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Evolution Mining Ltd
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Thank you for standing by, and welcome to the Evolution Mining June Quarter Results Conference Call. [Operator Instructions] I would now like to hand the call conference to Mr. Jake Klein, Executive Chairman.
Good morning, everyone, and thank you for taking the time to join us on the call today. As always, we do appreciate it. This morning, we'll be talking to the presentation we released on the ASX this morning. Bob Fulker, our Chief Operating Officer, is on the line from Brisbane. Lawrie Conway, our CFO and Finance Director; and Glen Masterman, VP, Discovery and Business Development, join me on the call from locked down Sydney. Wherever you are, I hope you are well and healthy and coping with these very turbulent, uncertain and constantly changing times we continue to find ourselves in. Starting on Slide 4 of the presentation. One thing that is not changing is Evolution's commitment to executing a growth strategy focused on sustainable high-margin ounces. This, in our view, is the pathway to building a unique gold business that will prosper through the gold cycle. The foundation of this strategy is developing a focused portfolio of high-quality, high-margin, long-life assets. This is the reason why we look at everything through the lens of how we can improve the quality of our portfolio and, at the same time, ensure that we secure an appropriate risk-weighted return on the capital we are deploying on behalf of our shareholders. It is also why we will continue to estimate our ore reserves at a conservative AUD 1,450 an ounce. Notwithstanding that we fell slightly short of our high operational expectations this quarter, the quality of our portfolio allowed us to generate, over the last 12 months, a sector-leading EBITDA margin of around 50% for every ounce of gold we produced.In the past, we have often talked about our belief in the potential of both Cowal and Red Lake. And today, we are now ready and committed to taking both of these operations to the next level. We are committing to Board-approved capital programs and execution plans that will make these assets the bedrock of Evolution's future and provide us a clear line of sight to producing in excess of 900,000 ounces of low-cost gold each year. This is a 35% increase on current production rates.We acquired Cowal in 2015 for $703 million. At that time, it was scheduled to close in 2024, only 3 years from now. Over our period of ownership, we have generated $1.6 billion in operational cash flow and $760 million of net mine cash flow. This is after all investment in capital projects and discovery, and it is more than the original purchase price. After producing 1.4 million low-cost ounces, we have still been able to grow the reserve base to 4.6 million ounces and have resources of 9.7 million ounces. Today, we are committing to another step change in the production profile of this asset, a $380 million underground mine that will enable the operation to produce a sustainable 350,000 ounces of low-cost gold a year and extend its mine life out to at least 17 years.Reflecting our focus on return on capital, this investment will generate an ungeared IRR of around 15% at an Australian dollar gold price of $2,200 an ounce. And if you look at today's spot gold price, an IRR in excess of 20%.15 months ago, we acquired Red Lake. At the time, we committed to a Phase 1 transformation of the operation that, within 3 years, we would be producing 200,000 ounces a year at an all-in sustaining cost of less than USD 1,000 an ounce. I am pleased to say that we are on track to deliver this. Today, we are announcing our commitment to accelerating the delivery of our aspirational targets and restoring Red Lake to a premier Canadian gold mine producing over 350,000 ounces of low-cost gold with a mine life that is in excess of 15 years.The Red Lake Mine that we acquired 15 months ago was headed towards closure. We knew that at the time. It was undercapitalized, and the mining equipment was old and inappropriate for our vision of the modern productive mine we intend to build. It is also why we were able to acquire an 11 million ounce orebody for USD 375 million. At our Investor Day in September last year, we released upgraded Red Lake reserves and resources and have subsequently acquired the Battle North properties and Bateman plants. The capital investment we are announcing today increases our confidence in the medium-term plan, evidenced by a defined ramp-up profile to reach 350,000 ounces within 5 years. We are confident that our commitment to this enhanced capital program is appropriate, timely and necessary to transform Red Lake into world-class assets.Turning to Slide 5. We continue to navigate the challenges of the COVID pandemic extremely well. And whilst it has added stress, inconvenience and has caused some delays to equipment orders, due to the responsiveness and resilience of our people, it has had a low impact on our business. We're indeed fortunate to have so many passionate and committed people in our business.Earlier this month, we announced our commitment to reducing our carbon emissions by 30% by 2030 and to 0 emissions by 2050. We really believe this is the right thing to do. We are very proud that our MSCI ESG rating has been upgraded to AA. This is the highest rating of our global gold mining peers.I'll now turn to Slide 7. Despite COVID, the 2021 financial year was another successful year for Evolution. We achieved annual production within our original production range. However, due to some one-off operational hiccups this last quarter, we fell short of our revised production guidance we published in April by around 3%.It did feel like it was a year of 2 halves, with the wind blowing into us in the second half. And whilst the fourth quarter was an improvement on the third quarter, we did not finish the year as strongly as we would have liked. I'm very confident that we have addressed the issues in our control that were the cause of this.Our cost control was strong. We beat our original AISC guidance and were within our revised cost guidance released in April. Our economic interest in Ernest Henry continues to be an exceptional asset for Evolution. Our discovery activities are delivering into our strategy with encouraging new drilling results from our Cue joint venture in WA.Cash flow was very strong, with operational cash generated of over $900 million and net mine cash flow of $555 million. On a per ounce basis, this is sector leading.With that, I will hand over to Bob to provide further details on the quarter and our growth projects.
