IGO Ltd
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Thank you for standing by, and welcome to the IGO Limited June 2020 Quarter Investor Webcast. [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, Ashley. Good morning, everyone, and thank you for joining us today as we walk you through IGO's operating and financial results for the June quarter, which were released to the ASX this morning. Joining me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer, both of whom will be available to answer questions during the Q&A session at the end of the call. Slides 2 and 3 highlight our cautionary statement and disclaimer as well as our competent person's statements. Of note, all currency amounts in the presentation today are in Australian dollars unless otherwise noted. I also note that our full year financial results reported today remain subject to a year-end audit, and we expect to release our full year audited accounts on the 27th of August. Finally, I note that financial numbers through the presentation will be rounded to the nearest million dollars. Moving to Slide 4. To start, I will provide a brief update on our response to the COVID-19 pandemic, which remains a large part of all of our lives and continues to pose a risk to our people and our operations. Throughout the quarter, IGO has continued to actively manage these risks, focusing on ensuring the safety and well-being of our people, the continuity of our key operations and to ensure that we are doing what we can as an organization to play our part in keeping the broader community safe and supported. We do consider ourselves very fortunate to have our key operations based in Western Australia where, as we stand today, the spread of the virus has been contained to a point where certain restrictions have been relaxed. Nevertheless, we remain on alert given the potential for this situation to change. To that end, we have retained a number of key protective measures with respect to physical distancing, hygiene practices and, where possible, flexible working arrangements. We have also increased our focus on supporting the mental health of our people, especially as it has now become apparent that the virus will continue to have an impact on our work and our personal lives for some time to come. I am proud that our people have shown great adaptability, professionalism and resilience in the face of some of these challenges. And I thank them for continuing to get on with the job safely. Moving to Slide 5. On safety, more broadly, our safety improvement plan continues with a focus on better systems and safety behaviors. And while our total reportable injury frequency rate is higher than we would like, we are encouraged that the serious potential incident frequency rate has shown some improvement over the last 2 quarters. We can do better, and we will do better to minimize any harm to our people. Moving to Slide 6, where we set out some of the highlights from the June quarter and the full 2020 financial year. I'm pleased to report that despite the various challenges during the year, we delivered a solid June quarter to deliver a strong finish to the financial year. Consistent performance from the team at Nova resulted in full year production which exceeded guidance for all metals, while at Tropicana, production ended the year within our guided range. The solid operational performance has delivered an equally strong set of financial results with quarterly net profit after tax of $40 million and underlying free cash flow of $56 million. For the full year, we achieved revenue of $892 million, free cash flow of $311 million and net profit after tax of $155 million, all of which are record financial results for IGO, a fantastic outcome for the year. Our ability to generate strong free cash flows has resulted in a further strengthening of the balance sheet with our net cash position currently sitting at $453 million. This is in addition to our strategic portfolio of listed investments, which ended the year valued at $108 million. We've also continued to focus on exploration as a key growth driver for the business. And I will expand on this later in the presentation. Moving to Slide 7, where our quarterly financial summary shows quarter-on-quarter improvements in all key metrics. Group revenue of $231 million was higher quarter-on-quarter due to higher metal prices as well as higher sales from Nova. Underlying EBITDA of $113 million was also substantially higher quarter-on-quarter, resulting in an EBITDA margin of 51%. Net profit after tax increased threefold compared to the prior quarter driven by the increase in Nova underlying EBITDA as well as a positive $28 million before tax variance on the revaluation of our listed investments. As I highlighted, this strong performance has continued to strengthen the balance sheet with IGO closing the year with cash holdings of $510 million, listed investments of $108 million and debt of $57 million. We expect to pay down the debt in September 2020. Moving to Slide 8, where we show the reconciliation of net profit after tax relative to the previous quarter in greater detail. The quarter-on-quarter variance was mostly attributable to higher EBITDA from Nova driven by increased concentrate sales and supported by 4% to 5% higher commodity prices. This was partially offset by lower gold production quarter-on-quarter from Tropicana. The large positive movement in mark-to-market investments reflects the strong appreciation of listed investments with our holdings in Legend Mining and Mincor Resources appreciating considerably over the course of the quarter. Moving to Slide 9, where we provide a brief summary of the quarter-on-quarter variance in cash position. Cash