Evolution Mining Ltd

ASX:EVN

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to the Evolution Mining Limited June 2023 Quarter Results Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Lawrie Conway, Chief Executive Officer and Managing Director. Please go ahead.

[Lawrence Conway, CEO, MD & Director]

Thank you, Darcy, and good morning, everyone. Thanks for joining us this morning as we outline the results for the June 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 of Discovery; and Peter O'Connor, our GM, Investor Relations.

As outlined on our Investor Day last month, we have a very clear plan in place for the next few years where we'll be delivering low-cost production with reduced capital intensity, enabling us to deleverage the balance sheet and deliver improved returns for our shareholders. Over the period from FY '24 to FY '26, we will see 4 of our assets move to higher production rates and increased cash generation. FY '23 was about positioning these assets into this phase.

We have a fantastic pipeline of projects, which will increase mine life and margin, and they all have further upside potential, which we are currently evaluating. This is evidenced by the excellent drilling results that Ernest Henry released today, which further enhances the expansion project and continues to give us confidence that there is much more value to be unlocked at this asset. Glen will take you through these results shortly.

The June quarter was one aimed at setting the business up for FY '24. And I confirm that we start FY '24 positioned to deliver these plans. We did achieve this objective, even though there were a couple of areas we would have liked to have seen better outcomes.

On the safety front, our total recordable injury frequency reduced another 3% to 8.64, which is now 19% lower than at the start of the year. In a year with so much activity, change and adverse weather events impacting our business, it's very pleasing that our team stayed focused on performing their tasks safely.

For production, the positives include Ernest Henry returning to normal operations post recovering for the weather event. Mungari delivered another strong and consistent quarter. Cowal continued to deliver low cost ounces and higher cash flows. Red Lake improved by 12% to 31,500 ounces and we got higher production at Mt Rawdon.

Overall, for the year, we produced 651,000 ounces at an all-in sustaining cost of $1,450 an ounce, which is broadly in line with the guidance of approximately 660,000 ounces at $1,390 an ounce. The main cause for the production variances were unplanned outages at Red Lake, which resulted in 3,500 ounces lower production, a slower ramp-up at Ernest Henry of around 3,000 ounces and 1,000 copper tonnes and about 2,000 ounces lower at Mt Rawdon due to timing of pit access. This lower production flowed through to our all-in sustaining cost by about $25 per ounce, while the lower copper production impacted AISC by about $20 per ounce.

A lower achieved copper price of $10,600 per tonne for the quarter mainly related to QP adjustments from the March quarter, and this added approximately $25 per ounce to the all-in sustaining cost.

We generated just under $200 million of operating mine cash flow in the quarter, with the decrease from the last quarter, driven by the production impact at Ernest Henry. This incident resulted in approximately $160 million of lower cash flow in the last quarter. Full year mine operating cash flow was $944 million, while mine cash flow before major capital was $747 million. Our cash balance at the end of the year was $46 million. This was better than we had expected as we knew during May and June, the operating cash flow would be lower at Ernest Henry due to the limited revenue, as mentioned earlier, while the assets still incurred almost full operating costs as well as recovery costs.

With Ernest Henry now back to normal operations, we will see this higher cash flow resuming immediately from July. Bob will go through the operational performance for the quarter in detail shortly and how each of these assets are going into FY '24 situated to deliver their plan. However, there are a few key matters worth touching on now, which reinforces our guidance of 770,000 ounces at $1,370 per ounce and how the business is moving to higher net cash generation and deleveraging from FY '24.

Cowal achieved 2 key milestones in FY '23, which was the ramp-up in Stage H higher-grade ore and commencing production from the new underground mine. Cowal delivered record annual production under our ownership, notwithstanding the weather impact in the first half of the year. Cowal now transitions to a major cash contributor to the business as the capital investment reduces. Another key achievement for Cowal is that it has been cash positive for the last 3 quarters and was net cash positive for the year even after the major capital investment.

Ernest Henry returned to normal operations by the end of FY '23 and the work done to get to this point over the last 3 months is a credit to the team. This means that Ernest Henry now reverts back to the high-margin, strong cash generating asset that it has been for many years.

I was at Red Lake a couple of weeks ago, and there was a notable progress on the improvement plan compared to my previous visit. We are moving in the right direction and the changes in progress right now will further enable Red Lake to become more stable and start delivering returns. Red Lake had an improved quarter and while we wanted to deliver the 35,000 ounces during the quarter, the positive out of the slightly lower production is that it was due to unplanned operational outages as opposed to previous shortfalls being due to cultural or behavioral factors.

As we head into FY '24, the higher production rate at Red Lake will be matched by an improved cost position while a lot of the cultural and hygiene matters have been resolved. As of 1 July, everyone is on salary contracts with consistent rosters and a bonus system, which is aligned to the rest of the organization being based on performance and positive cash hurdles.

