Northern Star Resources Ltd

ASX:NST

Earnings Call Analysis

Strong financial position and growth plans highlight Northern Star's performance.

Northern Star reported robust results, ending the quarter with a net cash position of $148 million and generating $122 million in net mine cash flow. The company expects free cash flow to increase as production ramps up, aiming for 2 million ounces by FY '26. With a solid track record of dividends, Northern Star distributed $280 million to shareholders. Key projects are on track, including the KCGM expansion, with $130 million spent this quarter. Increased production is anticipated from high-grade zones and improved mill performance at major sites like Thunderbox, targeting 1.4 million tonnes per annum throughput moving forward.

Strong Financial Position

Northern Star Resources has reported a robust financial standing, highlighted by a net cash position of AUD 148 million and total cash and bullion amounting to AUD 1 billion as of September 30. The company generated AUD 122 million in net mine cash flow, primarily driven by higher gold prices and operational performance. Additionally, the operational cash flow for the quarter was recorded at AUD 585 million, and free cash generation totaled AUD 52 million after accounting for capital expenditures.

Production and Guidance

The company remains committed to its production guidance of delivering 2 million ounces in FY '26. Key operations such as Golden Pike North, Jundee, Thunderbox, and Pogo are expected to increase production with the planned higher head grade and throughput. Specifically, the quarterly CapEx was AUD 423 million, earmarked for plant and equipment and mine development, reflecting their proactive stance towards growth and expansion.

Dividend Policy and Shareholder Returns

Northern Star is steadfast in its commitment to shareholder returns, having paid a final dividend of AUD 280 million for FY '24. This consistent dividend payout strategy complements the company's growth initiatives, demonstrating a balance between reinvestment in operations and returning capital to investors.

Environmental and Operational Improvements

Significant strides are being made regarding environmental sustainability and operational efficiency. The company is advancing projects across multiple sites, most notably the KCGM expansion, which is on track with AUD 130 million already spent. Furthermore, at the Thunderbox production center, the mill has successfully reached a nameplate throughput rate of 6 million tonnes per annum for two consecutive quarters, showcasing an operational performance that exceeds expectations.

Strategic Cost Management

Operational cost management is a critical component of Northern Star's strategy. The company is positioned around the midpoint of the global cost curve, providing resilience against market fluctuations. The plan includes significant investments in underground development at Jundee, aiming to boost overall productivity and reduce costs throughout the fiscal year.

Future Market Outlook

The company does not intend to change its operational strategy in response to current gold price fluctuations, which have been supportive, trading around AUD 4,000 per ounce. Northern Star is focused on leveraging its stable production and vast reserves—estimated at over 60 million ounces—and intends to maintain a disciplined approach in its capital management decisions. Expectation is that resource and reserve calculations will reassess under higher gold price conditions, aiding in future planning.

Hedging Strategy

Currently, approximately 20% of Northern Star's production is hedged at a favorable average price just above AUD 3,200 per ounce. The strategy aims to provide stability for investment decisions, though the company acknowledges the challenges posed by a rising gold price. Northern Star's strong cash generation capabilities enable it to remain agile in navigating the market.

Exploration and Growth Potential

Looking ahead, Northern Star is keen to explore additional growth avenues, particularly in North America. The recent conversion of its debenture with Osisko Mining is expected to yield CAD 189 million, enhancing liquidity for potential investments while considering shareholder buybacks. The ongoing focus on organic growth through existing operations remains a priority.

Earnings Call Transcript 2025-Q1

[Operator]

Thank you for standing by, and welcome to the Northern Star Resources September 2024 Quarterly Results. [Operator Instructions] I would now like to hand the conference over to Mr. Stuart Tonkin, Managing Director and Chief Executive Officer. Please go ahead.

[Stuart Tonkin, executive]

Good morning, and thank you for joining us today. With me, I have our Chief Financial Officer, Ryan Gurner. We are very excited to be reporting another strong quarter and to share with you the progress of the many projects across the business the team is working on to create additional value. We continue to deliver reliable and consistent operational results safely and responsibly in the most prospective and the most desirable jurisdictions.

With our first quarter results, a great start to the year, we are well-positioned to reiterate our production, costs and CapEx guidance for FY '25. The business is in good shape to deliver for our shareholders significant leverage to the increased gold prices, translating to increasing cash flows. Financially, Northern Star is in an exceptional position with an investment-grade balance sheet that remains net cash at the end of the quarter. I'm pleased with our prudent and measured approach to our returns-focused capital investment program in the fourth of our 5-year strategic plan to deliver 2 million ounces in FY '26. At KCGM, our mill expansion work is on track and the project to deliver ore feed and infrastructure for the expanded Fimiston mill is progressing well.

At Jundee, underground mine development commenced at Cook-Griffin, while the ramp-up of mill feed sources continued at Thunderbox. And at Pogo, major mill works were performed successfully to enable us to continue delivering high-margin ounces and above the quarterly guidance provided to the market. I'll now hand over to Ryan Gurner, our Chief Financial Officer.

