Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by, and welcome to the Evolution Mining June 2022 Quarter Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Jake Klein, Executive Chairman. Please go ahead.

[Jacob Klein, executive]

Thanks, Darcy. Good morning, everyone. Thanks. This morning, I'm joined by Lawrie Conway, our CFO and Finance Director; Bob Fulker, our Chief Operating Officer; Glen Masterman, our VP of Discovery is also here to answer any questions you may have on our exploration results.

I'll make a few comments this morning before handing over to Bob, noting that our commentary will be shorter than usual given the comprehensive business update that we provided on the 27th of June.

Strategically, in an inflationary higher cost environment, which is what we're in, it is more important than ever to have a portfolio of low-cost operations. Our all-in sustaining cost margin we achieved in the last 12 months is AUD 1,166 an ounce, and this is sector lead [Technical Difficulty] if we want to build a business that can prosper through the cycle, and I believe we are well placed to do this. We finished the year in line with our update. The June quarter was the strongest quarter of the year from a production perspective.

I want to highlight just a few things I think are particularly noteworthy in the quarterly that we released today.

Ernest Henry had a stellar year. It generated $435 million of net mine cash flow, and we only owned 100% of it for 6 months. What is equally exciting is the potential of this ore body. We are now working through the final checks and reviews of the mineral resource, but I'm confident that when it is released on the 1st of August, on the first day of the Diggers & Dealers Forum, you will share our confidence of the operation's very bright and long future. This cash flow we are generating from Ernest Henry is supporting our major investment in accretive growth at both Cowal and Red Lake, which drive the 25% increase in production over the next 2 years.

At Red Lake, we are making good progress. Our ore reserve models are reconciling in line with expectations, our development rates are being sustained and our mining rates and compliance to plan has improved. This allowed us to deliver 8% higher grade and process 8% more tonnes for a 17% improvement on production to over 38,000 ounces this quarter. These are the metrics required to deliver our FY '23 guidance, and July has seen these improvements sustained. Given the relatively high fixed cost component at Red Lake, as production grows, we do expect to see the cost per ounce continue to improve. We are confident about the future of Red Lake. It is undergoing a transformation, but it is one that will create significant value for our shareholders.

Cowal continues to prove itself a great asset. I am pleased that notwithstanding the inflationary cost pressures, the $380 million Cowal underground mine remains on the original schedule and budget with all major contracts now in place.

Despite challenging operating conditions, Mungari had a very good finish to the year and the pumped hydro opportunity at Mt Rawdon is progressing.

Finally, we do acknowledge and recognize the importance of operational delivery in FY '23 and are motivated and well positioned to do this.

With that, I'll hand over to Bob.

[Robert Fulker, executive]

Thanks, Jake, and good morning, everyone. In the June quarter, group production improved by 16% to 173,000 ounces at an all-in sustaining cost of $1,290 per ounce.

If I go directly to the operations, after a weaker start to the quarter due to weather, Cowal finished strongly and improved the overall material movement by 6% over the March quarter. Ore mines are also increased by 42%, with Stage H moving into significant ore movement over the coming quarters.

Additionally, the underground development ore increased from 2,000 tonnes in Q3 to 62,000 tonnes in Q4. We're using a marginal costing approach to development cutoff grade, and this is the reason for the 1.17 grams per tonne from the underground.

The open fleet replacement strategy saw the delivery of the new 400-tonne primary excavator. This will improve the total material movement over the coming quarters through improved availability. The $380 million investment in the underground remains on cost and schedule. Total spend to date is $112 million and practical completion is due this financial year.

We have seen a nice lift in development [ meters ] with the additional jumbo, with the June month drilling -- sorry, delivering 743 meters with 2 rigs. Ernest Henry had another strong quarter, increasing production to 21,000 ounces of gold and 15,300 of copper. Revenue was negatively impacted by concentrate revaluations due to a 23% fall in copper price, but we still delivered $117 million of operating mine cash flow.

During last quarter, we mentioned the development of focus to increase sublevel access for increased cave production. This quarter, Ernest Henry lifted lateral development by 39% to an average of 770 meters per month. The site team have plans in place to further increase this in the coming months, all with the aim to improve the cave operational draw and in preparation to deliver the feasibility study outcomes for the mine extension below the 1125 RL. The pre-feasibility study is on track for completion by the end of calendar year '22, and the updated mineral resource will be released on August 1.

