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Thank you for standing by, and welcome to the Independence Group June 2019 quarterly report conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.
Thank you, operator. Ladies and gentlemen, good morning, and welcome to this morning's call during which I will lead you through our results presentation for the June 2019 quarter which we released to the ASX this morning. Joining me on the call today are Matt Dusci, our Chief Operating Officer, who is with me in Melbourne; and Scott Steinkrug, our Chief Financial Officer, who joins us from Perth.Slides 2 and 3 in the presentation highlight our cautionary statement and disclaimer and our competent person's statements. Also of note, all currency amounts in the presentation today are in Australian dollars unless otherwise noted.Moving along to Slide 4. Before I jump into the details of the June 2019 quarter, I would like to reflect on what we have achieved over the past year. IGO is in the strongest position we have ever been, and as Managing Director and CEO, I am proud of what the IGO team has achieved. Let's reflect on the last year. We have continued to strengthen our culture, which is ultimately reflected in our performance across all metrics including engagement, health and safety, operational and financial. We care about and are also proud of the significant improvement over the last year in our key lead and lag injury metrics.At Nova we have exceeded the top end of our metal production guidance range. In fact, over the last 5 quarters, Nova has delivered metal production at a higher rate than the average rate envisaged in the feasibility study. This has been achieved through operational discipline and performance. We should remember that Nova has only been in commercial production for 2 years, and going forward our team will be continuing to implement a number of exciting projects to continue to drive operational excellence and improved performance.At Tropicana, with a strong finish to the year, we have, along with our joint venture partner, AngloGold Ashanti, seen continuous improvement at the operation, including the seamless integration of a second ball mill resulting in an annualized processing rate in excess of 8 million tonnes per annum being consistently achieved. We have also commenced the decline for the underground development of Boston Shaker with the firing of the portal 2 months ago in early May.Exploration and discovery remains a value-creation key driver for the business. Speaking frankly, I would have loved to have announced a material discovery over the past 12 months but this has not been the case. We have all the elements that we can control to unlock discovery in place. We have the right people, the right prospective land positions, we are applying the right science and the funding required.At Nova, we have made great progress to advance our understanding of the system, and this has demonstrated that the Nova magmatic intrusive system is larger than previously apparent. At Nova, and across the rest of our portfolio, the drill rigs are turning and I remain confident that a discovery could be made at any time.Finally our high-quality asset base, combined with our disciplined and focused approach to operations, has resulted in the delivery of strong financial returns with $77 million of underlying free cash flow for the June quarter and $278 million of underlying free cash flow unaudited for the 2019 financial year. Our balance sheet continues to strengthen, with closing cash balance at year-end of $348 million. We can do better, this is part of our culture and I look forward with excitement to what our teams can deliver over the coming 12 months.Okay, let's move forward to Slide 5 and jump into the details of the June 2019 quarter. Revenue for the quarter was 12% lower quarter-on-quarter, which was driven primarily by lower metal sales from Nova. The lower metal sales were primarily due to timing differences as the March 2019 quarter sales benefited from the receipt of revenue delayed from the December 2018 quarter. These timing issues also impacted underlying EBITDA and net profit after tax but with both results down 20% and 33%, respectively.Underlying free cash flow for the quarter was $77 million, lifting the full year results to $278 million, and demonstrating the high cash flow generation capability of our asset portfolio. Our strong cash flow funds our investment in growth opportunities as well as our returns to shareholders and continues to strengthen our balance sheet.Closing cash balance for the year was $348 million with a net cash position of $263 million. Prices received from metal sales for nickel, copper and cobalt were similar to the prior quarter while realized gold price was marginally higher. Moving to Slide 6. As we have done in previous quarters, we have reconciled net profit after tax on this slide to illustrate the factors underlying the quarter-on-quarter result. The key drivers to the result are, as set out on this slide, include lower metal sold from Nova; higher gold production and gold sales from Tropicana; and a higher overall exploration expense as our teams ramped up their infield activity across the portfolio. And one thing to remember is that the majority of our field activity each year is generally between that period of from March to October. Net profit after tax for the quarter was $30 million resulting in unaudited net profit after tax for the full year of $76 million which was up 45% year-on-year.Moving to Slide 7 where we provide a breakdown of cash flow. As illustrated on the waterfall, Nova and Tropicana cash flows equated to in excess of $100 million for the quarter. We also received a $16 million payment as part of the deferred consideration for the sale of the Jaguar operation which was sold in May 2018. Exploration expense increased by 63% quarter-on-quarter to just under $18 million with the total expense reflecting the increased levels of drilling activities.Moving to Slide 8. I will now discuss the operating and financial performance for our Nova nickel-copper-cobalt operation, which is shown in all its glory on this slide.Moving to Slide 9. At Nova, metal production for the quarter was higher than the top end of guidance but as expected marginally lower than the prior quarter. As planned by the scheduled mining sequence, mined and processed grades were lower quarter-on-quarter but this was partially offset by improved metallurgical recoveries. Nickel recovery for the quarter was 89% and copper recovery was 86.4%. This was the result of a consistent and sustained work program to improve the