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Evolution Mining Ltd
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Thank you for standing by, and welcome to the Evolution Mining March 2020 Quarter Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Bryan O'Hara, GM, Investor Relations. Please go ahead.
Thanks, Izzy. Good morning, and welcome to the Evolution Mining March 2020 Quarterly Conference Call. This morning on the call, we have Jake Klein, Executive Chairman; Lawrie Conway, CFO and Finance Director; and myself, all appropriately social distancing in Evolution's group office here in Sydney. Also on the call, we have Bob Fulker, COO; and Glen Masterman, VP, Discovery & Business Development, who are dialing in remotely.The March 2020 quarter was one for the history books with the COVID-19 pandemic providing the catalyst for some of the largest and fastest declines in financial markets on record. With governments and central banks around the world responding to the crisis with promises of extraordinary monetary and fiscal stimulus, it's been reassuring to see gold performing its role as a relative store of value with the Aussie dollar gold price up over 25% this year to a record high of over $2,700 per ounce. And despite being caught up in the extreme volatility of the broader markets in early March, gold equities have bounced back strongly with a number of Australian and global gold producers currently trading at or near all-time highs.Among these, Evolution continues to be a standout with sector leading cash generation per ounce, a focus on rewarding shareholders through growing dividends, strong balance sheet liquidity, a reputation for reliable operational delivery from our diversified portfolio and an attractive growth profile, driven by Cowal and now Red Lake. Thank you. And I'll hand you over to Jake.
Good morning, everyone. Thanks, Bryan, and thank you, everyone, for taking the time to join us on the call today. We really do appreciate it. I also hope that you, your families and colleagues are all healthy and well and navigating through these unprecedented times we are all confronting.At Evolution, we do recognize that we are in a very small minority of businesses that are operating in an environment where, if we can get our colleagues to sites and keep them healthy and safe, which we have been able to do so to date, we are in a very fortunate position where we can sell everything we produce at the current record-high gold prices. We are doing our best to remain grounded, engage openly and transparently with our communities and respect the very tough times so many people are going through.To date, our management of the COVID-19 pandemic has been very good. We are navigating through this with authenticity and staying true to our health and safety values whilst continuing to keep our business strong. To date, there have been no reported cases for our employees or our contractors and no impact on our production related to COVID-19.Impressive examples of the commitment of our people are many, and we are grateful to them. To minimize interruptions, our people have showed willingness to go above and beyond and adjust to work longer rosters or, in some key roles, relocating to be near the sites so as to avoid inter-state travel.Our safety is improving. We are not yet where we want to be, but the thing that gives me the most confidence is that Fiona Murfitt, our General Manager of Sustainability, is saying that after 3 months of being in the business, what a 3 months that has been, she believes there is a genuine level of care present across the company, which is the foundation of any great safety culture and any great corporate culture for that matter. Our continued work and focus in the area of sustainability was rewarded with an upgrade in our MSCI sustainability rating from BBB to A.As you have come to expect from Evolution, our focus remains on margin and cash flow. We do believe that this should be a differentiating metric for shareholders who are analyzing this sector. Net mine cash flow increased 11% quarter-on-quarter to almost AUD 160 million, and group free cash flow increased 33% quarter-on-quarter to almost AUD 112 million, both of which are very pleasing results. Cash flow continues to be strong. And as at today, our cash balance has increased to approximately $240 million, and including our undrawn revolver facility, our liquidity is around $600 million. Financial strength and robustness is important in these uncertain times. This quarter, you also see in our results the merits of having a portfolio of assets with material contributions being made from some assets that have at times in the past been overshadowed by our larger assets. Mungari and Cracow both contributed record net mine cash flows this quarter. Mungari has generated a very impressive $73 million in net mine cash flow year-to-date and is also having very encouraging exploration success.The June quarter will be a big one for us and one that we expect will bring us in at our guidance of around 725,000 ounces at an all-in sustaining cost at the top end of our guidance range of AUD 990 an ounce. These numbers exclude any contribution from Red Lake. The increase in production will mainly come from Mt Carlton as it accesses higher-grade material for the first time from the underground mine that it has developed and also from Mt Rawdon that is expected to be back mining the higher-grade area of the pit after recovering from the rockfall it had in the September quarter. We were fortunate to have had access to the Red Lake site for over 3 months since signing the deal in late November to when the lockdown started. Buying an operation that you're not able to be at when you receive the keys is a first for all of us, but I think the collaboration, preparation, use of technology and engagement is a reflection of what I think is really special about Evolution. If the first 3 weeks of our ownership are a guide to the future, Red Lake will exceed our most optimistic expectations.We were pleased that under the locked box mechanism that has operated since 1 January we will receive AUD 18.8 million in April. We are also taking the opportunity to strengthen our team and get the right people in the right roles. At Red Lake, the transformation has started with the appointment of [ Amber Adams ] into the role of Interim General Manager and a 40% reduction of the site leadership team roles. I have been incredibly encouraged and impressed how [ Amber ] and her new team have embraced the challenge we have ahead of us to transform the operation.In a very important group role, I am pleased to announce the appointment of Amanda Weir as General Manager, Transformation and Effectiveness, a role that reports directly to our COO, Bob Fulker. Amanda has a very impressive track record with her last role being Head of Geoscience and Resource Engineering at Olympic Dam for BHP.Importantly, the drill rigs have kept turning, and we continue to be encouraged by the success we're having at Cowal, Mungari and now also at Red Lake, which you will hear more about from Glen in a few minutes.With that, I'll hand over to Bob.