The structural matters have also been addressed. We have appointed John Penhall, previously our General Manager at Cowal as the VP Red Lake. John put his hand up for the role a couple of months ago, and we see John as the right person to lead Red Lake going forward. This will allow Bob to revert full time back to his COO role. We have reset the management superintendent levels and are in the process of rightsizing the organization with at least a 10% reduction in the workforce to be implemented by the end of the September quarter, which will deliver an approximately $12 million of annualized savings.

Mungari has been a consistent performer now for the past 2 years and the work that has been done in recent months on the cost profile. Mungari is expected to generate materially higher operating cash flow to fund the investment in the plant expansion. This change in cash generation at Mungari is why we were able to justify the investment in the plant expansion.

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

[Robert Fulker, COO]

Thanks, Lawrie, and good morning, everyone. As Lawrie said, across the group in FY '23, our TRIF decreased by 19%. All operations have seen improvements with the safety improvement plans taking effect. Quarter 4 has seen us come out of FY '23 ready and prepared for FY '24. Pleasingly, Cowal and Mungari exceeded plan for the quarter and the year. Ernest Henry has resumed normal operations by the end of June, recovering from the March weather event. This has set them up to deliver guidance in FY '24. Red Lake has increased gold production by 12% in the June quarter, which builds on the March quarter operational improvements and highlights our efforts are starting to bear fruit.

Mt Rawdon ended the year with higher-grade faces open and being mined and new water in the pit. Cowal delivered another strong production quarter with 73,000 ounces at an all-in sustaining cost of $1,138 an ounce. Pleasingly the ore mined was a quarterly record for Evolution. Quarter-on-quarter, ore mined increased by 3% reaching 4.5 million tonnes at 0.97 grams per tonne. This includes 54,000 tonnes at 3 grams -- 3.09 grams per tonne from underground. The combination of these underground and open pit ore tonnages resulted in a mill feed of 2.1 million tonnes at 1.29 grams per tonne.

Ore production will be lower than the last couple of quarters due to the planned mill shut in Q1. But thereafter, the quarterly ounce production will increase through the year as the underground feed proportion increases. With this increasing underground feed, we'll also see a steady increase in the process grade as the underground proportion increases across FY '24. The average combined processing grade for the year will be 1.3 to 1.4 grams per tonne.

The underground ramp-up continues as planned with full commissioning of the paste plant in a village this quarter and commercial production expected by the end of the December quarter. Cowal's full year operating mine cash flow was up $369 million and with a significant investment in the new underground mine completed, the major capital spend will reduce in the coming year. This means we have started to transition Cowal back to a material cash generator for the business.

Ernest Henry has fully recovered from the extreme weather we've encountered in March with the required -- which required a major recovery initiative, limited ore tonnes mined and the processing of low-grade stockpiles. The impact of this event on ounces, cost and cash flow are reflected in this quarter's results. By the end of June, tape, draw, shaft operations, production drilling and development were all at full production rate getting Ernest Henry back to being the consistent reliable performer, it has been known to be.

Quarter four production was slightly softer than expected due to some start-up issues associated with the mine infrastructure and the blending of the low-grade stockpiles with cave material. These issues were all resolved, and we've been now in steady-state production for over 4 weeks.

The operation has now moved into -- has now moved their attention to the development of the 1,200 level which will be the main source of production for the second half of FY '24. Feasibility study work on the cave extension is progressing to plan, and we'll be completing our mineral resource update during the September quarter. The all-in sustaining costs were significantly impacted by the low ounce and copper production as well as the lower-than-expected realized copper price. I expect future quarters to be back in line with historic levels.

Ernest Henry's full year mine operating cash flow was $398 million, whilst good and reflects the quality of the asset, I'm frustrated that we lost the fourth quarter, which would have delivered another superb year at Ernest Henry. As Lawrie mentioned, we have appointed John Penhall as a VP of Red Lake. I'd like to thank John for accepting this opportunity, and I look forward to seeing him and the team continue to progress the improvements at Red Lake.

Red Lake has delivered a 12% increase in ounces for the last 2 quarters. The June quarter also delivered a 12% increase in grade, accompanied by over 4,000 meters of consistent development. H2 delivered 12% more development than H1. These achievements have been delivered through the consistent focus on improving the mining practices as previously discussed.

On the cultural transformation, we have successfully converted all employees to an aligned incentive program, which includes a base salary compensation with an incentive bonus, linked to the operational performance. We've also implemented consistent rosters. These measures aim to foster employee satisfaction, productivity, realignment to our company goals.

During June we commenced the workforce resizing with the intent to match our people to the reduced equipment and the operating tasks to improve our operational efficiencies. These reductions will continue into FY '24 as we finalize the movement of people across the site. We are targeting a total reduction of approximately 10% by the end of Q1, and this is expected to yield an annual cost saving of approximately $12 million without compromising safety, whilst improving our productivity.

Q4 shortfall was a result of 2 more pass blockages, causing a 12-hour -- 12-days, sorry, production loss at Cochenour. These operational issues, which are easily remedied are different from the [indiscernible] issues previously discussed. These initiatives with our ongoing commitment to sustainably and continuously improvement at Red Lake had positioned Red Lake for delivery into FY '24.

