Thank you for standing by, and welcome to the Evolution Mining half-year 2022 results. All participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. If you wish to ask a question, you'll need to press the star key followed by the number 1 on your telephone keypad. I'd like to now hand the conference over to Martin Cummins, General Manager of Investor Relations. Please go ahead.
Thank you, Ben. Good morning, and welcome to the Evolution Mining FY 2022 first half results, and December 2021 mineral resource and ore reserve update conference call. As Ben mentioned, my name's Martin Cummins, and joining me on the call today we have Jake Klein, our Executive Chairman, Lawrie Conway, our CFO and Finance Director, and Glen Masterman, our VP Discovery and Business Development. Today, we released our FY 2022 first half results, an update to our mineral resources and ore reserves, and a presentation that covers both. On the call today, we'll be talking to the presentation pack. I'll now hand over to Jake and the team who will take you through today's presentation.
Thanks, Martin. Good morning, everyone. Really appreciate you joining us. I'm gonna start on slide 3 of the presentation, which is titled Highlights. Since we formed Evolution in 2011, our strategy has remained the same. Build a great team, focus exclusively on tier one jurisdictions of Australia and Canada, have a small, concentrated portfolio of high-quality operations in well-endowed geologically prospective gold districts, and continually seek opportunities to improve the quality of the portfolio of assets. In that context, this has been a truly transformational period for Evolution as we have achieved a genuine step change in the quality of our portfolio. Our average mine life is now over 14 years with good geological upside, and we have consolidated our ground positions in each of the world-class districts in which we operate.
Our EBITDA margin of 44% in the first half remains very strong, with improvements expected from ownership of 100% of Ernest Henry, turnaround at Red Lake yet to take effect. Our consistent focus on margins means that we continue to be conservative in our estimation of gold ore reserves, and use a sector low price of AUD 1,450 an ounce or $1,050 an ounce, and have today released record high reserves of over 10 million ounces and resources of close to 30 million ounces. Importantly, we continue to return money to shareholders with our 18th consecutive dividend declared of AUD 0.03 per share, fully franked. This leaves us well-positioned for a very strong second half performance and our FY 2022 production and cost guidance remains unchanged. Turning to slide 4, titled Accelerating Sustainability.
Delivery of strong financial outcomes needs to be built on strong foundations. Our progress in the area of sustainability is respected by our people and communities, and is also being recognized by external agencies, which is encouraging. We are proud of our relationships with the communities and our First Nation partners, and the shared value projects that we have committed to. It's this improvement and ongoing commitment that will continue to underpin our relevance for decades to come. We also recognize our obligation to provide a healthy and safe working place for our people, a place that's safe both physically and mentally. I acknowledge and welcome the media attention that this topic is currently receiving. At Evolution, we are supportive of the opportunity to actively discuss our performance and how we can do better.
It is only through our commitment to providing a workplace that is free of bullying, harassment, and prejudice that we as a company, and as a sector, will truly be the best we can be. Moving to slide five, titled Creating Real Shareholder Value. Our strategy of focusing on quality over quantity and margins over volume, in our view, is the pathway to being able to generate sector-leading returns on the capital we deploy. You can see the double-digit returns we have consistently achieved while also extending the mine life at our cornerstone operations. These mine life extensions have been achieved through the drill bits or accretive transactions that have generally been negotiated on a bilateral basis and which add genuine value. This, in our view, is the Holy Grail in our industry and is the true measure of a gold company's performance over the long term.
Cowal and Red Lake now have mine life visibility of close to 20 years, and Ernest Henry and Mungari in excess of 10 years. This provides us a great platform to astutely allocate capital and deliver on some of the outstanding organic growth opportunities we have in front of us. On slide 6, we outline the transformation of our portfolio. There have been lots of calls for consolidation in the gold sector. In the background, we have quietly been doing this, actively securing and expanding our positions in areas we understand and we believe in the geological upside. At Cowal, we are on track to grow this operation to 350,000 ounces of low cost production. The underground project is on schedule and budget, and we have commenced studies on being able to continue production from the open pit resources.
At Red Lake, we took advantage of a window of opportunity to consolidate the district by acquiring the adjacent Battle North assets. This quarter, we are encouraging progress in the turnaround of Red Lake, and Laurie and I are looking forward to visiting the site next week. At Ernest Henry, the integration is going well with a positive response from the local workforce and community. We've kicked off the pre-feasibility study to extend the mine life and have decided to extend the study a further 100 meters below what is considered in the concept study, which was completed by Glencore, and anticipated a 4- to 5-year mine life extension. As you'll hear from Glenn, we are excited about the geological potential of Ernest Henry.
The consolidation of the Mungari district with the acquisition of the Kundana and EKJV interests have opened up an exciting range of opportunities for us at that operation. A pre-feasibility study has been completed around an expansion of the mill to 4.2 million tons per annum, and unlocks the rich mineral endowments of the district to achieve production of 200,000 ounces for at least 12 years. Recognizing the opportunity, yesterday, the board committed AUD 9 million to transition this into a full feasibility study, which we expect to be completed in the December quarter this year. As we discussed with the quarterly results, there are the headwinds of COVID and cost inflation. As you'll hear from Laurie, these are well and truly exceeded by the very strong tailwinds in the price of both our core commodities, gold and copper.