Thanks, Jake, and good morning, everyone. On Slide 8, I'd like to start with safety. While our 12-month moving average TRIF has slowly increased for the March quarter to 9.7, the 3-month moving average has dropped to 7.7. This is an 18% drop in 3 months in the beginning of a down trend across the group. Mt Carlton continues its run of injury-free production with 144 days recordable injury-free at year-end. June quarter production of 169,000 ounces at an all-in sustaining cost of $1,232 an ounce, as Jake mentioned, is an improvement on our third quarter. But it was still short of our expectations due to a number of issues, which we have addressed. Those issues include seismicity at Red Lake, an unplanned 12-day shut at Cowal and Mt Rawdon pit performing but still below our expectations.Cowal delivered 53,000 ounces at an all-in sustaining cost of $1,106 per ounce and a mine operating cash flow was $63.9 million. The their spend on major growth projects has continued to plan with $41.6 million in completed work for the quarter, predominantly on the underground development, Stage H and IWL. The Cowal team's resilience was tested once again this quarter when the ball mill rotor experienced a major failure, taking the plant down for 12 days. The team responded extremely well and minimized the downtime by bypassing the ball mill in the circuit. Once back up and running, an average throughput of 1,117 tonnes per operating mill was achieved, which brought it back to plan. The 12-day downtime eliminated the opportunity for Cowal to overperform for the quarter and to cover some of the shortfalls in other sites.Ernest Henry once again made a significant financial contribution to the group, producing 21,000 ounces at a record low all-in sustaining cost of a negative $1,358 per ounce whilst generating a net mine cash flow for Evolution of $77.2 million. Red Lake produced 30,000 ounces at an all-in sustaining cost of $2,233 per ounce, with a net mine cash flow of negative $21.9 million. This was post capital expenditure of $30 million. [ Expect us to ] focus on delivering for the Phase 1 transformation. It included $9.8 million on mine development, $8.7 million on mobile and fixed plant acquisition and maintenance. Battle North and the CY Decline -- CYD decline accounted for an additional $4.5 million and $3.8 million, respectively.Red Lake this quarter was impacted by the seismicity in the [ R ] and the Hangingwall 7 zones, in combination with some ore pass issues at Cochenour. The team has implemented mitigation plan for these issues, and both development and production have started to increase. After our first full year of ownership at Red Lake, it's pleasing to see continued improvement to transform this operation back to an operational pillar for Evolution. 1 year into the 3-year transformational plan has seen significant change. For the quarter, several key achievements were: progress on the site development and improvement plan, which included jumbo training with bolting, increased development rate at Cochenour, North American supply established for the ground support supplies, rig shaft automation completed, the Red Lake mill operating at greater than 1,000 tonnes per day during the quarter, Campbell mill upgrade and supporting sustained higher throughput and the CYD box cut construction with development to commence this month.The McFinley decline is progressing well with breakthrough expected in the coming quarter. Bateman mill commissioning and extension studies are all progressing well. Mungari delivered 23,000 ounces at an all-in sustaining cost of $1,927 an ounce and a net mine cash flow of negative $5 million, including $21 million in capital spend during the quarter. Underground development and open pit capital waste stripping contributed $12.3 million and $5.3 million being spent to complete stage cell 3 of the TSF. All of these set the operation up for the future.On the production front, the underground continue to face stoping challenges, impacting the delivery of high-grade ore to the plant, which resulted in lower-than-planned production for the quarter. A stoping improvement plan has been developed by the team with the actions commenced in June. Open pit mining rates have continued to improve with a 38% increase from the March quarter. Processing also delivered well for the quarter, pushing the site past its 2 million tonne per annum gold for FY '21.Mt Rawdon produced 21,000 ounces at all-in sustaining cost of $1,338 an ounce and a net mine cash flow of $18 million for the June quarter. Ore mined increased fourfold relative to the March quarter as access to a pit bottom was reestablished. Unfortunately, this was lost again at quarter end. Mt Carlton delivered 22,000 ounces of payable gold in the quarter at an all-in sustaining cost of $1,301 an ounce and a net mine cash flow of $19.6 million.If I now turn your attention to a focus of today's release, the Cowal underground Board approval and the Red Lake growth plan. If you can turn to Slide 9, since the acquisition in 2015, Cowal has been a cornerstone asset for Evolution. And this transition to an operation with a mine life of over 15 years, treating circa 9 million tonnes per year, further demonstrates how great these ore bodies are. With the development of the underground, production at Cowal increased by 70%, and all-in cost will reduce by approximately 30% over the next 3 years.On Slide 10, the study shows a robust business case with the underground, which will increase production at Cowal to around 350,000 ounces a year. The Board approved construction of an underground mine that utilizes a conventional long-haul open stoping methodology with paste backfill. The underground will deliver an approximate 1.6 million to 1.9 million tonnes per year of high-grade fleet for the Cowal processing plant during a 7-year peak production period from FY '25. Development will ramp up to a sustainable rate of 1,100 meters per month in FY '23. Commercial production will commence post the commissioning of the pastefill plant in FY '23 as we have taken a conservative approach to not commence stoping until top drilling is available. Operations will commence with mining being performed by our contractor. The tender has been prepared for execution in the second half of FY '22. The current go-away decline contract has been extended to allow mining continuity up to this date.Mining costs of $65 to $85 per tonne have been benchmarked and are based on work completed with a select group of mining contractors over the study phase. These have also been stress tested in our sensitivity analysis on overall project economics.On Slide 3, the key milestones I'd like to point out: regulatory approval this quarter, I believe we are well on track for this; underground development contract award in half 2 of FY '22; and the pastefill plant and accommodation village. This project has progressed exceptionally quickly. We hand over the project to John Penhall and the Cowal site team completed in expectation of the regulatory approvals.As with all the long-life operations, we will seek opportunities to optimize and improve the project as we gain further information from the drilling campaign currently underway. And our procurement work have started for long lead time items such as the paste plant, village units and the primary mining contract. And the Project Director has started. This is an exciting time for all of us at Evolution as Cowal moves to a truly integrated mine with a combination of an open pit and underground operation.If we move to the next slide with Red Lake. As mentioned, with the Battle North acquisition completed, we now have a pathway to a targeted plus 350,000 ounces from FY '26 and a reduced all-in sustaining cost greater than 20%. Our 11 million ounce resource now paired with an expanded plant capacity provides a mine life in excess of 15 years. The Red Lake operation is truly world class. Our Phase 1 of the 3-year transformation is on track, and the Battle North acquisition has given us the opportunity to accelerate ore treatment.On Slides 13 and 14, these 2 slides show visually the proximity of the operation. Slide 13, you will see the consolidation of the district, and on Slide 14, I've highlighted the McFinley ore body, a recent addition