Mungari is continuing to reward our trust in the operation through consistent and reliably delivering. The full year production was 136,000 ounces. As previously announced, we approved the transition of the Mungari growth project into execution. This will expand the processing capacity to 4.2 million tonnes per year.

The quarter's production was in line with our expectation due to a lower proportion of underground feed than previous quarters, combined with an East Kundana milling campaign. Cutters Ridge was completed during the quarter, and the mining fleet is now concentrating on the prestripping activities at Paradigm. Ore extraction is now expected to commence during the September quarter from Paradigm. The all-in sustaining cost increased to $2,083 per ounce, primarily due to the production -- the planned lower production.

Mungari's total costs were 4.5% lower in H2 compared to H1 as a benefit of the site optimization that we've been seeing. For the full year, Mungari reported a mine operating cash flow of $108 million, highlighting a solid financial performance.

In the fourth quarter, Mt Rawdon demonstrated notable improvements in gold production, achieving the highest material movement and ounce output for the year. During the period, we have experienced reduced rainfall resulting in improved pit availability with access to the high-grade zones in the pit. The pit -- technical challenges will require active management going forward. This may require, for safety reasons, minor modification to the mining sequence. Quarterly net mine cash flow increased to $11 million. Looking ahead for FY '24, Mt Rawdon is well positioned to deliver production and cost guidance as the high-grade ore in the pit floor is mined and processed.

Thank you for your time, and I'll now pass it over to Glen for an exploration update.

[Glen Masterman, VP, Discovery]

Thank you, Bob, and good morning, everyone. I'd like to turn your attention to the exploration announcement we released this morning, describing further [indiscernible] and high-grade drilling results at Ernest Henry. I did not anticipate I will be describing much in the way of new results from the June quarter, given the strong infill focus of the surface drilling program and the fact that the underground program had been on hold since March. However, the results we received were much better than I expected and continue to underscore the quality of this world-class mineral system. The latest results have done 3 things.

Firstly, we've confirmed extension of the lower lenses below the feasibility study footprint not towards Ernie Junior. Secondly, we have extended the high-grade gold domain identified within the modeled copper grade shell further south and down plunge. And lastly, the lower lenses are wider than we had previously modeled with the [indiscernible] now positioned further west in the model. The upshot of these results is that the mineral resource will continue to grow outside of the mine extension footprint, particularly in the area showed in green on the long section as shown in Figure 1 of this morning's exploration announcement.

As well, the drilling results are confirming that metal grades within the mine extension footprint and below are holding steady, if not increasing on the gold side, which is consistent with grades estimated in the model.

As Bob mentioned, we will be completing our next update of the Ernest Henry Mineral Resource in the September quarter, which will incorporate the strong results from the last 6 months of drilling.

I'm pleased to also share that we recently awarded new underground and surface drilling contracts at Ernest Henry. Both service providers are in the process of mobilizing the site in order to commence the eagerly awaited definition and extension drilling programs at Bert and in the Ernie Junior connector zone. I look forward to being able to report what I expect will be another way of exciting drilling results during the September and December quarters.

Turning now to Mungari, where I spent last week on site with our geologists running the underground and open pit drilling programs. Our drilling is focused on solidifying the production schedule beyond the first 5 years of production for the growth project at the 4 million tonne per year milling rate. It was really pleasing to see the two underground rigs set up almost side by side, aggressively drilling extensions of mineralization beyond the leading edges of the Genesis and Christmas veins at Kundana. The work being undertaken is growing potential resources on these two known structures as well as providing new insights into the potential for new structures which I'm confident we will discover as we continue to build our geological knowledge of the Millennium system.

It was also good to get out to the Paradigm pit to see exposure at the top of the [indiscernible] in geology suggesting we will not be far off breaking through to the top of the ore body. I visited our RC rig to expect -- inspect progress we are making with our definition drilling below the current pit design. It's early days in this program, which aims to convert resources to reserves that will drive expansion of the pit design and enabling us to anchor in this production center for longer than forecast in the current plan. The rig will move on to tackle a similar objective at Castle Hill after it has finished the program at Paradigm.

Lastly, we included results of our modeling work at the Cue Joint venture in this morning's announcement which culminated in the declaration of a 143,000 ounces Inferred Mineral Resource at West Island. The resource optimized into a single pit grading 2.6 grams per tonne and is located 6 kilometers north of Musgrave Minerals Resource footprint at Lena and Break of Day.

There remains attractive upside in the high-grade loads defined in our deeper drilling at West Island, situated below the base of the oxide pit design. Numerous additional exploration targets occur along the 7-kilometer mineralized trend connecting back to the Lena and Break of Day deposits. We continue to assess our options on how we will unlock and crystallize the value of our interest in this joint venture.

With that, I'll hand over to Barrie.

[Barrie Van Der Merwe, CFO]

Thank you, Glen, and good morning, everyone. During the fourth quarter, all operations generated cash at an operating level. Despite the significant revenue impact of the weather event at Ernest Henry, it achieved breakeven mine cash flow before major capital in the quarter. The impact of the weather event, which resulted in approximately $160 million, our cash flow was a driver to the lower net cash flow for the quarter.

