Thank you for standing by, and welcome to the Evolution Mining Limited March 2023 Quarter Results 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 Mr. Lawrie Conway, CEO and Managing Director. Please go ahead.
Thank you, Darcy. Good morning, everyone, and thank you for joining us as we outline the results for the March quarter as released on the ASX this morning. I'm joined on the call today by Bob Fulker, our COO, Barrie Van der Merwe, our CFO, Glen Masterman, our VP Discovery, Peter O'Connor, our GM Investor Relations, and Taryn Chua, our Group Manager, Investor Relations. Barrie started with us last month, and I welcome him to his first conference call. At our call for the December quarter results, I talked about the macroeconomic changes that were taking place and the inflationary environment.
Since then, we've seen a continuation of geopolitical tensions, experienced a number of bank collapses, and seen some moderation in inflation, but not near the reductions to give sufficient comfort to central banks and businesses just yet. This has been good for gold, with it breaching the US $2,000 per ozt mark again and above AUD 3,000 per ozt for the first time. All things being considered, we do expect to see a continuation of capital deployment to gold. In terms of copper, the supply-demand imbalance has continued, which saw the price sustain around US $9,000 a ton and AUD 13,000 a ton in the quarter.
This is a healthy environment for Evolution through being one of the lowest cost, high margin producers in a period of elevated metal prices. Our performance for the quarter was solid given a number of difficult external events that we encountered. Firstly, and very pleasing, in terms of safety, we have now delivered three consecutive quarters of improvements in our recordable injury frequency. The extreme rain event at Ernest Henry resulted in mining activities being suspended in early March. The team has done an excellent job to resume mining activities in the past week, which was earlier than we had expected.
We will now complete the remaining recovery activities so as to safely ramp up to normal production rates by the end of this quarter. We saw the business start to transition back to a net cash generator following a number of quarters where we are investing heavily in two main growth projects. We delivered just under AUD 96 million in group cash flow and ended the quarter with a cash balance of AUD 164 million. Another enabler to improvement in our cash generation moving forward is that once we have delivered our last 35,000 hedged ozt this quarter, we move to being one of the few fully unhedged gold producers, fully exposed to a near record high gold price.
The weather incident at Ernest Henry and continued wet weather around Mt Rawdon were the main drivers to our flat gold production quarter-on-quarter of 164,000 ozt at an all-in sustaining cost of AUD 1,291 per ozt. Ernest Henry returns to normal production rates at the end of this quarter, our sector-leading low-cost position will be restored. We achieved a major milestone at Cowal with the first stope being mined from the underground. To deliver this mine ahead of schedule and to be under budget, the original budget of AUD 380 million during a period of high inflation market conditions for project development and construction, is a credit to the project and operations teams.
The ramp-up to the underground will be the main driver to production at Cowal, increasing by around 16% to 320,000 low cost ozt. Red Lake improved this quarter with a 13% increase in production at an 8% lower all-in sustaining cost. We expect this improvement to continue into the June quarter, with production to increase to at least 35,000 ozt at a lower all-in sustaining cost. Moving into FY 2024, Red Lake is expected to improve further to 40,000–45,000 ozt per quarter and further improve their all-in sustaining cost position.
This is an updated outlook for Red Lake to around 160,000– 180,000 ozt for next year before moving up to at least 200,000 ozt per annum. Our main priority at Red Lake is to consistently mine at an annual rate of 1.1 million tons to keep our mills operating at current capacity and to deliver improved cash generation. The process optimisation study is progressing to plan and demonstrates strong financial returns. Any further investment in expanding processing capacity at Red Lake will only be considered when it demonstrates a sustained performance at current capacity and is delivering adequate cash flows and returns.
We also released, pardon me, new drilling results at Ernest Henry, which clearly reaffirms it is a world-class asset with material upside. These results continue to extend the mineralization, and Glen will take you through those results shortly. However, the key thing here is that the drilling program continues to provide further opportunities to extend the mine life beyond those already being identified in the current pre-feasibility study. The updated study, which is incorporating the previous drilling results and the increasing footprint, remains on track for completion this quarter.
Another growth catalyst, the Mungari plant expansion project, which will result in annual processing capacity more than doubling to 4.2 million tons per annum, deliver a material reduction in the all-in sustaining cost and a pathway to lifting production to 180,000–220,000 ozt over the next 10 years, is progressing to schedule. We look forward to outlining these details of the multiple growth opportunities at our Investor Day on the 5th of June. I'll now hand over to Bob to take you through the operations performance in more detail.
Thanks, Lawrie, good morning, everyone. We have delivered a solid March quarter, with gold production in line with Q2, despite the externalities experienced. Pleasingly, our safety performance continues to improve, with our total recordable injury frequency dropping by 5% over the quarter to 8.9. Cowal had an exceptional quarter, with the commencement of underground ore production ahead of schedule and within budget. As a result, both mined and processed grades increased during the quarter, with the operation producing circa 74,000 ozt of gold at an all-in sustaining cost of AUD 1,072 an ozt. Plant performance was outstanding, with another quarterly record gold production under Evolution Mining.
This was on the back of great throughput and recovery, combined with higher feed grades from both the open pit and the underground first production stopes. The underground project continues to advance, with the accommodation village and paste plant due for completion this quarter. The Cowal team are managing their costs and operational performances with all the major projects on track for timely delivery. Cowal delivered AUD 95 million of operating mine cash flow during the March quarter. Ernest Henry has safely resumed mining activities, with first stope ore being trucked to the surface this week.