flows from Nova increased quarter-on-quarter due to an additional nickel and copper concentrate sale parcel compared to the prior quarter. Tropicana cash flows were slightly lower primarily as a result of lower gold prices -- sorry, lower gold sales. Exploration and evaluation expenditures of $19 million were also substantially higher quarter-on-quarter as the team significantly increased activity following a slower March quarter, which was delayed due to weather and bushfires. Other notable items were the $31 million of payments for investments, $27 million of which was for our investment in New Century Resources, offset by nearly $25 million in proceeds from investments, which included receipt of $16 million from the 2018 sale of the Jaguar operation. I note that this is the second of 3 deferred payments for the Jaguar divestment. Moving to Slide 10, where we will now do a deeper dive on the quarterly performance from Nova. Moving to Slide 11. As mentioned earlier, Nova outperformed in FY '20 with production ahead of the top end of guidance and costs within the guided range. Quarter-on-quarter, production was slightly lower for all metals primarily as a result of planned lower milled grades. This drove a quarter-on-quarter increase in cash costs, which was offset by lower cash production costs and lower offsite costs; in particular, lower shipping and royalty costs. Full year cash costs were within guidance at $2.41 per payable pound of nickel. Nickel recoveries remained in line with the prior quarter at 86.9%, while copper recoveries were marginally lower at 88%. Moving to Slide 12, where we highlight the performance of Nova over the full year with production averaging 7,600 tonnes of nickel and just over 3,400 tonnes of copper per quarter, which remains well ahead of the average quarterly production rate envisaged in the feasibility study. While production was lower for the June quarter, underlying EBITDA increased to $83 million due to higher metal volumes sold as a result of additional concentrate sales and higher assumed quotational period metal prices as commodity prices recovered over the course of the quarter. EBITDA margins remained strong at 52% for the quarter. Moving to Slide 13, where we set out our guidance for Nova for the 2021 financial year. Relative to FY '20 guidance, we have set nickel production guidance for FY '21 marginally lower and in a narrower band at 27,000 to 29,000 tonnes of nickel in concentrate. This is primarily attributable to lower mined grades in line with the planned mining sequence of the Nova-Bollinger ore bodies. Copper and cobalt guidance is broadly in line with FY '20 at 11,000 to 12,500 tonnes of copper and 850 to 950 tonnes of cobalt in concentrate. Cash costs are guided slightly higher than FY '20 within a range of $2.40 to $2.80 per payable pound of nickel as a result of lower expected production, higher paste fill requirements due to larger stoping voids and higher year-on-year levels of mining development as we have decided to bring forward some development work, which will give us greater planning and mining flexibility in future years. These costs will be offset somewhat by reduced offsite costs, including lower royalties due to lower forecast by-product prices. Turning to Slide 14. We last provided 3-year directional guidance for Nova almost 2 years ago. And it has been pleasing to see production meet or beat guidance since then. On this slide, we lay out directional guidance for Nova through to the -- through to FY '23. As discussed on the previous slide, FY '21 guidance is broadly in line with the year just ended. Looking further ahead to FY '22 and FY '23, production is expected to stabilize at a lower rate due to lower grades mined and milled. Lower production will have an impact on costs, which are set to rise to between $2.70 and $3.10 per payable pound of nickel. Our Nova guidance for FY '21 through to FY '23 uses a mining and processing rate of up to 1.6 million tonne per annum. Moving to Slide 15, where we provide a more granular review of the Tropicana activities. Moving to Slide 16. Tropicana continued to perform in line with expectations and finished the year with production and all-in sustaining costs within guidance. The quarter-on-quarter variance in production was largely attributable to marginally lower milled grades as lower-grade stockpile material continued to supplement the planned shortfalls in ore mined from the open pits. Lower production and gold sold was offset by stronger gold prices over the quarter, resulting in the generation of $15 million of free cash flow to the business. All-in sustaining costs increased during the quarter, in line with the lower gold sales. Turning to Slide 17, where we highlight the FY '20 gold production and costs for Tropicana and the effect that the cessation of grade streaming in December 2019 has had on production and costs during the second half. EBITDA from Tropicana was $37 million with minimal adjustments impacting on operating cash flows. Importantly, EBITDA margins were maintained at 56%, demonstrating the ongoing strength of the Tropicana operation. Turning to Slide 18. At Boston Shaker, the underground development is approaching completion. The first ore production stope was fired in June, and we expect commercial production to be declared during this September 2020 quarter. As additional stopes come online through the 2020 calendar year and the underground activities ramp up, we will start to see the benefit of higher-grade ore from underground during the second half of FY '21. Turning to Slide 19, where we outline guidance for Tropicana for FY '21. The focus at Tropicana in the year will be to invest in the cutback of the Havana