The Red Lake transformation continues to deliver improvements with production increasing by 17% to 39,000 ounces, setting the mine up to deliver FY '23. Red Lake is now performing at the rates required to achieve FY '23 guidance. Development rates have been maintained above the 1,200 meter per month for 9 months now. And the rate of advance in the CYD 727 meters in the June quarter will enable us to extract the first stope in Upper Campbell in the September quarter.

Breakthrough to the old 3-level Campbell is imminent. Despite site access restrictions in May due to regional flooding, the operation mined 235,000 tonnes at 5.16 grams per tonne, 12% higher mine grade than the previous quarter, and processed a record 258,000 tonnes at 5.1 grams per tonne, an 8% improvement over the March quarter.

Processing performance in the June quarter is an annual run rate above 1 million tonnes per annum and in line with the FY '23 guidance. Both mills are running above our expectations, and we are finding ways to further increase throughput without affecting the availability nor the recovery.

The December 21 resource models continue to reconcile well and are performing too within plus or minus 5%. The FY '23 budget is biased towards delivery, our focus is on grade and mining the right tonnes at the right time. The budget has been built with a factored Upper Campbell grade to allow the new model and remnant mining variations to be taken into account.

The Mungari integration is progressing well, and this has mitigated the overall effects of COVID during the quarter. Mungari June production was above plane due to Kundana and Frog's grade and limited East Kundana ore processed. Cost reductions are continuing through site synergies and contract consolidation, and this will continue through FY '23.

Mt Rawdon is continuing to manage the water and North wall geotech issues well, and the production was expected with these constraints.

In summary, Red Lake performance has lifted this quarter and is now operating at the rates we need to achieve our FY '23 guidance. Cowal Underground project is now less than 12 months away from first stope ore and the project schedule and costs remain on track. And Ernest Henry continues to generate significant cash, and I'm excited about the upcoming resource update and the positive impact it will have on the extension study.

Thank you for your time. And I'll hand it over to Lawrie.

[Lawrie Conway, executive]

Thank you, Bob. Good morning, everyone. This morning, I'm pleased to update on our financial performance for the June quarter as outlined on Pages 8 and 9 of the report.

Our financial metrics were in line with our business update of 27 June with our group all-in sustaining costs for the year at $1,259 per ounce, while sustaining capital was below the bottom end of guidance at $146 million and major capital was well within guidance at $459 million.

Operating cash flow was $228 million for the quarter. For the full year, this was $893 million, which is the equivalent of around $1,400 per ounce. After investing $146 million in sustaining capital, we had just under $750 million available for investment in growth and other uses. The net mine cash flow for the year was $284 million or $445 per ounce, which is the equivalent of a 20% margin. Our group cash flow was $66 million and $110 million for the quarter and full year, respectively.

The balance sheet is very strong with $300 million in debt repayments made during the year, and our cash balance ended better than planned at $572 million, which gives us liquidity of over $930 million. Given this balance sheet strength, we proactively managed our revenue and cost position as internal and external factors change to ensure that our margins and balance sheet are protected.

Our cost guidance for FY '23 was outlined in our update on 27 June, with group all-in sustaining costs guided at approximately $1,240 per ounce. Sustaining capital is guided in the range of $190 million to $240 million, while major capital is guided at $530 million to $600 million where Cowal comprises most of this at $325 million to $360 million.

I look forward to updating you next month on the full year financial results. Thank you for your time this morning. And I'll now ask Darcy to open the line for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from David Radclyffe from Global Mining Research.

[David Radclyffe, analyst]

I just got a couple of questions, maybe first on Cowal. The plant had the best quarter of throughput for some time at close to sort of that 9 million tonne annualized rate. So just wondering whether you could provide a bit more color on that. Was it just a good run? Or was this something you think that could be more sustainable going forward? It looks like you clearly mined a lot more ore over the last 6 months than you've been able to process, so trying to think about the potential upside there.

[Jacob Klein, executive]

Rob, I think that's one for you. Thanks, David.

[Robert Fulker, executive]

Thanks, David. The percentage of ore is high, David. It will continue to be high because we're into a higher ore ratio in the pit than we have been in past quarters. Obviously -- maybe not obviously, but what we're doing is we're processing the higher grade that's coming out of the pit with the underground dirt. And we're building stockpiles again as you do in this phase of the pit. The planned throughput really is predicated on the mix of ores and oxide percentages and underground percentages and just what we can push through. We did go well last month though, it was a good quarter that we had at Cowal on throughput.

[David Radclyffe, analyst]

Okay. So I guess the budget for the next 12 months is something closer than it's been the last couple of years rather than this quarter.

[Robert Fulker, executive]

Yes.

