Thank you for standing by, and welcome to the Evolution Mining Limited December 2022 Quarter Results Call. 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 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 Mr. Lawrie Conway, Chief Executive Officer and Managing Director. Please go ahead.
Thank you, Darcy, and good morning, everyone. Thanks for joining us today. I hope you have had an opportunity to relax and enjoy the holiday season with family and friends, and I wish you all the best for the year ahead. On January first, I stepped into the role of CEO and Managing Director, with Jake continuing in the role of Executive Chair. As my first quarterly as CEO and MD, I'm pleased to provide you with an update on our operating performance for the quarter. Today, we announce the appointment of Barrie Van der Merwe as our CFO. Barrie has extensive experience in the finance area as well as in the mining sector. He will be a great addition to the Evolution leadership team, and we look forward to him joining us on the 1st of March.
As he's not yet commenced, I will also cover off on the finance section this morning. I'm joined here in Sydney by Bob Fulker, our COO, Taryn Chua, our Group Manager, Investor Relations, and Peter O'Connor, who joined us this week as our General Manager, Investor Relations. We welcome Peter to Evolution and look forward to his valuable contribution to the team. On the line from Canada is Glen Masterman, our VP, Discovery. In a global macroeconomic sense, we are seeing a redeployment of capital from the U.S. Dollar to gold as there is an expectation of the U.S. Economy slowing and interest rates may have reached their peak. This is expected to happen more broadly across the globe and has seen gold price rally in both U.S . dollars and Australian dollar terms.
This has pushed gold to above $1,900 an ounce or around AUD 2,750 per ounce. This is around AUD 350 an ounce higher than what we compiled our FY 2023 budgets. In China, the easing of COVID restrictions and opening up of the economy has seen demand for copper rise against slowing. This has resulted in the copper price rising to over $9,300 a ton and AUD 13,300 a ton in U.S. dollar and AUD respectively over the last month. The recent rally in the copper price has now also put it above our budget copper price. Additionally, we have seen cost inflation start to pull back and even in some areas, costs reduce. Shipping and supply chain logistics have also improved.
Labor shortages in parts of Australia continues to contribute to a tight labor market. Against the backdrop of these macroeconomic conditions, we are seeing the benefits of Evolution being one of the lowest cost, highest margin gold producers. We are benefiting from high-margin assets in the portfolio, and as our growth projects transition to production, we will see the benefits flow through in the coming months and quarters. That said, we do not rely on the metal prices and cost cycle to drive our performance. What we do in these times is ensure that the cash flow benefits from higher metal prices are realized, while at the same time remaining disciplined about our capital allocation. Turning to our December quarter and the outlook.
Our full year group guidance remains unchanged at 720,000 ounces, ±5% at an AISC of AUD 1,240 per ounce, ±5%. With a solid first half at 46% of guidance achieved, we are well-placed to deliver on our full year guidance with ramp up at our key assets, delivering planned second half weighted production. Cowal continues to access higher grade material in the open pit and commences stoping in the new underground mine in the June quarter. Red Lake will contribute increased production by accessing the higher grade Upper Campbell mine in the June quarter.
We saw a number of real positives from our operations, which resulted in an increase in gold production to 166,000 ounces this quarter at an All-in Sustaining Cost of AUD 1,099 per ounce, which was 27% lower than the September quarter. The performance at Cowal was outstanding given the extreme weather that experienced in the second half of the year. Once the heavy rainfalls stopped in early November, the team demonstrated that they had done all the right things in preparing for full access to the pit. We ended up breaking a number of records at Cowal, with December being the highest ever production month and the quarter being the second highest under our ownership. This quarter demonstrates that Cowal is well on its way to 320,000 ounces in FY 2024.
The quarter for Red Lake was a difficult one operationally. Importantly, though, the ore body is performing as expected with good reconciliation to the models. There are a number of factors relating to the mine plan compliance, dilution, and absenteeism. These all center around culture and leadership. We acted on them during the quarter with a number of changes to the management and operations team. At the same time, Bob has made Red Lake his primary focus in the business and will continue to do so until we are comfortable that the operation is back on track. The performance to date in January has improved and is trending in the right direction. At a group level, we generated over AUD 270 million in operating cash flow for the quarter. We were net mine cash positive post-investing in our growth projects.
This annualizes to over AUD 1 billion of operating cash flow. On a per-ounce basis, we generated an operating margin of AUD 1,677 per ounce sold, which is a 32% increase against only a 6% increase in the achieved gold price. At Cowal Underground and the Red Lake projects, they will move into production in the June quarter. Therefore, we are only one quarter away from pivoting to a significant increase in both operating and net cash flow. These projects lay the foundation to moving to around 800,000 ounces in FY 2024. Meanwhile, the studies for our growth projects at Ernest Henry and Mungari were completed during the quarter, and they present excellent options for mine life extensions and margin improvements at each operation.
Ernest Henry demonstrated its ongoing world-class low-cost position, generating AUD 156 million of operating cash flow for the quarter and just under AUD 260 million for the first half. The drilling results for Ernest Henry that we released today continue to excite us with mineralization not only extending below the Pre-Feasibility area, but also increasing the footprint within the PFS area. This grade is in line and better than our current mining area. We are gaining confidence of potential linking between the main ore body and Ernie Jr. Glen will cover this in more detail shortly. Given the ongoing positive drilling results, we have taken the decision to extend the PFS so as to incorporate the larger mine footprint in defining the optimal mine plan and location of the underground infrastructure.