pit resulting in lower overall ore mined. Through this period of investment in the Havana pit, we will supplement process plant feed with low-grade stockpiles, along with contributions from the simultaneous ramp-up of the Boston Shaker pit and underground. Gold production in this investment year will be lower at 380,000 to 430,000 ounces on a 100% basis. All-in sustaining costs will be higher at between $1,730 and $1,860 per ounce. These higher costs are the result of the lower production and higher than life-of-mine average underground costs as we ramp up in this first year of underground production as well as significantly higher stripping costs as we invest in the Havana cutback. Turning to Slide 20, where we highlight that gold production at Tropicana lifts back up to the 450,000 to 500,000 ounce per annum range following our investment year in FY '21 with commensurately lower all-in sustaining costs. Moving to Slide 21 for a deeper dive on our exploration portfolio, activities and plan for the coming year. COVID-19 continued to restrict any field activity on our projects in the Kimberley, Northern Territory and Greenland. We have, however, been able to continue drill-testing targets on the Fraser Range and to expand our copper portfolio through new joint ventures in the Paterson province of Western Australia. The map on the right shows the 6 belt-scale projects where IGO holds commanding positions over geology in Australia that has recognized prospectivity for the key clean energy metals, nickel and copper, that we are strategically focused on. Turning to Slide 23, where we highlight the target drilling that we have prioritized in close proximity to the Nova mining lease during the quarter. Our work during the quarter delivered positive results from the Kaon 2 and Chimera targets, both of which will warrant further assessment in the coming months. Separately, underground diamond drilling targeting an area which geophysical surveys could not assess accurately due to the proximity of the Nova processing infrastructure has intersected several intervals of blebby, disseminated and massive nickel copper sulfides with low grades over significant widths. Drilling and assays are continuing. Moving to Slide 24. Elsewhere on the Fraser Range, the team have continued to test and identify new targets while we have also incorporated key new tenements into the landholding through joint ventures with Matsa Resources and other private exploration groups. Infill aircore drilling was carried out over a number of geochemical and geophysical anomalies with strong results identifying mafic-ultramafic intrusive complexes, which is the host unit for Nova style mineralization at a number of locations. Meanwhile, our geophysics team has identified a number of new electromagnetic targets for testing, including Sergeant, Gabrielle, Skipjack, Billy and Mahi-Mahi. Slide -- moving to Slide 25, where we highlight our successful consolidation of a significant landholding in the Paterson province through new joint ventures with Metals X and Antipa Minerals. Combined with our existing joint venture with Encounter Resources and our 100% owned tenements, IGO now holds a dominant land position over ground in the Paterson that is prospective for Tier 1 sediment-hosted copper deposits. This is Elephant country with existing operations such as Telfer and Nifty in close proximity to our tenure as well as the Rio Winu project. A substantial program of work is planned for FY '23 as we balance the exploration portfolio more evenly between nickel and copper. Turning to Slide 26. In the Kimberley, some work programs have recommenced following the lifting of COVID-19-related biosecurity restrictions. At the Merlin prospect, reinterpretation of historic geophysical data, combined with new deep sensing surveys, has generated a high-priority drill target consisting of 2 strong electromagnetic conductors. These conductors are positioned down plunge of known high-grade massive nickel-copper-cobalt sulfide mineralization. A diamond drill hole to test this target is planned for the coming months. Turning to Slide 27, where we set out our exploration budget for FY '21. Exploration remains core to our growth strategy. And to that end, we have maintained our commitment into FY '21 with some $66 million of investment in exploration and discovery budgeted across the portfolio. The majority of this will be spent on the Fraser Range, particularly on a drill-intensive campaign close to Nova as well as $16 million, which is allocated to our Northern Australian projects, including the Paterson and Kimberley. We maintain our conviction that investment in exploration to discover the mines of the future can deliver transformational growth to IGO over the long term. Turning to Slide 28. Before opening the lines to questions, I will make some concluding remarks on the next slide, Slide 29. Despite the many challenges during the year, IGO has finished the 2020 financial year in excellent shape. Our operations have delivered in line with guidance, and we'll continue to generate excellent margins and free cash flows going forward. We have finished the year with a strong balance sheet with a cash balance after debt of more than $450 million, which is available to grow the business and underpin cash returns to shareholders. And we have a laser focus on growing the business through exploration and discovery as well as disciplined M&A. Finally, our team remains passionate, highly engaged and motivated to continue to drive value for all stakeholders through our strategy focused on clean energy metals. Thank you for joining us on the call today. We are now opening the call for questions from analysts. Thank you, operator.
