Newcrest Mining Ltd

ASX:NCM

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Newcrest Mining March quarterly results conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, April 30, 2020. I would now like to hand the conference over to your first speaker today, Chris Maitland, Head of Investor Relations and Media. Thank you, and please go ahead, Chris.

[Chris Maitland, Head of Investor Relations & Media]

Thank you. Good morning, and welcome to Newcrest Mining's FY '20 Q3 Results and the acquisition of the Fruta del Norte finance facilities conference call. Due to legal restrictions, we are unable to discuss details around the equity ranking other than the terms referred to in this presentation. Please refrain from asking questions about the specific details of the equity raising as we are legally restricted from answering those questions on this call. With me today we've got Managing Director and CEO, Sandeep Biswas; and our Finance Director and CFO, Gerard Bond; as well as our Chief Development Officer, [ Seil Song ].Please note the company's important notices and disclaimers on Slides 2, 3 and 4. As you may be already aware, Newcrest is a U.S. dollar reporting entity, and all dollar references made in this presentation are to U.S. dollars unless otherwise specified. I'll now hand the call over to Sandeep.

[Sandeep Biswas, MD, CEO & Director]

Thanks, Chris, and good morning, everyone. Today is a really exciting day for Newcrest. Gerard and I are going to take you through our production results for the third quarter, which were in line with expectations and our guidance. We'll then go through our impressive exploration results. We'll then discuss today's announcement regarding the purchase of the high-yielding investment in the Tier 1 Fruta del Norte financing facilities and our proposed equity raising through a fully underwritten institutional placement and non-underwritten share purchase plan. But first and most importantly, I'd like to spend a moment talking about our response to COVID-19 and the precautionary measures we've implemented to keep our workforce and host community safe. I'm very pleased to confirm that we've had no confirmed cases of COVID-19 across our workforce worldwide at this point in time. This reflects the extensive program of preventative actions we've implemented, which include the passenger screening and health checks for all [ of our ] staff, social distancing and our transport arrangements, camp dining rooms, meetings and gatherings, the introduction of special leave arrangements for those impacted directly or indirectly by the virus, remote working and workforce education and communication, modified rosters at a number of our operations to reduce the amount of travel and to allow for self-isolation periods. We've also been successful in sourcing around 55,000 COVID-19 rapid testing kits, which will be deployed at sites to strengthen the current COVID-19 controls that we've already got in place. As announced earlier this month, we've also established a AUD 20 million community support fund to support communities in the jurisdictions in which we operate. We believe the measures we've implemented and the dedication and commitment of our workforce will continue to keep our people safe and our mines in operation. The quarter has been another period free of fatalities or life-altering injuries. The total recordable injury frequency rate or TRIFR for the last 9 months has increased due to the inclusion of Red Chris, which is currently a higher injury rate than our other nucleus sites, but it is steadily improving. Red Chris aside, the group's year-to-date TRIFR for the half year would have been 2.0, which is a significant improvement compared to this time last year and is at industry-leading levels. This improvement was driven by fewer injuries at Cadia, Telfer and Lihir in the period. Operationally, Newcrest delivered gold production of 519,000 ounces and 35,000 tonnes of copper at an all-in sustaining cost of $827 per ounce. Gold production was 6% lower than the prior quarter due to lower production at Cadia and Telfer and the divestment of Gosowong in March. This more than offset the higher production at Lihir and Red Chris. Our guidance remains unchanged as we've experienced no operational interruptions due to COVID-19. Our expectation is that gold production in the June quarter will be higher than the March quarter due to a lower level of planned shutdown events. We continue to have a low-cost position relative to the industry and our senior gold peers, with an all-in sustaining cost of $827 per ounce for the quarter, which delivered an AISC margin of $742 per ounce. In March, we successfully completed the divestment of Gosowong for $90 million. And today, we announced that we've increased our economic exposure to the Tier 1 Fruta del Norte mine with the purchase of its financing facilities. This I'll expand upon later. We continue to deliver impressive results from our drilling at both Red Chris and Havieron. And I'll discuss the drilling results for both of those in greater detail later on. As outlined in our December quarterly report, Cadia's production was expected to be lower in the March quarter due to the planned shutdowns of both concentrators. Cadia's all-in sustaining cost of $137 per ounce is largely in line with the prior quarter. This represents higher sales, the benefit of a weaker Australian dollar on operating costs and lower sustaining capital. As you're likely aware, New South Wales has been drought for a number of years now, with the last 2 years having the lowest rainfall on record. We are encouraged by the recent rainfall in the Oran District, including in the last few days. Our updated modeling now shows that any potential impact of another record low rainfall year like the last 2 to production has now been pushed out to early calendar year 2021. As announced