operation of the floatation process during the quarter, and continuously through the 2019 financial year.Cash cost at Nova increased quarter-on-quarter to AUD 2.22 per payable pound of nickel due to a range of factors. This included a 6% lower payable metal production, lower lateral development meters resulting in less mining cost being classified as capital development and this reduces the amount of mining overhead that are capitalized, and then the balance relates to higher overall mining costs in the quarter with additional stope firings and higher quarter-on-quarter plant maintenance cost. Full year costs were AUD 2.07 per payable pound of nickel which was marginally above the top end of our guidance, and I will talk to this in greater detail shortly.Moving to Slide 10. The chart on the left highlights our quarter-by-quarter performance over the course of the year. As you can see, second half metal production was approximately 13% and 10% higher than the first half for nickel and copper, respectively, and this was a result of the planned mined schedule and stoping sequence. The Nova EBITDA margin for the quarter was 57%, which is in line with the prior quarter while free cash flow margin increased quarter-on-quarter from 53% to 61%.Moving to Slide 11 where we provide some additional color around our full year cash cost result at Nova. As mentioned earlier, these were above the top end of our guidance range of AUD 1.65 to AUD 2 per payable pound of nickel. I am mentioning this as the result does not reflect the outstanding effort and achievement by our team at Nova to deliver on their productivity and efficiency target for the 2019 financial year. As you can see from the chart, the full year cash cost result was negatively impacted by lower realized byproduct metal prices during the year than what we had assumed in our forecast that underpinned our cash cost guidance range for the year. Clearly, this is a factor which is outside of the control of our operating team but negatively impacted cash cost by $0.45 per payable pound in the quarter. Other inputs, including diesel pricing, further impacted cash cost by another $0.08 per payable pound. After adjusting for these uncontrollable operating variables, the Nova operating team would have delivered cash cost better than the low end of our guidance range. This is an outstanding achievement from the team.Moving to Slide 12 where we provide details of guidance for Nova in the 2020 financial year. Nova metal production is expected to be consistent with the longer-term directional guidance for 2020 that we have previously provided, with nickel production guided at 27,000 to 30,000 tonnes; copper at 11,000 to 12,500 tonnes; and cobalt at 850 to 950 tonnes. Cash cost guidance range for the year, we have set at AUD 2 to AUD 2.50 per payable pound, which takes into account lower byproduct credit pricing which we have forecast in our 2020 financial year projection. It also includes our forecast for higher shipping costs and higher diesel costs, with less diesel hedging gain forecast for 2020. It's also inflated because we expect to have significantly less underground capital development meters in the 2020 financial year as mining activities focus predominantly on production development. This results in a lower allocation of overheads -- mining overheads to capital compared to the 2019 financial year.We note that the copper and cobalt byproduct pricing used in determining our 2020 financial year guidance range is AUD 4.20 per pound for copper and AUD 24 per pound for cobalt. Underground capital development expenditure is forecast to be significantly lower year-on-year as life of mine capital development at Nova is substantially complete, and the remaining work will be done intermittently over the next few years. Sustaining an improvement capital expenditure for the 2019 financial year, just passed, was $21 million to $24 million. However, we only expended $11 million of this. The unspent capital expenditure was primarily intended for the derisking of our long-term water supply and increasing our potable water manufacturing capacity. This capital expenditure is still required, and is now expected to be spent in the 2020 financial year.I want to expand on this a little more. All of the water bore fields at Nova have high salinity, high salt, and we manufacture clean water using reverse osmosis. The greatest demand for potable water is for the washing of our concentrate products which are required to have low chloride levels and therefore cannot be washed with salty water. This drives that continuing need for that expenditure on additional potable water manufacturing capacity.Moving to Slide 13. I will now discuss Tropicana where we own a 30% unincorporated joint venture interest. Our partner, AngloGold Ashanti, own the remaining 70% and are the managers.Moving to Slide 14. Tropicana delivered another strong quarter of gold production with higher production and lower cash cost and lower all-in sustaining cost quarter-on-quarter as a result of higher milled grade. Recoveries also improved marginally. Tropicana also benefited from the increase in the realized gold price during the quarter, and which resulted in gold sales revenue to IGO's account totaling $75 million. For the full year, production and cost finished around the midpoint of guidance which is testament to the experienced operatorship from our joint venture partner AngloGold Ashanti.Moving to Slide 15. We've set out quarter-by-quarter production and cost performance from Tropicana for the 2019 financial year, which highlights the consistent delivery through the year. The decrease in cost quarter-on-quarter, combined with the higher realized gold price, drove EBITDA margins at Tropicana to 64%, while free cash flow margins were also higher quarter-on-quarter at 35%.Moving to Slide 16. It is pleasing to report that excellent progress is being made at the Boston Shaker underground development, which is one of our key ongoing value enhancement projects at Tropicana. The development of the decline from the base of the Tropicana open pit commenced in early May this year and progress to date has been better-than-anticipated in the feasibility study. IGO's share of the development capital expenditure for the Boston Shaker underground is $32 million, and most of this is expected to be expended during the 2020 financial year. First gold production from underground is expected in the September 2020 quarter, approximately 12 months from now. Significantly, the Boston Shaker underground development demonstrates the significant upside potential at Tropicana with further potential for