With geopolitical tensions rising and inflationary pressure in the U.S. increasing to its highest level in 40 years, it is encouraging to see investors turn to gold in its traditional store of value role. With that, I'll hand over to Lawrie.
Thank you, Jake, and good morning, everyone. I'm pleased to report the interim financial results for FY 2022. On slide 7, we have our financial highlights. At the initial glance, it may look like the results for the first half were not good. However, when you consider the corresponding period in the half year to December 2020, which was a record half year, gold prices were higher, our operations were at different stages of their mine plans, and we had not approved some material growth projects, the performance to December 2021 still positions us well to deliver a successful financial year. Our underlying profit was AUD 100 million, while statutory profit was AUD 91 million.
The main items of difference between the two profits are the AUD 10 million gain on sale of Mount Carlton and transaction integration costs of AUD 31.5 million associated mostly with the Kundana acquisition. I'll go through the changes to the profit in the next slide. Our EBITDA margin remains very strong at 44%, and we expect this to increase in the second half via the Ernest Henry acquisition and improvements at other operations. Our cash flows were impacted by a 57% increase in capital investment on transformation and mine extension projects at Red Lake and Cowal, which ramped up during calendar year 2021. We've declared a fully franked dividend of AUD 0.03 per share. Turning to slide 8, which shows the movement in net profit between the periods.
Firstly, the changes in the portfolio that Jake mentioned have delivered immediate results with AUD 44 million extra from Kundana at Mungari and the divestment of Mount Carlton. We'll see further benefits from these transactions going forward. Lower gold volume at Mount Rawdon related to limited access to higher-grade material in the pit during this half year, and Red Lake related to mining higher-grade remnant areas in the December 2020 half year contributed to an AUD 145 million reduction in gold revenue. The lower gold price was essentially offset by higher copper revenue.
On the cost side, the volume impact of AUD 27 million was predominantly due to the transition in the open pits at Cowal and Mungari, where we were mining waste in the December 2020 half year, which were capitalized costs, and mining ore in the December 2021 half year, which are operating costs. This resulted in AUD 21 million of net additional costs expensed in this half year. However, this essentially meant no material change to cash flow between the periods for these activities. Higher input prices impacted costs by the order of 3% or AUD 13 million. I'll cover the cost position on the next slide. Higher depreciation charges relate mainly to Cowal Stage H and the IWL, which are now assets in use. Moving to slide 9 on our costs and the drivers.
There has been no material change to our cost structure with labor, employees, and contractors making up 52% of our cost base, while our top seven cost types comprise 87% of our total costs. Therefore, these items have the most impact on our costs and receive the most attention. As with our peers, and as Jake mentioned, the cost pressures have increased in the last six months, and this has been from a mix of demand, supplier input costs increasing, and logistics due to COVID. Thankfully, to date, we have not seen any material disruption to supply of goods due to COVID. As I outlined on the last slide, we saw input costs increase by 3% compared to 12 months ago. We expect to see our labor costs increase by 4%-5% in the next year.
As has been our preference in the past, we try to move our labor costs via the variable components as opposed to the fixed pay rates. Our power costs in Australia are contracted until the end of this year, excluding Ernest Henry. They are coming off a lower price from a couple of years ago, and the new rates are gonna be impacted by the market conditions at the time of contract renewal. The chart on the bottom right shows our sensitivities to costs and revenue. It clearly shows that spot metal prices outweigh potential cost changes as compared to our current cost base in our three-year outlook. We continue to maintain our discipline on cost control, including competitive market engagements and working on productivities and efficiencies. Turning to slide 10 and our cash margin.
Despite the drop this period, our EBITDA margin is still sector-leading at 44%. Excluding Mount Carlton, the margin was 45%. Ernest Henry and Cowal continue to be standouts at 74% and 54% respectively. With the additional copper and high spot price of copper, Ernest Henry will increase in the second half, while Cowal, through access to the Stage H ore, should also improve. We expect the group margin to benefit from the improvements at Mungari linked to Kundana and the encouraging progress Red Lake has made so far this quarter. These cash flows are enabling us to fund projects in execution across the portfolio for production growth and mine life extensions. Overall, we are well-positioned for a strong second half and into FY 2023. Lastly, on slide 11, which looks at our dividends and the balance sheet.
We have declared an interim dividend of AUD 0.03 per share, fully franked. This will be paid on 25th March and brings our total return to shareholders to around AUD 1 billion. We have not changed our dividend policy, which is based on group cash flow. When determining our interim dividend, we look at what we expect the full year cash flow to be. We know that Ernest Henry will deliver significantly more cash in the second half due to the acquisition of the remainder of the asset, and we have taken the higher spot prices that we will achieve in the March quarter into consideration. We continue to balance investing for growth and returning funds to our shareholders, which is underpinned by a very strong balance sheet.
