Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to the Evolution Mining Limited March 2023 Quarter Results Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Lawrie Conway, CEO and Managing Director. Please go ahead.

[Lawrie Conway, executive]

Thank you, Darcy. Good morning, everyone, and thank you for joining us, as we outline the results for the March quarter as released on the ASX this morning. I'm joined on the call today by Bob Fulker, our COO; Barrie Van Der Merwe, our CFO; Glen Masterman, our VP, Discovery; Peter O'Connor, our GM, Investor Relations; and Taryn Chua, our Group Manager, Investor Relations. Barrie started with us last month, and I welcome to him -- welcome him to his first conference call.

At our call for the December quarter results, I talked about the macroeconomic changes that were taking place in the inflationary environment. Since then, we've seen a continuation of geopolitical tensions, experienced a number of bank collapses and seen some moderation in inflation, but not near the reductions to give sufficient comfort to central banks and businesses just yet. This has been good for gold with it breaching the USD2,000 per ounce mark again and above AUD3,000 per ounce for the first time. All things being considered, we do expect to see a continuation of capital deployment to gold.

In terms of copper, the supply-demand imbalance has continued, which saw the price sustain around USD9,000 a tonne and AUD13,000 a tonne in the quarter. This is a healthy environment for Evolution through being one of the lowest cost, high-margin producers in a period of elevated metal prices.

Our performance for the quarter was solid given a number of difficult external events that we encountered. Firstly and very pleasing in terms of safety, we have now delivered 3 consecutive quarters of improvements in our recordable injury frequency. The extreme rain event at Ernest Henry resulted in mining activities being suspended in early March. The team has done an excellent job to resume mining activities in the past week, which was earlier than we had expected. We will now complete the remaining recovery activities, so as to safely ramp up to normal production rates by the end of this quarter.

Secondly, we saw the business start to transition back to a net cash generator following a number of quarters, where we are investing heavily in 2 main growth projects. We delivered just under $96 million in Group cash flow and ended the quarter with a cash balance of [ $164 million ]. Another enabler to improvement in our cash generation moving forward is that once we have delivered our last 35,000 hedged ounces this quarter, we moved to being one of the few fully unhedged gold producers fully exposed to a near record high gold price.

The weather incident at Ernest Henry and continued wet weather around Mt Rawdon were the main drivers to our flat gold production quarter-on-quarter of 164,000 ounces at an all-in sustaining cost of $1,291 per ounce. As Ernest Henry returns to normal production rates at the end of this quarter, our sector-leading low-cost position will be restored.

We achieved a major milestone at Cowal with the first stope being mined from the underground. To deliver this mine ahead of schedule and to be under budget the original budget of $380 million during a period of high inflation market conditions for project development and construction is a credit to the project and operations teams. The ramp-up to the underground will be the main driver to production at Cowal increasing by around 16% to 320,000 low-cost ounces.

Red Lake improved this quarter with a 13% increase in production at an 8% lower all-in sustaining cost. We expect this improvement to continue into the June quarter with production to increase to at least 35,000 ounces at a lower all-in sustaining cost. Moving into FY '24, Red Lake is expected to improve further to 40,000 ounces to 45,000 ounces per quarter and further improve their all-in sustaining cost position. This is an updated outlook for Red Lake to around 160,000 ounces to 180,000 ounces for next year before moving up to at least 200,000 ounces per annum.

Our main priority at Red Lake is to consistently mine at an annual rate of 1.1 million tonnes to keep our mills operating at current capacity and to deliver improved cash generation. The process optimization study is progressing to plan and demonstrates strong financial returns. However, any further investment in expanding processing capacity at Red Lake will only be considered when it demonstrates a sustained performance at current capacity and is delivering adequate cash flows and returns.

Today, we also released new drilling results at Ernest Henry, which clearly reaffirms it is a world-class asset with material upside. These results continue to extend the mineralization, and Glen will take you through those results shortly. However, the key thing here is that the drilling program continues to provide further opportunities to extend the mine life beyond those already being identified in the current pre-feasibility study. The updated study, which is incorporating the previous drilling results and the increasing footprint remains on track for completion this quarter.

Another growth catalyst, the Mungari plant expansion project, which will result in annual processing capacity more than doubling to 4.2 million tonnes per annum, deliver a material reduction in the all-in sustaining cost and a pathway to lifting production to 180,000 ounces to 220,000 ounces over the next 10 years is progressing to schedule. We look forward to outlining these details of the multiple growth opportunities at our Investor Day on the 5th of June.

I'll now hand over to Bob to take you through the operations performance in more detail.

[Robert Fulker, executive]

Thanks, Laurie, and good morning, everyone. We have delivered a solid March quarter with gold production in line with Q2 despite the externalities experienced. Pleasingly, our safety performance continues to improve with our total recordable injury frequency dropping by 5% over the quarter to 8.9%. Cowal had an exceptional quarter with the commencement of underground ore production ahead of schedule and within budget. As a result, both mined and processed grades increased during the quarter with the operation producing circa 74,000 ounces of gold at an all-in sustaining cost of $1,072 an ounce.

[ Plant ] performance was outstanding with another quarterly record gold production under Evolution. This was on the back of great throughput and recovery combined with higher feed grades from both the open pit and the underground first production stopes. The underground project continues to advance with the accommodation village and paste plant [ GFA] completion this quarter. The Cowal team are managing their costs and operational performances with all the major projects on track to timely delivery. Cowal delivered $95 million of operating mine cash flow during the March quarter.

Ernest Henry has safely resumed mining activities with first stope ore being trucked to the surface this week. The site will continue to safely ramp up activities to reach normal production levels during the June quarter. The strong start to the March quarter delivered operating mine cash flows of $112 million and an all-in sustaining cost of negative $3,781 per ounce despite the impact of the weather event.

