Thank you for standing by, and Welcome to the Evolution Mining March 2022 quarter results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Jake Klein, Executive Chairman. Please go ahead.
Thanks, Harmony. Good morning, everyone. Welcome to the call, and thank you for joining us. We do appreciate it. Bob Fulker, our Chief Operating Officer, is taking a well-earned break from today's call, so I'm joined by our Finance Director and CFO, Lawrie Conway, and our VP Discovery and Business Development, Glen Masterman. At a macro level, this quarter inflation in the U.S. rose to 8.5%, its highest level in 41 years, while unemployment rates in the U.S. and Australia are at historic lows. Russia's invasion of Ukraine is now entering its third month, with the conflict showing no signs of reducing. COVID continues to wreak havoc on people's health, workforce availability and supply chains.
Closer to home, in February and March, the Australian east coast was battered by heavy rainfall and flooding that tragically killed 21 people and required thousands of people to evacuate their homes. Against this backdrop, gold has been fulfilling its traditional role as the best hedge against inflation and geopolitical uncertainty. Regrettably for the world, I expect these issues to continue. Turning to Evolution's quarterly reports and our performance, and starting on slide three of the presentation. There are many highlights in today's report, but three are clear standouts for me. Firstly, our portfolio has been transformed into one, which is among the highest quality, lowest cost, cash generative, growth-oriented portfolios in the gold sector.
148,000 ounces of gold produced at an all-in sustaining cost of AUD 990 an ounce or $717 an ounce is a 27% reduction quarter-over-quarter, and makes us very close to being the lowest cost gold producer of scale on the planet. Operating mine cash flow increased 33% to $ 269 million. Net mine cash flow increased 135% to $ 124 million, with the bulk of the $ 144 million of capital being spent on our most important organic growth opportunities at Cowal and Red Lake. We paid our 18th consecutive dividend of $ 55 million, bringing total dividends paid to shareholders to $ 1 billion. Secondly, the impact of 100% ownership of Ernest Henry and the transformation at Red Lake.
In the last quarterly report conference call three months ago, I said that I was confident that by securing 100% of Ernest Henry, we had concluded what is likely to prove to be one of the most transformative deals in Evolution's short history. Today's quarterly report is proof of this. The numbers speak for themselves. Copper production more than tripled to over 13,000 tons, resulting in an all-in sustaining cost of - $2,000 an ounce, and the mine generated $ 185 million in operating cash flow. Gold sales were higher than production at 39,000 ounces due to an additional 20,000 ounces of gold that was sold due to the cancellation of the previous economic interest.
Excluding the impact of those sales, operating cash flow for the quarter would have been $ 137 million, and all-in sustaining cost would have been - $4,200 per ounce. The transformation at Red Lake gained very important traction this quarter with a 67% increase in production to 33,000 ounces. We expect to improve this to over 40,000 ounces in the June quarter. This is a testament to the significant efforts of our people at Red Lake and the operations team under Bob's leadership. We still have lots of work to do, but we are making tangible progress in creating value at this operation. Thirdly, I was proud of the resilience our teams demonstrated. As mentioned a few moments ago, COVID and rain events caused problems across the country during the quarter, and we were also affected.
Over 25% of our workforce at Cowal tested positive for COVID during the quarter, which amounted to 199 people. Fortunately, everyone is recovering. This, of course, excludes the impact of those needing to isolate as a result of being deemed close contacts. Despite this, not only were we able to deliver a robust quarter at Cowal, but the team was able to plan and execute a very logistically challenging seven-day mill shutdown, which required a multitude of contractors, around 300 people, to assemble on-site. With very strict protocols in place, not one person involved in the shutdown tested positive. The unprecedented East Coast rainfall in the quarter impacted both Cowal and Mount Rawdon. Cowal managed through it, but at Mount Rawdon it did result in some instability in the north wall of the open pit.
Although this is being managed, it is, it has had and continues to have an impact on our ability to access higher grade ore from the open pit, and also required the crusher to be shut down for nine days. As you all know, the underperformance at Red Lake in the first six months of the year left us with very little runway on our original guidance. Taking these new factors into account, we have reduced our FY 2022 production guidance by 20,000 ounces or 3% from the lower end to around 650,000 ounces. We are expecting a strong fourth quarter with an increase in production of around 22%.
There is no change to our sector-leading all-in sustaining cost guidance of $1,135-1,195 an ounce, so we will continue to produce high-margin ounces. On Slide four, we have set out the results from Ernest Henry. Being a copper-gold mine, it is challenging to compare it to other gold mines. The best measure is cash flow, and on this measure, I am confident that there will be very few gold mines in Australia that generated $ 175 million in net mine cash flow this quarter. We have chosen to treat the copper as a byproduct credit, which delivers the exceptionally low cost of -$2,000 an ounce. Another lens to look at this through is on a gold equivalents basis.