Our gearing at the end of December was 12.5%, which is before we paid for Ernest Henry in January. That said, we will still be well under our 35% limit, and gearing will reduce quickly. During the period, the balance sheet was further strengthened by the successful U.S. private placements, which extended our debt maturity at very low rates. We now have a very low average cost of debt at 2.6%, and importantly, around 55% of this debt has fixed interest costs and is also our longest-dated debt. With the current balance sheet strength, the expected better performance in the second half and current metal prices, we are very well-positioned to deliver better returns going forward. Thank you for your time this morning, and I'll now hand over to Glen to take us through the resource and reserve outcomes.
Thank you, Laurie, and good morning. This morning I will provide an update of our annual mineral resources and ore reserves for the calendar year ending December 31, 2021. Before I do, I want to acknowledge the hard work, long hours, and inevitable sprint to the line by all of our people involved in delivering the pleasing results I am about to describe. I'd like to direct you to slide 12 of this morning's presentation, which shows our gold mineral resources increased 12% year on year to 29.6 million ounces, with the addition of 3.2 million ounces after accounting for depletion. Gold ore reserves increased 5% to 10.3 million ounces, up by 450,000 ounces of gold inclusive of depletion also.
The increase to the reported gold mineral resources was driven primarily by additions at the Mungari, Red Lake, and Ernest Henry operations. I will cover Mungari and Ernest Henry separately and in more detail on the next couple slides. Firstly, however, I would like to briefly summarize the increase in reported mineral resources for the Red Lake operation, which resulted from the acquisition of Battle North and the Bateman underground project. Since May last year, we have completed a full rebuild and estimation of the block model. Our maiden mineral resource for the Bateman Gold Project was 5.1 million tons at 4.6 grams per ton gold to 757,000 ounces, which when adjusted for production depletion, yielded overall growth of 696,000 ounces to the reported mineral resource at Red Lake.
The main difference between our current estimate and the mineral resource previously declared by Battle North is that we report only those resources constrained by optimized mining shapes versus reporting resources above a cut-off grade. Seven of the 19 Red Lake resource models were updated during the year to reflect new drilling information and/or new geological interpretations. The aggregate tons and grade have remained substantively the same, which reinforces our confidence in the veracity of the models. Improvements to the way in which we are mining at Red Lake, including reducing the amount of dilution and increasing mining recoveries in our stoping sequences, are positively impacting reconciliations where we are seeing production grades starting to trend back toward the expected reserve grade.
Moving now to our copper MROR results. The acquisition of 100% of Ernest Henry has driven a material increase in our reported copper resources, which increased 63% to 1.4 million tons with an addition of 541,000 tons of copper after accounting for depletion. Likewise, copper reserves increased 27% to 640,000 tons, with an addition of 135,000 tons net of depletion. As I will describe below, there is a somewhat outdated Glencore model for Ernest Henry dating back to May 2021, and we are currently working on including the 80 holes that have been drilled since then. We believe there is excellent geological upside at this deposit and expect more growth to come. Turning to Mungari on slide 13.
Acquisition of the Kundana, East Kundana and Carbine assets accounted for most of the resource and reserve additions. Completion of the mill expansion pre-feasibility study enabled re-optimization of resources at lower cut-off grades because of lower future processing costs anticipated in a 4.2 million ton per annum plant. In total, the reported Mungari mineral resource increased 124% to 4.9 million ounces of gold, and ore reserves grew 172% to 1.23 million ounces of gold. The key driver of value is the increase in resource and reserve grades, which reflect the high quality of the consolidated opportunity, in particular, the addition of the Kundana and East Kundana underground operations. The post-acquisition combination of tenements grew our overall Mungari land position by 60% to over 1,000 sq km in total area.
This is the first time a single owner has been able to consolidate the highly prospective Zuleika Shear Zone along much of its strike length. Drilling in the last six months at Kundana and East Kundana is confirming additional potential for extensions of mineral resources. The future focus of drilling will split between further de-risking the future production schedule assumed in the PFS for the expanded processing facility and unlocking value in new opportunities across our large prospective land position that were not previously available to Evolution pre-acquisition. Moving now to Ernest Henry on slide 14. Acquisition of 100% of the asset increased our reported mineral resource to 1.7 million ounces. The reported gold ore reserves, which are limited to the current life of mine area above the 1,125-meter RL, were depleted by production but partially offset by our adjusted ownership interest.
Additions to reported copper mineral resources are attributable to the adjusted ownership interest above and below the 1,125 meter RL and have increased to 885,000 tons of copper. Copper ore reserves are reported above the 1,125 meter RL only and increased to 269,000 tons under Evolution's full ownership. The December 2021 MROR at Ernest Henry is informed by Glencore's May 2021 block model estimate, which has been depleted to the December 31st, 2021 void model. As mentioned previously, there have been almost 80 holes for over 21 km of drilling completed since the data cutoff date. We expect to release an updated mineral resource in the September 2022 quarter, which will incorporate all additional drilling completed since the May 2021 model.
Future drilling priorities are linked to improving ore body knowledge for the Ernest Henry extension PFS between the 1,125- and 775-meter RLs. Drilling will also extend beyond the base of the PFS to delineate the continuation of the ore body down to and beyond the 480-meter RL, where strong copper and gold mineralization have been intercepted by the deepest drill holes in the mine. Slide 15 charts our MROR journey since Evolution's origins in 2011. The highlight for me is validation of our strategy of identifying and acquiring quality assets in highly prospective geological terrains that have given our discovery teams the runway to continue adding resources with the potential to extend the lives of our operations.