The PFS Mine Extension study is continuing, and all aspects are still looking positive. We look forward to providing an update during the quarter when this completes. Glen will discuss the exciting drill results we continue to see at Ernest Henry. I'd like to call out the efforts of the site team over the past couple of weeks. Everybody has been stepping up to the extra challenges and working together safely to bring the operation back online and thanks to all.

Over the past 5 months, I've been living the Red Lake experience and remain excited by the huge potential at Red Lake. With a committed team and the operational building blocks are being put in place, these will [ lay out ] the continued improvement from the Q3 results into Q4 and beyond. These include new ore passes to allow efficient material handling and the arrival of the new higher productive equipment for improved production drilling and the continued transition to mechanical bolting to deliver operational and cost efficiencies.

Operational improvements quarter-on-quarter include a 400-meter uplift of development to just below 4 kilometers for the quarter and circa 13% improvement in total ore mined and ounces produced. Our permanent Red Lake leadership team is taking place with a commencement in early March of the General Manager of Operations with the recruitment for the overall head of Red Lake operations progressing well.

In summary, with the significant time I spent at Red Lake over the past few months, I'm confident we've been putting in place the building blocks required to further -- sorry, to deliver further operational improvements through the remainder of this year and into FY '24.

Mungari demonstrated a reliable and consistent delivery with another strong quarter of gold production above the previous quarter, resulting in a 14% all-in sustaining cost reduction, highlighting the team is effectively managing costs despite the inflationary cost environment. The future growth project continues to progress, and we look forward to providing further updates later in the June quarter.

Mt Rawdon has continued to improve its access to high-grade pit ore, resulting in higher ore tonnes mined and higher gold production despite the heavy rainfall. Production and all-in sustaining costs are expected to continue to improve in the June quarter. Thanks for your time.

I'll now pass it up to Glen for an exploration update.

[Glenton Masterman, executive]

Thank you, Bob, and good morning, everyone. I'd like to turn your attention to the exploration announcement we released this morning, describing further exciting drilling results at Ernest Henry. Following on from results we released earlier in the year, we have continued drilling step-out sections into areas beyond the current resource boundaries to connect copper gold mineralization between the bottom of Ernie Junior and the lower lenses of the main ore body. We were confident that geology would support continuity of grade across this zone, and the 3 new results announced this morning confirm our prediction of wide zones of copper gold mineralization in these previously undrilled areas.

The new step-out results are illustrated on the long section, [ figure 1 ] the announcement. To give you a frame of reference, we are looking from East to West at a side view of the ore body and mine infrastructure. Domains of copper gold mineralization is shown as the light blue shapes, which we have modeled at a 0.7% copper contour. This is also the shell that we apply to constrain the reported mineral resource.

There are 3 areas that I would like to draw your focus to that I hope will lead you to conclude that there is an excellent opportunity for us to continue extending the mine life, both as part of the PFS and beyond. The first area is in yellow and shows the mineralization footprint, which is the subject of the current mine extension PFS. We have substantially grown the mineral resource in this area since the original Glencore concept study. This is being driven by the outstanding results from the ongoing drilling program. The PFS, which will be released in June is expected to drive a material increase in the ore reserve in this area.

The green area represents upside beyond the PFS and is one of the main opportunities for future potential resource growth, incorporating new drilling results such as those announced this morning. A mineral resource update is scheduled for completion in the September quarter, which will inform the feasibility study. As well, there is longer-term potential at depth below the [ 775 ] meter RL, which potentially adds future mine life upside.

I'd like to finish off with a comment on Ernest Henry, in terms of the growth that we're currently enjoying. From a geological perspective, this is creating lots of excitement across the Evolution geological fraternity. It's been a rare occurrence in my career that we received a good number of our geologists putting up their hands to be part of the Ernest Henry story.

The long intervals of high-grade copper and gold mineralization that we repeatedly generate in our step-out results has well exceeded my expectations of what would be possible. It continues to be an exciting journey, and I'm looking forward to our site getting back up to full speed drilling activities over the next couple of months, so we can keep telling the story, which is one that we definitely don't want to be over too soon.

With that, I'll hand over to Barrie.

[Barrie Van Der Merwe, executive]

Thank you, Glen. I'm very pleased to have joined Evolution, as CFO [Technical Difficulty] March, and to have the opportunity to talk to you all in this forum for the first time today. I'll provide a brief commentary on the financial results for the March quarter, outlined on Pages 5 to 6 in the report released today.

Operating mine cash flow of $270 million was consistent with the December quarter. All operations achieved positive mine cash flow after sustaining capital for the quarter. After major capital, all operations generated cash other than Red Lake, which remains in a capital investment phase with development of the Upper Campbell underground mine.

Gold sales of 166,000 ounces were marginally higher than the December quarter at an achieved price of AUD2,639 per ounce. This includes the impact of hedge book deliveries that are concluding at the end of the financial year, with only 35,000 ounces remaining to be delivered. The cessation of annual hedge deliveries of 140,000 ounces per year equates to an estimated $110 million to $120 million of incremental revenue at current spot prices when comparing next year to this year.

The achieved copper price for the quarter of approximately AUD15,000 a tonne was [ $2,000 ] higher than that achieved in the same [Technical Difficulty]. This is the result of a higher price achieved on sales for deliveries in the quarter and contractual price adjustments for deliveries made in previous quarters.

Turning to our cost performance. All-in sustaining cost per ounce of $1,291 per ounce for the quarter remains at sector-leading levels. Prior to the weather event at Ernest Henry, Evolution was tracking below the midpoint of all-in sustaining cost per ounce guidance of $1,240 per ounce. As pointed out in our updated guidance, loss of copper byproduct revenue is the major factor that is expected to move our all-in sustaining costs for the full year outside of the originally guided range. As Bob remarked earlier, underlying operating costs remain well controlled.