During this quarter, we repaid $40 million of debt and $37 million in dividends. Net cash flow for the quarter is better than what we expected at the start of the production outage.

For the year, all operations generated net mine cash flow, except for Red Lake, where major capital expenditure of $189 million will set the operation up to continue its transition to a stable, reliable production rate of 200,000 ounces, as outlined at the Investor Day. Production increasing 18% to 770,000 ounces in FY '24, a lower planned capital investment and our leading cost position will result in improved and strong cash generation in FY '24. Gold production in FY '24 is planned to be weighted to the second half as the Cowal underground mine and Red Lake's Upper Campbell mine ramp-up. In the first half of FY '24, we also have planned maintenance shutdowns occurring in the first quarter.

Copper production of 50,000 tonnes will be delivered evenly over the year. All-in sustaining cost per ounce of $1,370 per ounce for FY '24 is expected to decrease from current levels as production ramps up over the year.

Capital investment is decreasing in FY '24 with major project capital guided to be approximately $100 million lower compared with FY '23. As explained at the Investor Day, our focus with major projects is to manage overall schedule and budget of projects to deliver the business case. Sustaining capital is expected to be consistent quarter-on-quarter. That said, the discipline on capital allocation will remain to ensure that we are investing the right amounts at the right time. The balance sheet position is strong with gearing remaining below our upward target of 35%.

Moving into FY '24, the increased cash generation will see us move to a deleveraging phase. With the debt restructuring undertaken in June 2023 Evolution has no debt settlement commitments in FY '24 and benefits from the current high price environment with only 20,000 gold ounces or 2.5% of production hedged at $3,084 per ounce for delivery in the second half of FY '24. Higher production at current prices together with lower capital expenditure, will result in strong cash generation for the year and see us starting to reduce debt.

We will now take your questions, and I'll hand back to Darcy. Thank you.

[Operator]

[Operator Instructions]. Your first question comes from Andrew Bowler from Macquarie.

[Andrew Bowler, Macquarie Research]

Yes, just some questions around the labor force reduction at Red Lake, I mean 10% target. Can you just talk in a bit more detail as to where those reductions are occurring? Are they sort of at the operational level, at the tech services level or management level, just any more color, do you please?

[Lawrence Conway, CEO, MD & Director]

Yes. Actually, Andrew, I'll hand that over to Bob to walk through, but essentially, it's across all parts of the business and including the operational areas.

[Robert Fulker, COO]

That's correct, Andrew. So it's ticking everywhere. We're still restructuring and moving bit around, but that 10% will come from right across the business.

[Andrew Bowler, Macquarie Research]

And in terms of exploration question, probably more for Glen. Just on the Ernest Henry upgraded resource we're expecting this quarter. Has the data cutoff for that passed or are you still waiting on some results that will get included in that?

[Glen Masterman, VP, Discovery]

No. Andrew, the data cutoff has been closed already. So that modeling and estimation work is currently underway. I don't have the exact data of the data cutoff, but it would have been at least about 6 weeks ago. So the information that's come through in this morning's announcement will be bundled up and incorporated in the next update that we do as part of our regular annual run in December.

[Andrew Bowler, Macquarie Research]

And last quick one for me. Just on the Musgrave JV obviously interesting maiden resource there. Have you had a check [indiscernible] on how that JV could look if they're successful in closing the deal or is that still post deal completion tool?

[Glen Masterman, VP, Discovery]

Well, yes, it's an interesting situation is to develop for Musgrave and not surprising, I suppose, given that there is an operating plant nearby. Look, I think we've -- as I said, we're still assessing what our options are. There's still upside on that project. And we're making a call on whether that's going to be something that we will pursue and attempt to deliver or whether there's other opportunities that may make more sense in terms of how we sort of unlock our value in that joint venture interest.

[Operator]

Your next question comes from Kate McCutcheon from Citi.

[Kate McCutcheon, Citigroup]

Red Lake, can you just maybe talk through how the mining recovery and dilution are performing there and the ore pass issues that you have this quarter, are you confident that they are transient? Perhaps more color there.

[Lawrence Conway, CEO, MD & Director]

Thanks, Kate, Bob's all ready to answer those.

[Robert Fulker, COO]

I think the uplift in grade is a good indicator that the dilution is starting to get under control in the stoping blocks. We have seen a lot less issues with drilling since we put the [indiscernible] in place. We're getting the [indiscernible] post drilling extremely close to design now. And if they've got to drill a hole off the original design, they can actually do recalibrations on the run to make sure that the toe hits the right spot underground, so that is in place and working.

The blasting is actually working pretty well and -- not pretty very well. And we're having a lot less issues over the last, I'm going to say, 4 to 6 weeks. Then we were having, in last half of last quarter and the beginning of this quarter. So we're seeing a lot of improvements and a lot less issues with the blasting, which is helping recovery, improving flow of ore and improving the consistency of the delivery of the plan. So that's improving all of those sort of things.