from the Battle North acquisition.Slide 15. Looking back, it's hard to remember that we have only [ taken the keys ] for 15 months. We've achieved a lot in this time, but still a lot to do over the next 2 years to realize our original goal of 200,000 ounces at USD 1,000 AISC. We remain on track. To date, we have established the path to deliver the gains in production identified and to deliver value from the huge resource and reserve base at Red Lake.Increasing our underground development rate is key to delivering this increased production. To date, whilst we have achieved rate in excess of 1,000 meters per month, we now need to demonstrate consistency and reliability. Other initiatives we have commenced are the completion of the box cut for the CYD decline into the Upper Campbell area, which will establish an independent mining front. We've restructured the workforce, including several secondments from our Australian operations to Red Lake. The further use of new equipment and technology increased the use of surface remote and autonomous equipment and improved stoping and paste cycle times.On Page 11, although this is a busy slide, which I apologize for, there's a lot going on at Red Lake. In conjunction with the original transformation, we are embarking on further improvements to the Red Lake economics with increased processing capacity.To expand on my opening comments, the key milestones for the next 3 years center around delivering the 3-year transformation plan; expanding the installed plant capacity to 1.5 million tonnes per annum, this is through the inclusion of the Bateman mill and expansion of the Campbell mill capacity; increase the development and production rates to deliver the 1.5 million tonnes required to fill the 3 mills.From an ore perspective, the CYD decline will commence shortly with the first stoping ore expected in the first half of FY '23. Production will ramp up over the next 3 years to 650,000 tonnes per year. My goal is to, in time, establish the capacity to mine approximately 1 million tonnes from a decline as increased ore processing capacity becomes available. It's an exciting time for the Red Lake operation as the vision comes into focus. Lots of hard work to do, but I'm confident in the future of the operation.Thank you for your time, and I'd like to hand over to Lawrie.
Thank you, Bob, and good morning, everyone. Jake and Bob have already gone through the quarterly and our finish to the year. I won't go over the financial outcomes but do want to say that we have finished FY '21 in a very good position with $326 million of group cash flow and $160 million of cash in the bank. I will update you more fully next month when we release our FY '21 financials. This morning, I'm going to outline what the next 3 years looks like at Evolution. Firstly, to Slide 19, which has our production and cost outlook. Our production is planned to increase by approximately 35% over 900,000 ounces by FY '24. This will be driven by growth at Cowal and Red Lake, which we have outlined this morning. FY '22 will be up slightly from FY '21 as we transition to the higher production at Cowal and Red Lake from FY '23 onwards. Once these projects are executed, we will have a sustainable annual base of over 900,000 ounces. Compared to the outlook provided in September 2020, the main changes outside of Cowal and Red Lake have been at Mungari and Mt Rawdon. At Mungari, the Boomer results were positive but not enough to make it worthy of investment since it would have further eroded the margin at that asset. We therefore have taken the decision to remove it from our plan. Meanwhile, at Mt Rawdon, we have taken a decision to flatten the wall angles to minimize the geotechnical stability issues. This lowers their annual production over the next few years but does extend their mine life. In terms of our all-in sustaining costs, we continue to see us maintaining our low-cost position. The main area we see higher input costs is labor, which comprises around 53% of our cost base and is expected to increase by 3% to 4% per year. The increase in FY '24 all-in sustaining cost relates to higher mine development required at Red Lake for us to be able to match the expanded processing capacity that Bob outlined. However, we expect that once Cowal and Red Lake achieved their increased production rates, the all-in sustaining cost will improve beyond the FY '24 level. Turning to Slide 20 and our planned capital investment for the next 3 years. Sustaining capital is going to be fairly steady over the years with each asset generally requiring between $10 million to $20 million each year. We therefore plan to invest between $120 million to $160 million per annum. A key determinant is going to be the age of the installed infrastructure. Since we now have extended the mine lives at Cowal and Red Lake, it is appropriate to replace or upgrade equipment and infrastructure to ensure improvements in ongoing availability and to lower maintenance costs. For Cowal, it is mainly the mobile planning, while at Red Lake, it is across the entire site due to the lack of capital invested over the years prior to our ownership. Our major capital outlook is directly linked to the growth and extension opportunities outlined at Cowal and Red Lake. As we now have a well-defined path at these assets for the next 10 to 15 years, it is appropriate to invest now and cement them as cornerstone assets in the portfolio. This will see us invest between $450 million and $560 million each year for the next 2 years. The breakdown of these key projects and investments are shown on this slide. At Cowal, the main investment will be the underground project and the continuation of the integrated waste landfall. In respect of the outlook provided in September, the changes to CapEx levels at Cowal have either been timing of spend or scale of the underground mine. At Red Lake, the size of the mineral resource and the acquisition of Battle North has allowed us to sequence the mine development and plant expansions to deliver the 350,000-ounce annual production profile by FY '26. The capital investment matches the milestones Bob presented, whereby we will invest in opening up the 3 mining fronts in parallel over the next 3 years, but these will be done at different rates. At the same time, we will invest in expanding processing capacity to over 2 million tonnes per annum over the next 18- to 24-month period starting from the middle of FY '22. But the change in our major capital profile to the outlook in September 2020 is basically linked to Red Lake and the new mine plan, which now delivers over 170% increase in production and up to 50% reduction in costs by the time the asset reaches the sustainable run rate of 350,000 ounces per annum. Lastly, on Slide 21, we have our capital management details and how we plan to fund the growth as well as returns for our shareholders. The balance sheet is in excellent shape with our gearing ending the year at around 15% based on a cash balance of $160 million and net bank debt of $460 million. In July, we have repaid the revolver fully and drawn the new $440 million facility established at the time of acquiring Battle North. We have good liquidity at $850 million. And matching this with a strong cash generation, we have sufficient capacity to fund our future growth plans. However, and as we have always done in the past, we want the balance sheet to be in a position to withstand any negative impacts to fund any business development opportunities and to be able to return funds to our shareholders. Therefore, we are advanced on restructuring our debt profile to align the maturity to the group average mine life. This will double the average tenor and reduce near-term debt repayment commitments. We expect to have this completed by the end of the current quarter. In terms of dividends, we are not changing our policy, which is based on a percentage of cash flow. Subject to finalizing the FY '21 financials, we expect our final dividend to be in the range of $0.04 to $0.06 per share. This remains subject to Board approving and declaring any dividend. I look forward to updating you further next month with our full year's results. Thank you for your time this morning, and I'll now hand back to Jake to close out the presentation.