Total capital expenditure of $194 million was in line with the December quarter. Sustaining capital for the full year is expected to be at or below the lower end of guidance of $190 million and major capital at the bottom end of guidance of $530 million to $600 million.

Closing cash balance of [ 164 million ] after the final payment of [ 200 million ] to Glencore for Earnest Henry, as well as a debt repayment of [ 45 million ] during the quarter was achieved through positive Group cash flow of $96 million.

As a reminder, the fully franked dividend of [ $0.02 ] per share and aggregate payment to shareholders of $37 million that was declared earlier this quarter will be paid on June the 2nd. This is Evolution's 20th consecutive dividend for a total of $1.09 billion since [ 2013 ].

The committed revolving credit facility of $525 million remains available and fully accessible, providing total liquidity of $689 million. I would also like to remind you that more than 60% of our debt is repayable between the 2029 and 2032 financial years at a fixed interest rate of 3.6% for the year. This is an important consideration in assessing our balance sheet and liquidity position.

With unaudited gearing of approximately 31%, following a period of major capital investment, our balance sheet position is strong, flexible and improving, as the business commences its transition to net cash generation.

I will now hand the call back to Darcy to facilitate your questions. Thank you.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley.

[Rahul Anand, analyst]

Hi, Laurie, Barrie and team. The first one is on Red Lake. I was just looking at the guidance for next year and the [ 1.1 million ] tonne mining rate that's required to fill the mill. So if we back solve a bit for the grades for next year, it seems like we get to a range of about 5.2 grams to 5.3 grams a tonne, I wanted to get some color about the optionality or the upside in that grade for next year largely on the back of the fact that [Technical Difficulty] at about 7.5 grams a tonne, what could potentially lift production higher at Red Lake next year? Are there some critical items that you can perhaps change? That's the first one.

[Lawrie Conway, executive]

Thanks, Rahul, for the question. I'll hand it over to Bob to comment further. But when we look at next year, the greatest upside we have is the mining rates that we can achieve at Upper Campbell, which is where the higher grade material is that you are referencing on -- in the question and that's really where we see the upside. Bob, do you want to add [ to that ]?

[Robert Fulker, executive]

I agree. The average grades, if you put them across the 3 different operations, Campbell or Upper Campbell is the higher average grade and the more tonnes we can get out of there, the average rate will then increase. So that's the lever we have.

[Rahul Anand, analyst]

And I mean, is there any particular reason then why we're sitting at [ 160 to 180 ], which would back solve to a 5.2 type grams per tonne next year in terms of grade? I mean, is there -- is it fair to say it's just rather being conservative in the sense that you're still following through on those cultural changes, et cetera, for next year?

[Robert Fulker, executive]

Yes. Rahul, we're still getting into the meat of the upper Campbell areas. So it's taking us time to actually get in there and open up the areas and all the rest of it. It's really about getting that stability back into the delivery of the mining areas and making sure that we average or weighted across the 3 operations equally. Back end of the year, we'll be getting more Campbell than the front end, but we've already started stoping in Upper Campbell, but it's slow as we develop into it. Lawrie, [ do ] you want to add to that?

[Lawrie Conway, executive]

Yes. The only thing to add there, Rahul, is that when we look at the 3 different areas that we're mining from and the mills that they will go to, to keep those mills filled, that's where you'll get that averaging down of the grade. We can't mine the full year only at Upper Campbell grades from Upper Campbell and keep both those mills filled. So it is a balance, as Bob said, how we keep both mills filled from the 3 mining areas and they've all got different grades.

[Rahul Anand, analyst]

Second and final question around your costs, yes, absolutely, very good cost control there and firmly tracking below that guidance level. Can you help us perhaps understand some of the key changes made and how you've been able to achieve this? Obviously, last year, we saw very high costs across the sector. We were still expecting a bit of a tail in the inflation side of things, but you seem to be doing quite well on the cost side. How should we think about costs going forward? And any sort of key things to call out for that you've really performed well on?

[Lawrie Conway, executive]

Yes. Look, I mean it's an interesting one in that -- in the inflationary environment for a number of our inputs, the inflation impact is immediate and on some of the others, there's a lag. So when we look at it, our power contracts for Cowal, Mungari and Mt Rawdon were locked in until December. So that means, it will flow through the second half of the year and then into FY '24 and beyond. The labor was instant. We saw that around the 5%, 6% this year. Oil prices have come off. Shipping rates have come off. That's where we've seen benefits. So it is a mix, and it's really what each of the sites have been doing through the year is how to manage those costs.

I think as we go forward, we will see some inflationary impacts that flow into FY '24. We had allowed for some of that in our FY '24 outlook. But we're also seeing some of those costs ease from where they were through the first half of the financial year. So a bit hard to sort of pinpoint anything specifically other than what we have seen across each of our sites is a strong focus on it, managing it through a capital-intensive period and making sure that we took advantage of the high metal prices that we've been able to achieve, which is what's given us that performance in the March quarter.

[Rahul Anand, analyst]

Understood. Okay. Thanks a lot for that team. I'll pass it on.

[Operator]

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

[David Radclyffe, analyst]

Good morning, Lawrie and team. So my first question is on capital spending. Obviously, you've significantly reduced planned spending this financial year. It looks to be especially at Cowal and Red Lake. So I was wondering if you could provide some more color on those 2 operations, specifically about where that spending saving has come from? And then how should we think about that going forward in terms of does that deferred spending just slip into next year? Is it spread over a few years? Or is some of that spending now being canceled?