We expect this work to be completed by the end of the June quarter. The plant expansion study at Mungari completed on time at the end of December. The team has confirmed a compelling commercial case for expanding the processing plant. It will be presented to the board during this quarter for consideration, including the timing of moving to execution. Our Pumped Hydro project at Mount Rawdon also continues to progress well, with ongoing government support being positive both at federal and state levels. We continue to progress on the regulatory approvals process and further geotechnical drilling to de-risk the project. Briefly on our financial performance, which is covered on pages six and seven of the report. The standouts for cash flow before major capital were Ernest Henry at AUD 142 million and Cowal at AUD 93 million.
Significantly, Cowal was cash flow positive after major capital, and this shows the operation is pivoting back to a positive cash-generating position. Our All-in Sustaining Costs reduced to AUD 1,099 per ounce for the quarter. Year to date, AISC is AUD 1,307 per ounce, which will trend down in the second half to be within the guidance range of AUD 1,240 per ounce, ±5%. Sustaining and major capital were in line with the September quarter at AUD 44 million and AUD 151 million, respectively. Guidance for both sustaining and major capital remains unchanged at AUD 190 million-AUD 240 million and AUD 530 million-AUD 600 million, respectively.
The major capital is expected to be between AUD 165 million-AUD 175 million in the March quarter before reducing significantly to AUD 80 million-AUD 90 million in the June quarter. We ended the quarter with a cash balance of AUD 313 million and liquidity of AUD 838 million. The revolver facility of AUD 525 million is undrawn. Our unaudited gearing is approximately 30%, which is in line with plan and within our internal limit. Our cash and liquidity are expected to further improve due to the planned higher production and materially lower capital in the second half compared to the first half. When taking this into consideration with the current spot metal prices, sorry, should they be sustained during the quarter and the half, this will further enhance our cash flow and liquidity.
If the spot metal prices are sustained, we would generate an additional AUD 15 million-AUD 20 million each month over and above what we did in the first half. We continue to proactively manage our balance sheet through disciplined operating and capital cost control during this capital-intensive period and volatile price environment. I'll now hand over to Bob.
Thanks, Lawrie, and good morning, everyone. We have had a strong December quarter, with both gold and copper production lifting over the previous period as planned. Operational pressures, including the ongoing effects of La Niña weather patterns and the inflationary cost environment, which we're all facing, were managed through extremely well by the sites. Pleasingly, our safety performance continued to improve with our Total Recordable Injury Frequency Rate dropping over the quarter to 9.32. Cowal had an outstanding quarter, producing 73.7 thousand ounces at an All-in Sustaining Cost of AUD 1,042 an ounce, despite the ongoing rainfall that challenged the site during the quarter. Performance in the plant was the highest under our ownership on several metrics, including throughput, availability, and recovery.
Mine and process grade both increased during the quarter and are planned to increase further in the next two quarters. The underground project progressed to plan, remaining on track and budget for first stope ore in the June quarter. Underground development lifted 11% to 2,708 m. The paste plant construction advanced, and we're on track for commissioning in the June quarter on plan, and the accommodation village is nearing completion, expected in March quarter. As a result of the strong operational performance and the disciplined cost control, operating mine cash flow increased 66% to AUD 96.5 million in the quarter. At Ernest Henry, copper and gold production increased over the last quarter in line with plan, driven by high grades from the cave.
All mine and process both increased slightly despite shuts performed successfully in both the underground and the mill during the quarter. The higher production and the higher copper price contributed to a standout operating mine cash flow of AUD 156 million and an All-in Sustaining Cost of negative AUD 3,748 an ounce for the quarter. Reflecting our confidence in the mine life extension, we have engaged Barminco to support the acceleration of the decline below the 1,200 RL. Mobilization is commenced, and we'll see good advance in the March quarter. We continue to see positive results from the diamond drilling, which Glen will speak to later. Moving to Red Lake, as outlined by Lawrie, had a difficult quarter.
Partway through the quarter, we noticed a concerning trend emerging which needed immediate rectification. I made the decision to put my primary focus into Red Lake. I've predominantly been on-site for the second half of the quarter and have initiated key management and operational changes, including the appointment of a new operational head, Thomas Lethbridge, sorry, and we have commenced an external search for the site lead role. These changes have already delivered a monthly run rate during January at 1,500 m per month in development, 18,000 m of production drilling per month, and 80,000 tons of ore mined during the month. In summary, through being able to spend more continuous time on-site, I'm still confident in our ability to deliver at Red Lake going forward and over the long term. Moving on to Mungari. Mungari had an impressive quarter with production above plan.
Costs were well controlled despite the continued tight labor market. Higher gold sales and higher realized price resulted in the operating mine cash flow increasing to AUD 18.3 million. Mount Rawdon continues to be affected by the La Niña weather system, with water management strategies remaining a key focus on-site. The processing of low-grade stockpiles continues to drive production profiles, sorry, while there is a restricted access to the ore from the pit. Pleasingly, the North Wall exclusion zone has been removed following an extensive geotech review and the implementation of additional controls. This is an important milestone for the site as it provides an additional mining front, which drives higher pit productions and will increase tonnes mined from the pit this quarter. Thank you for your time, I'll hand it over to Glenn.
Thank you, Bob. Good morning, everyone. I'd like to turn your attention now to the exploration report we released this morning describing the exciting results at Ernest Henry. The ongoing surface and underground drilling programs continue to grow mineralization at this world-class copper gold deposit. We completed the mine extension PFS as planned in December. However, with the exciting drilling results continuing to come through, which indicate a larger mineralization footprint, we have made the decision to extend the PFS a few more months, which will allow the full benefit of the growing ore body to be optimized in the mine design and the location of key underground infrastructure.