The ore pass issues that we had at the Cochenour and Balmer mines, if you remember the last quarter, we had some issues at Balmer. We're in the process of putting the final development in for the Balmer rectification that should go in, in the next quarter and that will fix that issue permanently. The ones at Cochenour were minor ones around the blockages that just -- that occurred with some sloughing that was occurring in the actual pass and some issues we had with the top. We had Grizzly bars. We didn't have a Grizzly mat and they got bent, which allowed our oversized box to go in there, and that's all being and being fixed already. So those sort of things I'm expecting more reduced. With the ore passes, we're going to have issues going forward from time to time, but we just need to make sure that we've got the contingencies in place to deal with them, which we're building there.

[Kate McCutcheon, Citigroup]

Okay, understood. And then just Cowal Underground. I would have expected those metrics to lift quarter-on-quarter. Is there anything to read there or that's just part of the ramp-up?

[Robert Fulker, COO]

Which metric, sorry?

[Kate McCutcheon, Citigroup]

The tonnes mined and the grade out of the underground at Cowal.

[Robert Fulker, COO]

Yes, we'll continue to lift right through this year. So that grade that I gave was an average for open pit and underground across the Cowal 12 months. But the first quarter will be lower and the last quarter will obviously be higher. The tonnes will increase. We did 54 blast quarter. That will be around about 100 this quarter. And by the end of the year, that will be at around about 400,000 tonnes for the quarter. So that's the increase that we get through the year to deliver our yearly tonnes and ounces. And the underground value is obviously higher.

[Kate McCutcheon, Citigroup]

Yes. So that -- I think you kind of indicated at 2.3, 2.5 grade level?

[Robert Fulker, COO]

That's the -- yes, that's the average for the year and the first quarter, albeit the sort of the lowest grade with the small amount of tonnage we're getting.

[Kate McCutcheon, Citigroup]

Okay. Cool. And then my final question, maybe just for the Barrie, the one-off costs that we had at Ernest Henry, is there anything to be aware of that with them going through the P&L?

[Barrie Van Der Merwe, CFO]

So the once-off costs on the stat P&L, Kate, will of just go through as normal. And then as we said in the release, for AIC per ounces purposes, they were normalized. They will obviously be into next year insurance recovery of some of those costs as we move through and we finalize that.

[Robert Fulker, COO]

Yes. So in short, Kate, the loss cash flow, obviously, just doesn't come through into the revenue and all of the costs, both from an operating standpoint and a recovery standpoint, will go to the P&L. So the costs that are reported in the quarterly all will go to the P&L.

[Kate McCutcheon, Citigroup]

Okay. So all of that. Yes. Cool. That's helpful. And you don't have any clarity on the timing or magnitude of the insurance numbers yet?

[Barrie Van Der Merwe, CFO]

I mean, that's a bit of a process to work through and we will play out during the course of next year. Lawrie?

[Lawrence Conway, CEO, MD & Director]

Yes. We don't, at the moment, Kate, because the way the insurance stands. We've got a 42-day deductible, which, therefore, then they've got to work through. What's the -- what has been the impact of the outage less those 42 days and then what would be the insurable amount. We'd expect that to take a few months to finalize. We've put together all the information now that we've been back up and operating, providing that to the underwriters to get an assessment done.

[Operator]

Your next question comes from Daniel Morgan from Barrenjoey.

[Daniel Morgan, Barrenjoey]

Maybe just starting with that last point there, that the scope of the insurance plan as a rough rule of thumb, should we say that in scope is the operating cost sits at you would have incurred over those 42 days. Is that sort of rough rule of thumb that we can use?

[Lawrence Conway, CEO, MD & Director]

No. So it's a little bit more complicated than that, Dan, because you have your standing charges, you've got to work out what's the -- what falls into the deductible, then they assess as to go and look, have a 12-month look back in terms of what the sort of standard run rate would be and then make an assessment, obviously, also on what would be the metal prices to apply to that for the revenue that you would have foregone and the like. So from our perspective, we see that the insurance recoverable amount is not material or major in compared to the lost revenue, and that's why we actually won't be making a provision for it in the accounts.

[Daniel Morgan, Barrenjoey]

Yes, sure. Okay.

[Lawrence Conway, CEO, MD & Director]

Because you got to remember that -- you'll remember that we actually got back into commencing operations before we got to the full deductible days. So it's then how much have you been at lower operating rates post the deductible period, so that's why you get a lower amount that you're actually going to have as a recoverable.

[Daniel Morgan, Barrenjoey]

Yes. Okay. And just staying on Ernest Henry. It sounds like all the key work streams are fully recovered by the end of the quarter, and therefore, we've started this year well. But is there anything else that could be a hangover at site, which just suggests that the first quarter of this year has some operational impact we could think about or if we've got a clean year at Ernest Henry?