[Lawrie Conway, executive]

Thanks, Dave. Look, in terms of major capital this year, we're tracking in the sort of mid to low end of the major capital range. One of those drivers has been for the Cowal underground project, the project team was planning to have everything that was needed to be done by June this year. And through the course of the year, the reviews that Bob and the team have done is working out what needed to be in place, as we started production and what needs to be in place at [Technical Difficulty]. So there's probably been anywhere between $35 million to $45 million of capital that actually wasn't needed, as we commissioned and so that will move into the first part of next year. So that's been the main change in major capital for this year.

If we look at sustaining capital, I think it's really been the sites, again, having a look at their cost control and where they can save their capital. We're tracking towards the lower end of our sustaining capital. We don't see a material shift into next year, current indications through our plans. We're right in the middle of those. The planning cycle now says that we're still in the range of the [ $190 million to $240 million ] for FY '24. So that's really -- it's a combination of the sites managing their capital extremely well this year. They have identified some projects that don't need to happen. They have identified some projects that need to be deferred, and the main one has been the Cowal underground surface [ infrastructure] that's being pushed into FY '24.

[David Radclyffe, analyst]

And then as a follow-up, just in terms of Cowal, obviously, you had the plant shut there, but you're still mining well above what you're processing and it looks like you've built some pretty significant stockpiles this year. So given you've been trying to manage cash flows a little bit across the Group, and you've now got the underground obviously is ramping up, will you sort of look to slow volumes from the open pit? Or is this part of the mine plan to mine a lot harder than what you need in the short to midterm? Or do I say do you actually start thinking about using the fact that you've got a much higher permitted rate for processing?

[Glenton Masterman, executive]

Yes. A really good question, Dave, if you're asking a finance person, they always would say why do we outline the mill. If you ask a mining engineer, they would say we need to get the highest grade through the mill first. And the rehandle at Cowal is not that significant and incremental cost. So the plan [indiscernible] continuing to -- we will outline the mill by about 6 million tonnes per annum this year. That will happen again next year. Our focus there is feeding through the highest grade at the earliest possible time.

And when we do look at it, it's easy to say in hindsight, but if you look at Cowal with the stockpiles we have there through that 6- to 8-month period of extreme wet weather, we were able to process and process at higher grades than if we hadn't had that strategy in place. So it does give you some benefits in those periods.

[Operator]

Your next question comes from Jon Bishop from Jarden.

[Jon Bishop, analyst]

Hi, guys. Thanks very much for taking my questions. I just wanted to [ bury ] down a little bit on a comment you made on Mungari and the all-in sustaining cost reductions expected from your expansion feasibility plans there. Just intuitively, clearly, you'll get economies of scale out of the larger processing infrastructure, but I'm just wondering where else you're seeing major cost reductions because if I understand Mungari in order to fill that large plant capacity, you're going to have to increase the number of mining operations. Is that correct? Or have I missed something there?

[Lawrie Conway, executive]

Jon, look, I mean, the first -- the first benefit we do get is the economies of scale on the plant. So we see that reduction in the processing cost per tonne reducing materially, which then flows through to the all-in sustaining costs.

The other thing -- and we've seen it this year, where Mungari has now stabilized and brought the Kundana, East Kundana operations in to make it one operation. So there's going to be some efficiencies that will flow through and the project will benefit from that. What it will be is mining multiple ore sources, but they're getting -- they're able to be sequenced by having the plant expansion.

So we do see some benefit in mining costs, as we -- we start to strip it one, as we're mining in the other, and we're finishing at the third, you sort of get some benefits of consistency of ore and getting high-grade material through, which then gives you a benefit on your all-in sustaining costs. So the study is coming near conclusion. And when we get to the 5th of June is when we'll spell out the full economics of how this all comes together. But the case that's being put together is very compelling for Mungari.

[Jon Bishop, analyst]

And just then touching on that sort of capital allocation discussion. You've obviously been fairly clear in this quarterly release that Red Lake needs to stand on its own 2 feet. You've got the Ernest Henry Life of Mine Extension coming, [ which you did ] later this quarter and Mungari, of course, when you finished that work. How do we sort of view the medium term around your growth? I mean you've given us a flavor for Red Lake next year arithmetically at the reserve grade, if you to get to 1.1 million tonnes per annum that would sort of support 240,000 ounces plus per annum. What's the sort of time line that we should be looking at in terms of that growth? And how does it look? Or should we be sort of thinking [ 750 to 800 ] for the next 2 years to 3 years? What's sort of a fair outlook from the market's perspective, do you think?

[Lawrie Conway, executive]

Yes. I mean, I think if we look at it, Jon, our capital allocation process will make sure that we sequence these projects appropriately rather than trying to do them all at once. I mean it was a different circumstance, where we ended up with 2 new underground mines being built at [Technical Difficulty] doing the integrated wasteland form and a couple of other projects. Our view is that you would see Mungari is the first one to come up for a decision to go into execution. Ernest Henry has time based on when we get down to the 1,200 level and doing some development there.

And then Red Lake, really, as I outlined earlier on the call, is it has to earn the right to that capital by getting the mining rates sustained at 1.1, which keeps the plants full. The upside comes that if we can get efficiencies further at Upper Campbell and get more proportion of material coming through at the higher grade, then you get that without actually needing to invest the capital. And then you invest when you can see that you can sustain at the [ 1.1 ].

I think the thing that we've got to be conscious at Red Lake is that if we do the processing optimization, which takes it to [ 1.8 ], that mining rate has to lift by 60%, almost instantaneously. And that's the other thing that we have to take into consider [Technical Difficulty when that one gets sequenced. So over the next few years, that production profile, which we'll outline on the Investor Day is going to be predicated on when each of those projects get sequenced, which they're in the final stages of study right now.

[Jon Bishop, analyst]

Can I just squeak in one more. Do you have any update on the stamp duty timing if you had any sort of advice from the treasuries in Queensland in particular?

[Lawrie Conway, executive]

Jon, as I think I spoke to you once about this. We're currently in a mode of one-way communication. It's -- we'll wait for the [Technical Difficulty].