underground development to be evaluated at Havana and Havana South.Moving to Slide 17 where we set out our guidance for Tropicana for the 2020 financial year. Gold production is expected within the range of 450,000 to 500,000 ounces on a 100% basis, while all-in sustaining cash cost forecast to be higher between AUD 1,090 and AUD 1,210 per ounce. The all-in sustaining cost per ounce sold forecast is higher year-on-year due to a combination of higher deferred stripping capital, a greater amount of capital expenditure classified as sustaining and lower guided production and sales.The deferred stripping capitalized expenditure, which I just mentioned was going to be higher, is driven by the -- a higher mining activity which is shifting from the Havana pit, where we spent most of the last year, to the Boston Shaker pit, which has a higher strip ratio, and this higher strip ratio results in a higher allocation of cost to capital. Underground capital development is a new line item which relates to the Boston Shaker underground project. IGO's capital expenditure share for this project during the 2020 financial year is between $26 million and $29 million.The image that we have on the right of the slide shows the first blast of the portal at the Boston Shaker pit, and Matt Dusci, who's with me here and I were at Tropicana 2 weeks ago and we walked the first 300 meters of development that had been completed at Boston Shaker.Moving to Slide 18. IGO has an enduring commitment to exploration to discovering the mines of the future, and over the next couple of slides, we discuss developments on some of our key brownfield and greenfield projects.On Slide 19, we illustrate the extent, as we understand it today, of the Nova magmatic intrusive system in 3 dimensions. This understanding has been unlocked through the 3D seismic survey that we completed in 2018 as well as the drilling of features that we had completed over the last 2 quarters which were identified in the 3D seismic.In summary, the work has delineated a corridor of stacked intrusives, which are pregnant with blebby and disseminated sulphides. The size of this intrusive system is impressive, and we are excited about the expanded opportunity that this could create for IGO. But let me be clear, we have not yet made a discovery. However, the delineation of the intrusive informs where we should look. To use a metaphor, we have identified the haystacks in the paddock and now need to drill the haystacks to find the needles. The exploration promise that we have identified at Nova has motivated us to significantly increase the planned expenditure rate at Nova over the coming year. We have done this with the conviction, based on our work to date, that the Nova intrusive system is much larger than was originally apparent thereby increasing the probability of additional discovery.Moving to Slide 20. At Nova, our primary focus is understanding this intrusive plumbing system and discovering repetitions of the Nova-Bollinger deposits. As discussed on the previous slide, our work programs over the past 2 quarters have advanced our understanding. Our drilling in the June quarter intersected mafic-ultramafic rock types which shows strong similarities to those identified in the upper Nova intrusion. Importantly, these intrusions all contain disseminated to blebby magmatic nickel and copper sulphides. At the Elara and Hercules prospects where we drilled our deepest ever drill hole, some 2,500 meters, to test a distinctive 3D seismic feature and fully understand the stratigraphic sequence, we have gained a better understanding of the Nova system which is helping us prioritize the next drill targets.Moving to Slide 21. Across the Fraser Range, our activity was focused on drill testing high-priority targets which have been identified by our earlier geophysical and geochemical work programs using a combination of RC and diamond drilling. We also completed the last of the airborne EM survey. We have numerous targets across the belt which we continue to test and understand. Gold prospects such as Themis and Pion have delivered encouraging results from first pass aircore drilling, and follow-up drilling at the Andromeda copper-zinc prospect has also been encouraging. Further drilling is also required at Victor 1, Mafic and Mosaic where mafic-ultramafic rocks have been identified with unexplained off-hole conductors. In parallel we continue to identify new targets with Regal, Rhea and Meera identified during the quarter.Moving to Slide 22, we provide an update for Lake McKay in the Northern Territory where we hold a dominant land position across an unexplored protozoic terrain prospective for polymetallic base and precious metals systems. During the quarter, we commenced a drill program to test multiple targets. Most promising to date is from the Phreaker prospect where a copper-gold-silver mineralization was intersected in drilling, and also at the Grimlock prospect where broad reconnaissance drilling has intersected nickel with elevated cobalt in a laterite blanket.Moving to Slide 23 where we set out our exploration and project evaluation expenditure guidance for the 2020 financial year. As I indicated earlier, we are budgeting a higher commitment to exploration and evaluation year-on-year, primarily driven by an increased commitment to Nova near-mine exploration. At Nova and on the Fraser Range, at Tropicana and at Lake McKay, over 70% of the planned expenditure is for drilling.Moving to Slide 24. Our evaluation expenditure guidance for the 2020 financial year shown on the prior slide included the ongoing downstream processing study work which we discuss on the next couple of slides.Moving to Slide 25. During the quarter, we provided an update on the downstream processing opportunity and the work being done by our study team to assess this innovative and disruptive opportunity for IGO to produce battery-grade nickel sulphate directly from our Nova nickel sulphate concentrate. We are motivated to do this to unlock greater value from our nickel concentrate while also exposing the business to a rapidly growing energy storage and electric vehicle battery market. The IGO process which we have developed has been demonstrated to produce high-quality battery-grade nickel sulphate with high extractions at lower cost and with better environmental outcome than comparable processors.Moving to Slide 26. The study is ongoing and expected to be completed this -- later this calendar year with a number of key work streams underway to optimize the operational and financial merits of the opportunity. Notably, our team is looking at further flow sheet refinement, completing