[Ryan Gurner, executive]

Thanks, Stu. Good morning, all. As demonstrated in today's results, the company is in a great financial position. Firstly, our balance sheet remains strong in a net cash position of $148 million and cash and bullion of $1 billion at 30th September. Secondly, free cash generation across the business is strong with our capital investment program fully funded. We expect free cash to increase over the year as production lifts. And finally, we are focused on capital management, dividends and buyback, so our shareholders can benefit from increased gold prices.

The company has been a regular dividend payer since 2012 and underpins our company purpose of delivering returns to shareholders. And now to the details. On a net mine cash flow basis, the business generated $122 million, thanks to higher gold prices and operational performance. Figure 8 on Page 9 sets out the company's cash and volume movements for the quarter. Key elements being the company recording $585 million of operational cash flow.

Looking ahead, this is forecast to rise with increasing production from the high-grade low strip material at Golden Pike North, planned higher head grade and throughput at Jundee, continued throughput increases and recovery at Thunderbox with increasing grade planned and increasing throughput at Pogo. After deducting CapEx of $423 million relating to plant and equipment and mine development, $60 million in exploration and $50 million in equipment leases, quarterly free cash generation was $52 million.

Also during the quarter, the company paid its FY '24 final dividend totaling $280 million to shareholders. Quarterly investment in sustaining capital, growth capital and exploration are tracking to plan. Growth capital investment includes a KCGM, open pit development at Great Boulder and the East Wall, which will give us full access to Golden Pike North and underground development at Fimiston and Mount Charlotte, which is enabling us to lift production in those areas. At Jundee, underground development and infrastructure at the Cook-Griffin mine and our renewables project, which will be fully commissioned in Q2. At Thunderbox, development of the high-grade Wonder underground and open pit development at Orelia.

The KCGM expansion project remains on track with spend of $130 million during the quarter. This included work performed and commitments in respect of engineering and design, on-site construction, including bulk earthworks and major concrete pours and the major equipment package. Whilst operational free cash flow is expected to increase in Q2, the company will pay a semiannual coupon payment on the U.S. notes and the FY '25 annual group insurance premiums.

As previously mentioned, the company is not expected to begin paying corporate tax on its Australian operations until Q3. On other financial matters, depreciation and amortization is slightly under the low end of guidance range at approximately $710 per ounce sold. And for the quarter, noncash inventory charges for the group are a credit of $11 million.

After the quarter end, the company converted its debenture with Osisko Mining for 38.5 million common shares. Shareholder approval for the plan of arrangement was obtained on the 17th of October and is expected to become effective 25th of October. Shortly after, Northern Star is expecting to receive proceeds of CAD 189 million, resulting in a AUD 32 million pretax gain during Q2.

Lastly, in respect of hedging, Table 4, Page 9 sets out the company's committed hedged position at 30 September, the overall book being 1.8 million ounces at an average price just over AUD 3,200. The company replaced the 120,000 ounces of volume delivered during the quarter at an average price above AUD 4,000 per ounce. These commitments were predominantly placed across calendar year '26, aligning to the final period of capital investment for the KCGM plant expansion and commissioning start. I'll now hand back to Stu to cover the operations.

[Stuart Tonkin, executive]

Thanks, Ryan. And today, I will be covering the operations section as Simon Jessop is traveling. So as you can see in our results, we delivered strong operational and cost performance, starting with the Kalgoorlie Production Center which includes KCGM, Carosue Dam and Kalgoorlie operations, accounts for 52% of the group gold sales and 56% of mine operating cash flow.

Net mine cash was an outflow of $11 million due to the major planned works and $304 million of capital spend, largely at the KCGM mill expansion. At KCGM, the East wall remediation works were temporarily paused to build a platform for the new Carosue's underground portal locations, which have been filed subsequent to the quarter.

Full access to the Golden Pike high-grade zone is delivered from the second half of FY '25, growing production at KCGM. Open pit material movement achieved an annualized rate of 80 million tonnes with the guidance above 80 million tonnes. Pleasingly, the underground mines delivered a second consecutive quarter of increased activity, realizing the benefit of increased resourcing. Underground ore mined was 20% higher compared to the June quarter due to the increased production from Mount Charlotte and ongoing development ore from the Fimiston underground with the first stopes fired during the quarter.

Development meters increased 50% for the quarter to 6.3 kilometers versus 4.2 kilometers in the previous quarter. Mill ore volumes were lower than the June quarter due to planned major maintenance shutdown activity with mine grades reflective of the greater proportion of stockpile material processed and gold volumes and grades are scheduled to increase along with recoveries in the following quarters.

At Carosue Dam, gold sales were lower given the planned mill shut and lower gold grades from the underground mining sequence. And at Kalgoorlie operations, it continues to perform very well with strong milling performance at the Kanowna Belle mill. The KCGM mill expansion spent $130 million over the quarter and remains on track with on-site construction slightly ahead of schedule.

Stage 1 engineering and design is now 71% complete with minimal changes to the original design and major concrete pours are on track with 39% of total concrete poured to date. Shipping of all bulk steel has commenced and all major equipment has been fabricated and has been progressively freighted to site. We expect to receive all the major equipment by early calendar year 2025.