Following on from the drilling results we released in November last year, we have received assays from two additional diamond holes that further extend the domain of copper gold mineralization in the main lens, well below the area of the ore body extension PFS. We have been able to repeat the very wide intervals of mineralization in our latest hole, 1226D7, which returned a 118 me downhole interval, grading 1.15% copper and 0.79 g per tonne gold. This latest intercept, illustrated on the long section in Figure two and in cross-section on Figure two of this morning's update, is situated 80 m down-dip of the wide high-grade interval previously reported in hole 1226D6.
The combination of these excellent results and wide intervals, as shown in Figure two, supports a geological interpretation that the ore body will extend at similar widths well below the currently modeled limits of mineralization. Hole 1226D5, also released in this morning's update, crossed the main lens up-dip of holes D6 and D7. Figure one shows that mineralization is approaching the upper limit of the main lens on this particular cross-section. Below the reported interval in hole D5, the lens opens into an impressive volume of mineralization approaching true widths ranging 60-80 m wide, extends at least 270 m down-dip, and remains open at depth.
Figure one also shows the location of holes 1312 and 1314, which are two underground diamond holes completed during the quarter into the vacant areas in model between the Ernie Junior lens and the deep extension of the main lens. I'd like to draw your attention to Figure three, which is a close-up long section viewing the hole locations, highlighting their significance to expand the Mineral Resource into this undrilled area of the mine. Although we have not yet received assay results, both holes intersected wide intervals of chalcopyrite mineralization. Indicating mineralization is continuous down-plunge from the Ernie Junior lens on the upper right-hand side of the cross-section and up-plunge from the deep extension of the main lens on the lower left.
Pleasingly, we expect the new drilling results will drive an expansion of the Mineral Resource across this space, and we'll add more metal to the study area between the 1,125 and 775- RLs, which can be optimized in the PFS. Turning now to our Q project. We achieved the earning milestone under the earning and exploration joint venture with Musgrave Minerals. The joint venture was formed in December. Evolution now holds 75% of this prospective Greenstone belt at Lake Austin North. Diamond drilling results returned from Q, which are highlighted on pages four and five of the exploration update, were positive and have confirmed the geology and structure of the West Island prospect in a series of stacked narrow high-grade lodes within a broader lower grade envelope along the 1.6 km mineralized trend.
Modeling work is currently being undertaken to domain key lodes over minable widths that all being well can support estimation of a main Mineral Resource. The outcomes of this work will guide the future exploration program in the second half of FY 2023. I'd like to close out with a final comment on Ernest Henry, which is positioning itself as a rare opportunity that comes along in a geologist's career to participate in an expanding ore body story that is delivering such long intervals of high-grade copper and gold, exceeding current reserve grades, as well as going beyond my expectations. In my experience, ore bodies tend to bottom out and reduce grade as they grow deeper. Ernest Henry appears to be doing the opposite, and it will be an exciting journey over the next six months to understand what is possible with this ore body.
With that, I'll hand back to the operator to 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 Rahul Anand from Morgan Stanley. Please go ahead.
Hi, Lawrie and team. Thanks for the opportunity. Can we please start perhaps with Red Lake? I just wanted to get some color in terms of the Upper Campbell area, how much ore was available during the quarter, how do you expect that to progress over the year? Perhaps if you can also provide a bit of color around that absenteeism comment that was in the quarterly. Just wanted to understand what that relates to. Is that COVID-related still, or is there something else going on in terms of a tight labor market leading to turnover? That's the first one. Thanks.
Thanks, Rahul. I'll hand to Bob shortly to touch on Upper Campbell and the absenteeism, but I'll just make a comment that, you know, Upper Campbell is planned predominantly in Q4, is when we'll get the most tons out and the like. Absenteeism was really around that holiday period where we saw crew members not turning up to work. Bob.
That's correct, Lawrie. The, so we've mined two stopes so far in the Upper Campbell region. They're just two small crown pillars. But over the next 4-6 months, we'll be expanding that to being a little bit more consistent through the months, with Q4 being the highest production for the year. We're still developing, we're still opening up areas, and it's still coming on, online. The absenteeism, as Lawrie said, it was around that start of the festive season. It also was around some periods in the local area where people tend to go away on vacation as well as some unplanned absenteeism. We believe we have it under control now.
It's not to do with vacancies or anything like that. It's just about short-term absenteeism.
Okay. Understood. Thanks. Look, the second one was around Cowal. Obviously, a very strong quarter, and quite pleasing to see the result, especially, you know, given some risks around La Niña. I wanted to extrapolate perhaps into future periods. How should we think about this record quarter? I mean, is there certain parameters that you can provide for us to understand whether this record throughput and performance can continue at Cowal? Are there, you know, certain things that can be done to make sure that, you know, performance perhaps, continues to exceed expectations like it has this quarter?
Yeah. I think for Cowal in, you know, the December quarter, there was no major shutdown. There was a shutdown in September, not one in December. The next major one is in the March quarter next month. Then in June, we don't have a shut. When we look at the throughput, we'd be looking at where it is at the halfway mark rather than the throughput just for the December quarter. At about 4.4 million tons, that's in line with where we'd expect to see in the second half of the year. What we are seeing, though, is in Q1, was having to utilize lower-grade material off the stockpile.
In Q2, through the second half of November and December, they had full access to the pit, which lifted the grade that we've processed. We would then expect in the second half of the year is that grade profile lift again from the 1.14 to somewhere between there and 1.2. That's what we should see in the second half, versus the first half, assuming we have seen the end of La Niña.
Gotcha. Okay. Look, final one from me. You mentioned a couple of times in your introductory comments about gold price being above budget, copper price being above budget. In the past, obviously, Evolution's focused on keeping the margins and, you know, kept to the mine plan as it was set. Is there any incentive now to start picking some of the more marginal material that lies within the pits or in the stopes, to, you know, perhaps prioritize production over costs?