Thanks, Jake, and good morning, everyone. It's pleasing to start my quarterly comments with a couple of positives from a safety perspective. The site behavior safety programs continue to yield good results with the TRIF decreasing by 15% from 8.4 to 7.2 over the quarter. To date, we have not been materially impacted by COVID-19.On COVID-19, we have implemented and are operating under strict protocols to minimize risk to our people and communities whilst ensuring we can continue to safely produce gold during these times. We have suspended international travel, restricted domestic travel, rolled out strict social distancing practices, reduced face-to-face interaction, increased flexible working agreements and increased workforce communications to all employees or, at a minimum, we are aligned with government protocols.From a site perspective, we're also conducting on-site management meetings linked to our Evolution crisis management daily meetings, shift screening which includes temperature checks, hired additional vehicles and chartered flights, floor markings in pre-shift meeting areas to aid the 1.5 meter distancing, reduced contractors for nonessential mill shutdown work and instituted changes to rostering as needed, all whilst working closely with the communities in which we operate. 5 of our 6 operating sites have essentially residential workforces rather than FIFO. This gives some protection from the impact of travel restrictions. We were also very encouraged by the slowing infection rate across Australia. As everyone understands, this is a fluid and evolving situation, and the daily crisis management team meetings are in place to support all operations and office locations.In the March quarter, we delivered 165,500 ounces at $991 all-in sustaining cost, generating a net mine cash flow of $160 million. On reflection, we've had some real challenges this year with the wall instability at Mt Rawdon, ore body variability at Mt Carlton and now COVID-19. However, that being said, on the whole, we are on track to deliver guidance despite all these challenges.I'm excited for the outlook of all our operations. We are doing some great things from an innovation, optimization and data perspective, which I truly believe will be enablers for our business to improve our reliability, repeatability and our resilience. We are currently operating during a time of great uncertainty, and despite this ever-changing environment, I think all our people are doing exceptionally well managing the risks and keeping each other well informed and safe.If we turn to Page 6, Cowal delivered 60,500 ounces at an all-in sustaining cost of $1,031 an ounce with a net mine cash flow of $34.5 million while still investing $54 million on total capital projects building for the future. The focus on leading safety indicators and hand injury awareness has resulted in a continued and sustained reduction in TRIF with Cowal currently at 2.5, a site record.We have also had a proactive approach to the long-term water security, and I'm pleased to confirm that this, along with the completion of the pipeline twinning and recent rain, has reduced our immediate threat for Cowal from water -- from a water availability perspective. Work continues on additional saline bores to further reduce the reliance from freshwater sources, and we are confident there is enough water to supply -- sorry, enough water supply to meet Cowal's ongoing water requirements with no material impact on operating costs or recoveries.Mungari delivered 33,000 ounces with an 18% reduction in their all-in sustaining cost of $1,099 an ounce. This, as Jake said, was with a record net mine cash flow of $31.9 million. Frog's Leg Underground is continuing to deliver its scheduled tonnes and ounces, and the Boomer development is now only 90 meters from mineralization. This will be an exciting day for the team at Mungari.The open pit fleet has commenced the new Cutters Ridge pit, also a major milestone for Mungari. The plant continues to run well at the elevated levels, close to 2 million tonnes per annum, and the project work is progressing to identify the upper limit of the plant capacity.Turn to Page 7, please. Mt Carlton delivered 13,000 ounces at an all-in sustaining cost of $1,417 an ounce and a mine operating cash flow of $20.1 million. Underground development and capital spend has been accelerated to bring the high-grade underground ore into production in the June quarter, which we expect will result in a significant uplift in production and reduction in costs. The first underground gold bar was produced from development ore in March. Mt Carlton open pit and underground grade control drilling is continuing, and exploration drilling has commenced at Crush Creek. Mt Rawdon produced 16,400 ounces at an all-in sustaining cost of $1,357 an ounce. Whilst this is still high, we have seen Mt Rawdon's all-in sustaining costs reduced in line with forecast as I work through the western wall cutback. The net mine cash flow is holding steady at $9.1 million. Again, this is expected to improve as the capital burden from the western wall strip concludes. We are expecting Mt Rawdon's production to increase as access to the higher-grade ore in the pit floor is exposed during the June quarter.On Page 8, please. Cracow continues to consistently perform, producing just over 22,000 ounces at an all-in sustaining cost of $1,150 an ounce and a mine operating cash flow of $31.7 million. Pleasingly, Cracow's net mine cash flow of $27.6 million was the highest on record. Ernest Henry, again, made a significant contribution to the group's production, 20,000 ounces at a negative all-in sustaining cost of $188 an ounce whilst generating a net mine cash flow of $61.3 million.On Page 9 for Red Lake. The Red Lake operation is making great progress in these -- in critical areas. I'll leave the financial implications at closure for Lawrie. But from an operational perspective, the site leadership team has been restructured, reduction of 40%. We have commenced resource definition drilling in the production -- future production zones; increased underground development rates with a plan to exceed the 1,000 meters per month rate by July; commenced underground equipment procurement process; commenced #1 on Campbell shaft decommissioning; and we have commenced the refurbishment of the Campbell mill. It's an exciting time at Red Lake, and the new SLT is invigorated and motivated to continue the improvement journey.In summary, our focus remains on improving our safety performance, maintaining the health and well-being of our people whilst delivering to guidance ounce and cost. During these times of uncertainty and change in the world, it's my belief that we need to remain focused on our goals, connected as people and operations and continue to make the most of every opportunity.With that, I would like to hand it over to Glen. Thank you.