Turning now to Yandal Production Center, which includes Jundee and Thunderbox, where the quarterly highlight was the Thunderbox mill delivering nameplate throughput of 6 million tonnes per annum run rate for 2 consecutive quarters. Fantastic outcome by the team, and I thank them for their efforts. Yandal delivered positive net mine cash flow of $86 million, a record since the beginning of our profitable growth strategy commenced in FY '22, demonstrating our returns-focused approach for this production center.

At Jundee, Northern Star Mining Services mobilized and commenced mining at Jundee's newest underground mine, the Cook-Griffin, a recent exploration success. And gold sold benefited from a drawdown in gold in circuit, offsetting lower mill grades and longer-than-planned mill shut. [ Milling ] performance has significantly improved so far this quarter with grades expected to modestly increase throughout.

As I mentioned previously, Thunderbox was a standout, delivering a record mill throughput, including a planned mill shut. And pleasingly, at our new satellite mine, Wonder underground, production stoping commenced whilst our NSMS team continued to deliver industry-leading development rates there. We are continuing to work on improving the reliability of the processing plant and work focusing on milling and crushing circuits in the December quarter will continue. This work is expected to deliver targeted stable mill performance there at Thunderbox and a lower cost base from the second half of this year.

And finally, to Pogo, a fantastic achievement by our Alaskan teams deliver 60,000 ounces for the quarter whilst also delivering the planned major mill works that were significant there and above our previous guidance of 50,000 ounces for the quarter. During the quarter, the underground mine operated at a 1.3 million tonne per annum rate, and was constrained by stockpiling capacity, but certainly ahead of the total mill volumes in the quarter.

And that underground stockpiled ore now provides future contingency and increased confidence to deliver our annual guidance at Pogo. The Pogo mill continues to operate at very good rates this quarter on the outset of the completed mill works, and we have established our guidance for the plant to operate at a targeted throughput now above 1.4 million metric tonnes per annum.

So that concludes our operational highlights, and I would now like to hand over to the moderator, Ashley, for Q&A. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Daniel Morgan with Barrenjoey.

[Daniel Morgan, analyst]

Simple question with regard to your operational performance. Like, could you just do a quick around-the-grounds as a simple snapshot of where your businesses -- various businesses were versus your expectations in the quarter, like, with each business? Was it ahead? Or behind? And -- just to give us an overall sense of how we're tracking.

[Stuart Tonkin, executive]

Yes. Thanks, Daniel. We -- look, largely, we delivered, as a group, right in line. I think that's probably reflected in consensus view as well. We'd already flagged early that there was a significant amount of major works across all our plants within the quarter, and we explained that, [ notwithstanding ] the guidance, I think that was anticipated.

Pleasingly, Pogo really came out of the gate strong. We pulled out that mill motor fully rewound. We did a lot of other major works at Pogo on the, of course, [ ore beam ] and a lot of other circuit upgrades that were done in that sort of 5-week major project and pleasingly came out very strong, whilst the mines still continue to operate there. So that delivered 60,000 ounces, and we forecast 50,000 for the quarter. So very pleased with where Pogo's positioned and its continued run rate into this quarter, generating really good U.S. cash flow.

I've said in my opening remarks around the pause of the movement of materials from the bottom of Gold Pike at KCGM. Essentially, we've got that large, big platform built with waste where the new Carosue's portals have been cut, and that's the new access into that OBH cutback area. This new portal has been established and developed there that gives us neutral platforms access to Fimiston.

So very pleased with that work, and we'll essentially catch up the material movements throughout the next couple of quarters and really go hard into KCGM, lower part of that mine for the second half of the year. So I'd say that was set off in ounces in the quarter at KCGM. But across the rest of the sites, Jundee had a great sequencing delay, but the rest are pretty much bang on where we expected them to be this time of the year.

[Daniel Morgan, analyst]

So just following up a little bit on the Thunderbox, surprised to see the -- you're at nameplate despite the big rectifications. I know it's early, but have you got a sense for how much you might be able to push that nameplate for the rest of the year? And do you have confidence in the -- that the rectifications now mean that the mill can deliver?

[Stuart Tonkin, executive]

Yes. So if you recall, we spoke about -- on the onset of that expansion, it was really mechanical availability of the plant. So yes, the issue was we absolutely could deliver the 6 million tonne rate, but the availability was sort of in the 70s, low 70%. We've got that up mid-80s, and that's what's giving us the $6 million run rate, which says that if we get in line with most plants around Australia and our other plants at sort of low 90% utilization availability, we will get in excess of 6 million tonnes.

So we're just very pleased that, that's the minimum. And we've got a lot of material in and around Thunderbox that can feed -- that's stockpiled and can feed that in excess. We're not mine-constrained there or source-constrained. So if we can operate above 6 million tonnes, that's an opportunity and upside for us.

[Daniel Morgan, analyst]

And then, I mean, just pivoting over to Pogo. Again, the operation seemed to deal very well with a big mill rectification during the period. You built some stockpiles. You're talking about operating 1.4 million tonnes or above. Does that mean potentially this asset could deliver towards the upper end of your guidance? So could you just unpack what the rest of the year looks like and your confidence from here?