[Operator Instructions] Your first question today comes from Rahul Anand with Morgan Stanley.
I'll start with Nova if I may. Just wanted to understand the recovery rates you're expecting going into next year and if you’ve made any progress on that recovery number, especially if we think about it once the grades have come off in a couple of years. That's the first one. I'll come back with the second.
Yes. Thanks for that, Rahul. I'll get Matt Dusci, our Chief Operating Officer, to talk to that.
Yes. I mean as you've seen, copper recoveries remain strong and are sitting around about the 88% or 87.7% for FY '20. Nickel recoveries for FY '20 are around about the 87% or 86.8, I think, percent for FY '20. There's still considerable focus on what we do in terms of optimizing recovery going forward through the processing plant. And we continue to see promising results coming through on the nickel recovery. We don't expect recovery to drop with grade dropping. What we're trying to do is retain nickel recovery around about where we continually perform and the same for copper. If anything, we still think there's room for improvement on both nickel and copper going forward.
Okay. And then I guess the second question is more around Tropicana. So in the 2019 site trip that we attended in August, I got the idea from the forecast chart in there that 2021 would still be a year which would have production around the 440 to 500 ounces per annum. Has there been a change since then in terms of how the mining has sequenced in terms of, obviously, Boston Shaker underground coming on and then also the grades you're expecting from the open pit? Or is this consistent with what's been talked about before?
Yes. I'll take that. With the -- with Tropicana, like any mining operation, we continue to optimize and refine the plan. And there's been a lot of work done on the timing of some of the open-pit stages at Tropicana, which has continued to drive what the annual schedules look like. So directionally, what we were looking at a year ago is still consistent with what we see today. And if there's been any change at all, it's been within the detail of the numbers. If we were to do a sort of cold eye look back, one area of underperformance that we've had is the Havana South pit where reconciliation performance has not been as good as what we've seen in the other pits. And if anything, that's caused us to bring forward value that we might have otherwise mined in FY '21 into FY '20 and with less optionality at this stage in the mine's life to be able to fill that gap from somewhere else.
Okay. And then I guess finally, in terms of Boston Shaker, so going into '21, do you have an idea of sort of what kind of grades do you expect out of that? Obviously, you've talked about the material coming out from there. But is it too early to call that? And I'd also -- if you could also touch on some of that reconciliation performance.
Yes, sure. So you're talking Boston Shaker underground or Boston Shaker pit?
Underground and open pit...
Yes, perfect. I'll get Matt to talk through that, some of the volumes and grades for that.
Yes. So Boston Shaker underground, which should deliver around about the 3.2 to 3.6 grams per tonne, what we're expecting. So -- and it should contribute around about 20% of ore feed once it's fully ramped up. That will be supplemented with Boston Shaker open pit where majority of all of the ore source for FY '21 will come through from Boston Shaker open pit. And that's sitting around about the 2.2 to 2.8 grams per tonne.
Your next question comes from Sophie Spartalis with Bank of America.
Just wanted to stay on Tropicana for a little bit. Just in terms of that 450,000 to 500,000 ounce level that you're sort of guiding to FY '22, '23, how long should we expect that to sustain for?