in our guidance update on 11th of March, productivity has been impacted by access to [ ex-pit ore ] due to the presentation of difficult mining and geothermal conditions. As a result, we've had to process higher levels of lower-grade stockpile material, which has reduced metal recovery in the flotation circuit. The rectification plan that was implemented this year has started to deliver improvements. However, we continue to see great variability from Phase 14, and we're optimizing our mining activity to help manage this. During the quarter, gold production rose 14% compared to the December quarter, which reflects higher throughput and higher grades. This was partially offset by lower recovery rates. Lihir's all-in sustaining cost was 9% lower than the prior quarter, reflecting an increase in ounces sold and lower sustaining capital. Telfer's gold production was 6% lower than the prior quarter, reflecting a reduction in mill throughput and recovery which was partially offset by higher grades. Telfer's all-in sustaining cost has improved by 3% compared to the prior quarter, which reflects the benefits of a weaker Australian dollar on operating costs and lower sustaining capital. At Red Chris, our safety transformation plan has continued to yield benefits with a 44% improvement in TRIFR in the March quarter. And Red Chris all-in sustaining cost continues to improve with a $361 per ounce reduction compared to the December quarter. You'll all be familiar with this slide. It shows that Newcrest continues to have a strong financial position. To help our -- fund our growth activities, which I'll discuss later, we've bolstered this further with today's announced equity raising. So now if we turn to our exploration results. At Red Chris, recent drilling results intersected a new high grade zone. This discovery is in addition to the high-grade pod that we announced in March and continues to build on the impressive drill results we've seen to date. We've commenced in-field drilling to fully define the extent of these high-grade pods, and we'll continue to search for additional high-grade pods in the East Zone. We're also planning on additional drilling in the Gully Zone to map the extent of the high-grade mineralization, which will be vital in our studies on future block caves. In the East Zone under the existing open pit, we have commenced the East Zone Resource Definition Programme. Our intention is to develop a new resource model incorporating both the historical and the new Newcrest drilling data. The 2 high-grade zones we've intersected in the East Zone have returned some of the best porphyry results within the Golden Triangle. Our search for further high-grade zones continues with approximately 75,000 meters of drilling expected in FY '21. The block cave concept study has now been completed and we've commenced the pre-feasibility study, which we're expecting to complete during the first quarter of FY '22. The pre-feasibility study will incorporate our latest drilling results, which includes the 2 high-grade zones we've discovered in the East Zone. These are really encouraging drill results, which confirm our belief in this ore body. And we're accelerating the studies to confirm how we will mine this ore body and are looking to get the necessary permits and approvals to commence the decline by the end of this calendar year. So if you look to our second growth opportunity, which is Havieron, the results released today continue to be good and show expansion of the high-grade gold copper mineralization. Studies are well underway to investigate the potential of starting an exploration decline by the end of the calendar year or in early 2021. This will help us to better define the ore body. We're considering both selective and bulk mining options, and see the potential to achieve commercial production within 2 to 3 years from commencement of the decline. We're working hard to release the results of this study in the coming months. Our drilling results from Havieron project continue to confirm the possibility of the project to becoming a high-grade ore option for Telfer. The grades that Havieron are many times greater than the current grades we're processing at Telfer. Drilling during this financial year has been to support the delivery of resource in the second half of calendar year 2020. Work continues on the environmental baseline and engineering studies to support fast-tracking the commencement of the exploration decline. Finding hard -- finding gold is hard and rare. And with Telfer's infrastructure fully built and this workforce in place, these kind of drilling results add some extra excitement to what we're seeing at Havieron. We'll now go over today's announcement about our transaction to increase Newcrest's exposure to the Tier 1 Fruta del Norte mine in Ecuador. We've been very happy with our investment in Lundin Gold and its view on Fruta del Norte mine located in Ecuador. As you know, Newcrest currently holds a 32% interest in Fruta del Norte through our investment in Lundin Gold. And we're very excited about this acquisition opportunity. We're increasing our exposure to a Tier 1 gold asset that we already know extremely well and own about 1/3 of. The investment provides us a very attractive investment return, anywhere between 6% to 11% depending on the gold price assumption. In addition to the financial returns, it significantly strengthens our position in the asset. The Fruta del Norte mine is expected to produce around 340,000 ounces of gold at an all-in sustaining cost of around $628 per ounce over its expected 13-year mine life. The finance facilities give us approximately 34% of the free cash flow generated by the operation from 2020 to 2026, which is clearly in keeping with Newcrest strategy of adding exposure to Tier 1 assets. I'll now hand over to Gerard, who will take you through the transaction details.