[Unknown Executive]

Look, yes, that's what we see. And we know that the mill can operate at 1.5 million tonne rate. It's really around the planned shuts and the unplanned shuts, I guess, that impact away from that. Hence why we said now that the floor is not 1.3 million, it's 1.4 million tonnes through the plant. And we're obviously mining to match to that. You'll see the difference in the quarter table there showing that we were -- we mined 60,000 ore tonnes more that we milled during the quarter, which is stockpiled effectively to be buffer.

We won't necessarily get to maintain that level underground because we're pretty snowed in with the real estate. But it is a good -- something we've never been able to do is create a lot of stockpile between mine and mill and allows us, yes, to thinking and planning to disconnect the 2, so we could work independently. So it's -- yes, pleasing with the outlook of Pogo, pleasing where they started in quarter 2 on all things throughput, through consistent [ to ensure ] the mill, head grade and mining matching those volumes.

And obviously, the developments there are always ahead of schedule, so we're ramping up new areas underground. So it is -- yes -- we've watched this space with Pogo. You've seen growing U.S. cash flow generation. You've seen great resource outlook at that deposit and exploration upside. So I think people start to really [ catch ] the rate of the valuation on.

[Operator]

Your next question comes from Mitch Ryan with Jefferies.

[Mitch Ryan, analyst]

So just want to have some commentary. At Yandal, you've called out that satellite feed sources are expected to double to 4 million tonnes in FY '26. In light of that, I'm just wondering if you can sort of help us think about growth CapEx into FY '26. I know the guidance for this year is $285 million to $307 million, so we sort of expect that to be maintained given the capital will have to go and the infrastructure to maintain that satellite feed?

[Stuart Tonkin, executive]

Yes. Thanks, Mitch. Look, it's capital related, too, building undergrounds, taking them to commercial production, which include things like Wonder. And it will also be the peak capital that went into things like Orelia. It's now being tracking its ore source and that down. So those -- that capital that it burns, probably earning next future peak in a number of years. But ultimately, it's pretty flat to reducing across the southern part of Yandal, because we've already started those mines, spent that capital, bringing them to commercial production and then building stockpiles.

So it's really whether -- back to Dan's question, whether we increase throughput through Thunderbox, whether we need to accelerate the capital to match that extra milling throughput. But we won't give that capital guidance out until next year because there's still decisions to be made on whether that is or isn't. The thing at the moment is, yes, the Wonder underground is in production, and we've got -- it's an underground mine that's been developed, and that's really been fed in as that high-grade material.

And then to the north, the Cook-Griffin portals are being cut for this capital this year. Essentially, that will be ready for commercial production mid-FY '26 with limited other major capital at Jundee region in the north part of Yandal. So I think it's relatively flat to reducing into '26. But you've always got some capital in turning on satellite operations in the Yandal.

[Mitch Ryan, analyst]

And my second question just relates to -- you've called out Pogo is going from 2 to 3 shutdowns a the year. You may have given timings but I've missed it if you have. Can you just give some commentary around sort of which quarters we should expect those to fall in? And will it be the same quarters every financial year?

[Stuart Tonkin, executive]

Yes. So I guess one thing that happens with the increased throughput is you wear stuff out quicker. And we did do this sort of 2 shots per annum and the risk is you call them early and you're unplanned for it. So we've strategically gone to 3. Ideally, they are more compact and we can do other works. We could backyard all these other works up so that we also don't have the unplanned shut.

So we'll get to trial. We'll plan it that way. We'll run it that way. We still believe we'll have sprint capacity if decided those shuts to catch up. But I guess we'll guide back to make sure that the -- they look at the full year, not the "pick a point and draw a line." It's -- there'll be lumpy points within -- depending on those shuts. And then on other operations where we're trying to -- I've always been asked about why do you do you shut in 1 period, we usually have 1 major shut in quarter 1, and we do a half shut in quarter 3.

And obviously, that's reflected in the output for the group. And then when you line all those things up across all your operations, you have a bit of a see-saw. It will -- it's also around booking and planning that major works and labor a long way out. And once you're getting close to that, it's quite rigid to be able to move it. So we'll aim to smooth it. But I think as long as we just tell people to expect it, then I'm surprised if there's a bit of a trough, and then I'll expect to see it paid and netted off.

[Operator]

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

[David Radclyffe, analyst]

So first question's a bit of a high level on just if you could give us sort of your thoughts on the impact of what the sort of $4,000 an ounce gold price a sheet means for the business day to day now. So really thinking about near-term opportunities. So do you consider accelerating some of the stripping or pushing some extra development? Or do you think about even bringing forward some of the sustaining capital projects?

[Stuart Tonkin, executive]

Thanks, David. I guess what it means for us right now is we are enjoying significantly improved cash flows from production we're doing today and delivering into spot sales. So you'll absolutely see that in strengthening of balance sheet and compression of payback periods on investments that we made decisions on and committed to in previous years that are on the back end of execution.

These were very robust investments and returns generated from assumptions around 2,700 Aussie gold certainly not 2,700 U.S. gold. So the thing, at the moment, is we don't need to change our plan. We're in our fourth year of our 5-year strategic plan delivering into 2 million ounces next financial year. We're well-positioned and ahead of that, that we don't have to scramble.