Thank you, Bob, and good morning, everyone. Before touching on our drilling highlights for the March quarter, I would like to provide a brief overview of what we have done in our discovery group to manage the COVID-19 situation.Drilling programs continue at Red Lake, Cowal, Mungari, Mt Carlton and Cracow, where we have implemented the strict measures Bob spoke about earlier. We have suspended exploration activities at 3 of our 4 managed and operated greenfields projects in Western Australia and Queensland to avoid the risk of spreading the virus through interface with indigenous communities.We are continuing our exploration program at the Crush Creek project, which is located 30 kilometers south of Mt Carlton. The first diamond holes have been completed following the arrival 2 weeks ago of the first diamond rig. A second rig is due to arrive in May, which will help accelerate confirmatory and extensional drilling of vein targets, which we hope will become an important ore source to extend mine life at Mt Carlton.We were very pleased to take the keys at Red Lake early in the month, and we have now completed a full quarter of drilling under Evolution's stewardship. Four rigs have been operating continuously underground during the quarter. Drilling is focused at Cochenour and Lower Red Lake with the purpose of converting resources to reserves and to expand ore bodies in these areas of the mine. So far, we are very encouraged by recent drilling results, particularly from Cochenour, which has generated high grades over good mining thicknesses. Examples are highlighted on Page 13 of this morning's report.Early in April, we commenced our annual review of exploration programs and targets across all our operations and greenfields projects. This process includes the development, ranking and prioritization of new and existing targets for which we'll propose budgets in FY '21. Targets that have the ability for discovery of new high-grade resources at Red Lake are ranking very highly and will be advanced into the drilling schedule in FY '21.At Cowal, underground drilling with 3 rigs continues to build mineral inventory for the maiden reserve, which is on target to be released in the December 2020 half year. Highlights of infill results are presented on Page 15 of this morning's report.Surface drilling is continuing with 2 surface rigs and is delineating mineralized extensions at the lava zone, highlighted by the results received in holes 544C and 453G on Page 15 of this morning's report. As well, a new area known as [ Galway South ] is developing on the left side of the Figure 5 long section on Page 15. The mineralized zone remains open down plunge with future drilling design to extend mineralization beyond the cluster of holes shown on the long section, which end in hole IDs 545, 466A and 466EXT. Examples of mineralized intercepts at [ Galway South ] include 7.2 meters grading 12.1 grams per tonne in hole 545, which was drilled adjacent to a previously reported intercept of 30.4 meters grading 6.6 grams per tonne in hole 545A.At Mungari, drilling at Boomer returned more pleasing results with discovery of a new folded vein position beneath the original area of drilling. Drilling highlights are summarized on Pages 16 and 17 in this morning's report. Access development is currently 90 meters from the design breakthrough position, and we are expecting to come into ore positions later in the 2020 quarter -- June 2020 quarter. The Boomer structure remains untested for climate in north of the main mineralized area. Work along strike has been postponed owing to the need for cultural heritage clearance, which the company has suspended due to the COVID crisis.And with that, I'll hand over to Lawrie.
Thank you, Glen, and good morning, everyone. Prior to going through our financial performance for the March quarter and outlook for the year, I want to outline our approach to managing the balance sheet through the COVID-19 situation. Over the past month or so, in conjunction with the measures we have taken across our business to manage the health and well-being of our workforce, we have been ensuring the strength of the balance sheet is maintained. While we have no material production impacts and no liquidity problems, it is certainly prudent to do this work. This involved running multiple scenarios for varying types of impacts on our business.At the time of conducting these scenarios, we were preparing to pay our FY '20 interim dividend of $120 million and draw down $570 million of debt to close the Red Lake transaction. Both of these items were also taken into consideration. The scenarios we ran looked at the possibility of an extended impact on our business, including scaled back production at all operations through until the end of FY '21 and full suspension of all of our operations for a period of up to 6 months with impacts of Ernest Henry also being included in all of our scenarios.The scenarios allowed for additional costs due to inefficiencies to operate in this manner, any redundancy and restructuring costs and metal prices up to 25% below current spot prices all the way through until the end of FY '21. The most pleasing result of this work is that vindicated that we have a quality suite of assets which are highly cash generative and can withstand the disruption event for an extended period. In the scenarios we conducted, all of our operations would be cash flow positive for the FY '21 year. While we may not have captured everything in these scenarios, we are comfortable in their robustness. The outcome of the reviews from a group perspective is that we would not be expecting to draw down on our 3-year revolver facility, our debt facility and hedge commitments are all met, and our liquidity would continue to increase over this period. It confirmed our confidence to proceed with the interim dividend payment. Our cash balance in April has increased to around $240 million. And with the undrawn $360 million revolver, we now have over $600 million of liquidity.Turning to the financials for the March quarter, which are on Pages 10 and 11 of the report. We produced over 165,000 ounces at an all-in sustaining cost of $991 per ounce. Even though production was slightly behind plan, the improved AISC was in line with plan. Operating costs quarter-on-quarter were flat at similar activity levels, while sustaining