The one example I would like to leave you with, which I believe exemplifies our approach and that we would love to continue repeating in the future, is Cowal. Over the last seven years, we have added over 6 million ounces in mineral resources inclusive of depletion since we acquired Cowal from Barrick in 2015. The result has translated to almost 10 million ounces in resources and the conversion of 3 million ounces to ore reserves, net of depletion for total reserves of 4.6 million ounces and a mine life that extends to 2038. The results we've released this morning illustrate the strong platform we've built that will allow us to continue converting our large resource base and extend our ore bodies beyond existing resource boundaries.
We have the technical teams and budgets in place to continue improving knowledge of our ore bodies with the potential to make discoveries across our portfolio of high-quality brownfields and greenfields targets. With that, I'll hand back to Jake.
Thanks, Glen. I'll just turn to slide 16, which is a summary slide. You can continue to expect our focus on the application of a consistent strategy, which you've come to expect of us, and which we believe is the best pathway to value creation in this sector. Our portfolio has been transformed, and we have really high-quality assets, a small portfolio of high-quality assets. They deliver strong margins and will deliver even stronger margins in the second half of this year. A strong balance sheet, as Laurie said, with 55% of our debts at fixed cost, at very low fixed cost. As Glen has described, high-quality resources and reserves, all of which are in Tier 1 jurisdictions.
Finally, and importantly, we have a great team, which is highly focused on delivery over the next six months and beyond. With that, I'll hand over to Martin Cummins, who can open the lines for questions.
Your first question comes from Matthew Frydman from MST Financial. Please go ahead.
Sure. Thanks. Good morning, Jake and team. I have a couple questions. First, just on Red Lake, if I may. Look, you remain confident, I guess, in the technical aspects of the project and the delivery there. So my question is more just around the workforce. Quite a mature workforce there that have, you know, I guess, done things in a particular way for a number of years, before you acquired the mine. I guess since acquiring, you know, you've restructured the cost base, and sort of managed it on the asset level there. So I suspect the remaining workers have had to change quite considerably, the way they operate.
I was hoping if you could just provide a bit of color as to how that, you know, how receptive has that workforce been? How have you incentivized them and sort of your relationship with the union there? Just any sort of color you could provide on the dynamics of managing the workforce there. Thanks.
Yeah. Thanks, Matt. Thanks for the question. Just to clarify, the workforce is not unionized. We are fortunate to have Kirsty Liddicoat as our General Manager at Red Lake visit Australia this last week to participate in what was actually one of our first general manager leadership team forums that we've been able to have for a long time in person, except for our WA colleagues who couldn't make it. She has also presented to the board over the last couple of days. Look, it is a transformation. I think generally, you know, we are transforming this operation from a very selectively mined high-grade mine to what we describe as a medium grade. Our Mungari colleagues still describe it as high grade.
A medium grade, higher tonnage operation. We have all the infrastructure in place, and it is, you know, a journey to change the culture there. We're making progress. That's probably the most important thing. There is momentum building, and the commitment and understanding of our desire to change some of the mining practices is there. That's not to suggest that we don't have pockets of resistance to that change, but overall, we feel very confident that we can bring the workforce, and a large number of them are already on board with it, along on the journey.
That's great. Thanks, Jake. Thanks for clarifying on the union there. Look, if I just flick on to Ernest Henry now. Look, I guess at the time of the acquisition, the focus was really, I guess, life beyond the 1,200 level. You didn't really assume any material cost outs, in your valuation or material synergies there. You're quite complimentary, I guess, as to how, you know, Glencore had run that operation. I guess now the transaction's closed, and look, you may still stand by this view, but I guess, are there any sort of near-term opportunities that you are evaluating, you know, perhaps not in the next 6-12 months, but maybe 12-18 months ahead?
Yeah, I think there are. I mean, I think as Glenn described, the geological potential of this ore body is very material to us and very prospective, and the depth extensions are there. When Bob was talking to the board over the last couple of days, you know, Harry Harrison, the General Manager, there was a lot of comment around some of the areas that may have been left unmined outside of the cave area, which are reasonably easily accessible with existing infrastructure, but really weren't material to Glencore. Those are the sorts of things that, you know, may be much more important for a smaller company like ourselves and things that we're starting to look at.
I think I said on the quarterly call, the acquisition of Ernest Henry reminds me a lot of what we acquired when we acquired Cowal. A very well-run operation, but somewhat lost within a very large organization, where you know, a few thousand tons of additional copper was not material to them, but is material to us. Yeah, we are looking at things which may have been less important to Glencore, and are encouraged by the opportunity, recognizing that we did not assume a lot of that in our valuation model, and neither did we assume this fantastic copper price, which we're currently realizing.
Yeah. No, that's great. Thanks, Jake. Look, perhaps I'll just squeeze one more in, just on your power costs on the contracts there. Are you exploring renewable source contracts there if they're available? I guess just how long will these new contracts be in place for?