site selection studies and progressing a pilot-scale test work of the process flow sheet.In parallel, we have been actively engaging with potential project partners both technical and financial, domestically and overseas. Separately we have an ongoing dialogue with a number of potential nickel sulphate offtakers and have commenced the process of tendering our nickel sulphate concentrate offtake for deliveries from 2020. Interest in the IGO process is strong as is interest for the ongoing offtake of our nickel sulphate concentrate and potential offtake of our future nickel sulphate product. A future final decision on the nickel sulphate opportunity will be a value-focused decision between, on one hand, the potential value unlocked from nickel sulphate versus, on the other hand, the potential for higher future nickel sulphate concentrate payabilities.Moving to Slide 27. Before I conclude I would like to comment on IGO's safety performance and the importance of our enduring commitment to our people and their safety and the community and the environment.Moving to Slide 28. At IGO, we are fostering a strong safety culture across the business. This culture is built around transparent and trusted systems and process, continual improvement, visible and caring safety leadership and active training and education. Notwithstanding this, we regrettably experienced 1 lost time injury and 1 medically treated injury during the quarter, which is disappointing given the consistent improvement that has been achieved over the prior 12 months. Encouragingly, performance of our key lead injury metrics continues to improve.Moving to Slide 29. Our responsibility to the environment and the communities in which we operate is something we take seriously at IGO. We do this not just because it's the right thing to do but because we care. During the quarter, we completed a social impact assessment over our activities at Nova and more broadly on the Fraser Range gathering more than 300 responses from our host communities with the majority of the feedback being positive. We also concluded a very long and highly successful community engagement program in Kambalda following the sale of the Long operation to Mincor Resources. IGO also executed a comprehensive and progressive environmental rehabilitation program following cessation of our operations at Long which demonstrates our commitment to the environment and our ongoing care for our communities.Moving to Slide 30. Ladies and gentlemen, thank you for persevering through this call this morning. It is a little bit longer than normal and while I don't apologize for that, I thank you for persevering. In summary, as I reflect on the 2019 financial year, I'm proud of what the IGO team has delivered including a stronger culture and greater engagement with our employees, improved safety performance, delivery above the top end of guidance at Nova on production while delivering in-guidance production for Tropicana.A strong focus on cost with both operations continuing to generate strong EBITDA and free cash flow margins, which further strengthens our balance sheet resulting in a year-end closing cash balance of $348 million and a net cash position of $260-odd million. Progress on our enduring commitment to exploration and finding the next generation of mines and finally, our ability to increase returns to shareholders having announced in February our change to our policy whereby we will return between 15% and 25% of free cash flow to our shareholders.I would like to take this opportunity to congratulate and thank the IGO team for their hard work and delivery during the 2019 financial year. It is their passion for making a difference that excites me about what we can achieve together over the coming year and beyond.We have not discussed the nickel market during the results presentation. However, I wanted to quickly reflect on the last few exciting weeks we have had for nickel with higher prices, ever-decreasing LME stockpiles and an increased news flow on the higher demand for nickel-rich varieties of stainless steel and an increased focus on higher performance nickel-rich electric vehicle batteries. Our view is that the macro view for nickel, and other battery metals, is taking shape and that IGO is well positioned for this future.Ladies and gentlemen, thank you for joining me on the call this morning. We will now open the call for questions from analysts. Thank you, operator.
[Operator Instructions] Your first question comes from Hayden Bairstow from Macquarie Group.
Just a couple from me. Firstly on Nova, 5 quarters in a row of beating the feasibility numbers. I mean was there the thought process to changing the feasibility guidance ranges at least while you're in Bollinger for the next few years just given how well things seem to be going on grade? And the second question just on Tropicana. Just get an understanding of CapEx. I mean it's certainly higher than what I had. I mean, higher waste stripping this year. I mean is there anything you can tell us about 2021 and beyond about where it should settle back at?
Yes, sure. So the easy one first, Nova. Yes, the average run rate in the feasibility study was about 26,000 tonnes of copper per year. And our longer-term directional guidance that we provided a year ago had us at an average of 28,500 tonnes of nickel for FY '19, '20 and '21. We outperformed that, beat the top end of our guidance range in FY '19. We did that with a combination of a few more tonnes because we had the benefit of some tonnes on the ROM stockpile at the start of the year, and we also managed to squeeze a bit more grade through with refinement of our stoping sequence. We can't guarantee that will be the outcome for FY '20 and we've stuck to our long-term guidance range. But I do mention that we have an enduring commitment to business improvement and will be striving once again to deliver towards the top end of our range.At Tropicana, yes, all-in sustaining cost high year-on-year. It shouldn't be a surprise because if we look back to when we first embarked on the Long Island strategy, we put out some long-term directional guidance there, and certainly, that had contemplated the higher strip ratio in the FY '20 financial year. And that spoke to an all-in sustaining cost guidance range for FY '20 that is amazingly similar to what we have guided for over the coming year. And it's really just the difference in the strip ratios between the 2 areas.We will be having a site tour to Tropicana on Sunday, ahead of Diggers & Dealers, and the AngloGold Ashanti team will, no doubt, provide a bit more color around that during the site visit.