Through this lens, production for the March quarter would have equated to 95,000 ounces of gold or 380,000 ounces on an annualized basis at a low all-in sustaining cost of AUD 1,150 an ounce. The charts on slide five tell the story of the transformation that is occurring at Red Lake. I am particularly pleased that we gained momentum through the quarter, with March being the strongest month, and in many areas, breaking all-time records at the operation. Having consistently delivered above 1,200 m of development for the last six months, the Red Lake transformation plan now has a goal to consistently and safely mine 3,000 ore tons per day.
Was achieved in March with 106,000 tons mined, surpassing the previous monthly record in the history of the mine by more than 20,000 tons. Pleasingly, this mining rate is being sustained in April. Ongoing improvements to mining practices continue to drive reductions in stope dilution that improved mine grades by 17% this quarter. Both the Red Lake and Campbell Mill are operating at record throughputs. The CYD decline, which will provide an important new source of higher-grade ore, gathered momentum and is on track to deliver the first production ore in the September quarter, only six months away. We expect to improve production to over 40,000 ounces in the June quarter, with a focus on sustaining this level consistently over the next few quarters.
While being a few quarters behind our original schedule, we do remain confident of the potential for Red Lake to be transformed into a 350,000 ounce a year low-cost operation. Turning to slide six, the Cowal Underground project continues to be on budget and schedule for critical path activity. Major procurement milestones have progressed during the quarter and the award of the primary mining and drilling contract is imminent. This will complete the award of all material contracts. First production ore from the project remains on schedule for the June 2023 quarter when the paste plant is commissioned. Slide seven shows the significant impact the Kundana and East Kundana acquisition has made on the future of Mungari. The integration is progressing well with the objective to create what we are describing as One Mungari.
Standardized systems and processes and sharing of equipment and workforce across what was previously three separately run operations. One example of the operational synergies that are being captured is in the underground maintenance and training teams, where three separate units are being combined with significant savings and efficiencies. Recruitment of vacant roles is also progressing well, with vacant roles reducing during the quarter despite the tight Western Australian labor markets. Turning to slide. Earlier this month, I was fortunate to be on site when Mount Rawdon hosted a delegation from the Queensland Government, led by the Minister for Resources, the Honorable Scott Stewart. The visit included an update on the 2 GW pumped hydro power project and the significant contribution it can make to delivering Queensland's renewable energy targets. As a potential pumped hydro facility, Mount Rawdon is blessed by history, topography, and location.
It has a huge head start in that about a billion has already been spent mining 200 million, which has been processed for gold production over the expected 25-year period of its life. That billion has created a big hole which can be used as the lower reservoir of the pumped hydro scheme. In addition, the topography of the surrounding region also delivers Mt. Rawdon a great natural site for the upper reservoir. In terms of location, fortunately, Mt. Rawdon sits only 25 km from major power lines connecting Queensland southern and central grids. On top of that, the timing of the mine's closure aligns with Queensland's decarbonization strategy, with the state due to close the 700-MW Callide B coal-fired power station in 2028. The study work remains ongoing and is due for completion in June 2023.
With that, I'll hand over to Glen to provide an update on our exploration and discovery activity.
Thank you, Jake, and good morning. This morning I'll update on exploration progress achieved across the discovery portfolio in the March quarter, which is set out on slide nine. Key takeaways I'd like to draw to your attention are firstly, the positive drilling results returned on the Cue Joint Venture, which have expanded the mineralization footprint at West Island and confirmed the presence of very good grades at this emerging discovery. Secondly, at Mungari and Red Lake, drilling results continue to reinforce our views on underground upside potential, particularly at Kundana, where we are delineating new areas of high-grade mineralization very close to existing development. Turning now to highlights in this morning's report. Commencing with our Cue Joint Venture in WA, we completed our first full quarter of managing and operating drilling activities after taking over from our partner, Musgrave Minerals, at the beginning of January.
We recently switched analytical laboratories, which has reduced our assay turnaround times from well over 12 weeks to a more manageable five weeks. Faster analytical turnaround times give us the confidence to accelerate diamond drilling, with a second core rig expected to arrive on the project during the June quarter. This will increase to three the total number of rigs on the JV ground, in which we are earning a 75% interest. Encouraging results from the diamond program in the quarter are highlighted on page 11 of the report. Pleasingly, we identified additional mineralized lodes along the West Island trend, which has also extended 500 m in recent aircore drilling to 2.1 km long.
The June quarter program will focus on drilling extensions of known structures to understand potential scale of the mineral system and to test other target styles that may be important for hosting high-grade gold. At Mungari, drilling results outlined on page 14 extended the structure that hosts the Christmas Hanging Wall lode at Kundana. This mineralization is located 35 meters from the main Christmas ore body, which we are currently mining. The results signify that the important ore-bearing structure remains open along strike and down dip. The next round of drilling will target the high-grade quartz lode within the structure with the aim of potentially expanding the high-grade mineral resource. An exciting implication of the recent Christmas results is the realization of untested potential in the hanging wall of the Strzelecki lode, where this structural position is modeled to continue.