What we're seeing across the gold fields is all of that thinking at these higher gold prices, and you -- what typically happens in this environment, these pop-up shops that start new mines that are only economic at these levels, that does put a bit of pressure on resources and potentially costs at the time. But right now, we are producing. We have gold we can physically sell into the spot levels and are enjoying those improved margins.

So we don't have to change behaviors. And it's really a question for when we get to March, April when we assess our resource and reserves that are done at AUD 3,000, AUD 2,500, what numbers should we be using on our resource reserve for our long-term outlook. Because the market's long term outlook's about AUD 2900 an ounce on consensus. But if you wanted to put forward hedges today, you can get AUD 4,500 to high AUD 4,000 an ounce. There's a massive disconnect at the moment on sentiment outlook and ability to -- for producers to generate cash.

[David Radclyffe, analyst]

Okay. Well, it's good to hear. Obviously, you're sticking to plan, but maybe to follow up on that hedging comment. Could you just clarify again what the hedging strategy is? Last quarter, no hedging. This quarter, we seem to be back to hedging and rolling that forward program. Obviously, as you say, the $4,000 an ounce is a great and very attractive price. But the forward strategy hasn't worked so well in the short term. So just a bit of clarification will be good.

[Stuart Tonkin, executive]

The forward strategy of hedging never works on a rising gold price. But if you put our mark-to-market, if you put that against the forward consensus, it's well and truly in the money. So we do it for purpose on our investment decisions to guarantee those returns and guarantee those paybacks. And then we fall off after that. So our hedge book does tail off and we're not adding at the back end of it because we are off CapEx, and we have significant production and we are generating a massive buffer of cash earnings as well as having no debt.

So we're less concerned now on the other side of the [ Capitol Hill ]. And it's just the near term where we do have some 20-odd percent of our production hedge, which was put in place for a prudent decision around the investments at the time. So yes, that's what we're able to do and why we've done it.

We've been pretty clear on articulating that. It's worked and, I think, at the moment, it's -- we got to change and we can get those forwards. But we will be able to deliver into these spot levels with unhedged production that is double the next producers' ounce profile and 4 or 5x the next producer after that. Leverage to gold price, Northern Star has it in space.

[Operator]

Your next question comes from Al Harvey with JPMorgan.

[Alistair Harvey, analyst]

Stu and Ryan, just on the Osisko convertible conversion, I guess, just trying to get a sense of what the plans are for the CAD 188 million. Could that come back through the buyback? And maybe just a more general on just how you're weighing up capital management options across growth versus capital returns at present?

[Ryan Gurner, executive]

Yes. Thanks, Al. Yes, that's right. So I mean we've got -- obviously, we're expected to receive the funds later this month. So looking forward to getting them with a small gain there. Yes, look, it will be considered. Haven't thought through just yet what we're going to do with it. Once we sit in the account, we'll start considering it. There's $125 million left back on the buyback. That's -- it's not a great deal left to do that can be executed quite quickly. So there's plenty of time for us to execute that.

And the gain, I guess, from Osisko, we'll weigh out what to do with it and sort of go from there. But as sort of Stu was mentioning it or spoke about in the question around do we change behaviors, obviously, we're not changing behaviors from an operational sense. So we see good returns in what we've done. We've done a lot of the hard work now. So just really looking forward to the margins and the earnings growing from here under these gold price levels.

[Alistair Harvey, analyst]

Sure. And I suppose maybe just a follow-up. I mean, I think you've kind of answered it with discipline, et cetera. But just thinking, I guess, the Osisko convertible was kind of entered in as another option as further progress into North America. I mean, how we're thinking about potential growth M&A in that space?

[Stuart Tonkin, executive]

Yes, you're right. It was established as exclusivity to do DD and assess the Windfall deposit. That's where it was established. So view and appetite is to always look. We don't need things, and we've got a great organic delivery and plan and strategy. So -- and looking at the exchange rate, it's difficult to see value offshore at the moment.

So yes, we'll just keep focusing on -- you pointed out the disciplined approach to it, greatest returns right now in our organic delivery, and we consistently deliver into that. But yes, over the next couple of years, it's pretty exciting position when we've built the balance sheet we've got to date, and it's only improving. There'll be opportunities in front of us.

[Operator]

Your next question comes from Matthew Frydman with MST Financial.

[Matthew Frydman, analyst]

Firstly, on KCGM, and I think you might have alluded to this already in your response to Dan's question, so apologies if I'm going over old ground. But I just wanted to understand the lower feed grade during the quarter. Obviously, you said more stockpiles, and that was -- appears to be as a result of that lower open pit ore mined.

Is that just as a result of, I guess, lumpy access to those high-grade zones as a function of the mine plan? Is there anything we should be reading into there in terms of the lower open pit ore mined during the quarter and the higher stockpile feeds obviously despite the fact that you had a plant shut? And I guess, ultimately, is the expectation that all mine volumes are going to pick up in the following quarter?

[Stuart Tonkin, executive]

Yes. Thanks, Matt. So you're right. I think it's the stockpiles contribution. We're still getting 13 million tonne rate through the plant. It's just what blend and what grade. If you kind of think of last year out of KCGM, ultimately, at 450-odd thousand ounces. This year, around 550-odd thousand and then next year, the 650,000.

