Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining half-year 2020 financial results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will just need to press star one on your telephone. Please be advised that today's conference is being recorded. I'll hand the conference over to your first speaker today, Jake Klein, Executive Chairman. Thank you. Please go ahead.
Thanks, Miles. Good morning, everyone. Thank you for joining us. We do appreciate it. I'm joined on the call by Lawrie Conway, CFO and Finance Director, and Glen Masterman, our VP Discovery and Business Development. I'm going to make some brief introductory comments and then hand over to Lawrie to discuss today's half-year financial results and our plans for Red Lake. We'll then hand over to Glen, who will speak to the highlights of the annual mineral resource and ore reserve statement we released this morning. I'm going to start on slide three, titled Clear and Consistent Strategy. As almost all of you know, Evolution is a young company. Last November, we turned eight.
Over that time, our strategy has remained the same, to relentlessly focus on improving the quality of our portfolio of assets and occupy the space that we know delivers the best returns for our shareholders, being a globally relevant mid-tier gold company. This last six months has seen a number of significant positive steps towards being able to improve our portfolio and also grow our production base going forward. Turning to slide four. Today, the numbers speak for themselves. Record profits, cash flow, and EBITDA, and also doubling of our interim fully franked dividend to AUD 0.07. This is the 14th consecutive dividend paid by Evolution and also our largest to date. The Red Lake acquisition is scheduled to close at the end of March, and we are off to a flying start.
With the support of Newmont, we are implementing an interim operating plan and transitioning the asset to a safe and sustainable long-term future. As you will hear from Lawrie later in the presentation, we have a clear strategy and plan to transform this asset into a long-life, low-cost, cornerstone asset for Evolution Mining. Drilling at Cowal has increased the underground resource by 77% to 2.5 million ounces. The deposit remains open along strike and at depth. We currently have six drill rigs operating with a very optimistic view of future resource extensions. We expect to declare a maiden underground reserve at Cowal this calendar year. We are very confident this will allow a significant underground mine to be developed, which will deliver a step change increase to production at this fantastic asset.
Since acquiring Cowal in 2015, we have added 6.6 million ounces to the mineral resource, which now stands at 8.6 million ounces. Adding historic production means that the Cowal endowment now exceeds 10 million ounces, and we are of the view that there is still much more to be discovered. We are excited that the first mine life extensions at Ernest Henry below the 1200 RL level have been declared with three new levels included in the reserves. This is ahead of the 18,000 m drilling program that is currently being carried out at the asset targeting additional further extensions to both the resource and reserves. I started the December quarterly conference call by saying that our job was to safely and efficiently turn ounces in the ground into dollars in the bank.
Today, with the release of our financials and MRR statement, you see evidence of the success we are having in this regard. Turning to slide five. As you know, it is not all about what we do, but equally important is how we do it. We recognize and accept that sustainability performance is becoming an increasing focus of shareholders. It is one of the reasons we have elevated the general manager sustainability role to our leadership team, and we are delighted that Fiona Murfitt has joined us in this role. On slide five, we detail our sustainability principles that clearly define how we operate our business. Slide six reflects the highlight we have achieved in this area over the last six months. Importantly, we have been included in the Dow Jones Sustainability Index Australia, one of only two gold companies that qualified for inclusion.
Our graduate program is one of the initiatives I am most proud of at Evolution. We are training and developing some of the best and brightest young talents to undoubtedly be future leaders of our industry. We seem to live in a country of fire and drought. In the last few days it's turned to flood. We do hope that our donation of AUD 3 million to fire and drought relief will go some way in supporting the very many rural Australians who have been affected by these devastating events. Turning to slide seven. Whilst we are pleased that there's been some drought relief through the recent heavy rainfall and the Wyangala Dam has started to rise, we are determined to stay committed to our focus on environmental stewardship and water efficiency, particularly at Cowal, by reducing our dependence on surface water.
This is currently less than 20% of our daily requirements at that mine site, and with the further initiatives we are putting in place, from increasing pumping capacity, to increasing our recycling of water, to identifying and commissioning additional saline bores, we are on a path that we believe will, in time, make us self-sufficient and eliminate our need to draw surface water. With that, I will hand over to Lawrie.