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Thank you, Sandeep, and good morning, everyone. Today's purchase of the facilities increases our direct exposure to the cash flows generated from the gold produced by Fruta del Norte, with these cash flows ranking ahead of Lundin Gold equity holders. The financing facilities comprise a gold prepay credit agreement, a stream credit facility agreement and an offtake agreement. The gold prepays a subordinated term credit facility with quarterly repayments based on 11,500 ounces of gold per quarter, multiplied by the current gold spot price. There is a price risk collar that has the gold price reduced by 15% if it's above the specified level and if the gold -- and the gold price is increased by 15% if the gold price is below a specified level. Repayments under this facility are to commence in December 2020 and conclude in June 2025. The second agreement, the stream agreement, is also a subordinated term facility with monthly repayments determined by the value of 7.75% of the gold ounces produced by the mine, up to a total of 350,000 ounces, and 100% of the silver produced up to 6 million ounces. The third facility is the offtake agreement, which gives us the option to purchase 50% of gold produced by Fruta del Norte at spot prices determined by a quotational period. In aggregate, the facilities had a book value of $552 million in the accounts of Lundin Gold as at December 31, 2019. So our purchase price represents a multiple of 0.83x the book value per Lundin Gold's financial statements. At this purchase price, our expected yield is 6% at a gold price of $1,400 an ounce, and this rate of return, of course, gets higher at higher gold prices. As this next slide shows, this transaction increases Newcrest's exposure to the Tier 1 Fruta del Norte gold mine by an estimated 400,000 ounces of gold between 2020 and 2026. Based on Lundin Gold's production estimates, Newcrest expects to now have exposure to 1.9 million ounces of gold over the life of the Fruta del Norte mine. And as mentioned, the payments coming to us under these facilities rank ahead of payments to Lundin Gold's shareholders. Opportunities to increase exposure to Tier 1 producing gold assets are rare. The even rarer in today's market is to be able to make such investments that provide such an attractive rate of return. Over the next 6 years, the 2 main [ loan ] facilities are expected to provide Newcrest with additional exposures to around 400,000 ounces of gold from Fruta del Norte and deliver a yield of around 6% at a gold price of $1,400 an ounce or an IRR of 11% at a $1,700 gold price per ounce. In addition to attractive rates of return, these facilities offer protections that come from the higher seniority position in Lundin Gold's capital structure. These projections include the requirement for Lundin Gold to seek Newcrest approval for any material amendments to the mine plan, financial model or operating budget. It's our expectation that the transaction will provide immediate value to Newcrest shareholders through the expected addition to our earnings. With that, Sandeep, I'll give it back to you.

[Sandeep Biswas, MD, CEO & Director]

Yes. Thanks, Gerard. So you see, clearly, the Fruta del Norte transaction is consistent with our stated strategy of gaining exposure to Tier 1 ore bodies. As our investors are aware, we've always taken the view that it's prudent to maintain a low level of gearing. For more than 10 years, we funded our cash investments and growth from our cash balances, debt capacity and free cash flow. In this year -- financial year, alone, we've spent $835 million in the first half of FY '20 for the acquisition of Red Chris and then top-up of rights in Lundin Gold, plus around $450 million in major projects and exploration spend. We view this opportunity as the appropriate time to raise equity in order to maintain a strong balance sheet in line with our financial policy, while also executing on our other growth opportunities that we have within the portfolio while maintaining the optionality and resilience in these uncertain times. This decision was not taken lightly. The last time Newcrest raised equity was in 2009. We've worked hard to delever the balance sheet, and we wish to remain prudent with respect to balance sheet management. We anticipate making further announcement with respect to the equity raising in accordance with our ASX continuous reporting obligations in due course. We will communicate directly with investors with respect to their eligibility to participate in the equity raising. Due to legal restrictions, I can't discuss any further details relating to the equity raising. Today, we announced that we're undertaking our AUD 1 billion fully underwritten institutional placement, AUD 100 million share purchase plan. The funds raised will be used to fund the purchase of the Fruta del Norte financing facilities and to fund our future growth options, such as the construction of declines at Red Chris and Havieron. Under the share purchase plan, eligible and existing retail shareholders will be invited to apply for up to AUD 30,000 of new shares free of any brokerage commission or transaction costs. We think it's really important that our retail shareholder base are able to participate. As previously stated, the funds raised will be used to fund the purchase of the Fruta del Norte financing facilities and to fund our future growth options such as the construction of declines at Red Chris and Havieron. Newcrest will retain a strong balance sheet with liquidity of around $2.9 billion, which includes $1.5 billion in cash and a further $1.4 billion available through our committed bilateral facilities. This slide outlines the key timings and dates for the institutional placement and share purchase plan. We expect the institutional placement to close on Tuesday, 5th of May, with the SVP expected to commence trading on Tuesday, 9th of June. So in closing, I'd like to summarize the benefits we see from the acquisition of the Fruta del Norte financing facilities for Newcrest shareholders. It's an acquisition we're really excited about. It increases exposure to a Tier 1 gold asset that we already know extremely well and own 1/3 of. It has a very attractive financial rate of return. And it delivers a lot more than just financial returns. It significantly strengthens our position in the asset. In addition, today's announced drill results at Red Chris and Havieron are also very exciting and continue to validate our belief that they are quality growth options for the company, and we're focused on advancing them as soon as possible. With that, I'll open up the call to questions.