capital decreased as outlined in our December quarterly results. The higher metal prices adversely impacted the AISC, but the net cash generation outweighed this. If we had achieved the metal prices on which our current guidance is based, our all-in sustaining costs for the quarter would have been around $970 per ounce, and our year-to-date all-in sustaining cost would have been around the $1,000 mark.We generated $160 million of net mine cash flow with records at Mungari and Cracow of $32 million and $28 million, respectively. Group cash flow before dividends, debt and M&A costs was $111.5 million. Our year-to-date group cash flow was over $350 million or $640 per ounce sold. Year-to-date, our margins are very healthy with an EBITDA margin of 51%, all-in cost margin of $695 per ounce and a free cash flow margin of around 30%.Upon closing the Red Lake transaction, we moved back into a net debt position with the drawing down of the $570 million term loan. Our gearing is a very conservative 14%, and we are planning to reduce below 10% by the end of June. The amortization of this loan has been aligned to the group cash flows and the expected buildup of cash generation at Red Lake over the next few years. The first repayment of $20 million is due in July with $95 million due through FY '21.Looking at the June quarter and to finishing off FY '20. We are expecting to produce approximately 195,000 ounces, and as mentioned by Jake, the majority of the higher production is expected to come from Mt Rawdon accessing higher-grade ore in the open pit and Mt Carlton achieving first production from the higher-grade underground mine. This will bring the full year to around 725,000 ounces at the top end of AISC guidance of $990 per ounce. This is excluding Red Lake. Should current spot metal prices be maintained during the June quarter, our AISC would be negatively impacted by $20 to $25 per ounce due to higher royalties and lower byproduct credits. However, our cash flow would be $90 million to $95 million higher compared to the metal prices on which our guidance is based.Lastly, at Red Lake, we are expecting around 25,000 ounces at an all-in sustaining cost of AUD 2,100 to AUD 2,300 per ounce as the operation focuses on implementing the interim and transformation plans. Sustaining and major capital is expected to be around $5 million to $7 million and $15 million to $17 million, respectively, while exploration investment is expected to be $3 million to $4 million. Thank you for your time this morning. And I'll now ask Izzy to open the line for questions.
[Operator Instructions] Your first question today comes from Nick Herbert with Crédit Suisse.
I'd like to start on Red Lake. Jake, you touched on it in your comments. But just interested how much of an impact the COVID travel restrictions are having on your ability to implement your initial plans there given you can't get key or the personnel to site.
Thanks, Nick. Jake will respond to that one.
Thanks, Nick. Great to see you're following the tradition of your predecessor and first half report.
He taught me a few tricks.
We look forward to continuing. Look, the COVID-19 impacts has obviously restricted us from being on the ground when we took ownership of the asset. But we have had the opportunity of having several months of time to be on the ground. All of the leadership team and a number of our technical team and commercial team have been on the ground. We did a lot of planning, and we still have some of our colleagues on-site at the moment. But we are backing, as we do with all of our sites, the leadership team, the new leadership team there. [ Amber Adams ], as I said, has stepped up. We have redefined the leadership team. We've reduced the number of roles by 40%. And that site was ready and -- for change, and so the team there is really embracing it. And whilst we recognize there are challenges ahead of us, technology has allowed us to hold 5 virtual town hall meetings, so we've spoken to most of the workforce over there in a very interactive way. The feedback of those sessions was positive. I don't think it's restrictive in terms of the change we want to make and very encouraged in the first few weeks.
Okay. Good to hear. And then, I guess, you've been pretty clear on your 3-year turnaround timetable there. But just wondering if you're able to point to some nearer-term milestones, perhaps we can get a sense of just looking at that performance and just thinking along the lines of when maybe we can see a stepped improvement for productivity mine rates or a major staff cost reduction go through, really anything that's major steps ahead of that full 3-year implementation period.
Thanks, Nick. Jake will respond to that one as well.
Nick, your predecessor taught us some lessons as well, and that is not to fall into the trap of changing the promise too quickly. So we're sticking with that 3-year time line. There are encouraging signs, and I'm going to let Bob explain a few of those and give you a heads-up on some of the things which we see as opportunities there.
Thanks, Jake. I guess I'll start on a couple of the easy ones. Development, we've already started to hit some of our straps on development very pleasingly, but we're seeing an increase month-on-month. And we do expect that by the July-August time frame that we'll be actually exceeding that 1,000 meters per month rate, and we're on track to do that now. So that's a nice one to start with.The second one is some of the infrastructure work that we're working on like the Campbell shaft shutting, even though it's a small one, it's significant from a fixed cost and all the rest of it. And that will happen probably in the -- not probably, it's planned to happen in the March quarter '21. So that's a nice one to talk about as well.The other one is we're working through at the moment with the leadership team. We worked on the leadership team. We talked to them first and, as Jake and I have both mentioned, restructured that and a 40% reduction of people in that team. Now they're actually working with the site teams and with the guys on the ground to actually look at the entire workforce. And we are expecting that, that will happen this quarter, towards the back end of this quarter. So we will talk to the workforce first. But during this quarter, we expect to have most of those improvements bedded down.