Thank you, Jake, and good morning, everyone. It's a pleasure to be able to present the financial results for the six months to December 2019. Slide eight highlights the financial performance. While we've had some mixed performance from a couple of our operations, which have adversely impacted production or costs, the fundamentals of the business are very solid, and we are well-placed to continue to deliver superior returns for our shareholders. The underlying financials are very robust in delivering expanding margins. We achieved a record profit after tax, both in statutory and underlying terms, at AUD 147 million and AUD 149 million respectively. These were up 62% compared to the prior corresponding period, while our operating cash margin, EBITDA, was up 23% to over AUD 440 million, which was also a record. On a per share basis, we saw our earnings increase to AUD 0.087.
Importantly, these profit and margin results are flowing through to cash in the bank, which further strengthens our position and allows us to reward shareholders. Despite some operational missteps, our operations are sustaining strong cash generation, with operating cash flow of AUD 512 million and net cash flow of AUD 352 million, after capital investment of AUD 160 million. Cash flow was up 218% to a record AUD 242 million. On the back of this continued strong cash flow and the outlook for the business, we have doubled our interim dividend to AUD 0.07 per share, fully franked. At the same time, we moved to a debt-free position. Turning to slide nine to briefly cover off on the main drivers to the change in underlying profit. Total revenue was up 19%, with the achieved gold price up 24%, offset by 2% lower gold sold.
The higher metal prices in turn increased our royalty costs by AUD 5.2 million or 17%. Operating costs were in line with expectations. I'll cover off on the drivers to these changes in the next slide. At Cowal and Mt Rawdon, stockpiles were drawn down, which reduced profit by AUD 27 million. This is predominantly a non-cash charge. Cowal will continue to draw down stockpiles while the Stage H cutback progresses. At Mt Rawdon, they should process ore from the pit and start building up stockpiles again from the June quarter. Since we've taken the decision not to proceed with Tennant Creek project, we expensed AUD 16.4 million. This also was a non-cash item. Moving to slide 10 and the details of the changes in the operating costs. Mine operating costs increased from AUD 372 million to AUD 386 million.
This equates to approximately a 4% increase and just under 3% when royalties are excluded. The pie chart on the right shows the key cost drivers. We have shown this previously, and the breakdown of our costs has not changed substantially. The top seven categories make up 80% of our total costs, and this is where we place most of our focus. When you break down the movement in costs for the period, labor and royalties make up all of the change at AUD 15.7 million, while the other costs effectively offset each other. As per our guidance in August 2019, our cost per employee increased within the 3.5%-4.5% range. Meanwhile, our contract labor costs moved up at a lower rate, but we did have increased activity at some sites. Our supply teams continue to focus on cost reductions and efficiencies, with opportunities still existing in a number of consumables.
Turning to slide 11. The group and site EBITDA or operating cash margins are high and being maintained over an extended period. Our longest life assets are generating the highest margins of 60%-70% at Cowal and Ernest Henry. The margins at Mount Carlton and Mt Rawdon are expected to improve in the second half of the year. At the group level, we have a 50% margin with expected improvements at Mount Carlton and Mt Rawdon , as well as the current high spot gold price, we should see this margin go higher in the second half of the year. Lastly, the strong cash generation by the operations is being reflected by the portion of the asset repaid. We have nearly three assets fully repaid, while Cowal has repaid almost 80%, even considering the heavy capital investment over the last 18 months to two years.
Ernest Henry has paid back 27% in the last 12 months. Turning to slide 12 and cash flow. This, to me, remains one of the most important aspects of the business, making cash and putting it in the bank so that we have options when considering execution of our strategy. We delivered again over the last six months with a record group cash flow of AUD 242 million. This is high-margin cash flow at 27% of revenue and the equivalent of AUD 640 per ounce sold going to the bank balance. This is being driven by the mine cash flow, and on a net cash flow basis, they are delivering AUD 930 for every ounce sold. At the same time, we're investing in future production with AUD 113 million of major projects at the operations. While our AUD 46 million investment in discovery ultimately underpins our growth in resources and reserves.