Thanks, Lawrie. And turning to Slide 22. Our business is well positioned to prosper through the cycle. Our assets are in Tier 1 jurisdictions of Australia and Canada, something that I believe will become increasingly important to investors. We continue to remain on strategy, a continued focus on margin over volume, a desire to continuously improve and upgrade the quality of our portfolio and a recognition that every dollar of capital we deploy into our portfolio of assets must earn an appropriate risk-weighted return. Thanks for your time today. And with that, we'll open up the lines for questions.
[Operator Instructions] Your first question comes from David Radclyffe from Global Mining Research.
There's obviously a lot of information to digest here. Maybe just picking up first off with Lawrie's comment about the dividend. Given, I think, it's probably fair to say that the capital profile you've put out is higher than the market expectations and the dividend is linked to free cash flow, did you give any thought to actually obviously maintaining that policy but then just adding a caveat of a minimum set dividend?
David, I'll let Lawrie answer that question. But we -- you're right, we have released a lot of information, and it's consistent with our approach to trying to be as absolutely transparent and open as possible. So we'll let you and other investors and analysts sort through it. We hope we've done a good job at trying to explain it, but over to Lawrie.
Yes. David, we did consider that. I mean the flexibility we have with our dividend policy is it looks at the outlook of the business and cash generation. We do look at what our franking credit balance is going to be. And at the moment, we think that once we restructure the balance sheet, we'll have a lot more flexibility. But setting a minimum isn't something we're willing to do right at the moment.
Just to add to that, David, our budgets and forecasts -- internal forecasts are down at $2,200 an ounce. So obviously, at $24.50 current spot price, cash flow looks a lot better.
Yes, absolutely. Just a couple then on Cowal. Look, in terms of the underground you put out today, can we just clarify what you assume for the overall milling rate at the operation? Is it still 9 million tonnes, so 20% from underground on the numbers you provided and obviously delivering some headroom given your much higher permitted rate?
That's correct, yes.
Okay. Then are you able to provide some color on the grade profile given you have talked to front-loading high-grade material? Our numbers sort of suggest broadly to get that target of 350,000 ounces, you've got to produce at over 3 grams. So how long can we see over 3 grams initially?
Glen's on the line. And given that he didn't get a chance to promote some of the drilling and the success he's having at Cue, I think this is a question for him.
Thanks, Jake. So yes, David, the -- so what we've done recently is really to ramp up our definition drilling underground to build up our grade control stocks ahead of production. So that's in the preproduction period that we'll be pretty busy doing that. And we've got about sort of 90 kilometers of drilling to do to get -- to sort of deliver sufficient grade control stocks for the production plan in the first couple of years. I think at the moment, we're still -- obviously, we're working off a model. This is a global model. And as we start to infill this, we're going to start to understand and be able to optimize grade in that model. The production is -- in the earlier years is going to focus in and around the sort of Dalwhinnie areas and the Galway areas, and they are in the -- in the model, those separate elements to actually deliver higher grade than the average grade. So the infill drilling is focused in that area so that we can continue optimizing further detailed designs we need to do.
Just something to add to that, Dave. We talked about the 3 grams. We should expect that by the time the underground is ramping up, we're actually getting into the main part of Stage H of the grade. We're 0.92 this year. By end of FY '24 and going into '25 and '26, you should be seeing that about 15%, 20% higher. So that matches at the same time as we'll be -- we're currently planning about 2.45 to 2.65 grams per tonne coming out of the underground.
Okay. Then in terms of the very long tail from the underground and just trying to think here, why not maintain the 2 million tonnes per annum rate? Why sort of cut that back at the later stages of the operation?
That's based on our current knowledge of the stoping plans and what the mineral inventory is at the moment. It will change over time. And obviously, our intention is to grow this resource and this reserve base.
Just adding to that, David, as well, like I mean, in those later years in the underground life of mine, there's -- it is sort of deeper in the mine. So we still need to get the drilling in place to be able to sort of continue converting resources to reserves.
Yes, sure. Maybe quickly, if I can sort of sneak another one in. Sort of Mungari, can you provide more color on the volumes over the guidance period? And when do we actually get more color on the future given you're talking about now a large investment a couple of years out in terms of mine plan and reserve conversion? And I guess taking Boomer out of the plan now means that we're close to the end of the underground?