Great. Bob, that's really helpful. Maybe just a couple more. One on the gold price, Jake. You recently updated your reserve price to AUD 1,450 now, still very well below spot. And just wondering, what's led to change your view on that? Or perhaps, how long would you need to see gold sustained at current levels to warrant a change in your thinking on that reserve price again and any implications for mine planning?
Yes, Nick, that's a good one. I mean I think we want to see, are these $2,700 levels, are they sustained, are they long term. When we were looking at our budgets and planning for this year, we were using an AUD 1,800 gold price. So the gold price is $900 higher. Now as you've come to know us, we are focused on margin. This is a cyclical business. We're in a very good part of the cycle. We hope it gets better. But from a business perspective, as you heard from Lawrie, the way we're stress testing the balance sheets for these type of events like COVID-19 unanticipated, we want to be a business that can prosper through the cycle. So it's going to be a conservative reserve price. We will reassess it when we do our MROR at the end of this year again, as we always do, but will be conservative because we want to be a margin-focused business.
Yes, it makes sense. And then finally, I guess, similar vein, how do you think about hedging any appetite beyond what you've locked in there for Red Lake? And then also, on the Stage H cutback at Cowal, big material movement. So I'm just wondering how much of a swing factor is the oil price in the economics of that cutback. And is there any consideration in locking in some oil price hedging?
Thanks, Nick. Firstly, on the hedging, yes, look, with Red Lake, as we look at the 3-year turnaround plan, we wanted to make sure that, that asset is able to fund its own capital programs and basically not put impact on the rest of the business. So we did put 120,000 ounces in at an average of a spot average $2,300 an ounce over the 3 years. That's about 10,000 ounces there per period. But beyond that, we don't see the need to put more in place at Red Lake. We don't want to go -- we're probably at a group level when you take that plus existing hedges, around 15% of our annual production is hedged, and the benefit we see is that 85% to 90% of our production is exposed to the spot price. So we're comfortable -- we're continuing to use hedging as more as a tool for balance sheet and capital management rather than trying to say that we know what the gold price is going to be.In terms of the diesel, the thing I'd say there, yes, Stage H is certainly our biggest user. Diesel is 5% of our cost base, and we are looking at, as we do our FY '21 LOMs and budgets, is, is there any benefit there for us. At current spot prices of diesel, we would see that, that gives us a net -- taking into consideration the depreciating Aussie dollar, it would give us a net benefit on an all-in cost of around $20 an ounce for a full year, excluding, obviously, Red Lake there. The thing that we are seeing, though, is that the forward curve on oil is still not reflecting the current spot prices. And basically, within 18 months to 24 months, you're back up above what the current prices that we have in our plans are. So right now as we go through the next few weeks, which is when we are finalizing our life of mine plans, we will consider that for Stage H.
Your next question comes from Daniel Morgan with UBS.
A few questions here. On the Stage H cutback at Cowal, just wondering what your latest thinking on when that will be complete.
Thanks, Dan. Lawrie will take that question.
Yes, Dan. Thanks. We expect that by the end of FY '21, we're fully into ore and the Stage H cutback is therefore completed from a capital waste position.
Okay. Very clear. And moving to Red Lake, you've talked about some early wins or milestones, one of which is the higher development rates. Just wondering how you're achieving that when it's very early, you've just got the keys, you haven't gotten new equipment or established new protocols. Just wondering how you're getting the higher development rates early. What's -- how are you getting better productivity?
Thanks, Dan. I'll hand it over to Bob, who will expand on the response that he gave earlier. Thanks, Bob.
All right. Thanks, Bryan. Dan, thanks for the question. It's not magic or anything. We've focused the development into the areas that we want to produce from. So we have pulled guys from the lower productive areas and put them into the higher tonnage and the open stopes that are coming up in the future. We've also opened up additional development headings. So as opposed to restricting the development write-down to just 1 or 2 per cycle, that number is now up to 6 to 8. And our aim is to get that above that, so they can actually get better effectiveness in their cycle. So it's really around deconstraining the guys, focusing their attention and getting people to really concentrate on getting that turnover of headings every shift.
And I think, Daniel, just to add something to Bob's response, the thing which we've been most encouraged by is what Red Lake needs and people seem to embracing on-site is change. And that's really a change in culture. The geological potential is there. The infrastructure is there. It's probably too much infrastructure. There's too much gear. May not all be the right gear. But fundamentally, people are there. They want to be proud again of that operation, and that's what, I think, is going to lead to the greatest change in the way things are done. And that's just being embraced. It's going to take time. There are going to be mistakes. But what we're talking about is a little bit like when we talk -- when we took over Cowal in 2016. Everyone on-site knew what needed to change. It just needed the framework and the capacity to make those changes. And I think that's what we're largely providing. So I don't see it much different to other assets who we've acquired.
And just the guidance, I mean I know you didn't take the opportunity to reduce the FY '20 guidance below 725,000 at the quarterly. It does imply if you were to reach 725,000 exactly for the year, a big step-up in the final quarter. Just wondering if you could expand on your confidence on that and just reiterate the key drivers for that.