With the spot gold price being AUD 200-AUD 250 an ounce higher than what we achieved in the last six months, there is further upside to the cash generation in the second half of the year. Moving to slide 13. This cash generation, the strength of the balance sheet, and outlook for the business, have allowed us to continue with our dividend policy of paying a dividend based on our group cash flow. This has resulted in a doubling of our interim dividend to AUD 0.07 per share, fully franked. On key metrics, this dividend rates very highly with the payout equivalent to 13% of revenue, over 80% of net profit, and a yield of 3.6%. The dividend will be paid on the March 27th. I'll now change topic and talk a bit about Red Lake and our plans for the asset. This starts on slide 14.
In November, we announced the acquisition of Red Lake and expect to complete the transaction at the end of the March quarter. We will fund the upfront purchase price of U.S. $375 million by a fully committed five-year term loan with our syndicate of banks. We have not been waiting for the transaction to close before moving ahead with transforming it into a cornerstone asset. Rather, we have mobilized an integration team to ensure we are ready to take control on day one. At the same time, we have assembled a team, which has developed an interim plan from now through until the end of June, as well as developing an updated life of mine plan. We'll be able to have the Red Lake operation producing in excess of 200,000 oz per annum at less than U.S. $1,000 per oz.
Just to note that the mineral resources and all reserves on this slide were not included in our resources and reserves update today. Slide 15 summarizes some of the actions being implemented. In the mining area, we're moving to mining higher productivity zones as opposed to inefficient hand-to-mouth mining in multiple areas. We are increasing development to 1,000 m per month. This commenced at the start of February with good progress to date. The mine has excess fixed and mobile assets, which will be commissioned progressively over the coming months to reduce costs and improve efficiencies. In the processing area, we are targeting utilization of one mill, and that is the Campbell mill. To achieve this, we will undertake major maintenance in the coming months to improve the reliability of the Campbell mill and then place the Red Lake mill on care and maintenance.
The Red Lake mill will be available for batch treating as required. Right now, there's not sufficient ore available from the underground to justify operating both mills. We plan to upgrade the oxygen plant and thickener feed well to increase autoclave throughput and to reduce cost of consumables. One thing that has been very evident is that Red Lake has continued a workforce based on a 40 g ore body while producing at 7 g to 10 g. The workforce must be restructured and reduced. We intend to do this in a respectful and timely manner. We are still finalizing the restructure, and once this is done, we'll fully communicate it with the workforce. By the time of completing the transaction, we will be in a position to articulate the restructure plan. With that, I'll hand it over to Glen.
Thank you, Lawrie, and good morning. Turning now to slide 16. Drilling at Red Lake commenced under the Evolution operating plan in the first week of February. Five rigs are currently active underground, with drilling focused on the lower Red Lake and Cochenour areas of the mine. Resource definition drilling is prioritizing extensions of ore bodies that will support the operating strategy. Discovery drilling will focus on identifying more continuous ore bodies with potential for large resource additions. We expect to complete 40,000 m to 45,000 m of drilling up until the end of June. Our plans are continuing to take shape for FY 2021, which at this stage are pointing towards a combined res dev and discovery program in the range of AUD 20 million- AUD 25 million for over 100,000 m of drilling.
Early results from drilling completed in the Cochenour area of the mine are very pleasingly confirming our views on the opportunity to discover and add more high-grade resources to the future mining inventory at Red Lake. Turning to slide 17. Key highlights in this morning's annual mineral resources and ore reserve statement are the very strong growth of the underground mineral resource at Cowal, the addition of three new sub levels at Ernest Henry, along with our expectation of very good things to come in resources and reserves at Red Lake. Group mineral resources at the end of the 2019 calendar year are 15.2 million ounces of gold and 934,000 tonnes of copper. Group ore reserves are 6.6 million ounces of gold and 532,000 tonnes of copper. Firstly, at Cowal, mineral resources grew 1.2 million ounces to 8.6 million ounces, inclusive of 3.6 million ounces of reserves.