So you've got these step changes. And we said it's largely that second half when we're accessing the higher-grade Golden Pike sort of undisturbed. So the rate in 2 years going from 450,000 to 650,000, if you kind of cut the middle year in half, which we're in at the moment, we're seeing extension of last year's rate going into quarter 1, maybe quarter 2 and then the second half basically being at the run rate into FY '26. So it's just where we're positioned at KCGM. But once we've got all of the waste from that east wall off those bottom shelves, you have benches down the bottom and open up and destack those levels, we'll have good access to that grade, which then comes into the feed.

Setting off a bit of that is the improved underground performance at Mt Charlotte, particularly in the development ore coming out of Fim, and I expect to see that continuing to improve as well. So there is a bit of a lever and buffer there that not only are we relying on the high grade from the pit, we will likely get some better material -- the same material but more of it from underground sources throughout the year as well.

[Matthew Frydman, analyst]

Yes. Understood. And then maybe just a bit more of a fulsome update on the mill expansion. If I look at the capital spend there, I guess, in terms of the run rate relative to your guidance for the year, everything appears on track. But is there anything maybe at a more granular level that's moving around? How's progress on the ground relative to your time lines and your, I guess, project expectations? And is there any sort of challenges or opportunities that are presenting themselves given the, I guess, the broader industry backdrop?

Commentary has been that engineering services are a little bit easier to come by and maybe labor -- skilled labor is a little bit easier to secure. So is that kind of being reflected in how that project's progressing?

[Stuart Tonkin, executive]

Yes. So we're very happy with its progress, and we're ahead on some of the items in the schedule. We're actually ahead of plan, which is pleasing because we catch that up and it's -- we're derisking it each quarter we go forward. So yes, we're very pleased with that activity.

You can appreciate it's still -- there's still a lot going on, so the owner's team and the contracting teams that are there, and then we start to get all of the physical items being freighted and delivered to site. So we always like to say we'd rather be looking at it than for it. So it will all be laid out in sequence ready to be erected. By pretty much early calendar year, all the hardware will be there, and then we'll be slowly sequencing -- or just checking Q&A and making sure there's no issues with any of that.

But historically, when things are still coming on the water or they've got -- with the Suez Canal issues or all those sort of stuff or going a long way around or ports not accessing it, all those sort of things, you've just got to -- still going to plan, still all theory. We're really getting past those really critical items or events to make sure that they're not going to hold us up. So yes, very pleased with where we're at.

I wouldn't say there's massive opportunities on savings. I think when we look at the contingency, we're probably eating into it at the rate we would expect that it was there to achieve, and it's really around this labor productivity rate going into it with our contractors. So working closely with them, we're seeing some repricing savings, but we're also seeing some small movements. But very happy it's on time and on budget and derisking every quarter by the way.

[Operator]

The next question comes from Jonathon Sharp with CLSA.

[Jonathon Sharp, analyst]

Just a follow-up question from Mitch's question about Pogo shutdown. Has the maintenance strategy changed in terms of planned maintenance time over a yearly basis or over a per tonnes basis? Or has that actually stayed the same and it's just you're producing more, so more maintenance?

[Stuart Tonkin, executive]

Yes. So stretching it out to the 2 shuts, what we've looked -- even when we kind of -- we upgraded the plant from 1 million to 1.3 million tonnes per annum. We -- essentially, We're still keeping to the 2 shuts and trying to stretch out relines and works. And what obviously everyone experienced and we saw throughout the last few years, these unplanned issues that things just wore out at a higher rate.

And so we've gone now on a bit more of a conservative side. And it's not as simple as saying 2 or 3 in a year. It's taking weeks of gaps between -- so we look at mean time between failures. We look at which items can be upgraded so that they can last align with a major shut. So they're not small pumps or something like that, can't -- have to be brought down to replace or put in duty spares that can -- one can fail and you have the second one there that gets you through to the next shut.

So all of that overarching maintenance planning, thinking, alignment of all these things, so it's a bit more like an F1 car coming into the pit and getting everything done at once. That's the attitude as opposed to driving with caravan around Australia and fixing your car piece by piece. This is sort of a different maintenance regime. Again, we'll see how it goes, and we still expect it to give us a better planned result over the year and absolutely deliver that consistent guidance that we've marked.

So it's a natural maturing of the view at the asset, and we've got a very long-term multi-decade outlook there. So we're not just trying to tie it up wire. We're certainly making sure that the investment we're making is for the longer term.

[Jonathon Sharp, analyst]

Okay. Great. So could I summarize it as an increase in planned maintenance to decrease unplanned maintenance?

[Stuart Tonkin, executive]

Absolutely. And that is the eternal balance of investing capital versus operating. And that's, I guess, where we may have got criticism at the time for Fimiston building a $1.5 billion plant, but it was going to be there for 50 years. You're going to get the absolute lowest OpEx and the highest uptime and the reliability because of that investment. You can certainly have done it cheaper, and it will break along the way and not give you consistency.

So it's the exact approach to whether it's building mines or running infrastructure. It is that eternal balance. These aren't aircraft you've got to keep in the air. These are -- there's a balance between OpEx, CapEx, uptime, so it is that fine line.