Yes. So we're trying to incrementally improve the profile at Frog's Leg, and we are getting some incremental improvements over there. But we've always said that the future of Mungari depends on an extra 0.5 gram. This last quarter was 0.5 gram less than we would normally like. So what we've done, and we've been doing this in parallel, is looking at a future at Mungari where we can process low-grade material. And that's why we're doing this pre-feasibility study on mill upgrades. And that's in all likelihood the future of the operation. Of course, we'd love to discover some higher-grade material, but we are planning and getting the operation in shape for a low-growth future.
Yes. Just adding to that, I mean, what the plan looked at when we took Boomer and a couple of smaller satellite pits came out, it says that for the next 2 to 3 years, '22 through to '24, you've got underground feed there that supplement it by the end of FY '24 without any other successes in the underground. You transition to that lower-grade sort of asset. And the studies at the moment have shown -- we've been doing leach studies, we've been doing plant expansions, additional plants. Says that by about FY '24, you would upgrade it to sort of a 4 million to 4.2 million tonnes to take that lower grade that you'd expect from an open pit only from FY '25 onwards. And that study will finish in the next few months.
Your next question comes from Sophie Spartalis from Bank of America.
Similarly, I just want to have a look at Red Lake and the implied reserve grade there. So if you just assume the 350,000 ounces at the 1.5 million tonne rate, implied grade of around 7.4 to 7.5 grams per tonne, how do we reconcile that with the grade profile that you provided on Slide 14 where a lot of the grades are a lot lower than that level? Can you just talk us through how you plan to reconcile that grade differential over the next few years?
Thanks, Sophie. Can you just point us to the direction where you're calculating the tonnages and the grade? Because the reserve grade we're using is 6.9 grams per tonne, and the 5-year profile goes to plus 350,000 ounces. So the...
Yes. So if you do 1.5 million tonnes...
Yes, that's 1.5 million by FY '23. So that's -- and we're talking about an FY '25 target of plus 350,000 ounces.
Yes. So even if you do in '25 the 1.5 million tonnes...
Yes. '25, over 2 million tonnes.
Oh, okay. So at the 350,000-ounce level, you're drilling...
Over 2 million tonnes per annum. Over 2 million tonnes per annum.
2 million to 2.1 million from FY '26, which is when we hit the 350,000.
Okay. So that 1.5 million, when will you be at that level?
1.5 million will be in FY '24. And you'll be somewhere between 250,000, 270,000 ounces in that period until the plant expansion is finished.
Okay. And that is assuming the reserve grade of the 6.9?
Yes.
Okay. No, that's awesome. And then just in terms of the cost guidance, Lawrie, you talked around 3% to 4% of labor cost increases each year. Is that coming from a particular area of the group?
No. I think if you look at it, so if we take the West Coast, our turnover rates there increased through this year. So there is certainly a lot more cost pressures on labor availability in -- for Mungari. And then if you look on the East Coast, Cowal is probably getting more pressure from construction than mining into the area. So we see that not being as big an issue. Then when we look at Mt Rawdon and Mt Carlton, Queensland certainly haven't had as bigger pressures as we had in the West. And then when we look at Red Lake in Canada, we've been doing reviews. And as we acquired Battle North, our positions there are competitive, but we also know that as they come out of the pandemic and the country opens up a bit more, we'd expect to see probably in that still in the 3% to 4% movement there. But we're not seeing high turnovers over there at this point.
Just to add to Lawrie's comments, Sophie, that our retention rate is close to 90%, which I think would be sector-leading and something that we're working very hard on to make sure that people really have a highlight of their career at Evolution.
Yes, that's great. And then just a final one, if I can. At Ernest Henry, you talked around the drilling campaign that's going on there. When can we expect an outcome of the extension to mine life and whether there will be any mine plan changes? And do you expect to be any major change in how they tackle the asset under the 1,200 RL?
So the plan is still on track. And as we have outlined earlier in the year, so concept study has come into finalization at the end of the June quarter. That will be discussed with the joint venture partners in this quarter to agree to go into a pre-feasibility. Any change in reserve will come at the end of this calendar year, as Glencore updates there, MROR. And that's what we would then feed into 2022. So at the moment, everything is tracking to plan. There's no extra drilling that's being done right now. That's later in the second half of -- probably more in the December quarter. And then in terms of change to the mine plan, down to the 1,200, we've still got the best part of 3 and a bit years left. So we don't see any need right now to change that mine plan or sequencing.
Your next question comes from Daniel Morgan from Barrenjoey.
Just back on Cowal. So thank you for providing the huge amount of detail that you have on the underground. Just wondering how that is planned to dovetail with the open pit. I mean we touched on earlier with the milling capacity of about 9 million tonnes. You've been sort of running at about 8.5 million per annum. Just wondering whether you run at 8.5 million going forward for that towards the end of the open pit. You've got ore and stockpiles to put in against the underground ore that will still be coming. Just sort of wondering how the end of the mine life looks dovetailing the underground with the open pit.
Sure. Daniel, congrats on your new role. And we provided you a lot of information because we thought you'd been on break for a while. So you needed to do some reading. I'm not -- Bob's sitting in Queensland waiting for a question. I'm going to hand this one to him. Bob?
Thanks, Jake. I hope people can hear me all right. It's been a bit of a scratchy line sometimes.Daniel, the -- 2 parts to the question. The first part is the milling rate. The second part is how do you integrate the underground with the open pit. Is that right?
Yes. I guess what I'm trying to understand is the underground looks like it's got a longer life than the open pit, if you're milling really hard at the 9 million tonnes. And so the back end of the mine life, you've only got underground ore. I'm just wondering how that works in your thinking or whether you run the mill not as hard, so you've got some ore towards the back end mix with the underground. That's what I'm trying to understand.