Yeah, Matt, the power contract generally will only be sort of up to two years. Our focus on the renewables is really working with the energy providers. I mean, our energy consumption isn't large enough to be a driving force in terms of the renewables, but in terms of working with the energy providers in making sure that the ones that we choose are moving more towards the renewable space. That's really gonna be our approach through this contract renewal period.
Just one comment I'd make in an asset that hasn't got mentioned, but I think has some real latent option value is Mount Rawdon with the potential to convert that into a very significant pumped hydro scheme. You know, the feasibility study is being done on a 1 gigawatt being able to be stepped up to 2 gigawatt power supply, which, yeah, would be material to the Queensland grid. Would be fully renewable and a fantastic way to ultimately close what has been a very successful and long life mine.
No, that's great. Thanks. Thanks, guys. That's all from me. Cheers.
Your next question comes from Levi Spry from UBS. Please go ahead.
Yeah. Hi, Jake and team. Thank you for the call. Can I ask about Mungari? I imagine it's probably 5%-10% of most valuations. Is that about right? And can you talk us through, I guess, the move over the next couple of years there on the way up to 200,000 ounces? I guess the TBR stage looks like it's tracking well ahead of guidance at the moment. Just talk us through maybe the vision for that asset over the next little while, please.
Yeah. Thanks, Levi. Definitely undervalued at 5%-10% of our value. Don't reduce the value of our other assets to get that. Look, it's an interesting one. As Glenn said, it's the first time that one owner has consolidated that entire Zuleika Shear district. We've got a very significant ground position. We have a good mill there. As you know, you know, Mungari as a standalone was looking at a fairly low-grade future going forward, and that's why we did the pre-feasibility study that said the best way to create value there was to build and expand the mill to 4.2 million tons. Without Kundana and East Kundana, the pre-feas said that the most compelling value creation opportunity was to expand the mill.
We've now started to rerun those numbers and said, "Well, what about all these other opportunities, which have come with the EKJV and Kundana assets?" They're immense. There is a significant mineral endowment. The resource base is close to 5 million ounces, and there is exploration upside. It makes that case even more compelling. We need to do the feasibility study. We need to be confident of being able to really deliver a plan there. Scott Barber, who's the general manager at the site, is integrating the operations. We need to, you know, take the steps slowly and appropriately. Our view is that there is a very significant amount of value creation to be delivered over there. Glen Masterman, I don't know if you want to comment.
Yeah, I think, you know, what we're going to be focusing on is really conversion of that large resource tail, which comprises both underground and open pit resources. Converting those into reserves that will, you know, continue to extend a production future at that expanded scenario that we're contemplating with the larger plant. The other opportunity at Mungari now with our consolidated land package is the ability to look at some opportunities that we previously had or had not been available to us.
I think some of these opportunities, particularly new open pit targets, which aren't even on the books at this point, which will likely benefit as we analyze these in the coming 12 months from the, you know, processing cost scenario that's anticipated in the new plant. Several of these come from, you know, the Northern Star work that we inherited through the acquisition, which contemplated putting some of these opportunities through Kanowna. We also get the added benefit of reducing haulage. There is a number of these opportunities which are not on the books yet, but we'll be assessing in the next 12 months.
Yep. Okay. Can I just confirm the timing of the study?
The fourth December quarter this year, this study will be completed.
Okay, cool. Thank you.
Thanks.
One question for Lawrie. Just, stamp duty, cash stamp duty on Kundana, Ernest Henry. Can you just, talk us through modeling that?
Yeah. For Kundana, it was around AUD 20 million. For Ernest Henry, it's gonna be upwards of AUD 50 million. They'll both be done in this financial year.
Okay. Thank you. Last one, just on the Red Lake, can you tell us how it's gone in the last six weeks? You gave us some good indications on development meters and some of the KPIs in the month of December. How's it going since?
It's going well. We said we'd have a substantially better quarter this quarter. We're on track to do that. We look at the weekly reports at the moment at Red Lake. There are encouraging green signs on those reports. I don't want us to get ahead of ourselves. You know, we need to make good habits at that operation. It's a journey. You know, it's a transformation. We're in the right direction. We're feeling good about the last six weeks, but you know, don't wanna come to the end of this quarter and everyone goes, "Oh, we're disappointed with that." We've got to deliver at Red Lake.
We understand that, and we wanna do that.
Great. Thank you. Thanks for your time, guys. Thank you.
Thanks.
Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.
Good morning, Jake, Glen, and Lawrie. Thank you for the call. Quick question. I thought you settled on Ernest Henry on the sixth of January, but effective the first of January. Yet you've increased your reserves and resource, which were effective as at the thirty-first of December, inclusive of the acquisition. Is that? Have I missed something there?
We took ownership effectively sixth of January, but it was effective first of January. Between midnight and the first of January, we included those resources and reserves. When we released the statement, we'd acquired ownership of Ernest Henry.
Sure. Not a problem. Thank you. It doesn't change the end outcome. Just thought it was interesting. With on your existing holding in Ernest Henry, I think there's some mention of it in note 16, but just if you could talk me through how we should be thinking about that, modeling that for the full year results.