Can you remind us on the all-in guidance for Tropicana, the 3 sort of breakdown CapEx numbers you gave below. Is it only the sustaining one that's actually in there? Or is waste stripping there as well?
There's a separate item for capitalized -- or deferred stripping.
That's outside of all-in sustaining?
Yes, correct. Sorry, sorry, let me clarify that, Hayden. When we do the all-in sustaining cost, we incorporate that deferred stripping into the calculation of the all-in sustaining cost per ounce.
That's correct, and sustaining capital that's in the improving CapEx we don't put in all-in sustaining and we haven't got any in actual fact for FY '20 guidance and it's -- the waste stripping is in the all-in sustaining cost.
So the numbers -- everything that's a cost to our production we incorporate in that all-in sustaining unless it's a growth item that's going to increase our overall mine life. For instance, the development of Boston Shaker. So theoretically what you should be able to do with our numbers, and I know that this is not always the case, but with our numbers, you can take the gold price, you can subtract the all-in sustaining cost and then the rest should be our cash flow.
Your next question comes from Daniel Morgan from UBS.
Just a few questions. Firstly recoveries at Nova on copper and cobalt, continue to do some work on that. Just wondering where you see these stabilizing up? Or is there still more opportunity here?
We like to think that there's more opportunity and the guys can have a number of work programs which we'll be tackling during the 2020 financial year. And we would like to eke a little bit more out and we do have an aspirational goal at above the levels that we're achieving at the moment. Time will tell whether we're successful at achieving our aspirational goal.We have a site visit to Nova on Saturday, and we expect the site team will provide a little bit of additional color around some of the work programs they have completed and some of the work programs that they see ahead of them to try and continue to improve recovery for both nickel and copper.
So there's still a few drivers we've got up our sleeves, Daniel, to continue to improve.
Just on perhaps when you're putting together your guidance, within that is going to be byproduct credits and we've got the numbers for the price of copper and cobalt. Just wondering what payabilities you're factoring in, a rough range for the guidance numbers?
Yes. I think of our peers, we've probably got the best and most transparent numbers out there from a payability perspective with the nickel contained in our concentrate shown in all of our reporting and our payable metals shown in all of our reporting. And although we don't sort of speak to exactly what the numbers are, people can back-calculate very, very easily our average payabilities that we are achieving for the business.
I'm sorry, my question was recoveries not payabilities.
Recoveries. Sorry about that, Dan. With the recoveries, we have assumed a recovery going forward for -- and I'm quite happy to share this, for nickel of 88.5% for the coming year and we've assumed a recovery for copper of 87%.
And then just some accounting questions, maybe one for Scott. The cash cost guidance you've provided, just trying to understand how this interacts on a cash basis, the cost you're going to put through on an accounting basis through the P&L? Obviously you finished most of your development work, and so that's coming to an end. I'm just trying to work out that C1 number of $2 to $2.50, how would that relate to a cash number is what I'm trying to get at.
Dan, I take your point and cash cost doesn't necessarily always quite equate to the cash number, and that's primarily because the cash cost number is based on a production number whereas cash flow is going to be based on sales. And as Peter has alluded to in his script as well, is that cash flow is impacted by timing and we've had some big movements there in timing. So over the year, it should wash out. What you won't see then is ongoing CapEx, for example, coming into cash costs. As I said, look, it is -- it's a bit of a complex question and difficult to answer an outright on the phone like this.
Okay. Maybe we'll take this offline.
It might be worthwhile.
Yes. And then just a last one more on Tropicana. You've had -- you've got on an expansion of the mill and you've been going through an optimization process there. Just wondering if you can talk about where you're thinking on milling run rates versus recovery rates.
Sure. Dan, it's Matt here. So effectively, we are running around about the 8 million to 8.1 million tonnes, which is around about 1,000 tonnes per hour. We're working through where that right optimization is in terms of recovery versus throughput. There's options to actually increase throughput slightly on what we have done to ultimately drive more gold but that will also come out of the recovery -- our group recovery loss at this stage and we'll get more guidance when we're on site. Ultimately for the business, it's better to push throughput.
Yes. And that's about a 2:1 ratio. So throughput delivers a -- double the gold that we'd otherwise lose through the recovery loss.
Your next question comes from Michael Slifirski from Crédit Suisse.
Look, I've got 4 quickies. First of all with respect to nickel price going up, QPs, is there any QP benefit in the reported numbers? Or is there any QP benefit to come through? And how do we estimate that, please?
Yes. Scott?
Look, there will be a small benefit coming through then and it's entirely dependent upon prices. So then as nickel prices rise then into July and August, and they have risen quite significantly, so we'd expect the QP benefit to come through then from production and sales in the fourth quarter into the first quarter.
But there's no benefit from QP in the June quarter, Scott?
There's likely to be a benefit in the June quarter as well as we found metal prices -- in fact, sorry let me correct that, metal prices quarter-on-quarter have been fairly steady so there would not be a benefit from QP coming through into Q4 from Q3.
Okay. So it's an FY '20 benefit, not a FY '19 benefit. The numbers for '19 are now final?