[Operator]

[Operator Instructions] Your first question comes from Sophie Spartalis with Bank of America.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Sandeep and team, just wondering whether there was any involvement with Lundin Gold in the acquisition of those finance facilities, were they are aware of what you're intending to do here.

[Sandeep Biswas, MD, CEO & Director]

Yes, Sophie, that's the case. In fact, Lundin Gold had to grant their consent for the transaction to -- to be fully executed. So yes, fully aware and fully supported.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And then can you just talk about Ecuador? I understand that they're still within a national shutdown. Sort of any conversations you've had with the government in terms of when that's likely to cease. And I guess, the situation at the mine site, please?

[Sandeep Biswas, MD, CEO & Director]

Look, our latest reading out of Ecuador is not dissimilar to what we're seeing in other countries where there's a push for, particularly from the government, to start moving to reopen the country, to get producing assets like FDN back into production, get people back to work. But as with all things in all countries, it really has to be balanced with what they're seeing in terms of the COVID disease and the rates of infection. And we also have to be mindful of the safety of the local communities as well. So it's just a matter of time. We think that mining is more important to the future of Ecuador than even before COVID, mainly due to the fall in oil prices that we've seen. And I think FDN is one of the flagship operations within Ecuador, and this is just a passing phase.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And then just a final question from me. Just in terms of how will this be reported going forward in the quarterly, will we see -- or maybe I'll leave that open to you guys to answer to in terms of production financials?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Yes. So it will be recognized as a financial asset on the balance sheet, Sophie. And but as we said before, we intend to present our attributable ounces via our 32% equity shareholding in the Fruta del Norte. But no, the ounces don't -- the ounces that these are backed by won't be in our production report.

[Operator]

The next question comes from Daniel Morgan with UBS.

[Daniel Morgan, Director and Analyst]

Sandeep and team, I'm just wondering about if you could elaborate a little bit more on why the over raise versus the acquisition cost. I mean on my read, the balance sheet was very strong, could handle the capital commitments for the next few years that you've got on no risk on my numbers of breaching liquidity limits. Just why raise more money?

[Sandeep Biswas, MD, CEO & Director]

Look, I think -- yes, and this is one of the reasons we thought long and hard about it. It's -- we've always taken the view that we have to maintain and the prudence in relation to maintaining a low level of gearing. And if you put this in light of the last 12 months, we spent a lot of cash in the growth space. And we viewed it's a good time to balance -- invest further investment in growth. And what we expect to be the imminent expenditures of declines at Red Chris and at Havieron and our other growth options that we're also pursuing. That's a good time to also balance our suite of -- how the balance sheet is structured and raise equity. So that's the first time, as I said, since 2009, and this helps balance out our sources of funding. And it's always good to have low leverage and cash on hand. And I think it's doubly important of times of uncertainty with the COVID-19 risk, which have been extremely managed well by us and the industry at large. It also allows us to be able to take advantage of any other opportunities that may present themselves in terms of accelerating projects or whatever else there might be.

[Daniel Morgan, Director and Analyst]

Okay. And switching gears slightly to Papua New Guinea. The moves at Porgera, not renewing the mining [ list ]. I know it's not your asset, but it continues a theme of resource nationalism in Papua New Guinea. And I know it's many years away in 2035 for your special mining lease at Lihir. But does this make you concerned at all about your reserves, your mine plan beyond 2035? Does it make you more nervous about the Golpu special mining lease process and how you might go about that?

[Sandeep Biswas, MD, CEO & Director]

Thanks, Dan. Look, obviously, it's a concern for everyone. But the thing that I'd hasten to point out is there are a whole bunch of issues around Porgera which I can't go into, but best addressed by Porgera that go beyond just the -- just a license renewal. One of our hallmarks [ over the year in ] recent times has been to strengthen our relationship with the provincial government, with the local communities and with the island -- the government on the island, the local government. We've seen this net contributors into the country as well. And I think we're in a very different situation in a very different location. It is a longer way -- away from [ England ]. In terms of Wafi-Golpu, the 1992 Mining Act allows for 40 years of license. So I think that's a quite a long duration. And of course, in light of what we're seeing, what happened to Porgera, we'll obviously be engaging sooner rather than later in relation to ensuring that Lihir license stays there in the long term. But as you politely point out, I mean, 2035 is a long way off and a lot happens in 15 years.

[Daniel Morgan, Director and Analyst]

Yes. I appreciate, I appreciate that. And then just the last question about operational performance. Lihir, can you just talk about how you think about recoveries and recoveries improving from here?

[Sandeep Biswas, MD, CEO & Director]

Well, in terms of the recoveries, one of the key things is the balance of fresh ore to stockpile ore. And the other is the process control of the actual processing facility themselves, where we've made a lot of progress. So we're seeing recoveries pick up from where they were over the last year or so. And as we work to get more and more ex-pit material into the mix over the coming year, we should see recoveries in the high 70s, low 80s on occasion.

[Operator]

Your next question comes from Levi Spry of JPMorgan.