[Lawrence Conway, CEO, MD & Director]

I'll hand it to Bob, who in getting back into his role for a couple of weeks, is full bottle on it. But essentially, by the end of June, as we said, all of the areas that are allowing us to go back into the production areas is clear and clean. The area is down to the 1200 level is allowing us to get into there for development. Certainly, below the 1,200 there's still a little bit of clean up to do there, but it's not significant. And obviously, there's a little bit of modern stuff to clean everything up, Bob, that we need to get back into full operation.

[Robert Fulker, COO]

Dan, thanks. Everything above the 1,200 is fully operational in drilling. The 1,200 we're mining, we're actually production drilling. So we're getting at that level for production in hopes too, but we still do have a little bit of mud lift on that level. The 1,175 is clear, and we have got excess in there to start developing. The 1,150 has been stubbed but it still got mud in it, but we haven't started down there yet because we're concentrating on the 1,200 and 1,175.

And the decline is actually down to 1,125, but we haven't -- still -- we're still using it as a sump and motor just as we clean the upper parts of it up. The first area we started developing was back up at the top of the mine where we've been doing some work on ventilation, and that's all complete. So all the teams are down to that 1,200 and 1,175 now.

[Daniel Morgan, Barrenjoey]

Yes. Hell of a good job by the team. Just pivoting over to Red Lake, Bob, if I could. How is the CYD decline tracking? And do you have an update on when you might expect it to link up with the lower levels of demand?

[Robert Fulker, COO]

Yes. I'll just -- I'll reiterate what you just said. There was a hell of a good job done by the team at Ernest Henry. They really did marking and didn't complain about any of the work they're doing and it was pretty messy work, so really is appreciated by everybody. CYD, if we were to go flat out with CYD, it would be through this year -- in this financial year.

Because we do have a jumbo in 11 Level now. It is developing up towards an incline. The priority in 11 Level, though, at the moment is to actually get the drive across to an old stope, so we can use it as backfill. And we've actually mined a stope on 11 Level already. So the only reason that we won't get it through within the 12 months is because we'll be making sure we actually get the ore out as we link the top and the bottom together.

So it may be a little bit longer than that. To tell you the truth, if I get more ore out of CYD, you'll will be happy. So that will be the determining factor. But if we actually -- if we hit at the top and bottom month a day, it would be through this financial year.

[Daniel Morgan, Barrenjoey]

And last question. Did you have any contribution from the Upper Campbell during the quarter or in July? Just wondering what the conditions are like in those areas.

[Robert Fulker, COO]

Yes. We got -- sorry, two stopes in the Upper Campbell. We've got 1 stope in 11 Level through the quarter, and we're expecting to see the next one come through on 3/4 level around about middle of August, we should start firing. So we should see it in this next coming quarter as well. There won't be another stope on 11 Level for a little while, whilst we get that drive out to the waste fill stope. And then the idea is to try and get to more as well.

[Operator]

Your next question comes from Mitch Ryan from Jefferies.

[Mitch Ryan, Jefferies]

During the quarter, the Cowal [indiscernible] publicly available for the expansion project and that includes CapEx of roughly $300 million. I'm just wondering what sort of timing for the key components of that CapEx spending is and how much of that sits inside the FY '24 guidance of $85 million to $90 million for cap this year.

[Lawrence Conway, CEO, MD & Director]

Yes. Thanks, Mitch. I mean in terms of this year, there's very little in terms of the capital for the open pit continuation. As we had on the Investor Day, it's about $5 million is all that we'll be spending on it this year. The public period's closed and then we've obviously got to see the outcome of that public period to work out what the next steps are. On the regulatory piece, we still see that going through FY '24 and into FY '25 before we actually go through to those decision points on the project.

[Mitch Ryan, Jefferies]

Okay. And just -- there's no rush on any of the capital associated [indiscernible] as is required?

[Lawrence Conway, CEO, MD & Director]

Yes. Look, as we said on the Investor Day, we've got options around the OPC, obviously, with the stockpile material, but we've got to go through the approvals and permitting process before we make a decision on the project. But yes, at this point, there is no rush on that project to start today.

[Operator]

Your next question comes from Jon Bishop from Jarden Australia.

[Jon Bishop, Jarden Limited]

Just -- you made some comments in your opening remarks around some of the productivity, I guess, focuses that you've had at site there. I mean some of your peers through the quarterly reporting process and certainly for the last 12 to 18 months have talked about fairly sticky inflation. And I think a lot of it's driven not only by consumables and fuel to a point, but certainly, the productivity issues. What are you guys doing differently that gives you some comfort for your all-in sustaining cost outlook?

[Lawrence Conway, CEO, MD & Director]

Look, I mean, Jon, as we talked on the Investor Day, when we look at our cost structure and nearly 50% of our costs are labor. We still expect that to move, as we sit on the Investor Day by 5% to 6% through FY '24. The pleasing things as we finished June, our site with the highest turnover rate, which has been Mungari in the WA market, has seen that come down materially over the course of the year. So that's been pleasing in terms of being able to maintain that workforce and the benefit that Scott and the team have been able to do through the work done on bringing 3 operations to 1 and in reducing workshops and warehouses and all those sorts of things. This means we have a need for less number of people on that site.