[Jonathon Sharp, analyst]

Yes, makes sense. And just another question on KCGM mill expansion. I mean it appears things are going pretty well, at least on paper. But as you know -- as we all know, things -- there's always issues to manage. What do you see as the key risk or challenges in the next 6 months?

[Stuart Tonkin, executive]

Look, it's probably we're very pleased with the visibility on all of the elements, the quality of the work, the rate of the work. So we're very happy with that. In my view, it's really the coordination or the overlap of activities and making sure that someone's great work isn't undoing someone else's adjacent to them and that there's not that -- because we obviously -- we're running a 13 million tonne per annum plant. We've got a fence around building a 27 million tonne per annum plant adjacent to it.

And so we've just got to make sure that those interactions don't compete or that if it's already in advance, risk assessed and planned ahead. So that's the only part. We've got a large owner's team really looking carefully at all this. We've got a very highly competent contractor there in Primero managing the build, doing great work. So yes, very confident with what we're seeing at the moment, and it's been derisked.

[Operator]

The next question comes from Hugo Nicolaci with Goldman Sachs.

[Hugo Nicolaci, analyst]

Congrats to the team at Pogo for the performance there. A number of questions on the quarter have already been asked, so I want to try and come back to the mine grade outlook across the portfolio, particularly at Yandal. I appreciate we've tried to touch on this one before, and you've historically guided to the outlook for grade across most assets being in line with the reserve grade.

So if I take Thunderbox as an example, mine grade there has been below reserve grade since 2021. Are you able to give us a bit more color across the portfolio on how you expect grade to track over the coming years relative to reserve grade maybe and also just with regard to the timing of new pits and new areas being opened up?

[Stuart Tonkin, executive]

Yes. I don't think it's departed too greatly there, Hugo. So I think there's a recovered grade. There's mining factors that have been applied as we've opened new mines. But I think relative to reserve grade, it's around sequencing. So I think we've -- Jundee always historically had quite a lumpy profile because of the nuggety ore body and the sequencing of higher grade that comes in. It's less of an issue down the south because you've got more consistent grades. And therefore, it is around, I guess, how much of that material goes into that now expanded 6 million tonne blend.

So I think the Thunder ground -- Thunderbox underground, originally at the higher parts or middle of the ore body was around those [ 2 ], 2.2 grams and on the periphery sort of gets down to [ 1.7, 1.8 ]. So I don't know whether we're anchoring back to original reserve grades there, but it's certainly very productive, very profitable at those lower grades, but that is reality of that ore body.

And then it's just the sequencing of Orelia or obviously, Otto Bore's come in the -- we really haven't seen a huge contribution from Orelia pit to see whether it's meeting or matching reserve, but we certainly put in very conservative numbers on that to make sure it was economic. And then it's just the Wonder underground coming in as well.

So D Zone has been consistent. So I don't know the reference to the setup against reserves, but we're guiding essentially plus or minus, but 300,000 ounces in the north at Jundee, 300,000 ounces in the south at Thunderbox. It will swing around about, but ultimately, that's what we're working to give us a 600,000 ounce production center across that Yandal system with multiple ore sources all being satellite mines being fed into those plants.

[Hugo Nicolaci, analyst]

So maybe in the near term, just depending on where you are on that sequencing piece and maybe grades kind of track a bit below reserve grade and then come back up as you start to see a bit more contribution from the higher-grade zones, is that fair?

[Stuart Tonkin, executive]

Yes. So the 2 things will happen. If we're over reserve grade, there's a time in the future we'll potentially be under it to average into it. But we will -- secondly, every year when we cut our reserves, we're looking at our metal core factors and making sure we're reconciling those models closely. So there's either 2 things happen, either downgrade, upgrade your reserve on an annualized basis with that model feedback or you're looking at your mining factors, which obviously been dilution that's to your -- from your resource to reserve grades.

So they're very iterative things. I would not be macro discounting any of our numbers based on a quarter outcome at any of our operations because they have swings around about. You just go back through all the historic quarters. There's pluses and minuses. Jundee will knock out an 85,000 ounce quarter, and then it will knock out a 60,000 ounce quarter, doing exactly the same activity in very similar areas. And reliably over 10 years, it will have [ this de-soaring ] to do that.

[Operator]

Your next question comes from Hayden Bairstow with Argonaut.

[Hayden Bairstow, analyst]

Just a quick one on KCGM, Stu. Just noticed there's a Stage 1, Stage 2 engineering work and Stage 2 is only 30-odd percent done. How much of that is the CapEx? And is there any sort of concern that that's where we might get some CapEx variability as that engineering work's tidy up?

[Stuart Tonkin, executive]

Yes. Good question. We broke -- because it was a very big project, we actually broke it into 2 stages. We originally worked to try to tender them separately and have them at separate portions to see if there was any benefit in breaking up the project. And it was also around the leveling of the resources. So the engineering doesn't sit there and do all this work on everything and then nothing. They do the first primary critical path elements and then they -- if it goes to the same group, they can then flow those resources into Stage 2. So it's a lot of that back-end leach tanks and yes, the back end of the flow sheet.