Growth was driven by significant additions in the GRE46 underground resource, which increased 1.1 million ounces to 2.5 million ounces. Almost 700,000 oz were added by our drilling programs over the last 12 months. The balance of growth at GRE46 was achieved by moving to a higher gold price assumption of AUD 2,000 per ounce, enabling optimization of our MFL outlines to a cut-off grade of 1.5 g/t . Approximately 660,000 oz have been upgraded to indicated classification at an average grade of 3 g/t . Application of a 3 g/t cut-off grade raises the average resource grade to 4.5 g/t for over 1 million ounces of gold. The resource base will inform the underground pre-feasibility study, which commenced in the December 2019 quarter. Our aggressive underground infill program is continuing with the aim of converting more inferred resource to indicated classification.
We expect to continue growing the resource and to be able to deliver a maiden ore reserve in excess of 1 million ounces upon completion of the pre-feasibility study during the 2020 calendar year. Moving to Ernest Henry on slide 18. The addition of three new sub levels to reserves below the 1,200 m RL has extended mine life. The commencement of drilling in the December 2019 quarter to improve the geologic understanding and the resource beneath the 1,200 m RL will continue this year in 2020, with 18,000 m to upgrade resources and expand reserves. Evolution's interest moves to 49% in all gold, copper, and silver below the 1,200 m RL. Ernest Henry finished the 2019 calendar year with mineral resources of 1.3 million ounces gold and 356,000 tonnes of copper, including ore reserves of 0.7 million ounces gold and 150,000 tonnes of copper. With that, I'll hand back to Jake.
Thanks, Glen and Lawrie. Just turning to slide 19, which is the summary. Really, I think it says it all. As Lawrie articulated, we're delivering sector-leading financial returns and remain one of the lowest cost gold producers in the world. We are excited by the pending acquisition of the Red Lake operation and are very optimistic about the early stages of what we're seeing over there. Of course, the drill bit is delivering, and it's delivering at our most important highest margin assets at Ernest Henry and Cowal particularly. I want to finish off before opening the lines to questions by just calling out our most valuable asset in this company, and that is our people. The very many talented, hardworking people we have in this company, who without whose energy, passion, and commitment, none of this would have been possible.
Miles, can you please open the lines for questions?
Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, just please press star one on your telephone and wait for your name to be announced. If at any time you need to cancel your request, just press the pound or the hash key. Just once again, that's star one on your telephone. Your first question today comes from the line of Daniel Morgan from UBS. Please ask your question, Daniel.
Hi, Jake and [Glen]. Just a question on the underground resource at Cowal. Understand to do this work, you need to cut off what's included or not. In your latest quarterly results, you had a continuation of good high-grade hits that were outside the old resource shell. I just want to hear about where you had to cut off what was included in your current estimation and were the hits that you've had recently, are they outside the new resource shell as well? Thank you.
Daniel, that's definitely one for Glen to answer.
Thanks, Jake. Daniel, our cut-off date for data included in the resource estimation, in forming this result, was at the end of November, in the last calendar year. Drilling that we have disclosed in the last couple of weeks in our December quarter end was not included in that update. We are expecting to run two more updates over the next six months that will inform the final PFS and ultimately a reserve. Those results that we were describing a couple of weeks ago will be included in the next update.
Thank you. Just an update on Mt Rawdon. Obviously, you've put out the latest on the resource and reserves. Just wondering how you're planning to mine and blend the stockpiles, because you have declared a stockpile reserve now, which you hadn't last year. Just wondering how it's going to be mined and blended over the next few years. Do we have two to three years of very high-grade production and then it tails off obviously as you put through the stockpiles? Do you blend the mine operation with the stockpiles on a more even basis?
Another one for Glen. I just want to add one more thing to his response on the Cowal drilling. Having sat through a board presentation yesterday on the Cowal drilling, the answer to your last part of the question was, are we getting drill results outside of the resource envelope? That is definitely the case. Glen.
Thanks, Jake. We're referring to Mount Carlton. The stockpiles that have been put out there this morning consists mainly of around about 80,000 oz-90,000 oz in the tailings storage facility, which will be processed towards the end of the mine life. What we're doing in the interim as well, Daniel, is we are about 40% of the way through a resource definition drilling program at which we have very little assay results at this point. That drilling is targeting the underground resource in order to fill in a number of gaps in the model that are still evident, and in addition to that, to grow it. What we're expecting to do is to be able to bring the resource and the reserve upwards again in the underground. Stay tuned to those results.