[Levi Spry, Research Analyst]

Yes. Just starting in Ecuador. So just maybe just exploring that a little bit more. So your expectations around Lundin getting back to production and how long it will potentially take to ramp up to full production rates?

[Sandeep Biswas, MD, CEO & Director]

Look, I think that's a question more for Lundin, but it's very hard to tell. I mean what I can say, it's very hard to tell with what's happening with the COVID response. I mean it is completely COVID-related. In terms of getting the plant back up and running, the only thing I'll point to is how quickly they constructed and commissioned and got the plant running. It was a great piece of work. Very close to the capital budget as well. It's a well-run site with a good management team. So we don't have any concerns of when the green light is given that they'll be able to bring the operation back up to their planned rates in the shortest possible time.

[Levi Spry, Research Analyst]

Okay. And then just in terms of the acquisition, so you're raising money at a discount for a 6% yield, you mentioned that it's about more than financial returns. So maybe you can talk to that a little bit more for the event of the default, what happens then, change of control, we haven't bought Orion's equity. Maybe you can just talk to it being about more than financial returns.

[Sandeep Biswas, MD, CEO & Director]

Yes. Well, look, let me hand over to Gerard to go through the detail of that. The only thing I will say is the financial returns are 6% at around $1,400 if you look at spot prices, you're 11%. So it's obviously quite variable to the gold price, which is the sort of exposure that we're looking for as well in relation to those gold ounces.

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Sandeep, I'll pick up on that. The facilities give us probably 2 forms of protection, one, a form of negative control. We have, as I mentioned earlier, the ability of the requirement for our approval for any changes to things such as the life of mine plan, which again ensures that this is run like a miner would run it as opposed to a financier. And that helps protect our equity investment and the value of the asset. But in the events of default, all of which are specified in detail for both the senior and junior facilities that are in public domain on SEDAR. The most pertinent one is that relating to -- if the operation is suspended for more than 90 days. And then it triggers basically 2 levels of action. Stage 1 is basically just penalty interest rates and restricting some payments and distributions by the mine. Stage 2 involves more customary wind-up type situations and senior lend support to basically navigate out of that. And so when we say it's got more value, it's about making sure that, that the decisions that they're taken in -- should that -- those worst-case scenarios transpire that we have a seat at the table, we've got a good position and making sure that, that our interest in Fruta del Norte, the asset are well protected.

[Levi Spry, Research Analyst]

So 90 days. So what are we at now?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Fruta del Norte suspended on the 22nd of March. So the trigger date on that would be the 28th of June. As Sandeep said, the indications are that the country will open up before then. But this facility is for a 6-, 7-year period. So there's opportunities and protections through that period. What I just said, Levi, was just an example of what happens under an [ impending ] [ default ].

[Levi Spry, Research Analyst]

And just a bigger question. So a line and there's a lot of streaming companies out there. Is this -- can we take this to being a slight change in strategy?

[Sandeep Biswas, MD, CEO & Director]

No, it's equivocally no. We wouldn't be having this conversation if we weren't already a 32% holder. This is about our stated goal of exposure to Tier 1, or in this case, it's just an extension of equity holding. And look, the financial returns are good, but it's not just about that. It just puts us in a stronger position as well.

[Operator]

The next question comes from Nick Herbert with Crédit Suisse.

[Nick Herbert, Research Analyst]

I might just start on Lihir. I'm wondering if you could just talk to it more the flexibility you have around the mining fronts there. Obviously, ex-pit tonnes have been quite constrained. You've called out the March quarter also that go below that in the December quarter. So if you could just talk to that and the mining rates you're expecting over the next couple of quarters. That's question one.

[Sandeep Biswas, MD, CEO & Director]

So this is really about Phase 14, which is quite tight. We're now broadening out the benches in order to give us more phase positions than we have enjoyed in the past. We're also pre-stripping Phase 15 as soon as we can, so we can open up the flexibility of the ore sources that we can draw from. I mean that's the situation at a high level.

[Nick Herbert, Research Analyst]

Right. When does the access phase kick in?

[Sandeep Biswas, MD, CEO & Director]

That's not till probably 12 months away, I think, something like that. It's not till next calendar year. But the important thing as it pertains to Phase 14 is getting the broader benches in place instead of the split benches where we got down to.

[Nick Herbert, Research Analyst]

Okay, great. And then maybe just a couple for you, Gerard. Just want to get a clearer understanding of the payoff in the prepaid credit agreement. Are you able to disclose what the acquisition price allocated to that facility was versus the $235 million book value?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

I actually can't. But it will be a mechanical allocation that we do in due course. I don't have that number to hand, sorry.

[Nick Herbert, Research Analyst]

Okay. All right. And then just on the offtake agreement, are you able to low round off the reference pricing those ounces are and whether there is any additional costs to execute that offtake?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Short answer is it's the -- set by reference to a quotational period. The margin that we expect to get on those ounces is actually quite small. The value of the liability in the accounts of Lundin Gold was $27 million. So it's not a big deal. That's why I referenced earlier to the main facilities really are the gold prepay [ in the Street ].