[Operator]

Your next question comes from Matt Greene from Credit Suisse.

[Matthew Greene, analyst]

Just to follow on the FY '24 outlook at Red Lake. Previously, you were sort of targeting around that 1 million tonnes with Upper Campbell contributing [ about ] 40% of that feed. Can you just provide more context, as to what kind of change in terms of volumes or the contribution for the different mining areas?

[Lawrie Conway, executive]

Thanks, Matt. I'll pass that over to Bob.

[Robert Fulker, executive]

Thanks, Matt. In the midterm, that's still the aim is to get to around 40% from Upper Campbell. Next year, it won't -- it will just fall short of that by a little bit. But at the back end of the year, the run rate will [Technical Difficulty] close to that sort of rate. It's because of the development and the opening of the new areas, that is just -- it's taking us time to get into all the [ old ] areas. So long term, yes, it's about still the same.

[Matthew Greene, analyst]

Thanks, Bob. And I guess just in terms of the reconciliation on the -- those Upper Campbell stopes, how is that sort of stacking up relative to the 7.5 grams a tonne reserve grade?

[Robert Fulker, executive]

Yes. So the actual stopes, and I'll ask Glen, if he wants to add anything from a knowledgeable geological perspective after a mining engineer sort of tries to describe it. The stopes are actually coming out and reconciling nicely to the models. We are having some swings and roundabouts in some of the zones around the old ore bodies. But generally speaking, it's coming out, as you'd expect.

[Glenton Masterman, executive]

I think you've characterized it very well, Bob, and these [ narrow load ] systems. We do expect swings and roundabouts. So some stopes will do better than the model, others not as well. On average, the reconciliations are coming out, where we would -- where we're comfortable.

[Matthew Greene, analyst]

And I guess, just lastly on the mill optimization. Are these -- I guess, have you completed the geomets and studies internally? Or are they still ongoing?

[Robert Fulker, executive]

We have some of the data in already. I actually don't think we're going to be complete with knowledge that I'll be happy with for a while, but we have enough data now to actually start figuring out what's going on with the different ore bodies.

From a -- yes, from a metallurgy perspective, there's the linkage between that and being able to mine the different areas in the right proportion is where we're going to start getting some of the benefits.

[Matthew Greene, analyst]

So then, I guess conceptually and appreciate for doing some work on this. How are you thinking about utilizing the mill capacity and existing infrastructure? Are we still looking at that [ 1.8 ] possibly the pathway to [ 2 ]? Or has the scope changed materially since what you've presented to the market previously?

[Lawrie Conway, executive]

No, Matt, the scope hasn't changed. So it's still targeting -- the scenarios that have been run says [ 1.8 ] is the right sort of rate for Red Lake. And then the multiple scenarios are looking at 1 plant, 3 plants or a combination in between. So that hasn't changed from when the optimization study started.

[Matthew Greene, analyst]

So it's just the one plant, is that just expanding one of the existing plants? Or is this potentially a new plant?

[Lawrie Conway, executive]

That's what I said. There's multiple. So it's either it's -- is it upgrade Campbell? Is it a stand-alone? Is it the combination of 3 or somewhere in between. And that's why the study when it finishes at the end of this year, we'll sort of give us a direction, as to which is the right way to go.

[Matthew Greene, analyst]

So it sounds like maybe talk to you end of this year, we should see some more color on that.

[Lawrie Conway, executive]

Yes. I think I'd go back to the earlier point, though, Red Lake has got to earn the right to get the upgrade the capital investment for.

[Operator]

Your next question comes from Alex Barkley from RBC.

[Alexander Barkley, analyst]

Just a bit more specific question on the FY '24 guidance change at Red Lake. It sounds like a lot of the issues were cultural, you've talked about that, but operating procedures, the [ ore waste pass ] thing and it sounds like, as these issues have come up, you've jumped on them pretty quickly. So just trying to work out exactly what the negative carry through into FY '24 is that you're expecting because it seems like everything is heading in the right direction there.

[Lawrie Conway, executive]

Yes. I think if we look at it, Alex, the performance in the December quarter was lower than we had expected. The work that Bob's outlined has improved through the March quarter. And when you look at what we're going to be producing in the June quarter, that's at a lower run rate than we had actually planned at the start of this year.

As Bob also just said earlier, the Upper Campbell percentages of material that will come through in FY '24 are a little bit lower than we had expected, as we've been able to access the stopes from those old workings. So they're the main sort of things that are going to impact on FY '24. But I think it's fair to say as -- and I'll hand it over to Bob. But the things that we had seen that needed to be corrected over the last 5 months, we've been put in place and they will deliver through the course of the next 12 months.

[Robert Fulker, executive]

Exactly. Alex, I guess the good example is we have one pass in Cochenour, but we need to get this [Technical Difficulty] Red Lake. So it's planned, signed, it's in the schedule, but it won't actually get in place until probably end of Q1 or Q2 next year. That's the Balmer pass. The drill rigs, we've got 1 drill rig underground operating now. We've got a second drill rig in 28 pieces going down the whole of Cochenour. So it will be up and running in the end of this quarter. So we're slowly getting these things in place, and we'll see the benefits come in. They get operational fully.

[Alexander Barkley, analyst]

Just one more on Red Lake. The comment about consistently reaching 1.1 million tonnes per annum mined before you think about the mill expansion. I would have thought with Upper Campbell, I think mining capacity, you mentioned maybe it can do one on its own, it would be more a case of just waiting until Upper Campbell ramps up rather than getting consistency across the whole site. So given a year or 2, I would have thought you'd easily reach 1.1 and then maybe even have to throttle that back the tonnes coming out of the mine, as you say until the milling jumps up. But just why exactly did you make that comment? It seems like it's just a matter of time before you hit 1.1.