Lastly, what I'd also just share with you is that we do expect to be commencing drilling in the June quarter at our Crush Creek project, which is located 30 km to the southeast of Mount Carlton. Crush Creek is a low-sulfidation epithermal target. It has a mineral inventory which does not qualify by our resource standards at this point in time. The drilling program is targeting to confirm the historic drilling and then extend some of those areas in the directions which were open, are open. With the objective of being able to be in a position to extend the mine life at Mount Carlton with resource and reserve from Crush Creek.
Thank you very much.
Thanks, Dan.
Your next question comes from Matthew Frydman from Goldman Sachs. Please ask your question, Matthew.
Sure. Thanks very much. Firstly, just a question on the MRR update at Ernest Henry specifically. You call out the fact that you've added three sublevels there. Is it fair to think about that as around one year of additional production for that mine? Just wondering how much additional drilling below the 1,200 m RL has been done to yield that result. It looks like it's just the 10 holes from the last quarter, if I'm reading that correctly. The extension of that is it sounds like you're doing a great deal more than that for the remainder of this calendar year. Is it fair to think of the additional drilling that you're doing as mostly targeting extension versus, obviously, the early benefit you've had from resource conversion?
Another one for Glen, I think.
Matthew, no problem. Thanks, Jake. Matthew, I guess the addition of the three new sublevels were brought in early. The reason we're able to do that is that there was sufficient density of drilling below the 1200 m RL to call for that resource then to convert to reserve. That's the reason why that's been brought in early. Approximately 4,000 m has been completed since the commencement of drilling last quarter. Another 18,000 m to come this year. The objectives of that program will be to continue infilling on the resource below those three new sublevels, along with some deeper step-out drilling to expand that resource.
Just to add to that, it does add approximately another year to the mine life. There's potentially another five sublevels which could be mined without significant infrastructure development. It could be trucked in the view of Glencore to the crusher. That would add between four and five years of reserve mine life. There's this resource drilling, which is going materially deeper than that. Will require capital, significant capital to develop it. The results will inform how to develop that.
Sure. Thanks for the further detail there, Jake. Secondly, on Red Lake, wondering if you guys can provide a little bit more detail on some of those, I guess, early productivity targets that you've set during this transition period. Particularly, I'm looking at some of the things you've called out in mining. You've talked about higher productivity zones. Wondering exactly what that means. Does that mean wider development headings, potentially lower grade? Does that just mean more productive areas of the mine that are, I guess, already quite developed? Secondly, wondering what's driving the increase in development rates, what the plan has been since that program started at February. Is that around redesigning your development, again, to be wider and more productive?
Is it about changing the amount of resources that have been allocated to that task versus the other tasks in the mining process? I guess just wondering what the drivers are behind some of those productivity improvements.
I think Glen's volunteering to answer the first one.
Oh, thanks, Glen. Good on you.
I guess, in terms, Matthew, of where we're drilling and how that's going to support the operating strategy going forward. One of the things we want to be able to do is to really understand the extent of the resource adjacent to the near-term mine plan. For example, one of the, I guess, geological situations we're learning about is that the resources aren't closed off along strike as some of the existing development and production levels. We need to be able to get in there early and understand how far these continue along strike so that we can then get the right amount of development into place to be able to extract that ore in the near future. The priority of the drilling program at the moment is really to deliver the results that will feed into that planning exercise in the near term.
Longer term, the program will look at really expanding on areas that are larger and more continuous in the ore body, and that is around, for example, in the Cochenour area of the mine, where we do feel that we have some opportunities to add significant resources that will become part of the future mining inventory. Lastly, of course, I always need to throw in the ultimate carrot for us, which is the discovery of high grade. We feel that with the size of the land package, what we're starting to understand about the geology there, that there are opportunities that we're really confident in the future could potentially lead to additions of new resource at significantly higher grade. That's the program that will get underway in earnest into FY 2021.