Look, our focus remains on the margin. I mean, if we look at it in the quarter, our sustaining cost did get a benefit from copper, but it also got a benefit from the increased production and the operating costs were down about AUD 60 an ounce based on Q2 versus Q1. Our focus remains on that. I think as we go through both the pits and the underground, you know, material, that's at the margins, certainly in the open pits will end up on the stockpile, and we'll process the higher grade. Similarly, in the underground, if we think there's an economic return on it, we'll take that material to surface as well.
Understood. Thank you, team. I'll pass it on.
Thank you. Your next question comes from Alistair Harvey from J.P. Morgan. Please go ahead.
Hey, good day, Lawrie and team. Just following up on Red Lake. You kinda mentioned that a bit of unplanned absenteeism over Christmas. Just trying to understand how that kind of played out in terms of production. It sounds like perhaps it was the dilution that played more of a part in the production miscue. Maybe you can just step us through the issues there, Bob.
Dilution had an effect, Al, on the on people and therefore on tons. Dilution had an effect on the available tons, so there was a combined net effect. The dilution was a combination of both underbreak, so therefore not getting the right grade at the right time, as well as some benching of a couple of our key stopes, which we've fixed now with some drawn blast QC, quality assurance/quality control actions going into place. The dilution was really the... It was the bigger effect than the absenteeism, but absenteeism did affect us from an ability to get the tons out. Across the lease, the models are still actually within that plus or minus 5%.
They're still performing really well, 'cause we actually when we do the survey and the CMSs and everything else, we can actually track back to where we've had issues. We have done a lot of improvements in the real past area over the last four to six weeks. We're actually starting to see the net effect of those coming to fruition now.
Great. Thanks, Bob. Just to follow up on the management changes, I just wanna kinda understand when, just to clarify, when those came into place? I guess the commentary around you spending a bit more time over there. It's just trying to understand how that impacts, you know, executive management across the board of business when you've got, you know, Ernest Henry and Mungari potentially to expand over the coming year?
Yeah. Do you wanna?
Yeah.
At about mid-November, Jason Floyd, and myself, basically really deployed ourselves to thinking about Red Lake. I think I only just got back to Australia on Sunday. I've been there since the 28th to 29th of December. Jason is now back there as well, and he'll cover while I'm back in Australia. The ops manager left before that, and we've now replaced that position with Thomas Lethbridge, who used to be our general manager at Rawdon. Pretty excited about having him back in the fold. We're out actually looking for the lead for Red Lake at the moment. We've got a external search going on through Canada as we speak.
The broader context across the group, we have made some changes to cover my absence. Did you wanna comment on that, Lawrie, or do you want me to?
Yeah. Look, Al, I mean, I think, you know, what we saw and at Red Lake through that quarter and partway through was moving away from the plan, going back to old habits, and it was going to end up giving us the difficult quarter we had. You know, as Bob said, he and Jason have been focused on that. I think, you know, the pleasing thing is that the Australian operations have been delivering to plan. They've been well-managed. The site general managers and their teams knew what they needed to deliver, and Cowal was an example of that when the weather improved and the quarter they ended up with. You know, from the Australian operations and the executive team time allocation, it's still focused on the entire business.
Bob is predominantly focused on getting Red Lake back on track.
Yep. That was a good result for the Oz ops in my view. Maybe I'll just finish with one more before I queue back up again. Just on the Mungari study, I guess it's completed in the December quarter and presenting to the board in March. Just wondering if you could refresh our memory on the scope here, if there's, if there's been any changes and I guess any color on how the project stacks up on economic returns. It's not heaps of detail in the quarterly today on how much value that could add to the, to the business.
Yeah. Look, Al, the study did finish on time, and certainly what the team in the last six months was looking at is the doability of the project in the environment in Western Australia. It still came back within the capital cost estimate. We haven't put a lot of the detail in there in the quarterly because we thought it was more appropriate for the board to see the results of the study before the market. That board meeting is next month. Where we finish the study, the timing of the project still looks at a, you know, two and a half year duration. The project capital still remains in line with what we had previously guided to the market.
The returns are certainly above what we'd be expecting as the minimum thresholds in terms of rates of returns and NPV.
Thanks, Lawrie. Appreciate it. I'll queue up again.
Thank you. Your next question comes from David Radclyffe from Global Mining Research. Please go ahead.
Hi. Good morning, Lawrie and team. My first question is on Ernest Henry and the copper outlook there. When you acquired the copper stream, you were thinking about a 60,000 tons of copper a year profile. I think that was then downgraded to circa 50,000 tons. Currently, you are annualizing up at that 60,000 ton rate. Was this the plan? Or are you seeing better copper grades or reconciliations, or have you changed the plan there?
Thanks, Dave. look, it is pleasing that the performance in the first half at Ernest Henry, the grade has outperformed slightly, but we also have been able to get higher than we had planned throughput. At the same time, in the last few months, the team have been working on finishing some projects which were centering around concentrate grades and recoveries, and they've been able to come to a solution on that, which has given us a tick up in copper for the first half, and we'd expect some of that to flow through in the second half. It's nothing that we've seen any different. We had actually guided to around 50,000-55,000 tons over this year and next year.
You know, the grades will come down as we get to the end of this part of the mine area. What we are pleased with is that the drill results that Glen's talked about is that the grade's actually holding up at depth, so there may be upside, but we'll see what happens as this study finishes over the next four to five months. Glen, anything you want to add?