[Lawrie Conway, executive]

Yes. I think that's a [Technical Difficulty] but you've got to take it in the context of everything at Red Lake and everything in terms of Evolution as a Group. So it's fine to say, yes, we can get to the 1.1 and we possibly go above that and incrementally increase our milling capacity. But to take it to the 1.1 to the 1.8 means you've got to invest in the capital on the processing side, and you've got to also invest on the mining side and the mine development for an asset that at the moment hasn't delivered sufficient cash returns to then go and compete for the capital within the broader group. We've got a number of other projects that are probably showing up as more compelling right now. And you've got to have that confidence that you can lift, as I said, the mining rate by 60% to fill mills that are already able to feed up all the feed that comes through.

[Alexander Barkley, analyst]

Yes. Okay. So sorry [indiscernible] reaching that 1.1, yes, it shouldn't have been, but you're right, that's the step-up that made the [ extra bit ]?

[Lawrie Conway, executive]

Yes, I agree with you there that we can achieve the 1.1. And if the mix is coming more from Upper Campbell, that's actually higher ounces, [ it will ] cost and a higher margin, that is an avenue that we're targeting towards for Red Lake. But as you'll see this year, we're not going to even achieve 1 million tonnes through the plant. So that's what we've got to get to as that next step, then get more of the higher grade ore through and then justify the expansion of beyond 1.1.

[Operator]

Your next question comes from Matthew Friedman from MST Financial.

[Matthew Frydman, analyst]

Sure. Good morning, Lawrie and team. Apologies in advance, I'm going to carry on from the last few questions on Red Lake. I guess, yes, to just ask it quite simply, is 1.8 million tonnes per annum of mining still an achievable target in your view, given everything that you've learned about the site and given your increased knowledge of Upper Campbell now that you're mining in that area? Or has that view changed, I guess, given, as I say, your knowledge of the mining conditions, orebody geometry, geotech, the advance rates you've been able to achieve? Has that changed your fundamental thinking?

[Lawrie Conway, executive]

Welcome back, Matt, to the calls. I'm going to hand that over to Bob. The short answer is, yes. That hasn't changed and Bob.

[Robert Fulker, executive]

Thanks, Lawrie. [ Good day ]. Matt. How are you? The short answer is, I still believe it's achievable, but it's a stability and improving consistency at the 1.1 and then it's just getting multiples of that 400,000 to 500,000 tonne range. So if we can get -- or when we can get the Upper Campbell working, then we can link in the middle on the Lower Campbell, which is -- there is a lot of development to get there. But then we can actually link in Upper and Lower Red Lake as well.

So it has to be -- I thought about it as multiple mining fronts and mining areas to get that extra tonnage regime. And with that comes the complexity of a large operation, and it's just a system that we're going to get in place, which back to what Alex was saying, we're getting those things in place, but it's going to take time to get them to be stable.

[Matthew Frydman, analyst]

Thanks very much, Bob. Is it fair to say that if you think about a proportional increase in ore mining rates from, say, [ 1.1 to 1.8 ], proportionately, you'd have a similar increase in amount of equipment and people down the hole, a similar increase in the monthly development rates that would be required. I mean, would all of those things increase proportionately? Or is there sort of scale benefits of having multiple mining fronts?

[Robert Fulker, executive]

There will be some scale benefits, but you've got to take it into consideration of the style of the ore body and the geology. It's always going to be, as Glen was saying, an ore body that it's small, it's [indiscernible] and it's going to take a lot of development to get it out. So -- but there will be some scale from the size.

[Matthew Frydman, analyst]

Thanks very much, Bob. And then just another one on Ernest Henry in terms of the remediation work and, I guess, the potential design changes that you've implemented post the weather impacts. Has that changed your thinking at all or [ fed ] into the mine extension study in terms of future proofing that asset as you go deeper and potentially mitigating future weather events?

[Robert Fulker, executive]

Yes. Great question, Matt. From my perspective, the reentry in the -- getting the operation back up and running in such a short time has been a magnificent effort from the guys on site. Looking forward out of this one, though, as we go deeper, there's always been a thought that at some stage, we need to put additional mitigation strategies below, where the emergency stopes are now, and that's some of the work that we're working on as we speak. Obviously, these events brought it more to the [ frontal lobe ] than possibly has been, but it's always been a thought process that we should do something deeper.

[Matthew Frydman, analyst]

Thanks, Bob. Would you expect any material costs associated with that? Or that will just be part of implementing the expansion study if you push forward with that?

[Robert Fulker, executive]

I think it should be just part of the actual expansion or whatever we do, Matt. I don't think it's going to be significant.

[Operator]

Your next question comes from Mitch Ryan from Jefferies.

[Mitch Ryan, analyst]

First question, I will start on Ernest Henry, just you obviously had Barminco mobilized the site. Can you provide any color on the key milestones for the decline development below the 1,200 RL and also the associated cost in [indiscernible] is that being capitalized or expensed?

[Lawrie Conway, executive]

I'll hand it over to Bob to talk about Barminco's performance, but I think they didn't get much of a time on site before we had to suspend. But in terms of the cost for the decline, they will be capitalized to the project, the extension project.

[Robert Fulker, executive]

And [indiscernible].

[Mitch Ryan, analyst]

The question was more about future milestones rather than [indiscernible] the weather.

[Lawrie Conway, executive]

Yes. No, no, we're going to -- like Bob is going to touch on those for you, Mitch.

[Robert Fulker, executive]

So Mitch, the work that Barminco is doing, and as Lawrie said, it's been a little bit stopped because of what's happened. But the -- the plan is to actually get them to help to accelerate the actual decline into the actual area below the 1,200 and 1,125. At the moment, they're actually helping out with some other development in the upper areas of the mine until we get back down to the bottom. From a milestone perspective, I'd expect that we'd come out with that when we talk about the actual outcomes of the pre-feasibility study, and that's what they're working towards at the moment.