I'm a firm believer in -- if we can get the gold out earlier, it's better from a cash flow and better from a value perspective. So I think running at an appropriate level early is right. The 9 million tonnes, that's how gold always run at, around about that rate. But it depends on the feed. So it depends on the proportion of oxides to fresh rock and the hardness. And so that's why it goes up and down a little bit. But that's our aspiration, to do that 9 million tonnes. Towards the back end of the mine life...
So it's -- sorry, it's probably worth adding that there's a pre-feasibility study ongoing for additional open pits and starting extensions to the E42 pit.
That's where I was going. That's the answer, Dan. It's like how do we actually -- how do we bring more ore in, how do we actually bring other things in at the same time as doing this underground. Undergrounds do extend past the life of pit. If you look at some others, there's some recent examples in Australia. And it means that you've got to change the configuration of the processing plant. But the first process is to actually bring some of these other studies in, which are starting to starting to commence now, of other open pits in that extension of E42.
And on the constraints, towards that -- and I appreciate you haven't done the work, but what are the major drivers of bringing some more open pit material in? Is that you need to do more drilling? Or do you need a permitting decision? Or is there some sort of a reserve price assumption that you'd be thinking about potentially changing?
I think it's safe to say all of the above. I mean it's very early in the study work, but our aim is to bring some of them in at the back end of E42 so that we can get more additional ore at a higher -- or better grade than the stockpiles. That's the aim. Glen, did you want to talk about the resource to reserve?
Yes. Sure, Bob. So we're looking at, in terms of the satellite pits, north and south of E42. And there are drilling programs underway this year -- well, in FY '22 that will inform what we expect into the feasibility study that will examine really how they come into the overall life of mine plan and sort of integrate with the potential expansion of E42. We know that the ore body extends beyond Stage H there, along with the integration with the underground.
Okay. And Red Lake, just wondering if you can touch on the things that you're going to need and the time line for those on a permitting perspective to do the plan that you've outlined today.
Lawrie?
Yes. Daniel, I mean, from a permitting perspective, for the milling, we're going to need full approvals on those over and above the 50% uplift in capacity. So the work is ongoing with those. We'll need some permitting to move material between the leases to the plants. We've got one of those secured in relation to the Bateman mill. We're working on the others. In terms of the mining, there's nothing out of the ordinary that's required in terms of access into those mines. So yes, permitting, from our perspective, isn't going to be the main issue. That said, it's also making sure that the First Nations and the stakeholders are brought along on that journey to understand going from what we've got today to where we will be by 2026. It's a material change in that regard.
It is. And one of the benefits of buying the Bateman mill is that all the approvals will be at a provincial level and there are no federal approvals that we require.
Okay. And my last question is a little bit more conceptual. I mean I note that you've gone harder and earlier on this carbon net 0 commitment that you've recently announced, harder and earlier than peers, I would say, sorry. I'm just wondering if you can talk about how you think about this in terms of the cost of these commitments. How can you quantify this? I know it's -- we're all heading in this direction, but just wondering how you quantify the cost of these to the business and potentially what peers we'll have to contemplate as well.
Sure. So we've done a lot of research and work before we made this commitment, Daniel. 70% of our emissions are scope 2 emissions and the 30% are scope 1 emissions. It's -- if we were to buy carbon offsets for all of our emissions, it would cost us about $9 million. And that is the situation where we don't want to be in, where we're buying carbon offsets. But that -- if you want to quantify the cost of making that commitments without any changes to the way we do business, that would be it. We believe that Cowal, which contributes 50% of our emissions, is the place we should be most focused on. And the pathway to getting below the 35% or achieving the 35% reduction by -- the 30% reduction by 2030 is to get to grid power, which is renewable. So we need to get in the cube early, and we've started that to progress that. So that's a renewable power source from the group.
Your next question comes from Matthew Frydman from Goldman Sachs.
Hoping everyone's well. Thanks again for all the detail on the outlook this morning. Firstly, on Cowal, a couple of questions on the economics of the underground project. I guess firstly, noting that you've run the economics and the investment case there on a $2,200 an ounce gold price, delivering a 15% pretax IRR. Clearly, that's well above where you cut reserves and even where you cut resources. And I guess also noting that 30% of the mine plan there is in the inferred resources category or even exploration target. So I'm just wondering how sensitive that material in particular is to that $2,200 an ounce gold price assumption versus the $2,000 an ounce resources cutoff or even the $1,450 an ounce reserves cutoff. Is it a question of gold price assumption there? Or is it purely a question of drilling density, as Glen alluded to earlier? And then secondly, the extension of that question is using that high gold price, is that applying a different threshold to these projects because it's low risk in your view? I guess to your comments earlier on risk-adjusted returns.
Yes. Thanks, Matt. I think I'll break that question into 2 parts. First, Glen will address the sort of resources and reserves conversion, then I'll hand over to Lawrie. But we're not applying a difference return profile to this project than other projects. A plus 15% return would be, in our view, very attractive. Glen?
Thanks, Jake. Yes, Matt, so what -- look, what we're doing or really what we have in the underground life of mine here and that resource component that you described up to 30 -- or inferred resource component up to 30%, that comes in, in the later years of the life of mine, and it's just not sufficiently drilled at depth at this point in time. So what we're doing is -- really the aim in the preproduction period is to drill to get to 2 years of grade controlled stocks ahead of production, and that will be really the annual plan in terms of really derisking the indicated resource down or measured, which we can use for grade control on, as said, optimizing a stope design. So at any point in time, that's going to essentially be our goal. So getting to that sort of deeper inferred will occur later on in the life of mine plan. And as I mentioned a bit earlier, the focus is really just on the first couple of years at the moment to get that resource model derisked to -- for the optimized stope designs.