Like if we were to look beyond that, we'd maintain that rate for another year beyond FY '23, and then we start to see a declining production portfolio based on current reserves. But rather than get out there and talk to that today, we've remained silent because we continue to work up the further underground scenarios under the Tropicana pit and under the Havana pit. And sure as eggs, that work is going to change what the profile looks like from FY '23 onwards. And so therefore, we know it's going to change and -- as we do that work.
Okay. And then so in terms of the mine life of the Boston Shaker open pit then, is that sort of really coming our way '24, '25, '26, and therefore, you'll be fully loaded with underground ore from then?
No. Well, essentially, what happens is Boston Shaker open pit is a key ore source for FY '21. Once we're into FY '22, we'll start seeing some material coming out of Havana as part of this pre-strip and Havana ramping up supplementing with Boston Shaker. What the opportunity is, is to continue to extend underground in terms of Havana and Tropicana so that we continue to supplement open-pit material with underground material, pushing out both extensions through life of mine.
Okay. And then what's that proportion, that ideal proportion of underground versus open-pit ore once everything is kind of in equilibrium?
Ideally, so to continue to have a full mill rate around about that 8.3 million tonnes to 8.6 million tonnes per annum throughput.
Okay. So are you talking 50-50 underground, open pit, so you still got that higher grade coming through?
Too early to tell, Sophie. It's going to come out of the studies. Conceptually, you've -- we can imagine a future where underground would comprise 1/3 to 1/2 of the feed to the mill. But we've got to do the work, and it's too early to be able to start scheduling some of that. At the moment, Havana underground assessments are moving on. We've completed all the trade-off studies for that exercise, now moving into the PFS. And in the coming quarters, we'll be able to showcase some of that work.
Okay. And then just moving to Nova. Obviously, with the feasibility, there was always talk around cost sustaining of $1.50 to $2 a pound. We're now talking $2.40 to $2.80. Understand that you brought forward a lot of that development work. But can we expect costs to retrace back to sort of that $1.50, $2 a pound going forward beyond FY '22?
I think where we're seeing the costs in that 3-year forecast, that's probably a more realistic view of the cost based on where the market is today and with the benefit of 2 to 3 years of historical performance and a really granular understanding of what the controllable costs are at Nova.
Okay. So then just a quick follow-up to that then, you...
And then the other part there that's a key factor, which shouldn't be underestimated, is the cash cost per payable pound is always after by-product credits. And the by-product credit pricing that we have in that forecast model for FY '21 through to FY '23, the pricing there is lower than what we assumed in the optimization study, and that has a huge impact on that cash cost per payable pound. I'll just let Scott round that out a little bit.
Yes. Sophie, just in relation to then financial year '20, just to point -- just to add a little bit more to that. So we had cash costs of $2.41, and that was based on copper and cobalt prices of $3.82 a pound and $21 a pound. Now if we put into this financial year '20 the guidance pricing, which was $4.20 and $24 a pound, we would have been right in the middle of our guidance range, right at $2.25. So you can see the sense of that -- the implications of the cash costs.
Okay. So just then given this new environment or new cost sort of level, what initiatives are you working on internally to try and drive that down further? We spoke about recoveries earlier but anything else?
Yes. There's a continuous work program at both Tropicana and Nova as we continue to optimize both assets. And at Nova, we've had a huge focus on both applications of technology that contribute to overall productivity, cost and safety improvements as well as a number of business improvement programs, and they're continuing to bring down overall cost structures. And in addition to that, our purchasing people have been very active, and we continue to make gains on a lot of our contracted goods and services, which contributes to lower cost structures going forward. So this remains a continued focus for us. And we -- if you do a granular review of -- through the rearview mirror on our cost profile, you can see that the controllable costs that we have, we're delivering on those just about to the penny. And the big variances we see are in the uncontrollable costs, which has all to do with by-product metal pricing.
Your next question comes from Nick Herbert with Crédit Suisse.
I have a few to start off with -- on Tropicana, please. Just looking at the step-up in cost guidance for next year, how much of that is accounted for by the elevated strip ratio? And then can you also just give some detail on what that strip profile looks like over the next couple of years? And then in terms of its 3-year outlook, costs still seem to be above historic rates despite the higher production. So just wondering if you could talk to some of the cost drivers there as well, please.