Barminco will and have been helping us before the rain in some of the decline work, which is the extent [Technical Difficulty] for other sublevels and also starting to think about how we get them involved in the potential of any additional infrastructure for the extension.

[Mitch Ryan, analyst]

Just to -- because we haven't had enough Red Lake questions, another one for the day. Obviously, with the study coming up at the end of the year and your comments that they need to stand on its own two feet, let's say we get to a point, and it isn't standing on its own two feet, do you then think that we could arrive at a point, where you're having to look at the carrying value of the Battle North, the Bateman mill with regards to that.

[Lawrie Conway, executive]

No. I mean, at the moment, Mitch, what we do is when the study is finished and depending on where we go with it in terms of how that expansion would be done, then we assess what the values of the assets. We do that every 6-month reporting period at the moment. There's nothing expected on that. And it does depend on when we actually do time the expansion as well.

[Mitch Ryan, analyst]

Sorry, and my final question staying on Red Lake. Just you've started to see some operational improvements. We've seen a few demons like that. But just what's driving those operational improvements over the last quarter? Are you throwing more people or machines added or you're getting better productivity out of the existing machines and people?

[Lawrie Conway, executive]

I'm going to hand that over to Bob, who's almost a Red Lake resident. But I think it's -- it is -- there is a combination of things, both around reorganizing the site, getting continued work on the culture and the behaviors, but also [Technical Difficulty] has been installed and Bob.

[Robert Fulker, executive]

Yes. That's exactly right. And the additional thing, I would say is we have been identifying, I'll say, internal constraints, and we're focusing on making sure that we put permanent solutions in place, as opposed to just [indiscernible]. A good example is that ore pass. Another good example is the drill rigs. We've been persevering with the old style drill rigs now, and we just have to bite the bullet and say, you know what, we need to go to the new style to get the uplift in productivity and cost reduction. So it's making sure that we focus on the right things. The guys on site, they want to work well. They want to actually develop and produce. We just need to put the systems in place around them to allow them to do it.

[Operator]

Your next question comes from Trent Allen from CLSA.

[Trent Allen, analyst]

Thanks, guys. I think we probably have had enough Red Lake questions. So I'll step back and ask the M&A question. It's very topical at the moment, of course, Newcrest, Newmont, we said [indiscernible] Bob's old friend, OZ Minerals this week. And I don't know if it's accurate, but I read in the papers that the owners of Northparkes might be entertaining offers for that asset. Of course, Evolution grew by M&A and portfolio upgrades and it hasn't been on the cards for a while, but it feels like with Red Lake finding a level and it's generally back in operation, something you might think about. I won't ask if you will consider it as I know you will in the future, but maybe you can remind us of what your criteria are for M&A. How many assets you like to operate? What kind of operations you look at? And also, what state the balance sheet might be [Technical Difficulty] before you consider it?

[Lawrie Conway, executive]

Yes. Trent, I think, yes, it's fair to say as the consolidation in the industry been happening at an elevated level at the moment, our view is that it does provide an opportunity, where assets will come onto the market. Kirron and the team are continuing to assess what opportunities may arise. I mean, from our perspective, we've said we believe operating up to 8 assets is a size for us as an organization. We've got 5 at the moment, of which one will transition out in the next couple of years in terms of Mt Rawdon either as Pumped Hydro or finishing mining. So we've got capacity from that perspective.

In terms of asset quality, we want assets that are long life. We're looking for a plus 10-year mine life, high margin similar to what we've got as long as it's improving the quality of the portfolio. They are assets that we would certainly have a look at. I think with the Ernest Henry transaction back in 2016, it shows that we're willing to look at joint ventures, as well as owning assets 100%. And our focus in Tier 1 jurisdictions hasn't changed.

[Trent Allen, analyst]

This is always a cheeky question, but do you have any plans to raise capital in the near term?

[Lawrie Conway, executive]

No.

[Operator]

Your next question comes from Tom Prendiville from Canaccord Genuity.

[Tom Prendiville, analyst]

Good morning, Lawrie and team. Maybe I'll just follow on from Trent's corporate related question and just dig a little deeper into your comments around hedging. Clearly, your hedgings rolling off quite quickly, and you'll be completely unhedged by the end of this financial year. Obviously, this will give you full leverage a near record high gold price. My understanding is Evolution only really hedges if you undertake M&A. So I guess my question is, can we assume with the hedge book rolling off that you won't jump straight back into hedging? Or what is the strategy over the near term?

[Lawrie Conway, executive]

It's a good M&A question by [ stealth ]. I'd say that our hedging is being used as a capital management tool. So we have not only done hedging in acquisition mode. So Red Lake when we acquired it, we knew we had to do a lot of development to get it back to an improved operating state. So we did some hedging there on cutbacks, major cutbacks for open pits are other examples of where we've done hedging. So our view is where we are right now, where the balance sheet sits going forward, as Barrie explained, our position is to remain unhedged. And when we do, do M&A, we always look at the total mix from a balance sheet, debt equity and hedging all have a role to play.

[Operator]

Your next question comes from Paul Kaner from Ord Minnett.

[Paul Kaner, analyst]

Nothing on Red Lake, just one on your balance sheet. So I appreciate that sort of 60% of your balance sheet or your debt, sorry, is longer dated and that there is this optionality there with the revolver. Is there any sort of earnings or gearing ratios on the other facilities that could impact your covenants. For example, if you were sort of go by that sort of 35% gearing mark, would anything need to be renegotiated?