[Nick Herbert, Research Analyst]

Understood. And then finally, I guess, an extension of the earlier question and your comments on PNG. Just wondering if you're still, or would still like to be, 100% owner of Wafi-Golpu if the opportunity presented itself?

[Sandeep Biswas, MD, CEO & Director]

Yes. I look at -- if the opportunity and the price, which is the most important thing presented itself, then I think so. Now look, would you get to 100% or not? I mean I'm pretty sure that the government at least will want to participate at some level. So the 400% is unlikely. But the key thing about Wafi-Golpu is to see whether we can come to the right agreement to get it permitted. Now the PM himself has been quite vocal in recent times about putting Wafi-Golpu permitting as a priority for his government. No doubt, in my mind, driven by the fact that they need to have investment coming out of the COVID situation. And due to the oil price drop or energy price drop, I'm personally am uncertain as to the timing for the LNG projects and what have you. Whereas a gold copper project, I think there's every reason to progress it under the right circumstances and the right agreements. So we will wait and see, but his -- the statements that he has been making and the communications we've been receiving have been quite positive towards recommencing those negotiations.

[Operator]

The next question comes from Rahul Anand with Morgan Stanley.

[Rahul Anand, Equity Analyst]

I might start with Lihir quickly, please, in terms of COVID-19. So there was a comment, of course, in your quarterly talking about how the resident community there is well aware of the challenges, but then also you have your expat community as resident there for several years. What I wanted to understand was this biannual strategy. How many more people do you potentially need from outside of the country or maybe perhaps from Australia? And does that in any way constrain your biannual strategy that you talked about last time? The second part of the question for Lihir was simply around the recovery impacts of potentially different sulfur grades. I mean do you see that perhaps changing and perhaps recovery moving on the back of that in the next quarter or perhaps early next year? That's the first one. I'll come back with a second on Red Chris please.

[Sandeep Biswas, MD, CEO & Director]

The first one has 2 parts. So if I start -- before I forget the second one, just ask me again. The -- so Lihir has really responded well to the COVID challenge. This is one where the entire island has come together to put it on lockdown. So we've extended the rosters of the people that have been on site. We have the residential management team, and we've also had other people volunteer and come in before the curfew came down to come and be part of keeping Lihir going. So quite a lot of spirit there with the community, the local government, the provincial government, Newcrest have been working very closely to get the entire island on lockdown, right down to banana vests not being allowed on. So it's a real effort to lock down Lihir. Now in terms of shutdowns, our next sort of biannual shut isn't until September or October. And I think by then, either the restrictions would have been lifted or sufficiently lifted or contingency plans put in place to make sure that those particular paths can be executed.

[Rahul Anand, Equity Analyst]

Okay. So it is reliant on some sort of easing by that time?

[Sandeep Biswas, MD, CEO & Director]

Well, all [ excusing ] the -- I mean we can take people to Lihir now as specialists, but you've got quarantine periods from where people come from and quarantine periods there. So it can all be -- it could actually be done now. It's just the degree of difficulty is harder with the quarantining things in place. But as we come out of this over the next -- as the world comes out of this over the next 4 or 5 months, we'll determine what the right strategies are for getting people safely that we absolutely need. And there's lots of expertise that we use in PNG, but the foreign specialists, particularly, will work out a way, and the best way. I don't think we'll have a situation where we can't do things. It's just a question of what we need to do to get it done.

[Rahul Anand, Equity Analyst]

Perfect. Okay. And then the second one was on Red Chris. So the ...

[Sandeep Biswas, MD, CEO & Director]

Sorry, on sulfur. On sulfur, sorry, I forgot.

[Rahul Anand, Equity Analyst]

Oh yes, sorry, I forgot my own question.

[Sandeep Biswas, MD, CEO & Director]

Yes. Well, one of the most important things about the Lihir processing circuit is the flotation system. So we use that obviously to balance the load of direct high-grade to the autoclaves and then floating the lower grade material. But that also gives us the ability to pull levers to increase the size that's fed to the autoclave. That's the only critical point is the sulfur grade to the autoclave. So we can [ play tunes ] in the float circuit to make sure it has the right level of sulfur to maintain that sort of autogenous leaching from a temperature viewpoint.

[Rahul Anand, Equity Analyst]

Yes. Got you. Okay. Then moving on to Red Chris, sort of the new drilling results and potentially another high-grade pod there. Is this increasingly -- in your mind, how are you viewing these opportunities? Are you starting to think about these as potential cash flow opportunities as stoping opportunities that can then in the future sometime start funding that block cave? Or is that all out in the open and you're still sort of taking it as it comes?