[David Radclyffe, analyst]

Okay. And maybe just a couple of quick follow-ups for Lawrie. First off, maybe could you talk to the impact of QP or PP on Ernest Henry on the copper sales? And where do we see that? Is that in the received price? And then also a little bit of an accounting one here. Just looking at the very large swings at Ernest Henry and Mungari on the depreciation rates, just trying to understand why they're moving so much. And are they reflective of the rates we should be using going forward?

[Lawrie Conway, executive]

Yes. Thanks, David. The first one, the QP adjustments to the Ernest Henry copper actually comes through in their revenue. So when we get to finalize each shipment, the final price is what we'll see as the revenue for the copper for Ernest Henry. And that's sort of why you'll see for the quarter that we averaged about $10,500 a tonne for the quarter as opposed to around $14,000 in the March quarter. So that's where we see that.

And then in terms of the D&A, what happens in the June quarter is when we update our MROR in February, we then process the changes of that MROR through the latest life of mine plan. So you actually get a number of true-ups in the quarter, and that's what happened at those 2 sites. Now the only other thing is, with Ernest Henry, you're dealing with the transition from an economic interest joint venture to the new asset, 100% ownership, but there's very little in the June quarter for that item. And we have to finalize the valuation of this acquisition in the coming months. When we get to the August full year results is when we'll break out the D&A by site for this year. And I think the things that you'll see is most of those assets will pretty well be in line with the full year for FY '22 rather than just the June quarter.

[Operator]

Next question comes from Matt Greene from Credit Suisse.

[Matthew Greene, analyst]

Just a follow-up on the QP pricing, if I may. Just generally speaking, what is the settlement lag? Is it 3 to 4 months on your copper sales?

[Lawrie Conway, executive]

Yes, Matt. So depending on the shipments and where we are in terms of the contract year, Glencore gets to nominate the QP. And at the moment, they're on a 4-month moving average. So every shipment at the moment is open for 4 months.

[Matthew Greene, analyst]

Got it. That's helpful. And then when -- I mean, we've seen the FX move a great deal. So I mean, I presume you're pricing these in U.S. dollars. But when it comes to the Aussie dollar, are we -- are you settling -- is that being settled at the settlement date? Or are you hedging out your FX at the settle date?

[Lawrie Conway, executive]

No, we don't hedge it out. So the copper is sold in U.S. terms after the 4-month period when we get to the final copper price. That's set in U.S. dollars. And then when the settlement comes through, any FX variance will go to the FX account in the P&L. And that's only from the period of closing the price at the end of the 4 months to settlement. So that stub period doesn't affect the copper revenue per se.

[Matthew Greene, analyst]

Got it. Okay. That's helpful. And then just on Red Lake, the reconciliation upgrade 5% to 6% of what you're seeing in the grade control model. Has this tended to be more positive or negative reconciliation in recent months?

[Jacob Klein, executive]

I think it varies around it. I mean, we're very comfortable that the models are working. It's up and down. and we're very comfortable that the models are correct. And I think that's a very important thing -- takeaway for people listening to the call is that there have been questions on the performance of the models. And we now understand where the dilution and where the impact came from in the first half of the year. We've corrected that. And the models are performing well and are comfortable that our -- where we're mining, the models are accurate and reliable.

[Matthew Greene, analyst]

Okay. That's great to hear. And just lastly then on Cowal, the CapEx, the $380 million that you've got there, how much contingency is in that number? And I guess now that your contracts are all now in place, are you still comfortable with your contingency level?

[Jacob Klein, executive]

Yes, we are. I think that was a credit to the team that put the investment decision to the Board. We had a significant contingency in it. It's proven to be appropriate and robust and we expect to deliver within the $380 million.

[Matthew Greene, analyst]

That's great. That's all for me.

[Operator]

Your next question comes from Daniel Morgan from Barrenjoey.

[Daniel Morgan, analyst]

My first question is just on Ernest Henry. In your recent update, your copper production is -- if I've got this right -- slated to drop to 55,000 then 50,000 tonnes over the next 2 years. Just wondering what is driving that? Is it tonnes or grade? And is it somewhat related to the reorientation of the cave that you're undertaking? And perhaps it's worth just reiterating what you're doing on that cave.