Yeah, Mitch, it's an interesting one. Under the accounting standards, it's deemed to be an acquisition by stages, which means the first part, the remaining value as at December gets uplifted, as well as the assets that we've acquired or the remaining assets. We would see that, at the moment, the balances at the end of December was around AUD 300 million. That will get uplifted along with the AUD 1 billion that we acquire. Essentially, when it runs all the way through, you will see an asset on the balance sheet effectively about AUD 1.3-AUD 1.35 billion, which then will start to be amortized over the mine life. In our appendix there, you'll see that the D&A is being updated for Ernest Henry for this year.
You'd see about, you know, $1,900-$2,000 an ounce as the D&A. The reason for that being as high as it is is that you'd recall that the acquisition we made gets us the copper. We already had the gold down to the twelve hundred, and we also pick up the remaining gold and copper in the below the twelve hundred that was in the old Newcrest reserve. On a gold equivalent basis, that D&A is pretty well in line with what our group D&A is, which is around $600-$700 an ounce. That's sort of how it'll all be treated at the moment.
We've got 12 months to work through the purchase price allocation, but that's sort of what it'll look like as at the end of December.
Okay. Thank you. I just wanted to spend a bit of time focusing on the Ernest Henry PFS. Obviously, you've said that that's on track for the end of this calendar year. I just wanted to understand, how do you think about that, given that's only going to down to the 775 RL? If you look at slide 14, there's potential beneath that. How, you know, the interplay about is it contemplating things such as shaft haulage and/or conveyor, you know, extending the conveyor down to that depth? How do you take that into play if you're limiting yourself only to the 775 RL when it looks like the ore body continues in depth?
Yeah, Mitch, that's a good question. First, I must recognize the impressiveness of you getting to 90% of the accounts already. The way we thought about it and we had a presentation to the board in the last couple of days was that at the $875, sort of tracking and conveying, was line-ball. That's why we've decided to extend it down to the $775 with a view that in all likelihood, you're just gonna start to get to some sort of mechanized conveyance system, and you'll be able to judge quite clearly. In the interim, Glenn and his team will be looking at, you know, how what is the potential depth extent.
In all likelihood, it's gonna be kind of a hybrid solution because we do need to extend and start developing into those areas. We'll be looking at how the drill results come out and what the ore bodies look like below that 775 level before we need to commit material amounts of capital to there.
Just to add to that, Mitch, I think the 775 level is also where we have detailed drilling information that will inform the study. The drill hole pierce points into the ore body start to space out a little wider. So there's a bit more work to do as we go forward to continue sort of drilling underneath that 775 level as well as some more infill work to cap off on the pre-feasibility study we're working on.
Just to reiterate, you know, what Glenn said in his speaking notes was, you know, we basically depleted a Glencore model, so it's a slightly historical model from May to 2021. We're gonna include these 80 drill holes into a new model. The resource may be updated sometime in the September quarter, but then we need to wait for the completion of this pre-feasibility study to increase reserves. You know, we're confident that you will see an uplift in resources and reserves based on the drill data.
Thank you, guys. I really appreciate the call. That's it from me.
Thanks, Mitch.
Thank you. Your next question comes from Daniel Morgan from Barrenjoey. Please go ahead.
Hi, Jake and team. Obviously, lots of M&A activity, both buying and selling in recent times. Just wondering if conceptually, Jake, the portfolio is now done for a while. It's all about integrating these assets and investing in them.
Yeah, Dan, Look, I think, you know, we understand the need to now deliver. We have done a lot of deals in the background. They've largely been bilateral deals. They've largely been strategic around the assets that we believe in the geology of. We feel we do have, you know, a very high-quality portfolio with lots of organic growth opportunities in them, but recognize also at the same time, you know, Red Lake hasn't delivered as we expected in the last six months, and delivery is gonna be a key to getting shareholder recognition and value.
Thank you. A question maybe more for Lawrie. Just on the debt, you've highlighted 2.6% as a, you know, I guess, an interest cost on the debt. Just wondering, do I take that on your debt balances to get the finance costs? Or are there, you know, some other finance fees I should add as well that are more fixed in nature, like a dollar millions type charge? Thank you.
No, Dan, effectively, the only other costs which are, you know, like on the revolver, having that available, there's a charge on that. There's performance bonds as well. Really what you'll see that average rate is over all of that debt. The delta from there to the total finance charge is not gonna be that material.
Thank you. Either for you, Lawrie, or for Jake, I guess the dividend you did pay more than the policy on free cash flow. You've got circa AUD 1.4 billion of debt now pro forma for the Ernest Henry transaction, including the AUD 200 million to come. How do you think about returns in terms of dividends versus, you know, paying down this debt level over the next couple of years and the amount of investment you've still got in your assets?
Yeah, I mean, when we look at it, Dan, you know, firstly, the USPP was deliberately positioned to put longer-dated debt in. I mean, we've got AUD 90 million of debt owing in the next six months, about AUD 130 million thereabout next year. What we will do is balance that plus the investment in the assets and the dividends. What we'd see is that as you get to the end of this financial year, you know, Red Lake should be running certainly at a higher rate than it has been in the first half and therefore not being a drain on our cash. Cowal will have six months of the Stage H ore behind it, and then in the start of FY 2023, it will be hitting underground ore.