Yes, Daniel. I mean it's dependent on and we are confident of the delivery of higher-grade material from the underground mine that's been built at Mt Carlton. It will be the first stopes that are -- that deliver ore to the mill. And we're confident we're ahead of schedule there. And as Bob said, the first gold bar has been produced from development ore there. And then Rawdon has basically been treating stockpiles predominantly since the wall failure in the September quarter, and it will be back in the higher-grade part of the pit and will deliver a quarter which is much higher than this quarter. So really, it's been the things which have impacted our production to date that we expect to now have addressed, and that's from the Mt Carlton underground and Rawdon getting back into higher-grade ore.
And then the last one from me is just the Cowal underground studies. Obviously, everyone's jobs are harder with these mobility restrictions, working from home and remotely. Just wondering if the timing of that might slip a little bit. Or what can you talk about that study in light of these mobility restrictions?
Thanks, Dan. Lawrie will respond to that.
Yes, Dan. I mean I think where we're at, with the work going on in the exploration and the decline, the underground, the team and the crews are able to get to site and are doing that work and getting the meters we need. So we're not experiencing any problems there. And with regards to the rest of the studies, the teams are either working based at Cowal or working remotely. So we are seeing all of that progressing to plan. I think the thing that we are looking at is when do we make the submission to the regulator such that they're in a position that they're ready to operate and receive such a submission, and that's the only thing that may impact on our timing. But everything remains on track for, as Glen said, our maiden reserve before the end of December, and that would mean a submission to the regulator in that by the end of the December quarter as well.
Your next question comes from Sophie Spartalis with Bank of America.
Just following up from Dan's question around the production guidance. It seems as though, for the full year, it's -- you're aiming for the mid- to upper end of production guidance, but you're also guiding to the upper end of the cost guidance. Can you just maybe talk through the cost pressures that are coming through, please?
Thanks, Sophie. Another one for Lawrie.
Yes. Thanks, Sophie. I mean in terms of cost pressures, I mean, nothing has really changed with us throughout the year. The biggest movers have really been labor, which we had experienced the changes in the first half of the year. So that was the 3% to 3.5%, which is as per our guidance that we issued in August. What we are seeing is that it's the production mix that we have seen through each of the assets in the year, whereby, as Jake and Bob have both talked about, Mt Carlton and Mt Rawdon have missed their mark but are certainly going to be getting back to the revised number of getting us to the bottom end of guidance. And obviously, on a per ounce basis, that is really why our AISC has gone up. And the second one, which has been back in October when we updated our guidance, the higher gold price and lower copper price is adding about -- that plus the Mt Rawdon impact has added $50 an ounce to our guidance. Where we are trending in the last quarter, we see Mt Carlton and Mt Rawdon access back to the higher grade, so we get the ounces, which will bring our AISC down in Q4 and bring us back towards the $990 an ounce.
Okay. Fantastic. And then maybe one for Jake. Just in terms of COVID-19, obviously, we're all now aware of the pressures from and how we've had to adjust to that. Can you just maybe talk through the positives that are coming out of it in terms of the way your team is thinking, whether we can expect ongoing change in the cost base given new ways of doing business, less travel, et cetera?
Well, I think I could start it off with a bit of a flippant comment, Sophie, that some of our sites may be actually performing better because they're having less visitors from the group office. But they haven't had the courage to tell us that directly yet. But I think the way in which the team has responded has been fantastic. We really are adapting and embracing, and people have gone above and beyond what would we normally expect of them. There has really been a terrific commitment to the protocols, which our CMT group has put in place. The CMT team is meeting every day and having a conversation about changes, how we can do things, putting protocols in place. Our communication, I think, has probably gone up in terms of we have a daily briefing on COVID-19 across the whole organization. We're very conscious of communication. Obviously, these -- the technology has allowed us to hold these virtual town hall meetings. We are engaging with our sites all the time. One of our site general managers said to us when we had our quarterly general manager leadership team catch-up over a couple of days last week, said he thought the communication had actually got better, and we were more connected to each other and our people.So will it change the way we do business in the future? Well, I'm not buying airline shares at the moment, but -- and I prefer to own gold shares. But I'm not sure about that. But it certainly, I think, will have us reflecting on and sort of thinking about how much travel we do, do and whether there is technology that can help us do that more efficiently.
Okay. Great. And then just a final question for me. Just in terms of Ernest Henry exploration, can you maybe provide an update there, please?
Thanks. That would be one for Lawrie.
Thanks, Sophie. Yes, the program is tracking to plan, and the results that we saw in the December and March program have given confidence to the JV parties to approve for the third platform to be put in place. And basically, what we really want to do is see the third platform in and the drilling down there. We do have a fourth platform planned for later in the year, which will give us the total of the 18,000 meters. But essentially, we just want to see the full results of that to determine what would be the impact on infrastructure and logistics underground and everything before sort of making anything public around that work yet. But I think it's fair to say that, as you know, our joint venture partner, Glencore, spend nothing on exploration and development unless they absolutely have to or see value in it. And the pleasing thing is we got approval to go to the third platform.
Your next question comes from Levi Spry with JPMorgan.
A couple of questions. First one on Red Lake, looked to be a pretty good quarter. So forecasting lower production this quarter, is that really just about you focusing on development and seeing it up for the future? And can you remind me when the reserves and resource statement will come out for Red Lake?