[Robert Fulker, executive]

Dan, it's Bob speaking. A couple of things. Number one, the cave shape is actually changing over time. And therefore, the number of available draw points and available active phases is reducing over time. It's also a part -- that is also part of the reason why the cave orientation or the cave reorientation is a good thing from a productivity perspective because we go from -- and these aren't exact numbers, so just take this as indicative -- we go from around about 14 to 18 draw points per level back up to that 25 to 30 draw points per level that the cave had, if you go back 3 or 4 years. So when you actually improve the number of available active headings, you can actually get the tonnes per draw point back up again because turnover of the draw point increases. So in the next year or so, the tonnage regime is a little bit predicated on that.

The other one from my perspective is that it's just the actual -- the grade and the hardness as we're going through the different zones in the cave. The grade does move a little bit, not a lot, but this is just a straight output of that. Once again, though, there's nothing wrong with the model. The models will be good, and I'm pretty excited about what we're going to talk about in August.

[Daniel Morgan, analyst]

And just lastly, gold mining valuations, Jake, have been crunched recently. As a company with traditionally more access to capital than many others, is this an opportunity to improve the portfolio? Or is the next 12 months more -- much more focused on the various asset turnarounds being undertaken?

[Jacob Klein, executive]

Dan, that's a good question. I mean I think asset prices have been crunched. I was an acquirer of shares in Evolution when we put out the release, that's the confidence I have in this company and the future. The reality is that we need to do both things. We laid ourselves down on the operational delivery last year. We recognize that that's the ticket to opportunities. But yes, in a stressed market like we're in, where capital availability is low, we do see opportunities emerging and would like to be in a position to take advantage of them, noting that we need to ensure that investors have the confidence that our operational predictability and delivery is on track.

[Operator]

Your next question comes from Mitch Ryan from Jefferies.

[Mitch Ryan, analyst]

Just a follow-on from Dan's question there with regards to Ernest Henry and the lower copper component. Just wondered if that was also a factor of you focusing maybe on more of the broader economics of the mine versus under Glencore management where they were primarily focused on the copper or if that's something that may play out on a longer-dated time frame and hasn't been a component in the '23 guidance.

[Robert Fulker, executive]

Mitch, I'll try and answer it, then I'll hand it to Glen as well. We have -- we are getting a better and improved gold recovery than has been historically achieved at Ernest Henry. That is not affecting the copper recovery at all. So we've actually managed to lift the gold recovery but not affect the copper recovery. So that's not a factor in that equation. Glen?

[Glenton Masterman, executive]

And I think as well, Mitch, what we're seeing is that in this type of mineral systems, so copper, gold, is that the grade throughout the ore body is pretty uniform. But we are seeing a little bit of heterogeneity with our infill drilling in different domains with different grades. And so that's going to come out in the mineral resource model that we scheduled to release August 1. We'll be able to sort of talk to some of these some of these, I guess, insights that we're developing as a result of this work.

[Jacob Klein, executive]

I think I'll just finish off by adding that when we did the due diligence, there was -- the data room had a 60,000 tonne per annum for the next couple of years. We put that back down to 55,000 and 50,000 tonnes based on the site view. I think this mine has, if you went back to Glencore, when you said was the 60,000 tonnes deliverable? they would say that their expectation was that the site would push and be able to deliver that. We've gone for a conservative approach. It is, as Bob says, a budget and a forecast biased to delivery.

[Mitch Ryan, analyst]

And my second question, primarily for Glen, is the updated MROR for Ernest Henry, if I look at Figure 3 in those planned drill results, I'm assuming that they won't be informing that. When will we start to -- when will we expect to see those sort of numbers released to the market or any assays on those?

[Glenton Masterman, executive]

Yes, Mitch, they're going to start to come through in the September and sort of wrapping up in the December quarters. And so those results from underground drilling that we have completed since the data cutoff for the MR update, it's just a mineral resource update that we're working on at this point in time. The OR will be updated at the end of the year in our year-end annual statement. But we're -- so we're also drilling from service at the moment. We've got 2 rigs that arrived back in April. And the idea is to get a better angle of attack on the ore body. And what we're seeing in the mineralized footprint is that it's actually a little larger than what we've already modeled. So that's a positive outcome from the surface drilling. And that's sort of based on visual estimates that we can make because of the copper distribution that we're seeing visually in the call.

But look, we want to wait for those results. We'll be able to sort of release those, as I said, over the next couple of quarters. The mineral resource update that we're finalizing is going to incorporate around 35,000 meters of new drilling. So it doesn't capture the surface work or, as I said, the underground work since June or May. But there's a fair bit of new information that goes into that model update that will inform the outcome that we'll release to the market on August 1.

[Operator]

Your next question comes from Peter O'Connor from Shaw and Partners.