At Red Lake, drilling returned high-grade results on an extension of the R zone at Lower Campbell, as summarized on pages 12 and 13 of this morning's report. The results confirm great continuity at the local scale and highlight an opportunity for significant resource potential between these deep intercepts at the bottom of the Lower Campbell mineral resource. Future drilling will be planned as short stepouts from adjacent development to extend the mineral resource into the 500-m gap identified on the R zone corridor. I look forward to sharing results of the June quarter drilling programs at our next opportunity in July. With that, I'll hand over to Lawrie.
Thank you, Glen. Good morning, everyone. This morning I'm pleased to update on our financial performance for the March quarter, as shown on slide 10 of the presentation and outlined on pages nine and 10 of the report. We had a very strong quarter of cash generation with operating cash flow up 1/3 to $ 269 million, and we delivered $ 125 million of net mine cash flow. This was an increase of 135% from the December. We invested $ 144 million in capital, comprising $33 million in sustaining and $ 111 million on major projects. Our group capital guidance remains unchanged at $ 150 - 175 million for sustaining capital and $ 440 - 505 million for major projects.
Group cash flow for the quarter was just under $22 million. Jake mentioned our excellent all-in sustaining cost performance for the quarter, and the $990 per ounce equates to a margin of around 60%. We remain on track to deliver our group all-in sustaining cost within the guidance range of $1,135-1,195 per ounce. We did see some higher costs come through in the quarter, and these were in line with what we outlined at our half year results. As I mentioned at the half year results, though, the improvement in metal prices and revenue are more than offsetting these cost pressures. Our achieved gold price was up 3.6% in the quarter. The achieved copper price was down slightly by 1.5%, but our copper volume more than tripled.
The focus remains on managing the cost pressures across all of our operations. The balance sheet continued to strengthen even after the increased debt associated with the Ernest Henry acquisition. Our gearing is sitting at around 23% and is expected to trend down below 20% in the coming months. This is in line with our first target level that we set post any acquisition. We ended the quarter with a cash balance of $ 538 million and have around $ 900 million of liquidity. Turning to slide 11 and a summary of the quarter. Delivering an all-in sustaining cost below $ 1,000 per ounce is certainly sector leading, and we will finish the year within our group cost guidance range. The margins we are generating is able to fund our growth plans and still return funds to our shareholders.
The immediate exceptional contribution from Ernest Henry is evident in terms of additional copper exposure, reducing our group all-in sustaining costs, and materially increasing the cash flow. The existing mine life, plus the expected extensions, will see this cornerstone asset generate significant benefits for many years to come.
The ability of the team at Red Lake to achieve improvements in all areas of the operation gives us confidence that the transformation is now progressing well, and we expect the momentum to increase again in the June quarter. The other assets are performing well, and throughout the business, we have demonstrated resilience against the extreme rainfall events and the impacts of COVID, especially the isolation requirements for positive cases and close contacts. We are in a very good position to close out the financial year. Thank you for your time this morning. Harmony, please open the line for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Greene from Credit Suisse. Please go ahead.
Hey, good morning, Jake and the team. My first question is just on Red Lake. Great to see things heading in the right direction there. My question is just around the milling. Can you please provide some context as to how running the Campbell Mill beyond the 2,000 tons per day went? Are you getting a sense of what the optimal milling capacity could be? And just to confirm the exception to run beyond that level, I think I recall you mentioning it was only for six to eight weeks. Is that the case, or have you been able to extend it?
Yeah. The last question first, it's a 12-week trial that you can restart if it's intermittent. We are confident that we can run it till the end of June and into early July at these higher rates of 2,000 tons per day. But we are. You know, we're pushing it to the boundaries. I think it was only running at about 1,700 or 1,800 tons a day when we acquired the operation. These are the milling throughput which it achieved in the first quarter are historic highs, as the other mining rates. We're starting to get the productivity through that we need to convert this into a medium-grade, higher tonnage operation.
No, that's great. Thanks, Jake. Then, if you know, development rates are being sustained above the 1,200-m a month, and if you're able to get 3,000 tons a day on a sustained basis, what's your thinking around the Balmer Mill versus the Red Lake Mill? I mean, it's a newer mill. Are there potential for cost savings there or scale if you were to go down that medium-grade path, if it should transition to Balmer? What's your thinking around running all three mills?
We're assessing that, Matt, now. You know, it is, I think, an 11-km distance from the Campbell Mill and Red Lake Mill. We're also doing. You know, we have the opportunity to do the bulk trial at the McFinley deposit, which is near the Bateman Mill. But we're working out the milling strategy. Obviously, the upper Campbell area, which will come on track in the first half of next year from the CYD decline, gives us higher-grade and potentially, you know, a completely independent access to ore bodies. Up until now, we've been focusing on keeping the two mills filled because this is the first quarter which the Red Lake Mill and the Campbell Mill have run combined throughout the quarter.