Yes. And on the economics, Matt, I'd reiterate what Jake said. We run our studies based on the resource and reserves. And then from a financial modeling, we use whatever plan assumptions we're using, and our metal price assumptions for our current life of mine plan is 2,200. So hence, why that study finishes at that pricing. When we look at the sensitivity to it, you're probably going to be getting back down to -- I would say it's in the AUD 700 to AUD 800 range before you're at NPV neutral or breakeven. And then when you're at 2,000, you certainly still got a reasonable NPV in this project. We run what those sensitivities are. And then as Jake said, that IRR at current spot is 21%. And therefore, the NPV is going to be higher by the order of -- I would have said 450 million, 500 million NPV at spot pricing. So we've run all of those sensitivities. It's not something that's going to be sensitive to the price.
Yes, sure. I guess applying that, I guess, to a group level, if a 15% pretax IRR is sufficient at a $2,200 an ounce gold price, if that's sufficient for an investment approval from the Board, I guess, to me, that would imply that there's probably a host of other projects across the portfolio that screen pretty well under that set of inputs. So under that gold price scenario, can you maybe chat through whether those other options do exist and whether that's something that you'd be looking at?
The first thing I'd say, Matt, is based on the projects we've outlined today, I'd be a bit worried if Bob's got more in his back pocket to give us those sorts of returns. I mean realistically, when we look across the portfolio, Cowal with the underground and the open pit studies, they are going to give us the greatest return. If we look at Red Lake opening up the mining fronts, getting the processing plants up to 2.2 million to 2.1 million tonnes per annum, Ernest Henry going below the 1,200 and then optimizing Mungari as it transitions to a lower grade and you upgrade your plant, those ones are probably the standout ones. And they, as you'd see from our outlook today, need a bit of capital in the next few years. So some of the others are probably going to struggle to match it. But it doesn't mean there's not smaller incremental projects at each of the assets that they'll be trying to bring through over the next couple of years.
And Matt, it's probably worth me just kind of adding my perspective on your comments on returns because our BD team has been very active over the last 12 months, the last 10 years, but the last 12 months particularly. There are very few projects you can buy, and there's been a few in Australia that have sold in recent months where you'd be able to put in AUD 2,200 gold price and get a plus 15% return based on reserves and resources. So on the buy versus build, these projects which we're building and taking these assets to really a different level, 350,000-plus ounces of long lives screen better than almost everything that we've looked at from a buy perspective over the last 12 months.
Yes, sure. That's good insight. I guess I was thinking more in the context of your $1,450 an ounce reserve price. To me, I guess -- and as you guys have talked to in the past, that $1,450, a very conservative number, basically ensuring that you're generating a positive margin through the cycle. But to me, it seems to you that you're kind of implying that you need something higher than that in order to deliver a positive return on the Cowal underground.
No. We're saying that we're going to be mining to our reserve cutoff, but we're assuming a $2,200 long-term gold price.
Sure. Got it. Okay. And then maybe back to the specifics on Cowal, Lawrie, I think you alluded to this a little bit earlier in terms of what's driving some of the CapEx differential between what you guys guided to last year. Just wondering if you can point specifically to, I guess, which areas of the mine are being developed earlier or being brought forward versus prior to expectations? And I guess maybe a question for Glen, but could that underpin -- I guess in addition to that reduced tail that we see in the back end of the underground mine life, is pulling this development forward also bringing forward the potential of further production in that tail?
Yes. Matt, it's a combination. So when we look at the integrated waste landform, we've got capital that's moving from FY '21 into FY '22. And that was through the ability to actually remove the need for another lift on the storage facility. So therefore, we're able -- we weren't -- we didn't have to go at the exact same rate on the IWL. So some of that capital comes into this year. And obviously, some then goes out into the other year -- into '23. Also, with the IWL, as we've been now getting right into the deep part of the construction, we've been able to identify areas that some of that capital can move out into '25 and '26. So that's sort of what we're saying about timing on that project. It's not moving in terms of overall scope by probably 5% movement in total overall capital cost of it. Then when we look at the underground in our 3-year outlook in September 2020 and our life of mine plan from last year, it assumes a different approvals timing. And therefore, capital that was in FY '24 is coming into FY '23 and likewise, '23 into '22. And that's really why we say there's a change there. And the last piece on the underground is in terms of now where we're looking at that 1.7 million tonne mining rate compared to what we had originally planned back in the pre-feasibility, you do see some of that development capital coming forward post commissioning into earlier years. And that's why we say you get a little bit more development because of the size of the mine but also the timing based on approvals and what ended up in the feas study that we could mine at. Glen, anything in terms of optionality on the underground that's going to come up in the drilling?
It's going to -- absolutely. So -- and I think -- and it happens in a lot of underground mining projects, whereby as we drill in the future years, there will be new opportunities that, depending how they meet us or pass through the quality filters, may change the sequencing a little. But that's going to be informed by the future drilling.
And we do have around $15 million of capital assigned to doing a pre-feasibility study on these open pits, which will complement and not -- and reduce this tail.
Yes, that's a good point because in last year's long, we actually had that out 2 years later. But now that we've got approval through on this and the underground plan, it says that we need to start and move into the feas study now.
Got it. Thanks for the detailed discussion there, guys. One last one, quickly for me. Obviously, I'm taking up a bit of time already. But just quickly on Red Lake in the quarter, I noted there that you called out some seismic issues that you had in the underground. And you've talked to operational and planning controls that you've put in place to address that. Just wondering if you can expand on that, exactly what those controls entail. And just wondering, it involves you -- is this an issue that's only present in the lower levels of the mine? Do you see it -- do you take it as a positive that a big chunk of the future mine plan is focused on Upper Campbell and the other areas of the mine? Or do those seismic issues really need to be accounted for and addressed and controlled throughout the mine, I guess, particularly as you're planning to pretty materially lift the amount of material that you're moving around underground?
Bob from Queensland.
