was going to be better, and then we had a couple of unanticipated events.

[Jim Pollock]

Right. Now if -- you have your mining plan set at AUD 1,300 an ounce and the current price is around $1,800 an ounce. Can I take it from that, that you are actually leaving ore in the ground?

[Jacob Klein, Executive Chairman]

There will be inventory in the ground that is not in our reserves, which can be considered at some later stage.

[Jim Pollock]

But you will be able to recover that? It's not as though it's going to be sterilized and lost forever?

[Jacob Klein, Executive Chairman]

As best as I understand, it won't be sterilized.

[Operator]

Your next question comes from the line of Ranjeetha Pakiam from Bloomberg News.

[Ranjeetha Pakiam]

Just a very general question for me on the outlook for gold, Jake. This year we saw that rally in December after the Fed turned a little bit more dovish and for [indiscernible] markets. It's been pretty range-bound this month and has struggled to reach that psychological level of USD 1,300. So I just wanted to get your thoughts on this. Where do you see gold going forward?

[Jacob Klein, Executive Chairman]

On a personal level, I have a favorable outlook for gold given the geopolitical uncertainty and the financial risk in the system. But as the Executive Chairman of Evolution, we are not banking on that as a company. We want to be a company that prospers whatever the gold price is and recognize that we operate in a very cyclical sector. We happen to be in a very favorable environment at the moment, and we should be driving returns -- superior returns for our shareholders.

[Operator]

Your next question comes from the line of Matthew Frydman from Goldman Sachs.

[Matthew Frydman, Research Analyst]

Firstly, it's great to see the progress on the JV with Glencore at Ernest Henry given the potential for that ore body. I was just wondering whether you can give us an idea of how that drill program is being managed between yourself or between Glen's team and Glencore? And also at a high level, whether there's been any discussions on any potential time line for how you're going to process those results and then presumably present them to the market.

[Jacob Klein, Executive Chairman]

Yes, Matt, look, it was pleasing for us that when they were finalizing their program for 2019 that there were some plans for the drilling to happen. So the first step is to initiate the joint venture, which we did, as we said in the release. Then this quarter we will form that joint venture to approve the program for the second half of the year. So there's nothing set in concrete yet. But the way the joint venture operates is that Ernest Henry and Glencore are the operator. So they will do the drilling program, and we will have input into it but they perform the works. So in the next quarter we'll know what that program's going to be in the last quarter of this year.

[Matthew Frydman, Research Analyst]

Sure. So expecting any results to be potentially released on -- in line with Glencore's time line for how they update the market on resources and reserves at a later stage.

[Jacob Klein, Executive Chairman]

You would see that the drilling that goes through in the latter half of this year would form part of their results that they do for the 2019 MROR.

[Matthew Frydman, Research Analyst]

Understand. And just secondly on the Float Tails Leach, wondering if there's been any updates in your thinking there about potentially adding some more capacity there down the track. Is that part of, I suppose, the ongoing mill and underground study at Cowal? Or I guess, are there any things that you'll be looking for in the ramp-up and the commissioning of the Float Tails Leach circuit that are going to give you an idea or give you some confidence about the future potential?

[Robert Stanley Fulker, Chief Operating Officer]

Yes, Matthew, to start with, I think I would like to get the Float Tails Leach stabilized. We have got the program for the mill to increase the throughput in the mill, and that will obviously flow over into the FTL circuit. The other one is we have locked in for the last quarter this year that increase in recovery due to the Float Tails Leach. So that will actually see some improvements in the output of ounces for that quarter as well. So I guess the -- to answer your question sort of, that's all in front of us. And the Float Tails Leach actually opens up a lot of options and opportunities for us to do everything that you just talked about.

[Matthew Frydman, Research Analyst]

Sure. So it sounds like commission it, get it running well first and then it potentially could inform part of the future state.

[Robert Stanley Fulker, Chief Operating Officer]

Yes. And we've got -- we do have capacity in the tanks and in the leach circuit to expand. So it does have that optionality for the future.