Yes, Levi. Thanks. Look, I think it's fair to say that the asset is really being run in harvest mode. I think there was very little development planned in the first quarter and done. And really, it was cash harvested in that first quarter, and we're shifting that completely to be focused on exploration and development. So that's what you're seeing coming through, and that's why we generated or the mine generated that $18.8 million, which was, frankly, a nice surprise to us given that we weren't anticipating that would be as cash generative in the first quarter. But it also gives us some confidence that when we get this asset right, it will be a very cash-generative asset. There is, as you can see from the exploration results which Glen articulated this morning and that's in our quarterly, the prospectivity there is great. It just requires a change in cost structure and efficiency and productivity and culture to really generate those -- make it a great mine again. And that's the path we're on.And sorry, yes, the MROR. So as you know, we have a commitment with Newmont to basically create a base for the resource numbers. That's being worked through, and we anticipate that being done sometime in the September quarter.Just to add to that, I think there are 160 wireframe models at Red Lake, and that kind of describes some of the complexity which that mine has got itself into. And Glen's interest and desire is definitely to consolidate them, simplify them, and that's the work that's going on. So it is a big piece of work that's happening at the moment.
Yes. But it relates to the market reserve in September quarter, do I understand that right?
Yes, around that time.
Yes. Yes. Okay. And just on Cowal. So the underground reserve there in December half, so that will be -- that will include a PFS for us to model more accurately?
Yes, that's right. Yes.
Yes. And can you just remind me the ramp-up on the recovery work that's happening there, how that looks over the next little while?
Thanks, Levi. Bob will take that question.
Thanks, Levi. Is the question around the general recovery? Because at the moment, the issue that Cowal's having is that they're treating low-grade stockpiles. And as you treat lower and lower grade as the stockpiles start to deplete, as Lawrie said, that we're going to be treating them for the next 12 months until we get back into ore and Stage H. You will see a net effect on the overall recovery. The float tails leach is working well. We are seeing a nice uplift from the ore sorting. So all those sort of things are doing what they're supposed to do. But the overall numbers are being affected by the lower grade into the processing plant. Does that sort of answer the question?
Yes. So the big step-up doesn't have them until we get better grades in FY '22. So what sort of recoveries are we talking about longer term now, including the float tail leach?
We said it's around the mid-80s, Levi.
[Operator Instructions] And your next question comes from Ben Crowley with Macquarie.
I'm just wondering if you could give us just a little bit more granularity on sustaining CapEx. I mean I appreciate that at December, you were trending towards the bottom end of the range, and now you've cut that again a little bit below the original range. But it's a pretty significant step down on a per ounce basis across the board, I think, with the exception of Cowal. So yes, just if you could give us -- give me a bit of an idea on what the drivers of that have been, whether anything is being deferred and really whether they're the sort of numbers that we should be thinking of going forward.
Yes. Thanks, Ben. Look, what we said in the December quarterly results is that the second half would be over $10 million less in the second half. And it was really around the timing of the programs because if you look at it in the first quarter, we spent over $27 million. So on an annualized rate, you're getting up towards $120 million, and that wasn't what we were expecting to spend. So therefore -- and in the second quarter, we did $20 million. In the third, we've done $12.5 million. We would expect in the last quarter that's going to be $15 million, $20 million. And it really is just coming down to when these programs are completing. We have seen that in the fourth quarter and while we've lowered it again now, it's just because some programs at some of the sites had planned to be doing really can't be done because of the restrictions, really only getting essential things on site. And some things have just been purely pushed out.What we'd see, and it's no different to what we said at the start of the year around the guidance, is that, effectively, for all of our sites, we would see that $90 million to $110 million is the run rate that the sites would be operating under. Just at the end of this year, we're going to be probably around that $80 million plus mark to $85 million. But that's where we sort of see it going forward.
Yes. Okay. No worries.
Thanks, Ben. You can ask another question if you want.
In that case, well, just a quick one maybe for Glen. Just wondering about Crush Creek. You're obviously starting the drilling down there. But yes, maybe if you'd just give us a bit more of an idea of what kind of target, what you're looking at in terms of potential size of target. Maybe just a bit more detail on the geology there.
Yes. Sure, Ben. So Crush Creek is a -- it's an epithermal style geological target that it's a bit different to Mt Carlton, Mt Carlton being a high sulfidation, sort of high sulfide style of ore body, where we float a con and also have a gravity circuit. But Crush Creek is more aligned to, say, the style of mineralization we have at Cracow. So it's a low sulfidation epithermal. There is a drilled mineral inventory at Crush Creek. It's in the range of 100,000 to 200,000 ounces. It's unclassified, so it doesn't make it into our resource classifications. But the drilling program there is targeting some of the higher-grade shoots in these vein targets to really just confirm the grade continuity that has sort of come out of some of the previous open hole RC drillings, so that's one of the reasons why we won't classify it as a resource. We don't like that type of drilling. So we've got the 2 -- well, we've got 1 core rig, a second 1 on its way. And really, the idea, as I said, is to confirm some of these higher-grade shoots, extend them where we can and then expand the mineralized resource footprint in order to sort of build on additional mine life that we can augment production at Mt Carlton.