You know, up until now, our issue has been on mining rates. We're getting that right. We need to start getting consistency and reliability. We feel we're getting there. You can see the trends. You know, obviously, we've had a tough 12 months at Red Lake pre this quarter.
Yeah. That's great, Jake. Then just on Cowal, a challenging quarter there with the rain and COVID. You mentioned the 25% of confirmed cases. If we were to take the close contacts that had to isolate, what sort of levels of absenteeism did you experience at the time on-site?
I think I saw that the highest level of absenteeism on one day was about 80 people, 75-80 people. It's now down to about 35. It's reducing. 80 out of about 400 people is a lot of people offsite. That's 400 of total workforce. If you took that shift and those who are on break, it would be less than the 400.
Yeah. Got it. Okay. Do you expect things to ease with these recent changes on close contacts by the government?
John Penhall, the General Manager of Cowal, is sitting in the room. Yeah, he's nodding his head. Well, none of us are pandemic experts, so we're hopeful. Yes, Cowal has dealt with the brunt of it, and they've dealt with it very, very well. I mean, getting 300 people onto site for a shutdown was a pretty remarkable achievement without getting infections.
Yeah. No, I appreciate it. Okay. Look, if I could just squeeze one last one in on Mt Rawdon there. Perhaps a longer-dated question here, but a lot of the gold miners wanting to become net zero on emissions. What's your thinking on this pumped hydro project? Could this be a project that you participate in the future, and look to maybe, I guess, generate credits to offset carbon elsewhere in the portfolio? Just on the scale, how did you arrive at the 2 GW for 10 hours?
I think the scale has been determined really by the reservoir capacity on the test. You know, it is a multi-billion-dollar project, and we are not power operators, and we don't intend to become them. Yes, there is, you know, the opportunity which I've described, you know, can we have some ownership of the project? It would be small, and a disproportionate amount of carbon credits, you know, to me would be a structuring outcome that would be fantastic for Evolution. It's. We haven't yet been able to test it. The first priority is to make sure that this project is feasible and economic. The pre-feasibility study says that it is. The meetings with the Queensland Government suggest that it fits and aligns exceptionally well, within their requirements.
The more I read about pumped hydro and deep battery storage, the more compelling Mt Rawdon becomes. Fundamentally, Matt, Evolution's priority is twofold. One is to do the right thing by the community and the remediation of the mine. The second thing is to maximize the value of the project, and the pumped hydro has the potential to be a very significant and valuable project for Evolution shareholders.
That's great. Appreciate your time. Thanks, Jake.
Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.
Good morning, Jake and team. First question. This one is probably Lawrie's wheelhouse. On page 10 of your quarterly working capital build of roughly $67 million during the quarter, it seems high relative to previous quarters. I'm guessing it's got something to do with the Ernest Henry acquisition, but just wondering if you could please provide some color on that quantum of movement.
Yeah, Mitch, it's exactly that. I mean, what happened in the March quarter is we closed out the joint venture, so we get the gold sale, so that was a positive working capital movement. But we then moved to 100% of the concentrate, which works on either a three- or four-month quotational period. So in this very first quarter of owning 100%, our working capital will increase, and it increased by over $40 million on the receivables side. That was the major impact on our movement in working capital in the quarter.
Okay. Thank you. My second question. Understandably, you've softened the guidance for FY 2022, given the events during the quarter. Just wondering if there are any drivers for that change that are likely to flow into FY 2023 and that are potential risk of impacting sort of the guidance that's out there for FY 2023 currently?
I mean, I think, Mitch, the real risk is on Red Lake. You know, we had guidance out there for 200,000 ounces for next year. We are relooking at that. You know, we're likely to need to downgrade that in due course as the final budgets and plans come in place. But it is, you know, 40,000 ounces is the next hurdle, and then 50,000 ounces a quarter from there.
Okay. Thank you. I guess on that, can you provide a bit of clarity on Red Lake with regards to that 40,000 ounces? The way I would think about it is that that's the new base once you've achieved that in the fourth quarter. Is that the right way to be thinking about it? Or is it, you know, running hard in the fourth quarter and may come down in 1Q FY 2023?
No. You know, when we had this debate around reducing guidance in the range, we've made a conscious effort to try not to push the sites in the fourth quarter and fall off the edge of a cliff in the first quarter next year. We are very driven by the fact that we've recognized our missteps at Red Lake. We need to build confidence, and we need to get credibility. We are gonna be trying to build a base and then step up from those bases.
Okay. Thank you. That's it for me for now.
Thank you. Your next question comes from David Radclyffe from Global Mining Research. Please go ahead.