So we're on track with it. We don't see -- a lot of it is the engineering on a lot of the final design parts as far as cable trays and piping and small elements that even if it doubled, tripled in price, it makes no difference. It's the smaller capital items in that. The big major works were all heavily defined. And if we probably look back to how we put that contingency in place, the sort of $150-odd million contingency, it was thinking about what was still moving parts. And part of this design was considered in that review.

So yes, the hardware and the final design is set. It's really around sequencing the work that happens to get it done. And the closer they're doing it to that point, the more you see the detail. We're actually seeing some revised downward pricing for some of those elements with some of the inputs that have tended originally at high steel, high copper, high other elements. And then we're starting to see some reduction in cost in some of that final design work now or even just optimizations where we can do less work and actually get a saving there, too. So I don't see it as a threat. I see it probably as a benefit in the near term.

[Hayden Bairstow, analyst]

Okay. And just -- I mean there's not much in here on sort of exploration. But is there anything that the exploration guys are delivering Hercules or underground at KCGM that could actually come in and shift the 5-year production outlook a bit?

[Stuart Tonkin, executive]

Yes. So it's probably the -- it's getting the portals and the drill drives and the drilling happening at the moment. We would typically put out an exploration update around November, working at whether we want to do that or whether we just wait until the resource reserves sort of March, April sequence.

Yes. At this moment, the teams, we had $180 million exploration budget, and they're headlong into that. So it's really whether I could put drill holes up on a page and it makes not much differences around the formulation of that. As you mentioned things like Hercules, what does that look like from an overall resource and the capital, et cetera, to accelerate it into a mine? I think that's more likely to come after the resource reserve statement, not in the coming months.

I will just add, we are super excited with the exploration potential across the belts and then in the mine at KCGM and underground, hence why we'll be putting in probably 6 portals this year and getting access to them. And then we will be drilling heavily to prove out that long-term plan for Fimiston underground. And then Pogo in itself as well, there's some really exciting ones over there. A month ago, there was some really exciting follow-up targets to advance on. So seasonally, been able to drill through the winter from surface, is great. And then also the productivities we're getting out of the underground rigs is up -- is increasing. So we may get some better results as well out of Pogo. So yes, pretty excited about the exploration with extra cash flow at the moment. If there's good projects, we might even throw some more resources towards that stuff.

[Operator]

Your next question comes from Levi Spry with UBS.

[Levi Spry, analyst]

A lot of good questions there, update on KCGM and Dave's questions around, I guess, price and where we are in the cycle. Maybe can you just sort of tie that together a bit for us, Stu? So how do you think about risks in, I guess, the business and I guess, the sector overall? There's probably still a little bit of caution towards believing these prices from the investment community, I suspect. How do you think it plays out next?

[Stuart Tonkin, executive]

It is hard to believe these Aussie levels above 4,000. We're still coping with 3,000 and that's 4,100. I think that comes back to some of the original questions on do we change our behavior. And immediately, the answer is no. And in fact, we're enjoying prudent disciplined decisions we made in previous years. We're coming out of the back of that. So people who are dusting off plans or thinking about investment decisions at these levels, they've got to really look at the payback periods, and therefore, they may have to look at hedging and those sort of things to commit to it because you can only enjoy gold price when you've got gold, and we've got lots of it.

So I think there's that imbalance there of sentiment, theory, developers, time lines. We're going to be coming out of our -- we're delivering into 2 million ounces next financial year. And then the following year, Fimiston turns on adding another couple of hundred thousand ounces. So yes, this year, next year, a high capital spend. And we're still net cash dividend paying, have our buyback active. We have surplus cash generation. So I think it just enhances what we're doing at the moment more so than anything, and we don't have to be considering what if gold price goes up.

Our resource and reserves are calculated at very, very conservative numbers compared to spot. But at the time we calculate them, we also looked at a really robust through-the-cycle down -- type downturn kind of attitude to say what's -- with the 60-plus million ounce resource, how long does it take that to come out of the ground and how many decades ahead and what's the cost and gold price going to be. So I think they're all the things that we have visibility and runway to assess and consider.

But I think people that suddenly look at gold price and go look to gold producers and go now what do you do next, we're doing this day in, day out, controlling what we can control and the biggest ways we can create value, growing production, reducing costs, extending life. And when you overlay gold price, all it does is magnify -- up and down, but it magnifies the enhancement of that value creation. So we're sticking to the stuff that's in our control, and shareholders should benefit from being exposed to significant leverage to gold prices that we're enjoying at the moment.

And I don't ever speculate on gold price. We don't have to. We've got assets that will survive throughout the cycles, and we're pretty much midpoint on the global cost curve. And so there's a lot of assets above us that would struggle with a retracement. And the back quartile of the cost curve gets really steep. It's not flat throughout quarter 1 and quarter 4. It quartiles. It really gets steep. So there's a lot of things that production is being delivered into at these levels that it doesn't take much of a shock for a lot of those things to fall off. And as you also know, it's not really a simple supply-demand curve for gold. Like other commodities, it's -- there's another element with currency overlay in there.

[Operator]

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

[Stuart Tonkin, executive]

Great. All right. Thank you for joining us on the call today, and I appreciate it is a busy morning, lots of reporting. So again, thank you for joining us, and I look forward to updating you as we continue to advance our profitable growth strategy and go gold.

[Operator]

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