I then think when we look at the other items, power, we've got contracts out up to 8 years, 2 years, 4 years. So we just sort of know what those costs are going to be. Diesel price based on the oil has sort of held in a sort of a narrow moving range over the last 3 to 4 months. And again, we know what -- that's 5%, 6% of our cost base. So that's sort of -- we're using all of that information, which is getting it you to 60% to 70% of our cost base has been able to give us the ability to work out where the cost of the $1,370 is built up from.

[Jon Bishop, Jarden Limited]

Okay. That's really helpful. Just then to take it a little bit further with the Red Lake annual savings you've talked to -- is that factored in already into your guidance or is that sort of a new dollar amount that we should think about gradually becoming part of our outlook for Red Lake specifically?

[Lawrence Conway, CEO, MD & Director]

No, Jon, that was built into our plans and guidance on the Investor Day.

[Jon Bishop, Jarden Limited]

Great. Okay. Just one final question, if you wouldn't mind. Just to take up from Mitch on Cowal there. If I understand correctly, and forgive me if I'm wrong, the open pit, as you've currently operated sort of starts to wind off in fiscal '26. Is that correct?

[Lawrence Conway, CEO, MD & Director]

Yes.

[Jon Bishop, Jarden Limited]

So in terms of time frame for getting into the new pits assuming that you get through the consultation process, no problem. Is there any sort of expectation or should we be conservative in looking at production profiles dipping a little bit through fiscal '26 and '27 by feeding through some stockpiles? Are you reasonably comfortable that you'll be able to present the mill with consistent feed and relatively consistent grades?

[Lawrence Conway, CEO, MD & Director]

Look, from the OPC perspective, we know that we've got stockpile material of over 40 million tonnes sitting on the ground at Cowal today. Through FY '24 Stage H, we'll outline the mill. So that will increase by the end of FY '24. Obviously, there's certainly low grade and low low-grade material in those stockpiles. And what we see is, as we look at '26 and '27, you'd be talking about 40,000 ounces in '26 and 30,000 ounces in '27 would be the impact in each of those years, if we don't start OPC through FY '26 or '27.

So we know what those impacts are. We'll see what the permitting does, and we'll also see where Cowal in the business is from a perspective of when we need to and should be investing in that project.

[Operator]

Your next question comes from Hugo Nicolaci from Goldman Sachs.

[Hugo Nicolaci, Goldman Sachs Group]

Maybe just coming back to Red Lake, again, I mean more of a qualitative one. Now that you're putting those changes through around head count and they're starting to take effect. Have you had any feedback from the workforce as to how that's going and how that's being taken and the broader attitudes there? And then as a follow-on, where do you, I guess, see the next sort of areas of optimization of that asset?

[Lawrence Conway, CEO, MD & Director]

Thanks, Hugo. I'll hand it to Bob shortly on the workforce and the next areas. But I think when we look at it, the feedback from the site, we've done that through a consolidative process, whereby we've got a workforce that ranges up to 40 years of service. So we've got a number of people that are definitely close to retiring. And so in Canada, there is an early retirement scheme. We've made that available to people as the first part. Then as the equipments arrived and needing less people, we've been doing that. And then obviously, the support areas.

So those communications have been ongoing and the feedback has been positive around that restructuring, and that will be done by the end of the September quarter. And then in the other areas, really, what we're trying to do is to make sure that as we now bring in the equipment as we're changing the mining areas and the consumables obviously have to be better utilized. So it's those sorts of areas that John and the team will be focused on. Bob, do you want to just touch on it?

[Robert Fulker, COO]

Yes. I guess from the workforce perspective, Hugo, over the last 7 to 8 months, I mean myself, Jason, when he was there and Thomas in the last little period of time, we've been talking with the workforce continually about where we're at and what's going on. I think that's helped us go through this a lot smoother if they've been informed.

Obviously, it's a stressful time for people going through a change. I haven't had negative or bad comments. I've had comments from the town and from people in town that, this was expected by now what we're going through and they were expecting something. And I've had the same or similar comments from a lot of the workforce. But take into consideration that change is difficult to people, and we've got to be cognizant of the fact that it's probably a stressful time from whilst we're going through this period of restructuring.

The only ones that I'd add from the improvements from productivity that Lawrie said was, as the mine moves up and starts delivering more consistently through the year, I'm expecting that -- I'm not expecting, we are focusing already on the mill and the mills and making sure that we're ready and our productivity with them is improving. Of course, I haven't really been stressed for a little while. So we've had them up to the nameplate and above for short periods, but not for long periods. So the maintenance team and the production teams are already focused on that next area of potential.

[Hugo Nicolaci, Goldman Sachs Group]

Great. That's clear. And then maybe just a second one, just around, I guess, capital broadly in the group made the comment in the release just about having paid the 20th consecutive dividend in the period. Looking at, I guess, the full year cash flow movements implies you're finishing the year with that $46 million cash on hand. I guess how important is maintaining that dividend payout going forward and, I guess, balancing the rebound in cash flow into FY '24 against the $700 million per annum average CapEx over the next few years?