[Sandeep Biswas, MD, CEO & Director]

Well, it's part of this. So we've started the pre-feasibility, and it has 2 principal stopes. One is a consistent stope, which is the block cave itself. So that will be macro block 1 and 2, which is essentially in the East Zone. But as part of the study, we're also exploring, as we plan the decline that goes down to the extraction level and what have you at the bottom of the cave is further up in the ore body because that's where the high-grade pod that sits above or high up in the block cave, which is the one we announced in March, that's where it is, is can you peel off partway down the decline and go and start a high-grade stoping operation to fast-track high-grade feed to supplement the open pit material. So that's under active consideration. We're doing a lot of geotech work and more drilling to identify the edges of the pod. And can we geotechnically extract that material without compromising the main block cave, which comes from below. So it's a lot more work to do, but it's definitely on the agenda.

[Operator]

Your next question comes from Matthew Frydman with Goldman Sachs.

[Matthew Frydman, Research Analyst]

Sure. I might just follow-on from those questions around Red Chris. Clearly, pretty promising exploration results on an ongoing basis there. Wondering if you can give us an idea of the CapEx that you might be expecting for your preliminary decline work there? And then also, I suppose, a bit more detail on the time line. You did give some detail on Havieron, which is much appreciated, but yes, certainly any detail on CapEx at both Red Chris and Havieron in terms of the exploration declines and also the timing of that at Red Chris in particular?

[Sandeep Biswas, MD, CEO & Director]

Look, that's the purpose of the PFS to really look at giving some more definition around those costs. I'd be guessing right now as to what they might be. But the important thing to remember, though, is in both these things, these are greenfield mines, but they're brownfield operations. So the beauty of these things, they are both feeding existing processing facilities and infrastructure and what have you. So I think you just got to give us a bit of time to come up with estimates that we can sort of stand behind. But the time line for Red Chris is -- yes, the time line for both of these, if I could get them permitted overnight, I'd start the declines tomorrow. So it's just a question of -- at Red Chris, we hope. And we target that the fast track is to try and get this thing permitted so we can start the decline this calendar year, which is extremely aggressive. But the good thing about underground mining up where we are there is once you get underground, you can basically work uninterrupted all winter as opposed to constrained such as in surface-type operations from a construction perspective.

[Matthew Frydman, Research Analyst]

Sure. Maybe secondly, following on from the questions on Lihir. In the quarterly, clearly, you continued to highlight the problematic nature of the stockpile feed in particular and inferring that, that's mainly related to the clay content in those stockpiles. Wondering how that might bode for the pretty large sum of stockpile material that you still need to process going forward in the mine plan of that asset. And whether the issues that you see in the quarter and that you have seen for some time, I guess, change the view on what that asset can do going forward, particularly if you need to keep a fairly tight cap on the mix between stockpiles and fresh feed as you have alluded to in your response to previous questions.

[Sandeep Biswas, MD, CEO & Director]

Look, I don't think there's any impact on the long-term potential of Lihir. And what we're finding is, as long as your stockpile feed is above 30%, 35% -- sorry, your fresh feed is above 30%, 35%, I think things are fine. It's only when you drop below that, that you encounter some problems. So if you look forward, I don't think that's going to be a problem from a ratio viewpoint. It's not like you need the bulk of everything to be fresh feed. It's actually, let's say, about 1/3. That varies from stockpile to stockpile as well. Depending where it was drawn from, how long it's been out there, et cetera, et cetera.

[Matthew Frydman, Research Analyst]

Sure. Yes. That rule of thumb is quite helpful. Maybe finally, just on the offtake agreement and the quotational period around that, and I'm sorry if I've missed the detail here, but wondering what the -- what that quotation period is? Is it the full month in terms of ...

[Sandeep Biswas, MD, CEO & Director]

I think it's --Gerard or Seil will correct me, but I think it's only about 6 days. So we just -- and we get it at the lower quotation of those 6 days. It's a minor part of the 3 facilities, but I believe that's right. But Seil and Gerard, correct me if I'm wrong.

[Seil Song, Chief Development Officer]

Yes, I mean that's sort of [ running around here ]. Yes.

[Matthew Frydman, Research Analyst]

And is there any early buyout on that component in terms of Lundin potentially closing that out early?

[Seil Song, Chief Development Officer]

On the prepayment?

[Matthew Frydman, Research Analyst]

No, sorry, Gerard, on the offtake. Do they have an option to close out that prepay -- sorry, the offtake agreement?

[Sandeep Biswas, MD, CEO & Director]

Do you want to take that, Seil?

[Seil Song, Chief Development Officer]

Yes, there's no buyout on the offtake agreement, no.