I think there's 2 parts to that. One is the opening up of the upper level and front areas of the mine, [ front areas ] you can mine from. Therefore, you're going to have seismicity in the lower part of the mine -- that's part of the -- part of the ground. So getting more additional mining fronts will actually let us go to different mining areas and to slow down the mining in the areas that are more susceptible. And what the seismicity does is it comes with time. So if you can have time between activities, you'll actually stop the interruption. So getting additional mining fronts, getting additional areas to be developing, it's a big bonus for seismicity. We don't see anything in the upper levels. We don't see any indication at the moment. So it's only in the Lower Red Lake area that we're seeing it. The other things we're trialing is we're trialing destressing blasting around development. So blasting ahead of it. We're trialing different profiles to try and reduce the stress or improve the stress distribution. And we're trying to go to a better arch profile like we used in West Australia. So we're implementing all those things as we're speaking as well as different ground bolts -- or grounding support bolts, et cetera, et cetera.
And Matt, just before you go, I cannot resist saying that we did -- when we're doing the box cuts, some of the material was put through the plant because it was running 2 grams a tonne. And you see, we did put in one hole that insect the 2.75 meters at 21 grams, which is very close to the decline. So Red Lake does continue to be a geological magic pudding.
[ Treasure trove ].
Certainly wouldn't -- certainly wouldn't turn away 2 grams a tonne. Yes. Thanks for the detail, guys.
Your next question comes from Alex Barkley from Morgan Stanley.
Question at Red Lake around some of the operating capacities there. You're talking about 1 million, 1.5 million, getting to 2 million, 2 plus. And you're developing that McFinley mine as well. I was sort of thinking existing operations in Upper Campbell decline sort of 1 million tonnes each, which maybe puts your mining ahead of that. Can you talk about how you're thinking about mining versus milling capacity over the next few years?
Yes. So I'll take that, and then Bob and Lawrie can add to it if they want. But basically, we -- at the moment, we're only mining in the low Red Lake and Cochenour areas. And that's the one mining horizon we have at the moment. And we're planning to get -- we're currently producing around 850,000 tonnes from there. We're building the Upper Campbell mine, which we're targeting in the next couple of years, FY '24, to be able to ramp up to that to 750,000 tonnes. So that's 1.5 million tonnes from the existing areas and the Upper Campbell areas. Bob said in his speaking notes that he's hoping that we can get to over 1 million tonnes in due course from the Upper Campbell area.And then the McFinley ore body is kind of also going to add to that, 375,000 or 325,000 ounces, I think, we're -- tonnes, we're looking to get out of there in due course. So that will all come to over 2 million tonnes within the next 5 years. But it's mining -- it's really we're developing and we have 3 separate mines feeding 3 separate plants. Bob, do you want to add to that?
The only thing I'd add is that we're doing a lot of work on the McFinley ore bodies. Glen and his team are really trying to understand that, the same as we did with the Red Lake ore bodies when we first got there. And the plan is -- it's a simple plan, really. It's like put the best grade through first and produce at a rate that actually fills those processing plants.
Yes. And just on that, I mean you sort of talked about the difference in CapEx move at Cowal. At Red Lake, was there anything sort of a surprise that's moved from last year's numbers to this? I mean you've added a few extra things, Upper Campbell, McFinley. But was there any increases? Or is that all adding to incremental production growth?
Alex, yes, that's a good question. I'll hand over to Lawrie in a second. But just to say that the last September update, we were looking at that Phase 1 transformation, which was 200,000 ounces at less than USD 1,000 an ounce. So the CapEx we're talking about now takes us to that 350,000-plus ounces.
All right. Yes. Alex, I mean there's no real surprises other than the surprise on the upside in terms of what Red Lake can actually do. So when we look at last year's long, which guided into our 3-year outlook into this year's plan, it is the sequencing of the mine development. It's the expansion of the plants and obviously, the acquisition of Battle North and that plant and mine deposit because when we look at last year's plan that they are the only changes. Now they do add a few hundred million dollars of capital in the next 2 years. But certainly by FY '24, '25 and '26, you get that payback, as we said, you get 170% increase in production and a 50% reduction in the AISC and AIC. So there's nothing in there that surprised us, I'd say, on the sustaining capital, it's not so much the surprise. It is the fact that now you've got a 15-, 20-year mine life there. You've got some very old equipment. You've got equipment that's not actually fit for what we want to do at the mine. So we have made that decision to accelerate replacement of equipment and infrastructure over the next 2 years. And that will see Red Lake really get the majority of sustaining capital, which wasn't in our plan last time.
Your next question comes from Al Harvey from JPMorgan.
Just a quick one on Red Lake. I think you previously talked to 300,000 to 500,000 ounce per annum aspiration. Just wanting to know if that upper end of that range is still on the table or pretty happy with the 350,000-ounce target for now?
That's a good question, Al. Thanks. Our long plan has us over 400,000 ounces. But within the time frame and our conservative approach to guiding and providing outlooks, we're only prepared to say above 350,000 ounces today. But we certainly have aspirations to get above 400,000 ounces, and our long suggests that that's possible.
And maybe just another one on Red Lake recovery. So across the 3 mills that you'll be -- you'll have in time, can we expect that you'll still have recoveries around current rates at 91% or so? And is there any impacts on potential refractory material coming through and whether that changes your milling strategy?
We're expecting recoveries of between 91% and 92%.
There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks, Harmony. Just before you go, obviously, thank you very much for attending. I'm thinking that we may have lasted longer than the Premier of New South Wales in their morning briefing today on COVID discourse, which is good. It shows the interest. But I also want to just thank our team for having got all of these milestones -- got to these milestones. It's taken a huge amount of work from a huge number of people across our organization, and Evolution really is in good shape with some fantastic opportunities in front of us and world-class assets in our portfolio. We look forward to updating you at the financial results call. Thanks.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.