Hi. Good morning, Jake and team. Just to follow up, I guess, on Red Lake, a couple there. Firstly, you've got that chart showing the improved haulage from Cochenour, which looks like it was around half of the feed for the quarter. Is this showing that Cochenour was a key bottleneck and, you know, going forward, we should expect sort of similar volumes out of Cochenour?
Yeah, David, I don't know whether you've looked at the history of Red Lake, but that high-speed tram, there was nothing high speed about it, and it cost a huge amount of money. Originally, it had kind of built for purpose electric loco locos that it used. We've changed those. We've changed it. There's been some tremendous and successful change management there, and the team has done a great job there. They're now running it very consistently. Cochenour was never really able to provide a reliable base load, and it is now starting to be able to do that. It is lower grade, so as we open up better and higher grade sections in Aviation, MMTP, you've seen we've mined a couple of stopes there.
When the Upper Campbell area comes online from the CYD decline obviously we're gonna try and replace as much material, if the mills are full, with higher grade material.
Okay. Thank you. Just to follow up, given your previous comments there about the outlook for 2023, given it looks like the ore mining rates are coming up, but you've talked about better dilution control this quarter. Is really one of the key bottleneck next just getting that grade up towards reserve grade? 'Cause we're still obviously running below that. I mean, you do have new high grade areas coming in, such as Aviation, and I think you've said you've started stoping there. But is it really still grade that's the key drag into 2023, and that's the way we think about it? Or is there further sort of potential. But the aspiration, I guess, for the ore throughput levels was maybe high as well.
No. Look, I think there's an element of bruising that we've experienced over the 12 months. It's really is about getting the grade consistent, accessing these higher grade areas, getting reliability and predictability and confidence. You know, now the mills are running at maximum throughput. There's a 15,000 ton stockpile on surface at the moment. You know, remember three or six months ago, you know, Red Lake, there were skeptics as to whether it would be an operation that would survive. You know, we were always confident, but you know, this quarter you're starting to see the development rates consistently, starting to see the mining rates, the processing rates. It's about building confidence and getting credibility.
All right. Thank you, Jake. I'll pass it on.
Thank you. Your next question comes from Al Harvey from JP Morgan. Please go ahead.
Yeah, good day, Jake, Glen, and Lawrie. Thanks for the call. Just, maybe one on Mungari. Just wanted to get an update to confirm the Mungari mill expansion's still on track for FY 2022. You did kind of run through some of those synergies that you're seeing across the whole EKJV projects. Wondering if you could outline any more of those and how we should think about cost savings at the Mungari asset.
We're integrating three separate operations into one. We think there are synergies and opportunities over there. As you know, you know, there's a tightness in the labor market. I mentioned that our vacancy rates had actually gone down this quarter, but we did have high level of vacancies at the start of the quarter. There's plenty of opportunity. Glenn visited Mungari a couple of weeks ago, came back very excited about the geology. The study is on track for completion at the end of this year, this calendar year.
All right. Thanks, Jake. Maybe just to follow up on Mount Rawdon, have you got any expectations around how long it might take to stabilize that pit wall? Maybe just following on from that, how do we think about rehab costs in the context of the pumped hydro project? Does that shift that down the track further, or should we still need to take some costs out there for the rehab?
I think that is on the access to the ore this quarter, we've made some conservative assumptions that we believe, and that's part of the reason why we downgraded guidance. You know, we're expecting that it's deferred production rather than lost production. You know, we need to do the geotechnical work with regards to the rehab. It's kind of a bit of a binary outcome. Either we're gonna have to rehab it or we're gonna go down the pumped hydro scheme. You know, what I'd encourage people to start thinking about the option value of a pumped hydro scheme being viable at that operation.
Thanks, Jake. I'll just sneak one last one in there. Just on the Ernest Henry costs, obviously, taking out that lag effect, negative $442 an ounce, pretty impressive. Can we expect that to those actual numbers to flow into subsequent quarters now, or are we expecting any other kind of accounting lag impacts going forward?
Al, I'm gonna pass that question on to Lawrie, but thank you for asking the first question on Ernest Henry on this call so far. This is an asset that delivered us 17% of the purchase price in the first quarter that we owned it. Lawrie, over to you.
Yeah. Al, there's nothing further that should impact on the costing structures from the old joint venture. Going forward, depending on gold and copper produced and sold, the AISC will be normalized. You know, it would obviously depend on the copper price that we achieve in the quarter in terms of the byproduct credits we get. Jake has sort of locked in his mind that'll be -$ 4,200 every quarter. We've just got to get him back to the accounting days of the mechanics of how you calculate it.
No, that's great. Thanks, Lawrie. Thanks, Jake. Thanks, Glen. I'll pass it on.
Thanks.
Thank you. Your next question comes from Daniel Morgan, from Barrenjoey. Please go ahead.