I think you've largely covered it, Lawrie. You know, one of the highlights that's exciting me about the drilling results, Dave, is that we are seeing higher copper and gold grades, in an absolute sense. The copper-gold ratio is still the same, but higher absolute grades in these drilling results and certainly well above reserve grade. I think, you know, but when it's all said and done, by the time we sort of update our models as we go, you know, we certainly don't expect a downwards trajectory. It'll hold steady or hopefully improve.
Okay, thanks. Maybe as a follow-up at Red Lake. In addition to the dilution and absenteeism issues you're talking about, ore processing looks to be lagging. It looks to be sort of running at sort of 800,000 tons a year annualized. That's below what I thought was a target of 1 million tons. What's driving this? Is it a lack of stockpiles to supplement underground ore, or is there something else driving the lower processing rate?
I'll hand that to Bob, but it is back-ended as we get access to more ore in Q3 and particularly Q4. Correct. It's directly related to the mining rate, Dave. As the mining rate comes up, you know, this month, January to date, our run rate puts us at around about that 80,000 tons. The plan is to actually get that up a little bit higher, which will give us the sort of, 1 million+ rate for an annualized rate.
Okay, thanks. There's no stockpile left anymore to help supplement the processing?
It's what I'd call working stock. It sort of bounces around that sort of 2,000 up to sort of 10,000, then it comes down again as we have planned maintenance on shafts and things like that.
Okay, brilliant. I'll hand it over. Cheers.
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead.
Hi, Lawrie and Bob. Happy New Year. On G&A tracking above the guidance range, can we expect that to come down into H? My second finance question was, are those stamp duty payments still coming out of the cash flow this half or half just gone? Happy New Year to you, too, Kate. The G&A on a per ounce, it's trending above, but that will come down at the actual gross spend on G&A, which is in the table on page seven. They're actually in line, and we're better in the December quarter than the September quarter. In the second one, the stamp duties both at Ernest Henry and Mungari are still pending.
They're due when we get the notices from the Office of State Revenue, respectively. Okay. Sorry, that first one was depreciation. Sorry, I had G&A. Yeah. G&A is similar. There's two things there. One, as the production increases in the second half, the units of production depreciation will come through and that won't have an impact. The fixed or straight line depreciation items in the first half getting depreciated over lower ounces is what's giving us the higher G&A per ounce in the first half of the year. We do expect that to trend in the second half based on the increased production.
Okay, cool. Red Lake. Sorry to come back again here. On the site visit, you had those charts in the deck showing how reconciliation of design to actuals had improved. From your comments on the call, it seems like there was under break issues again this quarter. In your view, what's the key to getting consistency with this performance to plan? The second part of the question was, you've said that the model is reconciling well, you've called out dilution as problematic, which would imply that it's not reconciling that well. Are you confident that that's under control, or have I misheard that?
Yeah. Thanks, Kate, and happy New Year to you too. I'll do the second one first. The dilution, it's really the external dilution that's coming in that is being the cause of the dilution that we're talking about at the moment, not the models themselves. When we reconcile the CMSs back to the stopes and the design, et cetera, et cetera, we're seeing where the drill and blast is causing that dilution and the overbreak. On the overbreak and the conversations that we had at the site visit, if I was to coin it in a couple of words, I'd say operating discipline and leadership are probably the two main things we lost it in the last quarter, which we're gaining back now.
It got better, and then last quarter it wasn't so good conformance to plan, and now it's getting better in January?
Yeah. Yep. Compliance to plan is key at Red Lake, and we just have to be myopic on it and make sure that we follow it diligently all the time. In January, it's improved significantly.
Okay. Yeah. Thanks.
Thank you. Your next question comes from Levi Spry from UBS. Please go ahead.
G'day, g'day, Lawrie and team. Happy New Year. Just on the Ernest Henry, copper price, realized copper price was very good. I think you mentioned you've been doing some work on the offtake, but, is there any particular reason why price realized was so good? Just timing? Any change to payabilities or anything like that?
Happy New Year, Levi. No, there's no, there's no change in payabilities or anything like that. It's effectively what we saw at the end of the December month, which is when we priced the open shipments, that spike. Essentially, it was valued at AUD twelve and a half thousand a ton at December. The previous quarter was around AUD eleven and a half thousand a ton at the end of the quarter, and that's what gave the benefit whereby the achieved, price for the quarter gets to that AUD 13,000. It's just merely the open shipments that have to be revalued every month, which is about 20,000 tons, open every month.
Got it. Thank you. Just in terms of the exploration update there and the pre-feasibility sort of optimization, can you maybe just talk us through, you know, what that involves? You mentioned maybe moving the some of the infrastructure. Is this more just about bigger inventory, longer life? What are the sort of key value drivers here to the optimization?
The two main drivers are the drill program that Glen talked about. We have more drill, drilling to be done through the next couple of months. The ones that the results that Glen mentioned are still outstanding for the team to take into consideration and update the resource model. If it is showing that depth at the grades that Glen's talking about, and we do see a connection with Ernie Junior, then that will give the study team the decision of how far down do we put the next crushing and conveying system, and then the ventilation and the like that needs to be going with it. That's really what we're working through over the next four to five months.
Okay, great. Thanks, Lawrie.
Thank you. Your next question comes from Alex Barkley from RBC. Please go ahead.
Thanks. Good morning, everyone. Just at Ernest Henry, gold recovery was a little bit low, you know, even though grades were decent. Exactly why was that? Also, what was the copper recovery? I didn't see that one in the release. I might have missed that one.
Thanks, Alex. The gold will be, the recoveries will be on finalization of assays and the sales. That's what drove that mainly in the quarter. In terms of the copper grade, we'll get back to you if it's not actually in the report.
Okay. recovery should sort of bounce back-
Oh, recovery. Sorry, sorry.