[Operator]

Your next question comes from the line of Paul Kaner from RBC Capital Markets.

[Paul Kaner, Associate]

Just a quick question from me in regards to Mungari. Just ignoring Q1 for a second because it's a strong quarter. What drives the cash costs high in comparison to Q4 where you produce the same ounces? Is it a fact of the re-up cost? Or is there anything else there as well?

[Jacob Klein, Executive Chairman]

Sorry, can you just repeat that, Paul? We didn't quite get it.

[Paul Kaner, Associate]

So yes, just ignoring Q1 for a second because it was a strong quarter, what drives the cash costs high in comparison to Q4 where you guys also produced the same amount of ounces? Is this a factor of the re-up cost? Or is there anything else there as well?

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

Q4 last year.

[Jacob Klein, Executive Chairman]

Yes, are you talking about Q4 last year.

[Paul Kaner, Associate]

Yes, yes, Q4 last year.

[Jacob Klein, Executive Chairman]

I think we'll get back to you on that one, if that's okay.

[Paul Kaner, Associate]

Yes, no, that's fine.

[Jacob Klein, Executive Chairman]

I mean, but certainly from Q3 to Q4, it was grade-related. We went from 2.9 to 2.5 grams a tonne. And really, we ran out of options in some ways because we were restricted on the Mist side of the ore body. And that underground at Frog's Leg does require optionality because a couple of stopes didn't deliver late in the quarter.

[Paul Kaner, Associate]

Yes, no, I understand that. It's just grade was pretty similar to Q4 last year and production was similar as well. So I just wanted to see if there was -- if there's anything else there.

[Jacob Klein, Executive Chairman]

No, not on the -- not on the face of it that we can recall.

[Operator]

Your next question comes from the line of Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

Just to change tack a little bit, Jake, global M&A in the mega caps has been occurring. Just want to maybe get your thoughts on that and what the opportunity might throw off for Evolution?

[Jacob Klein, Executive Chairman]

Thanks, Daniel. Yes, it is interesting times in the gold space. But 4 of the largest gold companies have become 2, so I guess that may make us a bigger company in the rankings. Yes, we're one -- at below USD 700 an ounce, we're one of the lowest-cost gold producers in the world. I have yet to meet a shareholder of ours or an investor who've said that they won't increase their investment -- or a limitation of buying into Evolution is our size. So I'm not sure that the thesis of bigger is better is necessarily borne out by history of -- in the history of the gold sector where midtiers have generated better returns for shareholders over a long period of time. So I'm sitting on the fence with regard to the mergers and going on, "Well, let's see how they pan out." Clearly, they present opportunities for us from a divestment perspective in the event that noncore assets are sold and we would clearly be interested in seeing whether some of those assets are potentially available and attractive to us.

[Operator]

There are no further questions at this time. I would like to hand the conference back to your speakers. Please continue.

[Jacob Klein, Executive Chairman]

Lawrie, you've got an answer for Paul?

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

Yes, Paul, just going back to your question on Mungari given you were looking at Q4 of last year. A couple of things that really drove that was that in this quarter, we actually had a major shutdown on the circuit. And so we actually processed less tonnes. So the grade in Q4 last year was higher. Recoveries in this quarter were lower. So that's how you ended up with similar production with lower throughput and higher grade offsetting the lower recoveries. So in this quarter as well then, the operating costs were higher than Q4 last -- at the end of FY '18 because of the shutdown costs that we incurred in this quarter versus Q4 last year. And in this quarter, in Q2 this year, we spent about $3 million more sustaining capital than we did in Q4 of FY '18. So those 3 or 4 things combined together gave the difference in the all-in sustaining costs between those 2 quarters.

[Jacob Klein, Executive Chairman]

Thanks. And thanks, everyone, for the questions and for participating in the call. We really appreciate it. And I hope we've again demonstrated a transparency and a willingness to discuss the challenges that we confront that is recognized. Thanks for joining us, and we'll see you when we all speak to you when we release our interim results in, I think, 13th of -- on 13th of February.