Hi, Jake and Team. First question just on Cowal. Given the impacts of rainfall and COVID on the quarter and, you know, sounds like it still impacts this quarter, I'm just wondering if you could outline the latest thinking of grades from the open pit over the next 12 months. Thank you.
I mean, I think it's consistent, albeit John Penhall's right here, and I'm gonna put him on the spot, and our general manager is standing in for Bob while Bob's on leave. John, you're the best person to answer that question.
Yeah. Thanks, Jake, and good morning, Daniel. Look, we're expecting to see the grade incrementally increase over the coming 12 months. We see that looking back over the last 12 months as we've seen volumes come up, a strip ratio for well below one. It's gonna be a volume piece here. We're gonna see increased volume, and we're gonna see increased grade, and that'll translate through the mill. We're already seeing the grade come up from circa 0.9 12 months ago, up to around just less than 1%, 1 gram per ton, I should say, going through the mill now.
Thank you. Maybe an accounting question for Lawrie. Just the D&A at Ernest Henry was about $ 4,000 an ounce. Just wondering, you know, might be some accounting finalization adjustments in there or something. Just what's the best guidance on where that should settle? Thank you.
Yeah. Dan, we've got there certainly would be some in the finalization of the model, which was always averaging $1,350-1,400 an ounce, and then now you're amortizing a billion of asset acquisition. That was the impact in this quarter. As we finish the life of mine plans in the June quarter, we'll update on what the D&A profile for this asset's going to be going forward. I haven't got it in front of me, but we had it at the half year as to what it would be on an annual basis. I'll get Martin to follow that one up with you.
Okay. Thank you. Red Lake, revisiting a little bit of some earlier questions, just specifically on the mills where you've done this trial, you know, could you further out on what you've learned about, you know, the mill that you didn't already know? You know, what's potentially surprised you from running it at full tilt?
Yeah. Dan, that they can be pushed harder than they've previously been pushed, and they can produce. They have higher throughput capacity than they've previously had. We're kinda pushing the boundaries now. You know, Bob's always keen to push the envelope, you know. I think we started off at 1,700-1,800 tons. They're over 2,100 tons now at Campbell. The mills have never really been pushed to their maximum capacity.
Yeah. The only thing I'd add to that, Daniel, is if you recall, when we first took ownership of the asset, the Campbell Mill was one of the things that we'd identified through our DD that needed to get a little bit of love and attention and money on taking ownership, because it was not a mill that was set up to go for the extended periods. We completed those works, and the pleasing thing we've seen in this trial is that those works that we've done have allowed us to run even above where the team thought they could on an unlimited or an unconstrained basis. Therefore, they're getting a little bit more confident about the capital that may be required to have this sustain at these levels.
Then maybe just an update on the permitting process for that, 'cause this is a temporary dispensation to run these mills flat out, which I presume is obviously they'll have to throttle back in the September quarter. What's the process to re-permit them at a higher number once you know what that number is?
That's in train and we don't think it's a major impediment. It's more just process than anything else.
Yeah. If you'd recall, when we talked about the mill expansions in the second half of last calendar year, you know, if we were running at these rates, it's a local permitting approval, as opposed to if you go above, is it 50%, I think, then it's a federal. These improvements that we're running at are local approvals, so it's not as complicated.
Thank you very much.
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead. Pardon me, Kate, your line is now live. Thank you. Your next question comes from Alex Barkley from RBC. Please go ahead.
Yeah. Hi, Jake and team. Another one on Red Lake. With the mining rates going quite well, particularly in March, you know, well above even the 850 kilotons you'd guided from existing mines in FY 2022/2023. Just wondering why on an annualized basis the gold and all-in sustaining costs would still fall short of your FY 2022 guidance, despite you know, probably suggesting it was gonna be a better second half. Just wondering what you had expected for the third quarter in that original guidance versus what was achieved. Was it just basically a case around grade not being where they wanted, where you wanted them to be? Thanks.
I think, you know, the main issue is really the first six months of performance. That, you know, we produced 38,000 ounces, which, you know, left us, as I said, on our group guidance with, you know, no runway really, and a disappointing performance. That has been well documented. We're building from that base. You know, the third quarter was pretty much in line. It's consistently now kinda delivering, and we're getting more confidence, but, you know, a bit gun-shy as to making bold predictions. We need to build confidence for the site team, and we need to build confidence, you know, that these things are consistent and that 3,000 ore tons a day becomes a habit.
You know, we can start looking at optimizing and getting grade up. We're very comfortable with the models. You know, the reconciliations are not giving us concern about the models. We do have some work to do to further improve mining dilution. You know, these are all within the range of what you'd describe as normal improvements.
When you say the third quarter was pretty much in line, so grade were about what you had planned at the start of the year?