Then you've got Ernest Henry, which effectively from 1st January is giving us 70% extra copper plus 70% of those costs. It's gonna be a net strong net cash generator for us to be able to reinvest in the business, pay the debt, and also continue to pay dividends. That's really how we're gonna be looking at it.
Thank you. The Mungari mill expansion, last question. On page six of the presentation, it seems to indicate that by the end of FY 2025, if that is committed to, it would be up and running. Is that how I should understand it?
Yeah, that's right. That's right.
Okay. Thank you very much for your
Thanks.
-answers.
Thanks. Dan, are there any more questions? Dan? Operator? Alex, are you there?
Yeah, speaking.
Oh, good.
Oh, sorry. I think we may have lost the operator, but we can hear you.
Oh, okay. Great. Thanks, guys. A couple of questions. Firstly, at Mungari, to reach that 200,000 ounce per annum, with the PFS study done, what kind of mine tonnage were you presuming from Kundana and East Kundana JV mining?
I think, Alex, as we noted before, we were really thinking about it on a standalone basis before we acquired that East Kundana package. That'll be part of the feasibility study bringing it in. You know, it is higher grade. Glenn is optimistic about the prospectivity along that Zuleika Shear. You know, we have, as you can see on that diagram we've included, there are lots of opportunities, including, you know, Castle Hill probably being the nearest to the mine, where we've done quite a lot of work before 'cause that was in the Mungari tenement package.
Just to add to that. The way in which we're thinking about sort of the production mix, I mean, most of the production, you know, in the initial stages are going to come out of that Castle Hill area where we have, you know, sort of a large low-grade open pit resource. There'll be a blending strategy in how we sort of mix with the Kundana and East Kundana production, you know, that will really drive the sort of production outcomes through that plant.
Okay. Did you have an idea of sort of what the peak capacity might be from those acquired underground mining operations?
No, we don't. It'll all be part of the feasibility study.
Yeah, okay, no problem. At Ernest Henry reserve grades come out at 0.93%. You've been mining a bit higher than that, over 1%. M&I sort of considerably higher than both. Should we just presume M&I maintain a little bit higher based on that modifying grade and mine grade would eventually drift lower to that reserve grade you've just put out?
I think that would be the right way to think about it at this point in time. I mean, we don't really see or haven't seen, you know, any material shifts, particularly through our reconciliation information, you know, on a monthly and three-month moving average to suggest otherwise.
All right. No problem. Thanks very much, guys.
Thanks, Alex. Ben is back. Are you back, Ben?
Pardon me. I'm back. Your next question comes from David Radclyffe from Global Mining Research. Please go ahead.
Hi. Good morning, Jake and team. My question's on the maintained conservative price assumptions you're using obviously for the reserve resource statement. It can obviously be a trap to chase the price, but it's been many years since prices averaged those levels. Just wondering, if there's such an arbitrage now, does this begin to constrain the business? I guess what I'm thinking of is things like Ernest Henry as you go through the PFS study. You know, Glencore's using much higher price assumptions than yours. I'm just wondering if they could actually offset some of the upside of the additional 80 holes.
Yeah. Thanks, David. It is something that we've thought about. You know, we pride ourselves on the fact that, you know, we've started at 1,350 AUD, and we moved at AUD 100 only over the last decade. We wanna be conservative. You know, is this gold price sustainable at above $2,500 or it's almost $2,600 at the moment. It is something that we'll look at over the next 12 months, and it is certainly something that, you know, when we're looking at Ernest Henry, you know, we're looking at Net Smelter Returns, and we are starting to think about things about, you know, how do we optimize the value of the asset. You know, we'll remain conservative but assess it as we go forward.
All right. Thank you.
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead, Kate.
Good morning, Jake and team. Two questions on Bateman from me. The first one's for Glenn. You've got a drop in grade there compared to the prior numbers that were done, but total tonnes have increased significantly. Can you call out what's driving that on the back of confining to optimized stopes, but no extra drilling?
Yeah, Kate, the reason why that's happened is, you know, in terms of the, I guess the pre-acquisition resource previously declared was entirely based on a, you know, reporting, you know, blocks in the model above a certain cut-off grade. Now, what we've done that is different to that is that we've optimized to mining shapes. So that does include dilution and obviously, you know, some economics, you know, in terms of the ability to extract, you know, that resource. So that's what's driven the extra tonnes and that, you know, primarily and as a, you know, as a result, the grade has come down a bit.
Yeah. Crystal clear. Thank you. Secondly, how are you thinking about prioritizing this dirt now you've had it for a little while? It's obviously a lower grade than the rest of the Red Lake parts that you've got, but then again, you are still mine-constrained.
Yeah. Look, I think the first step for us is, as you will have seen, we haven't declared a maiden reserve that is JORC compliant for the Bateman project at this point. We recognize that there are some really good opportunities, you know, within that resource. We do have you know the development to those areas at the moment, which we're currently drilling. It's all about establishing you know grade continuity above our cut-off grade for reserve, which will obviously be higher than the 2.5 gram cut-off in the resource at the moment. That's the next step for us with the goal of identifying sweet spots in that ore body where we can focus future mining on.