Yes. Correct.
Yes. Okay. Secondly with respect to Tropicana guidance, was my understanding wrong or when I checked my notes, I seem to have recorded that -- the big capital is above 500,000 ounces based on the expansion, based on the Long Island strategy, based on improved recovery. Is that wrong? I was surprised by the guidance of a little bit weak than what I had in my notes.
Yes, it is. And previously we've talked to a higher number for FY '20 than the 450,000 to 500,000 ounces. But with the more detailed planning and the benefit of the shorter-term grade control planning that AngloGold Ashanti do, the numbers that we can bank for our FY '20 are that 450,000 to 500,000 ounces range that we've talked to in our guidance disclosure.
Okay. So is that less gold than what you thought? Or is it a sort of rescheduling of mining area? Is all the gold is still there, is it just a rescheduling? Are you saying that grade control has changed boundaries somewhat?
It's always a combination of the 2. And one of the benefits we have at Nova is that we've grade controlled the whole of the mine life, so we can -- we have very accurate longer-term projections. With Tropicana, with great control like any open pit mine is probably only ever about 6 months ahead of mining. So the projections for FY '20 are a combination of better information as a result of more detailed drilling of the near-term mining areas as well as the shifting goal posts that always come from changes to the schedule as you get closer and closer to an operating period.
Yes, okay. Two quick ones on Nova. Your conversation around the allocation of overhead. More overhead to operating capital rather than capital development. So if we look forward then, is mining now at a steady rate between the 2, given that capital developments done? Or is there further -- some fixed cost allocation to your operating development that might see further increases in that cost?
Yes. The key drivers obviously for development is activity-based, and then there's an element on top of that which is the design and the management aspects of that activity. That's done by a team which also has operating responsibilities. So day to day, you'll sort of split that cost between the operating portion and the capitalized portion. As the capitalized work program disappears, then the team -- then the whole of that overhead is then borne by the operating portion. There's a degree of optimization that can also be done and that's part of ongoing programs for FY '20. One part of that optimization is to review the equipment we have on-site because ultimately, equipment drives cost on-site and at year-end, we reduce from 2 jumbos on-site to 1 jumbo on-site, and there's the opportunity for some of that to be reflected in cost structures going into FY '20. Overall during the year, we saw good progress on our dollar per tonne mined underground. And for us, that's -- the real benchmark here is what is the cost per tonne mined and how do we benchmark against others.
Yes. Right. And then finally with respect to the conversation around potable water increasing the amount, does that imply that you'll have more concentrate that needs washing? Or that you just need some spare water? Or that you're going to wash the concentrate more thoroughly with more water than what you've got currently?
There's a number of factors going on. Yes, we needed the extra reverse osmosis capacity during FY '19. And we weren't sure what we really wanted to build for the life of the mine. So we used higher equipment during FY '19 to get by. That's driven higher overall operating costs and deferred the CapEx into FY '20. We've done all the work and the test work and the studies to understand exactly what we need for the water we have. We can now deploy the capital in FY '20. And ultimately when that capital is deployed, we'll be able to reduce some of the operating expense that we currently bear through the higher equipment.
Yes. And feeding into that, Michael, is also our negotiations on offtake as well. Because ultimately, if we can get the specifications lowered on offtake, that we may not necessarily have to commit to this capital on water.
Your next question comes from Matthew Frydman from Goldman Sachs.
Two main questions for me. Firstly, on Nova guidance and secondly, on the downstream. So on FY '20, your cost guidance at Nova, unless I'm mistaken, that's at least 20% above your prior guidance of flat cost for FY '20 and '21. And I'm basing that off presentations of yours from as recent as a month or 2 ago. So just wondering what's really changed here in that period? I mean in the commentary you've pointed to a shift away from capitalized development. Can you tell us, I suppose, firstly to be specific, how much development remains at Nova, and how much of that will be capitalized versus operational? And then secondly and expanding on your comments on going from 2:1 jumbo -- sorry, 2 jumbos to 1 jumbo, does that mean that all else being equal, unit costs should impact, take a leg down in FY '21 given potentially reduced development requirements?
Yes, sure. So just on the cash cost. As I've talked through in the commentary, cash cost per pound after byproduct credits are significantly impacted by the pricing of those byproduct credits. That's the long term -- that long term...
Sorry, what I'm referring to, Pete, had your copper price at $1 -- sorry, $4.08 a pound for copper and AUD 50 a pound for cobalt. So I'm guessing you're referring more specifically to the cobalt given that you've actually used the higher -- a higher copper byproduct number?
That's absolutely correct, yes. It's running those through, and then there's the other couple of factors which I talked through on the call which also drive higher overall cost for the year. One of those is higher overall continuing processing and maintenance cost, and a big driver there, as I've just captured with the questions from Michael was the higher cost and the higher water cost that we're dealing with on an operating basis at the moment, which will likely disappear once we deploy the capital in the future.So the drivers we've identified. We don't want to have the same issues as FY '19 where we were trailing our guidance all year as a result of underperforming byproduct pricing credits and therefore, we've shifted the guidance range upwards.