Your next question comes from Matthew Frydman with Goldman Sachs.
My questions are regarding Red Lake and specifically the mills. Wondering how you're thinking, since closing the acquisition, about the milling infrastructure. And you've touched in the quarterly on the plans to refurbish the Campbell mill that are currently underway. Wondering what the work program is there. Is the plan still to take that mill to 1 million tonnes per annum or there or thereabouts? And also wondering if the Red Lake mill is currently on care and maintenance and if the plan is still to maintain that.
Thanks, Matt. That's one for Bob.
Thanks, Bryan. I guess quickly, the current -- today, the Red Lake mill is actually operating and producing gold because we've just gone into the -- we're doing a 5-week shut at Campbell to improve the reliability and to change yet some parts that need changing. We are working in the whole gamut at Campbell, including the autoclave, including the crusher circuit, including the wet end being the tanks and steel replacements. And we're also working on some areas that can improve or debottleneck it around some of the shoots and some of the conveyors. So there's a whole raft of things that we're doing on Campbell.The long-term philosophy is that we concentrate on Campbell to try and get it up to maximum throughput, whilst Red Lake is either on care and maintenance or mothballed. But in the short term, we need to keep the Red lake mill going to enable us to produce that extra gold until we can get the Campbell mills where we need it to be.Our aim is to get the availability of Campbell back well over the 90% mark, and our aim is to actually really focus on debottlenecking and reducing those constrained areas of the Campbell mill to improve throughput. That's going to be a long journey. As we've always said, this is a 3-year sort of process, but the overall philosophy hasn't changed.
Sure. Wondering if it's too early to be able to give some detail on what the fixed cost saving might be if you did mothball or place that Red Lake mill on care and maintenance in terms of dollar millions per quarter or per annum, what you could save by doing that.
Matt, I will take that one. And I think it's too early to give you any guidance on that. The challenge at Red Lake is there is plenty of opportunity, and the real challenge for us is focusing on the ones that are going to make the biggest difference in productivity and efficiency at that site.
Sure. Maybe to think of it another way, is your goal to still get processing costs at that asset? I believe it was -- you're aiming for well under AUD 100 a tonne. I'm assuming that you're making some sort of adjustment to the way you operate the Red Lake mill is key to achieving that number.
Yes. Absolutely. And as Bob said, we're looking at all those changes. But our strategy has not changed. We believe that Red Lake can produce over 200,000 ounces of gold at less than USD 1,000 an ounce all-in sustaining costs.
Your next question comes from Reg Spencer with Canaccord Genuity.
Just following on some earlier questions on Red Lake. Given those improvements that you were already starting to see in your development rates, can we expect much of an improvement on what you guided to in the June quarter as we move further into FY '21? And I guess as part of that question, when might we expect to start to see some of those -- or some of the cost benefits from the improvements that you are making on-site to come into those all-in sustaining cost numbers?
Yes. Thanks, Reg. I think as you come to expect from us, we're going to be cautious in giving you longer-term guidance. We've just got ownership of the asset. It's going to be baby steps. We have plans and a real transformation plan in place. But although to sort of start articulating when exactly we believe those are going to be captured, baby steps, but they're all in the right direction.
Your next question comes from Ian Warden with Global Mining Research.
Thanks for the update on Red Lake particularly regarding COVID. Just wondering, with regards to the integration of Red Lake into the overall culture of Evolution and the team, what number of -- what's the percentage roughly of existing Evolution team that are sort of integrated at site? And has that changed at all with COVID compared to what you planned?
So there are 3 people at the moment who are on the ground or planning to be on the ground, but we're holding orientation sessions at the moment. So what does Evolution stand for and the culture of Evolution, those are being attended to by all of the Red Lake employees. It's being done virtually and going really, really well. We've had the Red Lake team at the virtual town hall meetings. I think they're coming to -- they're getting very clear on what we expect from them and what they can expect from us, and it definitely is different. And they're embracing it. So it's been interesting how we've navigated around this lack of access, and it has meant much more virtual meetings and things. But to date, it's going really well.
Your next question comes from Paul Kaner with RBC.
Just a quick one from me. At Mt Carlton, recoveries have been a bit low over the past 2 quarters. Could you maybe just comment on how you see this changing going forward, especially with the incorporation of the underground material?
Thanks, Paul. Bob will respond to that question.
Thanks, Paul. The recoveries have been affected purely because of the grade that we've been feeding, and the grade that we've been feeding has been predominantly low-grade stocks. And with the commencement of the underground and the first stope firing, therefore, some decent tonnages, the grade ore get lifted, and therefore, the recovery should come back up with it. We're seeing some nice improvements from the capital works that we've done in the plant as well, so that should help it as well.
We are showing no further questions at this time. I'll now hand back to Mr. Jake Klein for closing remarks.
Thanks, Izzy, and thank you, everyone, for joining the call. We do really appreciate it. As you can see, at Evolution, we are in very good shape, and I want to stress that this is not only because of the quality of our asset portfolio but mainly as a result of the quality of the people we are very fortunate to have in our business. At all levels in the organization, they are being values focused, working hard and, importantly, collaborating as a great team to deliver these results.Please stay healthy and safe. Look after yourselves and your families and colleagues, and we look forward to speaking to you soon. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.