Is that right? Yeah.
Yeah.
Yeah, yeah. Yeah, yeah. The gold one should sort of bounce back higher. Is that the idea?
Yeah. I mean, year to date, it's trending in line with what, where we're expecting but...
Yep. Yeah, no problem. just had a, your comment earlier about where copper guidance is sitting FY 2024. I think it's 50 kt. You're thinking grades might dip after that, if I heard correctly. I would have thought your depleted reserve grade might suggest slightly higher grades, you know, like copper production going up. just confirming that grade expectation beyond FY 2024.
For now, it's still in that 50,000-55,000 tons, in the foreseeable future there, Alex. There's no real change. It will.
Okay.
It will go up and...
Okay, thanks very much.
Thank you. Your next question comes from Daniel Morgan, from Barrenjoey. Please go ahead.
Hi, Lawrie, and team. Just first question on Cowal. Appears a very strong result in light of, you know, all the wet weather in the region, which you called out. Just wondering if you could talk about how that might have impacted performance. I mean, it's not obvious that it has, but, you know, is there any pit access issues that are a hangover that might impact this quarter, where we do a bit more stockpiling or? Thank you.
Thanks, Dan. No, look, I mean, what we saw is essentially from mid-November through to the end of the quarter, they had a clean run at it. No, no weather events that stopped them getting into the pit. In December, they actually did over 2 million tons out of the pit. They had no access issues. What we'd expect to see in the second half, as I said earlier, assuming La Niña's finished and they get a good run of weather, they'll be increasing the tons mined, and that will outmine the mill and allow them access to the higher grade material that I mentioned, where we should be trending up towards 1.2 g per ton in the second half of the year.
Thank you. Just at Ernest Henry, This, you know, obviously it looks very promising from everything you're outlining. Can you just remind us on the pathway and timing of a decision to proceed? I mean, it looks like you've almost made some of the early decisions, given you've made the early work decisions with Barminco on the development. Can you maybe talk about, you know, what a decision looks like, and the long lead items, when you might make a decision on that?
The study will continue in PFS through to the end of this financial year. What we are doing though is knowing the extensions below the 1,200 are going to happen. We are getting work done to make sure that that development doesn't become a bottleneck so that when we need to put the infrastructure in underground, we're able to do that. Those pieces of work are contiuing over the next six months as well. What we'd look at is the decision in June to go into feasibility study. What we'd be looking at is that you're still about two and a bit years away before you're really ramping up that development and installing the infrastructure.
Okay. Thank you very much for your answers.
Thank you. Your next question comes from Nick Evans from The Australian. Please go ahead.
Good day, Lawrie. Good day, guys. Just returning back to Mungari. I think when you said in June last year, when you said you were gonna defer it, you were sort of really working in an overheated, sort of both capital and labor shortages. Over the last six months, without pre-judging what the board may decide on this, are you sort of seeing a back to sort of previous normal? I mean, how are you thinking about the, I guess that sort of overheated market in WA at that time compared to where you sort of sit when you take it into the board next month, Lawrie?
Secondly, just across the board, in terms of the WA labor market and East Coast, are you seeing any change in where the pinch points are in terms of finding skilled labor? You know, is it hard across the board? Has there been any shifts since the international borders have become a little bit more open? Can you just talk us through sort of where you're seeing the labor market across the board at the moment, as well as specifically around the Mungari expansion? Thanks, sir.
Thanks, Nick. Mungari, look, from where we were, when the project went into feasibility study, the capital has panned out to be fairly well in line. I think that was because they had taken a view on where the WA market was heading and how many projects were in the pipeline. Pleasingly, they've been able to land at a number that's still in line with that. I think, you know, what we've really looked at is those lead times and then around the EP and the CM, which way we approach that, and is there a different way to do it than what they were originally thinking 12 months ago in terms of having the appropriate allocation of risk to the project.
From where it was 12 months ago to now, the project cost is still in line. I think what the next, you know, the next phase is working out when's the right time to go into that project to ensure that we can deliver it on time and on budget, and that's what the board will need to consider next month when we present the outcomes of it. In terms of the labor markets, you know, WA continues to be the area that we experience the highest turnover. You know, we are exposed to an increase in our FIFO workforce, which is now sitting in that 25% of the workforce at Mungari and changing habits of people over there wanting to be more FIFO. That's the issue that Scott and them are handling with.
The good thing is that each month for the last couple of months, the number of roles that we're filling is above the number of departures. Hopefully we are starting to see that slow down a little bit at Mungari. I think on the East Coast, we're still experience the access. Sorry, and in WA, it's a lot around the tradespeople in particular versus the operators. On the East Coast, you know, we're seeing it hasn't really moved upward or downward in the last three to six months. It's been pretty consistent. I think where, you know, for our operations, Ernest Henry FIFO, Mount Rawdon is generally residential drive in, drive out, where people are comfortable in that Southeast Queensland region.
For Cowal in the Central West, the turnover hasn't been as high as probably what it was this time last year.
Thanks, guys. I'll pass it along. Thank you.
Thank you. Your next question comes from Anthony Barich from S&P Global. Please go ahead.
Yes. Hello. Just wondering about that Mount Rawdon Pumped Hydro. August last year, Jake was saying that, you know, you certainly wouldn't be looking to build and operate something like that, but more, maybe look to spin it off or exit. Is that still the options that you're looking at? If so, is there Given the work you've done so far, has that given you an idea as to which way you're leaning? That's the first thing I wanted to ask.