[Lawrie Conway, executive]

No. So in terms of the 2 term loan facilities, there's a number of covenants there and one of them being tangible net worth, where within our tolerance is truly covered on interest and the like debt servicing. So they are not any issues for us. In fact, on all of them, we're very comfortable with where we're heading because what we sort of see, as Barrie outlined, the final payment to Glencore has been made. We've got $164 million in cash. That covers debt repayment this quarter and stamp duty should [ rise ]. We're ready then [Technical Difficulty] the dividend in June. So we are moving into that cash generation to start delever, which further improves the balance sheet position. But there is nothing that we look at that either restricts us on drawing the revolver or having any renegotiation on those 2 facilities.

[Operator]

Your next question comes from Al Harvey from JPMorgan.

[Alistair Harvey, analyst]

Can we just have a quick update on the Mt Rawdon Pumped Hydro study, just the timing for that? And I guess, whether or not you think that will be a material event for the stock when that comes out?

[Lawrie Conway, executive]

Al, Jake will be glad that you asked the question. It's -- we had to wait to this part of the call. Look, the study is going well. I mean, there's 2 key milestones. So later this year is really finishing the technical feasibility study to make sure that through all the works that it shows that this is actually technically viable. That's progressing well and is giving us a lot of confidence that, that will be the case.

And then the second part of it, which will be in the first half of next calendar year [Technical Difficulty] is when you sort of get to that commercial study piece being finished because you've obviously got to make the decision on the size of the facility, you've got to then work out what offtake parties would be willing to commit to it, who then also need to know what the terms of those offtakes would be. So that's in that period. So by the middle of next calendar year is when you sort of have a conclusion on it. And then that would -- that's when we would know what we would be doing with that project. As Jake has alluded many times, it's a range from [ 0 billion to 1 billion ], of which we've got 50%. But until these 2 parts of the study finished, we really don't know exactly what that value is going to be.

[Alistair Harvey, analyst]

Just one final one maybe for Glen. I guess, we saw Musgrave Minerals released their study earlier this week on Cue. I mean that's outside the joint venture that you have with them. But I guess just wanting a quick update on West Island. I assume you've reached the farm-in threshold and where you're seeing the potential for that project to go?

[Glenton Masterman, executive]

Oh, Al, I was hoping, you really ask a question on Ernest Henry drilling, but I can't talk about Cue. That's fine. Look, we did announced last quarter that we completed that [indiscernible]. So that takes us up to a 75% interest on the joint venture ground, which is north of the 100% owned tenements that Musgrave described in their update earlier in the week.

I think in terms of where we're at, look, we are -- we're in the final phase of completing resource modeling on 2 main targets there. So West Island is one of them that you mentioned. The other one is [ A Zone ], which is a little bit to the South. And when we have that information, that's going to sort of guide where we go next on the JV.

[Operator]

Your next question comes from Daniel Morgan from Barrenjoey.

[Daniel Morgan, analyst]

A quick one on [ accountable ] things, there was a large lift in D&A apportion to Mungari. Any driver there? I know it can be lumpy, but just is there any change there or something that we need to be aware of?

[Lawrie Conway, executive]

Dan, look, the main thing there would be probably in the -- in this quarter will be a true-up, as we finalize all the acquisition accounting, the fair value uplift that then is being -- starting to be amortized related to Kundana and East Kundana. But we can certainly get you the breakdown on that and the position on it going forward.

[Daniel Morgan, analyst]

And I mean, sorry to just return to Red Lake. I know there's been a lot of questions, but the CYD decline, my impression is that supposed to link up with the lower levels of the mine, and that's a big catalyst for the operation. When is that projected to occur?

[Lawrie Conway, executive]

I'm going to hand that over to Bob because that is a good news piece at Red Lake at the moment.

[Robert Fulker, executive]

So the actual decline from the surface, Dan, is [Technical Difficulty] around about 5 level and still going down. A 11 level has opened up. We did the final stripping into the shaft about a week, week and a half ago and all went well. So we now have a [ 5.5 ] to 5.5 drive from the Reid shaft all the way around to the Campbell area into the location, not quite to the actual decline up and down location, but to the location and the level, where we can start developing upwards as well. So that leaves just that level between sort of around 5 to 5.5 level to 11 level. And that's around about going full tilt 6 months of development.

[Daniel Morgan, analyst]

So to be clear, from the end of this year, you're going to be able to drive equipment down and access all areas of the mine. Is that a -- am I on the right path?

[Robert Fulker, executive]

The milestone to be able to get everything down, CYD is a little bit later because we need to go from 11 level down to 14 level. From a 14 level down, we've got a [indiscernible] drive. We can drive everything basically down and across into Red Lake, into Lower Campbell, et cetera, et cetera. We won't be able to drive it up into Cochenour that stage until we get the decline at Cochenour broken through to the 52 level, and that is around about 9 months to 12 months to get Cochenour [ run through ].

[Operator]

Thank you. That is all the time we have for questions today. I'll now hand back to Mr. Conway for closing remarks.

[Lawrie Conway, executive]

Thank you, Darcy, and thank you, everyone, for your time today. We do appreciate you making the effort to join the call. Yes. As I commented in the release, it was a pivotal quarter for us at Evolution this quarter. It allows us to continue the transition to net cash generation and grow production in FY '24, which is going to be further enhanced, as we move to being fully unhedged at the end of this quarter to take advantage of the higher metal prices.

We have a number of engagements coming up in the next couple of months at the Macquarie Conference in early May, Bank of America Conference in mid-May prior to our Investor Day on the 5th of June, which includes site visits to Cowal and Ernest Henry over subsequent days after the Investor Day. And if anyone's needing any information on that, feel free to reach out to [ Rocky ] and Taryn.

Lastly, I do want to pass on our appreciation to Taryn Chua, Investor Relations, who is finishing up with us at the end of this month. She has done an incredible job both in Investor Relations and at business development, and we thank you for her efforts and wish her all the well for the future. And thank you, and [Technical Difficulty].

[Operator]

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