Yes, sure. So a key driver, FY '21, FY '22 and even into FY '23, is cutbacks and stripping. And we've provided the deferred stripping CapEx there in our guidance numbers. And if you do the back calculation there, that comes to about $560 per ounce as a contribution to the all-in sustaining cost. That sort of winds back down a little bit in FY '22, but there's still going to be a significant deferred stripping component in FY '22.
Okay. Sure. And then the -- you might have it in the presentation. Sorry if I've missed it. But have you guys mentioned what your by-product copper price assumption is for FY '21 and in the next 3 years?
I think we have done, and it's very similar to the actual by-product prices we had for FY '20. So for FY '21, we've stated AUD 3.83 a pound and AUD 21 a pound for cobalt.
Both Aussie dollars.
Yes.
Okay. Great. And that's within that 3-year cost guidance as well, that assumption?
That's pretty similar, yes.
Okay. And next one, exploration. The $38 million budget this year for Fraser Range, can you just clarify what the Fraser Range spend was for the last couple of years? And then I guess extension to that, you seem to be casting the net wider on exploration. Is that, I guess, indicative of a change of view on Fraser Range prospectivity? Or how are you sort of thinking about that in the broader portfolio context at the moment?
Yes, sure. So FY '20, Nova or Fraser Range spend was order of magnitude $50 million. So the overall spending in FY '21 is lower. But if we dissect that a little bit more, we find that our near-mine spend remains pretty much unchanged year-on-year, and where the spend is winding back is in the northern part of the Fraser Range. There's also been a change to the sort of exploration we're doing on the Fraser Range. Previous years, we were full throttle on our regional assessment of the whole project area, both geophysical and geochemical and in parallel starting to drill targets. All of that regional assessment is pretty much finished, although we are going back and doing some infill in certain areas. And the budget going into FY '21 is all about drilling. We've got the targets, and now it's all about drilling those targets and driving discovery. We have a strategy, which is both nickel- and copper-centric. And we've continued to evolve our exploration portfolio so that we're stacking up our future exploration opportunities in front of us so that as the Fraser Range matures, we can move on to those other areas and also diversify our commodity focus. And it's just a natural evolution of the portfolio. And some of those -- some of the targets we have in those areas look very, very interesting.
Okay. Great. And then just finally, maybe if you don't mind just providing some thoughts on New Century's potential Goro investment. They mentioned yesterday that they're seeking upwards of $100 million potentially co-investment for that transaction. Just wondering if you could provide a comment there and potentially how that deal could fit within your strategy.
Yes. We previously invested in New Century to enable a look at the Goro opportunity by way of a joint venture. We did the work to understand the opportunity. And although we acknowledge the huge upside in the project, we decided that it wasn't the right opportunity for IGO, and we walked away from that potential joint venture. We continue to follow what the New Century guys are doing as a very interested shareholder. And we continue to think that for the -- we continue to think that for New Century, that's a good opportunity.
Your next question comes from Daniel Morgan with UBS.
First question just on the payability that's come through at Nova you can calculate it at about 72%. I had thought we might see a bit more coming through this quarter. I know that contracts are -- there's timing differences and things. But can you just comment on when we might see some of the payability benefits coming through from the new contracts?
Yes, certainly. Two things going on there, Dan. One is that the -- when the contracts take effect, and we had half the contract -- new contracts starting 1st of January, the other half of the new contracts starting 1st of July. So September quarter will be the first opportunity to see what all of that looks like. And then the second thing going on is nickel pricing. And so nickel pricing has been at a lower level through the last 2 quarters. And as a result of that, we're at a lower point on the payability curve. And in the future quarters, as we see higher nickel prices, we'll be able to see what that payability looks like at a higher point on the curve.
And on Nova, there's a degree of, I guess, discretion about how much you can run that in terms of million tonnes per annum. And I think you're highlighting 1.6 is the sweet spot that you're going to run it at. Just wondering if you could talk about, are you balancing mine life against exploration success? Or is it just trying to make sure you maximize those recoveries with lower-grade ore coming through?