Thanks, Anthony. Jake will be very pleased that Pumped Hydro got a question. The project will, over the next 12 months, it'll continue with the geotechnical drilling to de-risk the project, whilst at the same time, we're trying to work through with the government bodies and the regulatory bodies around the approvals piece. Our view hasn't changed. We don't see this as a project that will be long-term in Evolution's portfolio. Ours is to take it to commercial close and then look at a way to exit that project.
What we'd see is that, by sort of middle to late this year, we would be finishing the sort of the technical feasibility study, and then around in the first quarter of next calendar year, we'd be seeing commercial close on the project where you're matching up the feasibility study with offtake partners and financiers to build the project.
Okay. Thanks. Couple of things which may be related in some way, just in terms of labor, at least. Red Lake, what is the actual culture/leadership issue there? Secondly, on the, what Nick mentioned on follow-up there about the labor and cost issue, do you see any respite on the horizon? You actually did do well containing the costs despite labor market. What was the key to, you know, containing those costs despite all that stuff you fleshed out with Nick's question?
I'll answer the cost one and then hand to Bob on Red Lake and what he's seeing in terms of culture and leadership issues on site. In the costs, I think, you know, when we look at it, 50, 55% of our cost base is labor. As we had announced on the September call and the full year results, you know, our labor costs have moved 5% to 6% in the year. Therefore, we haven't seen any further pressures on our labor costing. Our energy contracts have all been awarded for each of the operations. Red Lake isn't subject to that, so this is the Australian operations.
Again, you know, they will roll into new contracts at Cowal and Mungari and Mount Rawdon from this month onwards. But they're still within our cost guidance numbers. Then in the other areas, you know, around diesel, parts and the like, as we said earlier in the call, we've seen those stabilize. Some of them have come down. Some have obviously come down with the appreciating Aussie dollar in the quarter versus the September quarter. That's really what we've got. What we've got from an operational perspective is making sure that we're using those items as efficiently as we can, given the cost piece is out of our control. Bob, do you wanna touch on the Red Lake?
Yeah. Thanks, Lawrie. Anthony, it's culture is a hard one to actually define. When you look at the Red Lake, the culture and the leadership, I think the easiest way is to look at the history and where they've come from. The district has a long history of mining, a long history of being good miners. Over a long period of time, though, the if I was to say the high grade zone made us a little bit easy on a few of the harder areas, that's probably the easiest way to say it. That goes to leadership and holding people to account and actually setting a direction and then making sure that people actually follow the direction.
That's, that's on us, okay. That's on the leadership. That's on us to stand there and actually expect people to do what's required. I will say that the culture, I think is improving. I think the accountability and the people's accepting of their own personal accountability and that of everybody to deliver is actually lifting and is actually changing. It's pleasing to see that.
Was it there when you bought the asset? I mean, this is a, you know, was this a concern given you paid $335 odd million for it, you know? Following on from that, you know, is it, was it something that was there at the start and is going downhill, or has it just kind of been the same and you're struggling to address it, or what?
From my perspective, it's something that we're working with. The upside that I see is we get this right and we get access to the 11 million ounces of resource that we've got there. That's the positive from my perspective. It takes time to work with people, and that's what we're doing.
I think it's fair to say, though, Anthony, we've owned it for two and three-quarter years. Through the first part of that, international borders were closed. We weren't there on day one that we acquired it. We did have five or so months before we took ownership to be able to learn as much as we could about the operating style and culture. I wouldn't say that it's got worse. I agree with Bob. It's actually got better because we've had to work with the sites to bring them on the journey of understanding where we want to take Red Lake to maximize the value out of the 11 million ounce resource there.
It meant changing from an operation that used to be, you know, 20, 30, 40, 50 g a ton to sub-10 g a ton, which means you've got to operate differently and you need to be more efficient. You need more modern equipment. Getting them to buy into those, and then also embedding that culture through appropriate leadership at the site to say that once we change and move into this operating mode, we don't slip back. I mean, this is an operation that's been going for over 50 years, and that is a change for them. When they do buy into it, as Bob said, when you look at the development meters, the tons we're getting, the processing plant improvements, it does actually work.
We've just got to stop slipping back into old habits and have the leadership team on-site, make sure we stay the journey.
Right. Thank you.
Thank you. We have a follow-up question from Alistair Harvey from J.P. Morgan. Please go ahead.
Yeah, thanks. Thanks, guys, for the follow-up. Maybe one for Glen, just to start with, and bear with me, it's a bit geological. I guess looking at the drill intercepts, on figure two of the Ernest Henry exploration release, looks like 1226D6 does have very impressive grades. 1226D7 just below, not quite the same tenor, although still impressive. Is there a view there, like a change in the geological interpretation that perhaps ore bodies are now dipping more progressively depth with depth, dipping to the west, a bit more?
You know, I guess we're just trying to think about with the expanded capacity and life extension, how that impacts how you're thinking about CapEx more broadly and the potential for, you know, I guess, the upside to mine life there? Sorry, that's a big question.
Al, I'll take the first part of the question. You know, just what we're learning on the geology. You've called it correctly on the difference between D6 and D7. We do see a core of high grade, you know, on that figure two that you referenced, in D6. We see similar grades project up-dip. It's a narrower zone, down-dip. This is a geological feature that we've begun to observe over the last sort of six to nine months. There is in various mineralization domains at Ernest Henry, as you may appreciate, there are numerous lenses there, not just one or two. The center or core areas of these lenses are cored by higher grade domains.
That's something that we're starting to see come through in the models. We're actually able to separately domain that, these sit within a sort of broader envelope of mineralization that reports back at reserve grade. The cores of these things are reporting higher than reserve grade, and the envelope's at reserve grade. To your point on, you know, the western lode dip, it's a good question, actually. What we're seeing is that as we push these holes further to the west, we are seeing mineralization actually build further out in the same direction. That's something we haven't been able to...