Okay, you are drilling it now, so it obviously.
We are.
is somewhat of a priority. Yeah.
Yeah.
I'll just add to that, Kate, that you know that was all part of our due diligence. Nothing in the Battle North resource is surprising to us at all. It was included in our due diligence and our engagement with them in acquiring the asset.
Yeah. Got it. Thanks.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Al Harvey from JPMorgan. Please go ahead.
Yeah, good day, Jake, Lawrie and Glen. Maybe just starting with you, Glenn. Just on the Mungari resource and reserve increase, I'm not sure if you guys can kind of break down the proportion that was unlocked from the lower processing costs from the mill expansion study versus just bringing on the ounces from the Kundana acquisition. That'd be helpful if you could elaborate on that.
Sorry, Al, I'm just coming off mute here. Yeah, the relative splits there-
In terms of the growth driven by the low processing costs and at the larger plant is about 538,000 ounces in resources and about 250,000 ounces in reserves on a consolidated basis, fully consolidated basis.
Awesome. Thanks for that, Glenn. Maybe just another one. Thinking about higher copper prices at the moment and lots of potential around Lake Cowal. Have you guys looked at any further opportunities, maybe re-looking at Marsden, for example, or any other opportunities in and along the district?
Al, our focus at Cowal is on delivery of the underground and also expanding. We've commenced an open pit continuation study, and yeah, we see that taking us out to 2040 at Cowal, on a 350,000 ounce a year, getting us up to that level. I think the team at Cowal have a lot in front of them and needs to deliver what's ahead of them.
Yeah. Thanks for that, Jake. Maybe just apologies if I missed this in the intro, but just wanted to touch on the labor costs rising 4%-5%. Can you just elaborate on that a little bit. Are you seeing that across, like, Evolution sites and contractors? Maybe if you can, step us through how you're increasing the variable versus the fixed component.
Yeah. Al, what we're seeing is that you're seeing both our employee labor and as we're recruiting, we've seen the market move there. It's the same for the contractors. I'd say that, there's not a lot of difference at the moment that we're seeing in movement in rates. What we've seen, we're 3-3.5% last year. We expect it to be around the 3.5% as a base movement this year. What we're looking at, you know, we run a variable system down to the entire organization, from operator level up to supervisor level and superintendent is on a quarterly scheme, and beyond that, it's on an annual scheme.
We're looking at those structures and how we can make those and more attractive for bringing people into the organization and retaining them on above plan performance. That's where we sort of see that if we can achieve those, that would be a flow-on effect to our overall cost base in that 4%-5%.
Great. Thanks very much for that, guys.
Thank you. Your next question comes from Peter O'Connor, from Shaw and Partners. Please go ahead.
Morning, Jake, Lawrie. Jake, thinking through the next couple of months in WA and COVID, how do you think it will play out? How material could that be either way to what happens with your assets and WA in general?
Thanks, Rocky. We've been thinking about that a lot. I mean, I think we've been on record in saying that, you know, we think that, yeah, COVID arriving in WA is inevitable and it's positive that they're looking to open up the borders. Yeah, we are preparing for it as best as we can. Obviously, Cowal and Red Lake have the experience of having COVID present in their operations. Mungari is taking the lessons from that. It's difficult to predict the impact. You know, we have had at Red Lake and Cowal, up to 15% of the workforce unavailable at certain times, due to COVID or isolation.
Yeah, at this point in time, you know, we're confident that we have done our best to put plans in place that will mitigate the impact.
Thanks, Jake.
Thank you. Your next question comes from Michael Bennett, from AFR. Please go ahead.
Hi, Jake. My question I think you just answered. But seeing as I've got you, I think in your prepared remarks, you mentioned you get the feeling that gold is returning to its place as a sort of safe haven asset for investors. I'm just interested in how you're sort of seeing. If you can provide a bit more color on this environment, because obviously, yes, inflation's rising, but so is rates expectations and the gold sector has obviously come off its highs from last year as the economic outlook improved and the like. Can you just touch on what you were referring to in your remarks there a bit more?
Sure. Look, I mean, I think you know, the inflation in the U.S. is the highest in 40 years. The Fed has never successfully been able to bring inflation like that under control without either putting the economy into deep recession or managing inflation within a reasonable limit. You know, people are talking about 4-5 interest rates over the next 12 months, but that will never be enough to bring a 7% inflation level under control. The Fed has a very difficult and small landing strip to manage this. It hasn't been done successfully previously before.
My view is that they'll err on being conservative, and that will mean that inflation will be higher than expectations on a longer basis or longer dated basis, which would bring people back to a store of value commodity like gold.
Great. Thanks for that.
Thanks, Michael.
There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks, Ben. Really appreciate everyone's interest and appreciate your time. Just finally, a recognition and call out to our finance and technical teams who finalized the MROR statement. It is of very high quality and very much appreciated. Finally, Lawrie and I are going to get rugged up because over the weekend, we hope to be in minus 35 degrees Celsius at Red Lake. Speak soon. Cheers.
That does conclude our conference for today. Thank you for participating. You now may disconnect.