It's Matt here. Essentially, there's a lot of drivers into that throughput. So originally, nameplate's 1.5. We're up to the 1.6. The other -- the main constraint that we continue to work through at the moment is mining schedule. And that's got to do with paste fill volumes and how quick we can fill a void to get back into that void or mine close to that void. So we've also got a program of work associated with -- this year associated with paste fill rates and with the idea of trying to increase paste fill rates to unlock potentially more throughput in the future.
Okay. And just last question. Just wondering whether you could comment on, from a strategic position, your position in Nova plus Tropicana and the cash balance. Does a demerger make sense or not? And your cash balance, what could we expect in terms of acquisitions versus dividends or capital returns?
Yes. So capital return policy, and we've got a clear policy out there, and we've also indicated to the market that we will review that policy come early 2021 calendar year, likely disclose that in our December quarter FY '21 quarterly report. And -- but at the moment, our -- that policy dictates a strong return to shareholders of 15% to 25% of free cash flow. And we've demonstrated a track record of delivering at the midpoint of that policy over the last 1.5 years. We continue to look at opportunities to grow the business, both exploration and M&A. On our exploration spend, it's pretty much a match with the cash we're returning to shareholders in that sort of 15% to 25% of free cash flow range. And I think some of the M&A opportunities we've looked at have been quite visible. And I can assure you that we continue to look at opportunities but in a very disciplined manner because we want to ensure that any new assets that we bring to the portfolio through M&A are going to have the same quality metrics as what we have at Nova and Tropicana but are also going to deliver a step-up in the scale of assets that we have.
And maybe just a follow-up question on that. Would you be interested in conceptually partnering with other companies that might have opportunities in the nickel-copper-cobalt space -- large-scale opportunities? Would you be willing to partner? Or do you want to run and control 100% of an operation?
We've got a demonstrated track record of working efficiently in a joint venture on Tropicana. And I think that's a competitive advantage that we bring to potential M&A structures in the future. And it all depends on the scale of an activity. We want anything we do to have a material impact on IGO. So if we're going to do it in joint venture or partnership with someone else, then it needs to be commensurately bigger.
Your next question comes from Levi Spry with JPMorgan.
A couple of quick questions there from Nick and Dan. But just on Tropicana, so costs probably catch the eye a little bit there. So just moving past this year to next year and beyond, $1,400, is that what we can expect longer term? And I guess what does that mean in terms of your inventory? What are you using for your reserves currently? How -- what does that mean for all these undergrounds, I guess?
Yes, sure. The -- like if you think about where Tropicana in its life, we've got the same 4 pits that we started with, and those pits are just getting deeper. So over time, we do see our all-in sustaining costs move upwards. We've got a little bit of a hump in the overall cost profile FY '21, '22, and then it starts to trend down a little bit. And that's all related to the big cutbacks we have to do at Havana to unlock the bottom of that pit, which goes down to some 400, 450 meters of depth. So the other question you have -- part of that question you had there, Levi, I didn't hear.
Reserve statement.
But...
Does it mean you'll use a higher price -- yes.
Yes.
Does it mean you'll use a higher price to cut your reserves next time?
Well, it's all going to depend on the trade-off studies that we do and continue to do between open pit and underground. And then it's a trade-off between high-cost ounces at the bottom of a deeper open pit but with maximum extraction of the ore body versus lower-cost mining from underground where you don't get complete extraction of the ore body. And that drives those trade-offs. We continue to look at the gold price that we use. And that's a negotiation between ourselves and AGA, who are somewhat constrained with the gold price that they can use for the resource and reserve statements due to U.S. SEC requirements for resource and reserve reporting.
Yes. And just -- sorry, I'm sure it's in here. But just remind me the next sort of -- next announcement on the next underground. When is that study due? And...
We've completed the trade-off studies for Havana. And that took a little bit longer than we expected because we needed to inform that with additional drilling around the bottom of the pit. And we've now started the PFS, and I imagine that's going to be a calendar '21 disclosure, but there will potentially be news flow along the journey.
Okay. And just one last one on Nova and/or Fraser Range exploration efforts, just some of those near-mine ones in particular, like is there anything there you'd want to highlight? Some of those targets sort of sound familiar as if they'd been around for a while, but some of them are new. Maybe you could just recap on the priorities there.