We haven't been able to identify previously because of the, you know, really acute drilling angles, particularly from most of the deep drilling at the Mungari, which occurred underground on the 1,200 level. They were highly oblique angles. The reason we got the surface rigs in, was to drill across the ore body so that we could define that, you know, ore waste mineralization boundary of the ore body and actually bed that down accurately. What these results are telling us, is that, you know, there's more drilling that we're doing to push through, particularly that western contact to understand and locate exactly where it is.
You know, that might sort of, you know, it might indicate in the future that we're starting to see a western lode dip on the ore body.
Thanks. Thanks, Glen. maybe just if Bob could follow up on or someone else can follow up on just, yeah, how that's changing your views around, the study and, yeah.
Al, I'm thinking the question is the tonnage regime gonna stay the same or is it gonna increase with the increased geological size of the orebody? At this stage, any cave is predicated on the draw points, the ring turnovers and the cave draw model. At this stage, you know, it's too early for me to actually say whether this is gonna increase it. Our premise at the moment is that it will-
Be circle where we've been as we go down to the extension. Hopefully, if what Glen's saying continues, then we can reassess some of those draw points and number of draw points, and therefore figure it out. It's really too early to try and guess some of that.
The updated study over the next six months, that's just gonna really incorporate the current drilling?
Yeah. It will allow us time to assess what you just asked to see whether what is the appropriate tons that we could get out of the cave without actually offending any of the cave draw characteristics or the geotechnical considerations.
Great. Thanks very much, guys.
Thank you. Your final question comes from John Bishop from Jarden Group Australia. Please go ahead.
It's afternoon there now. Thanks for taking the questions, guys. Just a couple for me. Your hedge book at the moment looks very light. Gold prices have obviously gapped up pretty strongly in the last couple of months, and copper in the last couple of weeks. Is there temptation to build out that hedge book at the moment, given you're still fairly CapEx heavy?
Thanks, Jon. At the moment, you know, our hedge book is winding down. We use it as a tool to manage the balance sheet, but where we currently sit, there's no intentions to add hedging to the portfolio.
Okay, great. Similarly, just around hedging, for copper, obviously you're comfortable with current price direction. What about diesel? Is there any temptation to hedge diesel? You know, talking heads out there are obviously calling China reopening and huge increase to demand. Is there any temptation to hedge that side of the cost equation?
Oh, look, it is one that we always look at, where it sits as a percentage of our cost structure, and certainly as it will become less of a percentage of our cost structure, you know, sub-5%, more likely 3%. It's not one that we've got any in place at the moment. When we look at the forwards on them, they're actually not very attractive, so that's why we haven't done anything, even when the prices had come off their peaks.
Excellent. Thank you. Just a couple of questions. You've sort of talked a little bit around the Ernest Henry PFS. That last question around the geology was helpful. I mean, I guess very hypothetically, how deep or how far do you realistically wanna get ahead of this orebody? It obviously looks like it's improving with depth, in terms of tenor. You know, crystal ball, would you like a little bit more time, or where do you cut things off in terms of having enough life of mine ahead of you, in terms of committing the body? Is it middle of the year enough, or could you conceivably go longer?
I'd like for Glen to keep extending it every time he drills it. I mean, the reality is that we've got to time the mining out of the existing mine area and making sure that we're not ending up having to truck too much material until the infrastructure below the 1,200 is put in place. I mean, we've put the Pre-Feasibility down to the 775, which was 875 when in the concept study. You know, I think when you talk to the project team, their view is, you know, it's a, it's a few levels, it's not a lot. And all we need to do, as I said, is Glen to keep proving that it's getting bigger.
At some point in the next six to eight months, we have to make the decision about where that infrastructure goes and continue to so that there's not an impact on the existing production.
Okay. Just finally on Red Lake, probably done to death, but, I did note a quote. There was a concerning trend emerging that prompted the change in management. Are you able to sort of disclose a little bit more what that concerning trend was or trends were?
Yeah, look, in brief, you know, we had a very good quarter in September. You know, and that was also on the back of getting some material out of the upper levels of Upper Campbell. What we saw then starting to build into end of the December quarter was non-compliance to plan. We were starting to see waste coming back into the plant. You know, so it was just the slipping back into the old habits, and seeing, and as Bob saw, these results coming through, that it was gonna put the quarter at risk. Therefore, we had to make those changes so that we then didn't come into this quarter, with something that wasn't gonna give us the ability to deliver a better outcome for the year.
It was just.
Okay.
Look, it's getting the supervisors and superintendents to make sure that we stay with the plan and don't go back to the old habits.
Yeah. Okay. No, that's helpful. Thank you. Just finally, I guess one of the things that I rightly or wrongly took away from the site visit was at Red Lake there, one of the key pieces of work that seemed to be running in parallel with optimizing the mine plan and the underground development was understanding the resource in terms of grade, metallurgical distribution and the like. How is that body of work going? It's obviously hard when you've got three sort of major mining centers and a huge inventory there to get on top of. Are you able to give me some broad brush comments as to how that piece of work's going?
Yeah. No, that piece of work is going well for completion through this financial year, along with the processing optimization. Yeah, it is difficult with the amount of ore bodies there, but it is tracking well to finish out this year.
Okay. That's helpful. Thank you very much.
Thank you. There are no further questions at this time. I'll now hand back for closing remarks.
Thank you, Darcy, and thank you everyone for your time this morning. A lot of questions. You know, from our perspective, the first half is on track for where we need to deliver for the full year, keeping our guidance intact at 720,000 ounces at AUD 1,240 an ounce. We have a big second half planned, and we'll also update you with our half-year financials next month. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.