Sure. Thanks, Glen. Maybe, again, I guess just calling back to the early wins you say you've had in increasing development rates. Just wondering, obviously, that hasn't necessarily been informed by any additional drilling. Just wondering exactly how you're achieving that and I guess, going about achieving that lift in development rates going forward?
mate, I think the development rates were reduced because essentially the asset was being run in kind of harvest mode recently. We're saying we need to build up inventories, we need to build up mining stocks. It's really starting to get ahead of where the mine is at and where it's producing from. The other strategy which is emerging is to try and concentrate areas of production into a few larger areas rather than the very dispersed way in which it's currently being mined and operated. That's another focus, and that's a large part of where this drilling is going. The challenges Glen has and his team has is that the first couple of results he showed us yesterday means that he's going to struggle in the rest of our portfolio to match those type of results.
Sounds like a good problem to have. Thank you for the detail, gents. That is all from me.
Thanks.
Your next question comes from Reg Spencer from Canaccord. Please ask your question, Reg.
Thank you. Good morning, guys. Just a question on Ernest Henry. I was just wondering if you could give me an indication of the expected timing of any production from below that 1,200 m RL level that would fall under the different owner structural, different attribution of that production? Is this stuff that comes in at the back end of the mine plan, or might there be some ore production that would come in at some stage? Just to get an idea of sequencing, please.
Yeah, sure, Reg. The plan at Ernest Henry for the existing reserve still has about four or so years to go. What the current drilling that's added these reserves has added extra drilling that they'll do this year, whereby they don't believe at the moment they'll start any development until next year. We may, depending on how they go at drawing down the cave over the next couple of years, you may see some of that material start in about the third or fourth year. There's nothing expected below the 1,200 m RL in that next four-year period.
Okay. That's fabulous. Thank you. Just one for Cowal. I was just wondering if you could remind me your current thoughts around project timelines to the underground, assuming that there is a positive FID and no permitting hold-ups. Is this still a two-to-2.5-year lead time?
For Cowal, the current plan is that we will issue the maiden reserve through the course of this calendar year. We're looking at a submission for the State Significant Development to go in, likely in the September quarter, which would go through all of the processing and regulatory requirements that would see us, all things being equal, start production out of the mine in the first quarter or second quarter of FY 2023. That's sort of in the September 2022, December 2022 quarters.
Great. That's fabulous. Thanks, guys. Appreciate it.
Your next question comes from Nick Evans from The Australian. Please ask your question, Nick.
G'day, Jake. G'day, guys. Apologies, I struggled to get on the call, so I missed the first five minutes. I just wanted to follow up on the drought situation. The presentation sort of says 55 mm, which I'm sure is welcome, but probably won't make a huge amount of dent. How are you looking at Cowal now and water, and at what point will you start getting worried about potential detriment?
Hi, Nick. You didn't miss much in the first five minutes. It was just me speaking. We cover off on the water. Obviously, this rain in the last few days has been helpful, but we're not relying on that. As we articulated in the quarterly report, we have a strategy in place to mitigate the effects of the drought and trying to reduce our access to, or our need for surface water.
Okay.
We've been in that process, really, for the last 12 months. We've built a twin to pipeline, which has increased our pumping capacity by 30%. We're increasing our access to bore fields, we are equipping them and getting access to them. We're increasing the recycling of water, which is now up to going up towards 50%. We only use 20% of surface water or relying on 20% of surface water, and we, in the long term, want to get that down to zero. We are not relying on this recent rainfall, but continuing to implement our strategy to mitigate the impacts of our and reduce our reliance on surface water.
Given the situation that everybody's in up there, I mean, are you seeing potential curtailment on the horizon in 2020 at all?
Our planning is around the fact that there could be an increase in restrictions, and we are planning around that. Again, we're not changing our plan from what it was prior to this rainfall. Our plans are to mitigate the impact of a potential future increase in restrictions.
Thanks, Jake.
Thanks, Nick.
Okay. There are no further questions at this time. I will hand back to Paul. Please continue.
Thanks, Miles. Thanks everyone for joining us. These things do come around quickly. It feels like we were only speaking to you a couple of weeks ago, and Glen said, "Yes, that's right. We were." We look forward. The next milestone is gonna be closure of the Red Lake transaction. Obviously those drills are turning right across our company, and looking forward to updating you on results as we go forward. Thanks a lot.
Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating. You may now all disconnect.