Yeah, the Cochenour material is lower grade, and we are getting some dilution from the ore pass at Cochenour, which is an ongoing issue as we're mining those areas. We've factored those all into the guidance and everything we have now. But, you know, the Cochenour is a bit lower grade. Because of the success we've had at the tramming and the haulage, that material's, you know, being a base load, and Aviation and MNTP zones are only coming online now. That's where you're gonna see a bit of grade increase in the fourth quarter.
Yeah, okay. Sure. Excuse me if I misheard your comments earlier on the call, but I think you said Red Lake was a few quarters behind the original schedule. Is that pertaining to that sub-$1,000 per ounce guidance you have by FY 2023 end?
Look, Red Lake had 165,000 ounces of guidance this year. It's been the root cause of our miss this year. We've overestimated our capacity to transform the operation. We rebased it. We think we're on track. Nothing in what we've seen at the operation gives us doubt that it can be achieved. You know, we are definitely, you know, twelve months behind where we expected to be on delivery.
Okay. All right. Thanks very much for that, guys.
Thank you. Your next question comes from Andrew Bowler from Macquarie. Please go ahead.
Hey. Good day, Jake. Just sort of noticed a one-liner in the quarterly about development at Bateman. Is that largely to establish drill positions or are you considering, sort of heading in there in terms of getting some ore out as well?
It's to establish drill positions. We do have the opportunity to take 100,000 tons as what's described as a bulk sample there. That's not in the numbers that we're talking about today.
No worries. Just that sort of interim target of 3,000 tons per annum, and obviously heading beyond that, is it sort of expected that that'll come, you know, from continuing improvements in mining practices, or is the next big step coming from now opening up those new areas from that big capital drive at the moment?
Opening up the new areas. You know, this is gonna be a case of opening up multiple areas. We've talked about the fact that it was grossly underdeveloped and undercapitalized when we took it over. We knew that when we took it over. We bought it for $375 million a couple of years ago. We knew that was the case. We didn't know how much it had been undercapitalized, but you know, getting that 1,200- m a month was a key milestone. We've now shifted that to 3,000 tons, say four times a day. That's now being achieved and you know, it's about building bases, debottlenecking the whole process.
The mine is definitely processing 'cause we still have a mill sitting on site that is unused at this point in time, being the Bateman mill.
Thanks for that. Just heading back to Australia. I mean, Cowal, you're talking about stoping the underground there sort of roughly a year from now. Can we expect a reasonable volume of development ore from there over the next sort of year or so? And you know, if so, could you give us a sort of rough grade on that or is it expected to be quite minor before that first stoping milestone?
John, do you wanna take that one?
Lucky you. Yeah. No worries. Good morning, Andrew. Look, I think in the context of the underground as it develops, we're gonna see that normal profile as we start to develop into the ore body over the coming next 12 months. We're pretty busy drilling at the moment underground to get confidence in those first set of stoping. But I think as we follow the critical path, you're gonna see come through in our quarterly results, I guess, an increasing amount of ounces coming out of the underground, but mostly through development until we hit that first stoping. Like all mines, Andrew, it's gonna have a bit of a ramp-up period that posts the mill coming on board, but you will start to see increasing levels of development ore.
Again, it'll be at a modest grade because of course with development, it'll come through at that lower cut-off.
No worries. That's all from me. Thanks, John.
Thank you. Your next question comes from Matthew Collings from Morgans. Please go ahead.
Good morning, gents. It's just a very simple question on Mungari, and just maybe it's an accounting treatment around the JV, but it looks like there are disconnects between the tonnes and grade processed for the gold produced. Is the difference there just attributable to Evolution ounces versus a whole ore through the Mill, or am I looking at it the wrong way?
Yes, it is the answer. We're reporting 100% of the stats through the Mill, and then we're taking our production number that's attributable, so all of the 100% of the assets and 51 of the EKJV.
No worries. Thank you very much.
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead.
Hi, Jake and Laurie. Can you hear me now?
We can. Loud and clear.
Yay. Perfect. Just on Dan's question at Cowal. I thought at the September quarter result, you said we would see those grades from Stage H pick up to 1 g per tonne in December and March, and we'd be running at 0.8. What's driven that? Are you still expecting it to pick up to that 1.1.2 in FY 2023?
On that, Kate, the mining grade will always be the lower one because we are out of Stage H building that stockpile, so the lower grade goes on. That's the average grade mined, and the highest grade is going through the mill. When we were talking about the lifting grade, we're seeing that in the processed grade. We're moving away from the stockpile material to pure Stage H material. We saw that get up to just under a gram-
In this quarter, and it will lift, as John said earlier, over the coming quarters as we get the higher volumes of ore out of the pit.
Yeah. Understand. That makes sense. A question for Lawrie. How much longer is cash tax going to sit at that lower rate? Secondly, when are you expecting to pay stamp duty on the Ernest Henry deal?