Yes, sure. So I guess on that point, again, unless I'm mistaken, current spot pricing for copper is around AUD 3.90 a pound, $17 a pound for cobalt, so obviously well below your budgeting assumptions. Are you actually setting yourself up there to, as you say, trail guidance during the year, unless those metal prices improve?
Yes. We try to take and inform you by taking a consensus-based number and applying that for the year. And we've used the same process year-on-year. And going into FY '20, that's informed the copper and cobalt assumptions that we've taken. Time will tell as to whether that consensus number that we've based our forecast on has proved to be reliable or not.What we try to encourage people to do is actually look at the underlying cost that we now control. So that's $1 per tonne metric, but also the total cost per pound before adjusting for byproduct credits.
Yes, sure. And then I guess, again, just going back to that point on the reduced operational development requirements looking out to FY '21, is that your intention that as you transition to 1 less jumbo, the majority or, in fact, all of the operational development will be complete by that time?
We'll always have some operating development as the capital development that pretty much come to an end and we'll have that intermittent about that we need to do there, and that's primarily around the remaining capital development that's needed in upper Nova, which we'll just chip away at because that's not needed till later in the mine life and the new area at C5 which was never really in our capital development plan previously, and we'll be chipping away that over the next couple of years as well. And that's really taking the jumbo capacity we have on-site. And when we see opportunities in the overall development schedule, chipping away at that capital development when there's a gap in the operating requirements.
So -- it's Matt here. So for example, for FY '20, we're forecasting to around about 2,700 meters worth of development, 90% of that is operating, 10% is capital.
Sure, okay. I appreciate the detail, Matt. And then, again, not to harp on the point, but as I said, the previous guidance kind of implied flat cash cost across '20 and '21. All else being equal, understanding your operational development requirements, does that kind of imply you're expecting it would be again flat '21 versus '20?
In terms of operating cost, yes. I mean, it's -- on a dollar per tonne, et cetera, we will be flat across those.
Sure. I understand. Okay. And then secondly on the downstream nickel sulphate projects, and I guess obviously noting some reports overnight that another West Australian operation is looking at restarting and potentially producing nickel and cobalt battery products as early as next year. Does that influence the team's thinking around the timing of bringing your potential downstream project to the market? I guess particularly given that obviously we won't see the results of the financial study or the PFS until the December quarter this year. So I guess the question is can you remind us of the potential time line for the project post delivery of the PFS. And I guess what your sort of feelings of the market will be by that time, I suppose.
Yes, our assessment is that the market for nickel sulphate is an ever-increasing market. And a broad time line for our project, subject to it passing the various gates along the journey, would be delivery of a PFS in the December quarter. So if we gave that and do the feasibility study work, we would complete that feasibility study work in around middle of 2020 calendar year. Then we would have a period of permitting and construction, which would take us to a point approximately 3, 3.5 years from now before we would see any prospect for nickel sulphate production.
Your next question comes from Peter O'Connor from Shaw and Partners Limited.
Just an observation. Matthew's consensus forecast in your modeling, we've got no idea either. So you best to use your own. Four things for me. Just first on...
Either way, it'd be 2 bullies, Peter.
I wish. On operations, just a general question about cost pressures. I know you've talked a lot about your specific pressures at Nova, et cetera, and Tropicana. But just general industry tone over last couple of weeks on these calls, we've got a distinct turn under current events. There's pressure building up, particularly in the labor side. Just wondering whether you're seeing something similar?
I'll answer that. I mean we are seeing those cost pressures but -- coupled with those cost pressures, we're driving for productivity and efficiency gains. So what we want to do is to ultimately drive those productivity and efficiency gains higher, faster and quicker than what we're seeing in terms of cost inflationary pressures.
Is it contract cost or is it unit labor cost? What's the exact squeeze point on labor? Was it lack of bodies and paying more for them? What's -- how's that manifesting?
Yes. So it depends on where you're talking about and what type of labor as well. So for example, fitters seem to be -- we're seeing higher pricing pressures on fitters, et cetera, through the industry. So again, it depends on what business you're running and where those pinch points are in your own business.
Okay, fine. And just moving on, Pete, to nickel sulphate, just expanding on that last question. Can you just remind me the value equation in nickel sulphate? So the cost uplift in producing that product versus the revenue you expected in broad terms, how does that margin play out versus what you're currently at? I know you've indicated it's high, but just what are the broad-brush numbers on that value uplift and why?
Yes. So -- and without sort of going through a full economic assessment of the project, the key value uplift comes from getting paid for more of the metal in the concentrate, and we've demonstrated with our nickel sulphate process that we can extract 97% or more of both the nickel and the cobalt. So that's the significantly higher amount that we would get paid for relative to what we currently get paid for nickel and cobalt in a conventional nickel sulphate offtake. The indicative numbers there would be 70%-ish for nickel and 30% to 35%-ish for cobalt. So a significant uplift on what you get paid for. Then on top of that nickel as nickel sulphate currently attracts a price premium relative to nickel as nickel metal, so there's a further uplift there. And then offsetting that, you've got the capital cost of building it, and we've only ever talked about scoping study numbers in that sort of $400 million range. And we haven't previously talked about operating costs, and we'll be able to talk to both of those when we publish our prefeasibility study. When we provided an update during the quarter, we talked about, on a relative basis, what sort of overall payability equivalent building this nickel sulphate plant will deliver. And basically, it's the same as getting a payability uplift on nickel sulphate concentrate to 82%. So basically taking our playability from 70% to 82%. So that's a very shortcut way of understanding the full benefit of what the project can deliver.