[Peter O'Connor, analyst]

[indiscernible] getting excited about the 1st of August, I'm super excited, Jake, because I know Rob, I want to segway back to Dan's comments about valuation. I'm just asking, could you include in that some commentary buying your own equity? So buy versus build versus buy Evolution's, as you've told us what you're doing. And just a buy back, generally speaking, for Evolution.

[Jacob Klein, executive]

Rocky, I think -- I mean, I think our capital commitments are such that we're investing in growth at these opportunities at Red Lake and Cowal. So I don't think a buyback is on the horizon for us. I mean we've got to get through this growth and capital phase and then see what happens. But in the next couple of years, you won't see a buyback from us. We're leaving that to other investors.

I mean just to flag, I mean, one question I was hoping to get and maybe it will come out in the next couple of questions, but on Page 6 of the -- of our full year report, just to flag the improvements that are being made at Red Lake. You can see the tonnage coming up. This is a mine that we produced, 43,000 ounces in the first half of this last financial year. And then we've done 33,000 ounces and 38,000 ounces. And you can see the tonnage, the grade and everything going up. So the transformation is really happening at Red Lake. And I think it's worth just emphasizing that and getting people -- we're looking forward to taking investors there in September, and that will allow us to showcase the real changes that are happening at Red Lake. Hopefully, you'll be on that trip.

[Operator]

Your next question comes from [ Troy Wilkinson ] from [indiscernible].

[Unknown Analyst]

I'm not sure who will be best to answer this, maybe Bob, maybe Lawrie. Just in general, around U.S. dollar cost exposure, if any, and supply chain issues, particularly maybe around chemicals, for the mining process. So are you seeing any issues with that? Is that -- or if you are, is there an improving situation? Just sort of forecast around the supply chain.

[Lawrie Conway, executive]

Yes. Thanks, Troy. On the first one, I mean, when we look at it, FX exposure at the moment, we're still seeing on the Australian assets, our exposure, direct exposure, is 15% of our costs linked to the U.S. dollar. So yes, that's a few million dollars a year. It's not material in the scheme of things when we've got 50-plus percent of our cost as labor. And then when we look at the Red Lake operations, we're sort of seeing they cost more, around the 90% mark are linked to Canadian. So there's not a lot of exposure there again back to the Aussie dollar.

In terms of supply chain, fortunately, at the moment, we've not experienced any major issues at any of our operations in terms of supply and delivery of chemicals, reagents, consumables. It's something that the site teams and the group supply team have been working on really for the last couple of years since when the pandemic started and now the inflationary market that we're dealing with and making sure we've got adequate levels on site and alternatives in place. So fortunately, right now, we're not experiencing any issues around the supply chain.

[Operator]

[Operator Instructions] Your next question comes from Jim Pollock from Surbiton Associates.

[Jim Pollock, analyst]

Yes, good morning, everybody. A question or 2 on Mungari. On the figures that you gave for Mungari, you gave the recovery rate at -- what is it, I can't read my own handwriting -- 72.5%. However, I calculated at much closer to 80%, 8-0 percent. Why the discrepancy? And is it due to a Rand Tribune effect?

[Jacob Klein, executive]

Can you point out where you're finding that number, please, Jim?

[Jim Pollock, analyst]

Well, if you look...

[Jacob Klein, executive]

Recoveries are 92.5%.

[Jim Pollock, analyst]

Yes. But if you work it out on the tonnes of ore produced, the grade and the gold produced from it, I calculate the recovery at closer to 80%.

[Jacob Klein, executive]

Yes, that's the EKJV impact. So that's 100% of the material processed, but we're taking the attributable gold production and appropriate recoveries for that gold, for all the gold.

[Jim Pollock, analyst]

Good. Fine. So it's total tonnage, the grade is specified, but the -- what is it, the 35,000-odd ounces produced is only your share.

[Jacob Klein, executive]

That's correct.

[Jim Pollock, analyst]

Good. Okay. Lovely fine. See you all at Diggers.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.

[Jacob Klein, executive]

Thanks, everyone. As I said, a brief commentary and call to give you an update on the 27th of June. Just a very busy couple of months ahead for us. The mineral resource update for Ernest Henry, which is phased on the 1st of August. There's a Mungari site visit on the 2nd of August. 18th of August, we're releasing our full year results. And in September, really a great opportunity, if anyone wants to see what's happening at Red Lake because it is really a seeing-is-believing story, there is a September site visit, which is the first opportunity we're going to have to take Australian and North American investors and showcase the changes that have been made at site.

Thanks very much. We look forward to seeing you at Diggers.

[Operator]

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