The tax was lower in this quarter because based on our tax returns. The FY 2021 tax had to be finalized and paid in December at the time that we submit the return. Therefore, there's a higher amount that goes in the December quarter and the March quarter is lower. We then will see maybe a slightly higher tax cash in the June quarter. But again, we're gonna manage that based on where we see the FY 2022 year finishing and what franking credit balance we wanna end up with. And in the second one, the Ernest Henry will either be in June or potentially in the September quarter. We're finalizing the valuation that has to go in with the stamp duty lodgment.
We're hoping it goes into the September quarter, but it could be in June.
Yeah. Thank you. Finally, look, I know Bob's not here to answer this question, but what are you most excited about at Ernest Henry? Are there any near-term opportunities or levers to pull that you've identified in the first couple of months?
We're most excited about the cash that's generated, and I'm gonna keep coming back to this 'cause I wish someone would look at this. You know, we've got 17% of the purchase price back in the first quarter. We like the mine life extensions down at depth. The pre-feasibility study suggests that it's gonna have an extended mine life down there. We're excited about the geology, the operation and the cash generation.
Yeah, fair enough. Thank you.
Thank you. Your next question comes from Stuart McKinnon from The West Australian. Please go ahead.
Oh, Good day, Jake and team. Just two from me. Firstly, on Mungari, are you guys expecting. You know, COVID rates haven't quite peaked there yet. I see you note there's no major impacts to date, but you do mention that there's been a slight increase in cases in April. Are you expecting, though, that increase to continue and possibly you experiencing the same sort of levels of absenteeism as you did at Cowal or you're not expecting the same impact at Mungari?
Stu, you'd have to think that it is likely to increase, as travel increases and as exposure increases. What we'd hope is that we've learned from our experience at Cowal and at Red Lake, and that the protocols in place at Mungari are strong and have been built off what the other sites have learned, and we'll be able to contain it, in a way that is less disruptive.
Okay. Thanks, Jake. Just another one from me on the gold price. You mentioned the macroeconomic environment being supportive of the gold price, and certainly it's still at fairly historically elevated levels. Are you in any way surprised that, you know, the price hasn't sort of broken out above $2,000 an ounce? I mean, it's hard to imagine a more supportive environment for the gold price, and while it is elevated, it's not really sort of breaking any records or anything like that. Are you surprised by that or what are your thoughts on the gold price going forward?
My thoughts are that it's going higher. The Federal Reserve, I think, has a very, very challenging job of trying to bring inflation down from 8.5% last quarter without plunging the country into recession. That has very rarely been done successfully, and therefore, I expect inflation to continue, and that is always good for the gold price.
Okay. Thanks, Jake.
Thank you. Your next question comes from Michael Bennett from AFR. Please go ahead.
Oh, hi, Jake. Look, just a quick follow-up to that on COVID, given the broader labor market tightness. How many cases have you had at Mungari in April, and are you getting a bit frustrated that WA is still taking a very different approach, given what we saw this week with the easing of restrictions in New South Wales and Victoria?
Yeah. We've had 10 cases at Mungari to date, so much fewer than at, for example, Cowal or what Cowal experienced. I did see in, I think it was in your newspaper, you know, the call from mining companies that, you know, labor access, overseas labor immigration should be eased, and we would be very supportive of that. In a tight labor market like we have at the moment, access to skills without creating rampant inflation and just not being able to fill roles is critical to the future of the mining industry and frankly, the economy of the country.
Just one more on this issue. I mean, in the last few days I've seen in quarterlies BHP, Whitehaven, and others talk about these COVID impacts. I mean, if you sort of sit back, how big of a deal is this for production and guidance for the industry going forward? Are there any solutions? Because it doesn't seem like COVID is going away.
Well, I think there are solutions in that, there are waves of the virus and they do recede, and the sites and operations get better at managing it. Omicron seems to be less, you know, cause less damage or illness or death than previous strains. I think we've got to learn to live with it, and that's what our sites are doing and our people are doing. It does cause a huge distraction to our operations teams. I see John is nodding his head on this one. You know, in dealing with high levels of absenteeism, high levels of concern within the workforce, and legitimate concern around health. It is a distraction that certainly is not what you'd describe as normal business.
Great. Thanks, Jake.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks, Harmony. Thanks, everyone. Look, an interesting call and an interesting quarter. I'm gonna go back to just leaving you with one final thought that, you know, we sold our gold at $2,464 an ounce. That leaves us with an average margin of around $1,474 an ounce, or as Lawrie said, 60%. That's 150,000 ounces of production. Just to give you an equivalent basis, if we were able to keep the same mix of production on that quarter, you know, we.
We increased AISC to $1,740 an ounce or $750 an ounce, which I think will be more in line with the industry standard in Australia. That's the equivalent of us producing 300,000 ounces of gold at that AISC. Our view is it's much better to produce less gold at higher margin and make lots of money. Thanks for your time.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.