[Lawrence Conway, CEO, MD & Director]

Yes, I mean, our view is that from a capital management perspective, we look at it from the perspectives of being able to fund the growth into the business, being able to service debt and give returns to shareholders. So as we go into the August full year results, we'll be having those discussions with the Board and making recommendations in terms of dividend. But in short, we see dividends as -- just as an important part of our business and capital management plan as any other parts of what we do with the revenue we generate.

[Operator]

Your next question comes from Meredith Schwarz from Bank of America.

[Meredith Schwarz, Bank of America Merrill Lynch]

Just a couple for me, please. At Red Lake with the redundancies, I was just wondering if you can give us a guide as to what those costs will be, as I assume they'll come through the P&L in the first half of '24?

And the second question is on Ernest Henry, more of a production question. The recoveries have been declining over the last 12 months. What's your view on sort of getting those back up to the low 80s going forward?

[Lawrence Conway, CEO, MD & Director]

Thanks, Meredith. I'll hand the Ernest Henry one over to Bob shortly. In terms of Red Lake redundancies, I mean, we see that the -- depending on where the people come from and which schemes they have made redundant through, it could be up to $10 million to $12 million as the total cost of the program. But again, as I said, we -- by the time we get through this program at the end of September, we have to just assess where each of the people have come from and which schemes they are exiting the business on.

[Robert Fulker, COO]

And on the recovery, Meredith, the -- with the cave performing at the end of June, we'll see the grades return to the full grade -- or full cave grade, sorry, and that will actually allow the recoveries to go back up to those low 80s as we've seen in the past. So the low recovery has been a factor of the mixing of the low grade with the cave material and the restart of the mill. So it should return to the low 80s.

[Operator]

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

[David Radclyffe, Global Mining Research]

There's obviously been a lot of questions. So I might ask one on Pumped Hydro. The Queensland Government obviously recently had some pretty significant commitments. So I'm just interested in an update post your comments at the Investor Day, really around the view that given the size of these commitments, do you still see the capacity for state support for Rawdon or is the government now likely done? And therefore, that means you would be more reliant on nongovernment investment?

[Lawrence Conway, CEO, MD & Director]

Dave, Jake will send you a personal e-mail thanking you for asking the question. Look, I think the reality is, in the last 3 to 4 weeks, the level of engagement that Jake and the project team have been able to have with government has been high. So the short answer is, yes, there is still interest from the government in this project. And I think the interest in the government continues to build as they look at where the project is, how it feeds into the grid and the timing of when Mt Rawdon would be available to come on stream as a renewable energy project.

So from our perspective, we're still confident in terms of government involvement in the project. And as we go through until the end of the technical and commercial feasibility of the project, the engagement levels, I think, are going to continue to build as they have in the last few months.

[Operator]

Your next question comes from Al Harvey from JPMorgan.

[Alistair Harvey, JPMorgan Chase & Co.]

Just one on Mungari and expansion there. I guess, it sounds like grade is required to keep the production of that 200,000 ounce per annum rate in the first 5 years. And I think Glen mentioned it in the opening comments there. But there was some talk around the Investor Day around those higher-grade shoots from [indiscernible]. I'm just wondering if -- how those prospects are shaping up, and if we might see them come into the next R&R? And then following that, just you mentioned as well, progressing -- moving the drill rigs to prove up some more reserves at Castle Hill. So what's the focus here? Is it really around more ounces? Or are we looking to prove up mine life longer term?

[Glen Masterman, VP, Discovery]

I'll sort of separate that question into the two parts. So firstly, at Kundana and in the Millennium complex there. So the short answer is, yes, we will be upgrading our MROR with the drilling results that we're currently delivering. I think what we're seeing is expansion of the opportunity along the structures at Christmas the newly discussed new structures now that are early days. And I think there's a favorable understanding that we need to develop on those to sort of determine how they sort of fit in longer term to sort of potential resources. But -- it's really exciting stuff, but this is emerging.

And so yes, I'm expecting an upgrade on Kundana. And I think that's going to be over the longer term, one of the sources of high grade that we're able to sort of blend into the baseline that we will be producing from the regional production centers.

Sort of switching to the second part of the question, which is sort of what are we hoping to sort of, I guess, deliver with the drilling programs at Castle Hill and also at Paradigm. I think when we look at how we've optimized those resources and the design pits, the metal price assumptions we're using, we still carry a lot of inferred material or blocks into those pit designs as well as mineralization potential. And so the goal of these drilling programs is really to upgrade those -- the classification of those old blocks. And that will ultimately give us more ounces into those ore reserve design pits.

So that's goal number one. And then by virtue of sort of delivering or converting resources to reserves, we will also be able to extend that. So we're achieving both of those goals -- we're attempting to achieve both of those goals with these drilling programs.

[Operator]

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

[Lawrence Conway, CEO, MD & Director]

Thank you, Darcy, and thanks, everyone, for your time today. We really do appreciate it. We look forward to hosting some people at the Mungari site visit in a couple of weeks' time and then updating you on the full year financial. Thank you.

[Operator]

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