Okay. And just the price premium to that nickel sulphate product, what is that of a nickel metal?
The 82% I talked to was a middle of the range number based on what we've seen over the last year, and that was using $2,000 per tonne. And we've seen quite a broad range over the last 12 to 24 months in that sort of $1,500 to $4,000 range.
Okay. Well, hey, it's a known discovery. I love your slides, and your excitement was palpable so we know things are happening. Just to Slide 19, I love slides like that because there's lots of colors and lots of blobs. Exactly what am I looking at though? I can see Nova, I can see a whole bunch of other stuff that is non-geo. But it's declared upfront. So where am I getting excited, Pete? You look at that and you're clearly telling us this is what's happening there? Where is it happening and why? Where are you putting drill holes down? And where are the contacts that are exciting for you?
Yes, sure. And as we go along the journey, we'll be able to provide more and more color on that. And what we wanted to do here is just try and create a bit of a better understanding of the potential size of the prize here. And the size of the prize is -- has become apparent that it's much bigger than what we originally thought because we don't just have the magmatic intrusive that host Nova, we've got a series of these in a corridor, which is stacked on each other. And this is very common in these magmatic intrusive systems, and if you go and look at some of the modeling that's being done on -- with places like Voisey's Bay, et cetera, where the whole understanding is far more progressed than what we have here at Nova. You can -- it's very apparent how you got these series of chambers and tunnel-lets between the chambers which host the mineralization. And what's emerging here is we've got a very similar model from a magmatic intrusive perspective. What's yet to be proven is whether we've got any ore grade mineralization that's being concentrated in any of those magmatic intrusions. That's the work in front of us. But it's really exciting to see that the opportunity we were looking for is there. We now need to do the hard work to investigate those intrusives and really unlock and understand discovery.
So you talk about the needle in the haystack. How -- what -- how are you firming up your targets to avoid doing too much drilling? What's the...
Yes, yes. So it does become an iterative process, and again, we'll have a bit of a deep dive on Saturday when we've got the Nova visit because we'll have all of the -- our geological and exploration experts there, and I'm certainly not one of those. But we'll be -- it will be somewhat iterative because the seismic is something that we're beginning to understand. So the more drilling we do of the seismic, the more information that we can then get out of the seismic, so that's one part. And then we're also -- have what we think is a core competence in EM. And we'll be deploying downhole EM to help vector in on mineralization. But also we're developing a greater and greater understanding of the geochemistry when you're close, proximal or distal to potential discovery. So we'll be using that to help guide us from 1 drill hole to the next as well. So there's a whole host of tools in the toolkit that we will be using. And certainly, the work we've done on building the team, building the capability over the last couple of years will now pay dividends as we close in on that hunt for the next Nova.
So shift gears to, what we call, capital allocation and just ask you, with regard to the dividend policy you highlighted, the $278 million of free cash flow for FY '19, is that the number I should be thinking about as the basis for that payout ratio?
That would be a good assumption.
Okay. And going back to a prior call, it might be in the financials call, that we talked about the franking that you had or may have and how that could flow out. Does that form part of that payout at that 15% to 25% range? Or can we take that as being some form of special in addition to that to clear that amount of franking?
Yes. Yes. We have talked to a number of our tools in the toolkit. There could be a fully franked dividend in the ordinary course. They could be some sort of a special, either franked or unfranked, or there could be some buyback of shares. It really depends on the market circumstances at the time, and then the discussion amongst the Board as to what's the right thing to do at that time. So certainly what we want to be able to do is to return some of that cash to shareholders.
Are you prepared to give a gearing number or a target debt level that the Board is happy with to sort of shape that discussion?
Perhaps not at this time. I know that we are quickly running out of time and we're going to have to bring the conference call to an end very shortly because we do have a day of engagement with the shareholders with our first meeting in about 10 minutes.
Can I have one last one then?
Absolutely.
Given your balance sheet, given the capital allocation you've just talked about and given your excitement about the spend at the discovery at Nova, it still feels like you've got potential to maybe look outside. You've split the company up into 2 core assets, it's looking much, much better than it has for some time. Thoughts on looking externally as opposed to your internal options.
Yes. And I've never sort of hidden from this thing. We do have a team that looks at inorganic opportunities led by Andrew Eddowes. We are focused on a strategy that's aligned to what we call the clean energy metals, and primarily in that bag we're focused on more nickel and more copper. So Andrew and his team look for post-discovery opportunities through to operating stage opportunities in the nickel and copper space. But I think as you'll get -- hear commentary from many, many others in my position, finding the right opportunity that's going to be value accretive and aligned with strategy is a very challenging task.So ladies and gentlemen, I'd like to -- as I mentioned just then, we've got a number of meetings lined up for today with investors and therefore, would like to bring this call to a close. But we really appreciate your participation during the presentation and the Q&A session. And thank you very much, and good day.