Yes, sure. So these take some time to unpack. And Kaon 2, we've -- well, the Kaon series, if you like, we've mentioned a couple of times, the guys are quite excited about Kaon 2, and we have another drill hole going in there at the moment. And then the other one that get -- the other ones that get people excited are these deeper intrusions on the Nova mining lease that sort of trend through to the northeast and Angel end of the property.
[Operator Instructions] Your next question comes from Matt Frydman with Goldman Sachs.
Sure. I just wanted to continue on the discussion of exploration and capital allocation a little bit. You've clearly expanded the number of partnerships and JVs you've been involved in over the last quarter and even over the last 12 months. So I guess, firstly, why do you think IGO is well positioned to make discoveries or to add value to those areas, particularly areas like the Paterson where other larger companies have already pegged their preferred ground?And secondly, how do you think about prioritizing capital across a pretty broad range of potential projects and JV? And I guess what kind of returns are you actually seeking on those investments? Yes.
Yes. Fantastic questions. Like if we take the Paterson as an example, we haven't sort of thrown a dart at a map and jumped in there based off someone else's discovery. We've had a systematic approach to the Paterson that goes back quite some time, and that started with our initial investment in Encounter. That investment in Encounter funded them to do some work using some ideas that we brought to the table that were new ideas for exploration in that part of the world. So -- and we've taken the time to make sure that those methodologies that we've introduced to Encounter have worked in the Paterson province. That's then given us the confidence that yes, they do, and we're able to add value to exploration in that part of the world. And on the back of that confidence, we've looked for opportunities to expand our ground position. And we'll take those methodologies that are now proven on the Encounter ground and apply them more broadly on the Metals X ground and the Antipa ground.
And maybe just expanding on the returns you're seeking. I mean what kind of return do you expect from the $11 million you're putting into Paterson when you've presumably got a pretty long list of targets in the Fraser Range, as you've just described?
On all of our tenement holdings, we've thought very carefully about the areas that we want to be invested in, in exploration in Australia. We've targeted specific belts based on the underlying geology and some pretty clever prospectivity mapping that our people do. We've then consolidated those ground positions, and we believe that there's opportunity on all of those belts to deliver multiple Tier 1 discoveries. If we're just successful once on the whole of that package, that's going to return a multibillion-dollar return to IGO and its shareholders. And that gets my vote every day of the week.
Yes. Okay. And maybe just finally, I guess, to round off that point, you talked about the fact that you've reviewed the Goro opportunity. It sounds like you've made the decision to, I guess, go back to the side for now. Again, just coming back to, I guess, returns, did you apply any kind of specific thinking around IRR threshold or return on capital that kind of drove that decision around and why you thought that was the -- it was right to walk away from that?
We look at these opportunities through multiple lenses. Return on capital is one of those. Alignment with strategy, alignment with a whole bunch of our ESG metrics, these are all things that we look at. Where Goro delivers very -- in spades is -- this is a significant project, delivering good volumes of nickel over a very, very long mine life. And where it's challenged is on the cost side historically. There are opportunities to improve those costs. But we took the view that even if those costs are -- those benefits are delivered, from a financial point of view, it's not having -- from a financial point of view, in a joint venture, that the scale of that is not having the impact on IGO that's commensurate with the risk of going offshore into a nickel laterite. And we believe there's better opportunities that we can pursue for IGO.
There are no further questions on the phone line. We will now turn to questions received via the webcast. [Operator Instructions] Your first question comes from [ Michael Wieland ] and reads, "Given what has happened at Panoramic, what are your thoughts on deciding not to proceed with this acquisition?"
When we made the off-market bid for Panoramic, it was on -- without the benefit of any due diligence. By making the bid, we were able to get access to do due diligence and, on the back of that, realized that the price that we put forward in the off-market bid was at a level that was not supported by the B.D. And with the structure of that type of bid, there was no opportunity to reduce the price. And therefore, the only response we could make was to be disciplined and to not pursue the off-market bid that we'd made, which is what we did, of course.
That is all the questions we have time for today. I'll now hand back the conference to Mr. Bradford for closing remarks.
Ladies and gentlemen, once again, we appreciate your participation through this presentation today and the Q&A session. And we look forward to engaging with you again soon when we deliver our audited FY '20 financial statements in a month's time. Thank you very much, and have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.