[Operator]

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

[Peter O'Connor, Senior Analyst of Metals and Mining]

Congratulations on a very [ sheer ], very savvy deal. I got a couple of questions then. If I could walk through them. The first ones to Gerard. Is there convertibility in any way, shape or form of the facilities that you've acquired today? [indiscernible]

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

No.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. Have you in any way discussed with Lundin about any form of changing this debt facility into equity?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

No.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. And force majeure. Is there a force majeure clause within the shutdown component that you talked about before the [indiscernible] at hand?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Well, look, the -- it's more in the nature of nonperformance. I don't -- I don't believe there's a force majeure events as such, rather it's all covered in the event of default definition, all of which is very detailed and in the public domain. So no force majeure as such.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. And Sandeep, you've used the word numerous times during the presentation in the Q&A about strengthening your position, which would suggest that you're strengthening because it was weak before. Why was your position weak? And some of the comments you've made earlier suggest that this would appear to be a lack of -- not trust, I'm just trying a word here, a belief in the people that are running it or the way they're operating it?

[Sandeep Biswas, MD, CEO & Director]

So I have a lot of belief in the people who are operating it. I mean they've done a fantastic job. Ron runs a tight ship. They've hit all their targets. In fact, they've got commissioning done before expectation. I think their capital costs were sort of within 5% of budget, which is like a gold star in the resource space, as you would know. So I think they're doing a great job.

[Peter O'Connor, Senior Analyst of Metals and Mining]

So having control of the life of mine plan, et cetera, does that suggest a difference of opinion in the life of mine plan or concerned about where they may take the life of mine plan?

[Sandeep Biswas, MD, CEO & Director]

No, I don't. I don't think so. I think what these facilities -- first of all, they give us more exposure. There are those negative controls if necessary. We don't think that they'll be necessary, but they're there. And it gives us an overall a greater economic exposure. We have those protections. And overall, that raises the -- our position in the business.

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

And if I could, just to supplement that a little more, too. It's -- given the rights that exist in these facilities, we would rather be the owners of them rather than going to somebody that's not the longer-term interest of Fruta del Norte mine. So the control is more about the totality of the economics of the mine. And as Sandeep said, not a statement of how the mine is being run to date. It's -- if the -- us versus someone else holding these facilities, we think it's better that we do.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. That makes sense. And Sandeep, could I just ask about PNG and the Porgera issue. I'm just looking to your tenure at Lihir of 2035, which is, as you mentioned, a long way away. But should I think of Lihir as a 14-year mine life in that context? Because you could -- I'm assuming you can only say to me with certainty that your life of mine there is 2035. Unless you get extension. So given recent events, 2040 would be the life of line I should model. And beyond that would be subject to something that I just can't foresee.

[Sandeep Biswas, MD, CEO & Director]

No, I don't think that's right. I think the way we look at it and the way Porgera should be looked at is that it's one-off issue. There are a whole heap of a bunch of agreements and there's applications under the 1992 Mining Act on how we extend their license. And we see no reason why we shouldn't be granted that extension if we do the right thing according to our obligations and then we have the supportive framework at federal, state and local government and the community.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. That makes sense. And just lastly, the equity raise. I'm not asking about the equity raise itself, but just the backdrop that you mentioned about the last time you raised equity was 2009. Is it a coincidence that this is the first time since 2009 you raised equity because gold price at [ USD 100 sort of ] [indiscernible] are at or near the highest in that period of time. And I'd say I agree because you should raise equity at higher gold price and lower gold price and a higher share price and lower share price, but no, ] too secret ].

[Sandeep Biswas, MD, CEO & Director]

I think so. You've been around too long like me. I think the way to look at it is this is investing in the growth of the company. I mean Newcrest is entering a growth phase, right? If you look at options like Golpu, Havieron to replace Telfer. You've got the Red Chris, you've got Cadia being expanded. You've got our other potential projects throughout our portfolio around exploration and et cetera. I think it's a very exciting phase going forward for Newcrest. And going into that phase with good projects, strong balance sheet for optionality, low gearing, is prudent. And we are in a cyclical industry, right? I mean gold is not going to stay at high prices forever. It will go up and down. And it's just more, I think, some may call it conservative, but I think it's good, prudent balance sheet management.

[Chris Maitland, Head of Investor Relations & Media]

We should probably head towards last question. Are there any more online?

[Operator]

Our next question comes from Trent Allen from CLSA.

[Trent C. Allen, Research Analyst]

It's not a big question for the final question. But just to clarify for me. The offtake agreement is a physical delivery of gold, is that right? And if so, what happens if FDN is closed? Do they have to find that gold in the spot market and deliver it to you? Or is there -- have I misunderstood?

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

It just becomes -- it's like a loan repayment, Trent. It operate -- the gold production is the mechanism for calculating the value. And if not paid, it rolls over. The obligation to pay doesn't go away. It just -- it accumulates.

[Trent C. Allen, Research Analyst]

Okay. So they don't have to go out and find the metal for you in that period, it can be delayed.

[Gerard Michael Bond, Finance Director, CFO & Executive Director]

Correct. It's a classic stream or finance facilities settled by the revenue from the gold.

[Chris Maitland, Head of Investor Relations & Media]

Okay. I think with that, we'll wrap up the questions. So thank you, operator, and thank you, everyone, for making the time to join us on today's call. And that will conclude the call. Please focus on staying safe and look for the good times and speak to you all soon. Thank you.