The site will continue to safely ramp up activities to reach normal production levels during the June quarter. The strong start to the March quarter delivered operating mine cash flows of AUD 112 million and an all-in sustaining cost of -AUD 3,781 per ozt, despite the impact of the weather event. The PFS mining extension study is continuing. All aspects are still looking positive. We look forward to providing an update during the quarter when this completes. Glenn will discuss the exciting drill results we continue to see at Ernest Henry. I'd like to call out the efforts of the site team over the past couple of weeks.
Everybody has been stepping up to the extra challenges and working together safely to bring the operation back online. Thanks to all. Over the past five months, I've been living the Red Lake experience and remain excited by the huge potential at Red Lake. With a committed team and the operational building blocks are being put in place, these will allow the continued improvement from the Q3 result into Q4 and beyond. These include new ore passes to allow efficient material handling and the arrival of the new higher productive equipment for improved production drilling and the continued transition to mechanical bolting to deliver operational and cost efficiencies.
Operational improvements quarter on quarter include a 400 meter uplift of development to just below 4 km for the quarter and circa 13% improvement in total ore mined and ounces produced. Our permanent Red Lake leadership team is taking place with the commencement in early March of the General Manager of Operations, with the recruitment for the overall head of Red Lake operations progressing well. In summary, with the significant time I've spent at Red Lake over the past few months, I'm confident we're putting in place the building blocks required to deliver further operational improvements through the remainder of this year and into FY 2024.
Mungari demonstrated reliable and consistent delivery with another strong quarter of gold production above the previous quarter, resulting in a 14% all-in sustaining cost reduction, highlighting the team is effectively managing costs despite the inflationary cost environment. The future growth project continues to progress, and we look forward to providing further updates later in the June quarter. Mount Rawdon has continued to improve its access to high-grade pit ore, resulting in higher ore tons mined and higher gold production, despite the heavy rainfall. Production and all-in sustaining costs are expected to continue to improve in the June quarter. Thanks for your time. I'll now pass it over to Glen for an exploration update.
Thank you, Bob. Good morning, everyone. I'd like to turn your attention to the exploration announcement we released this morning describing further exciting drilling results at Ernest Henry. Following on from results we released earlier in the year, we have continued drilling step-out sections into areas beyond the current resource boundaries to connect copper-gold mineralization between the bottom of Ernie Junior and the lower lenses of the main ore body. We were confident the geology would support continuity of grade across this zone. The three new results announced this morning confirm our prediction of wide zones of copper-gold mineralization in these previously undrilled areas.
The new step-out results are illustrated on the long section, Figure 1 of the announcement. To give you a frame of reference, we are looking from east to west at a side view of the ore body and mine infrastructure. Domains of copper gold mineralization is shown as the light blue shapes, which we have modeled at a 0.7% copper contour. This is also the shell that we apply to constrain the reported mineral resource. There are three areas that I would like to draw your focus to that I hope will lead you to conclude that there is an excellent opportunity for us to continue extending the mine life, both as part of the PFS and beyond.
The first area is in yellow and shows the mineralization footprint, which is the subject of the current mine extension PFS. We have substantially grown the mineral resource in this area since the original Glencore concept study. This is being driven by the outstanding results from the ongoing drilling program. The PFS, which will be released in June, is expected to drive a material increase in the ore reserve in this area. The green area represents upside beyond the PFS and is one of the main opportunities for future potential resource growth, incorporating new drilling results such as those announced this morning.
A mineral resource update is scheduled for completion in the September quarter, which will inform the feasibility study. There is longer-term potential at depth below the 775 m RL, which potentially adds future mine life upside. I'd like to finish off with a comment on Ernest Henry in terms of the growth that we're currently enjoying. From a geological perspective, this is creating lots of excitement across the Evolution geological fraternity. It's been a rare occurrence in my career that we receive a good number of our geologists putting up their hands to be part of the Ernest Henry story.
The long intervals of high-grade copper and gold mineralization that we repeatedly generate in our step-out results has well exceeded my expectations of what would be possible. It continues to be an exciting journey, and I'm looking forward to our site getting back up to full speed drilling activities over the next couple of months, so we can keep telling this story, which is one that we definitely don't want to be over too soon. With that, I'll hand over to Barrie.
Thank you, Glen. I'm very pleased to have joined Evolution as CFO in March, to have the opportunity to talk to you all in this forum for the first time today. I'll provide a brief commentary on the financial results for the March quarter, outlined on Pages 5 to 6 in the report released today. Operating mine cash flow of AUD 270 million was consistent with the December quarter. All operations achieved positive mine cash flow after sustaining capital for the quarter. After major capital, all operations generated cash other than Red Lake, which remains in a capital investment phase with development of the Upper Campbell underground mine.
Gold sales of 166,000 ozt were marginally higher than the December quarter at an achieved price of AUD 2,639 per ozt. This includes the impact of hedge book deliveries that are concluding at the end of the financial year, with only 35,000 ozt remaining to be delivered. The cessation of annual hedge book deliveries of 140,000 ozt per year equates to an estimated AUD 110 million-AUD 120 million of incremental revenue at current spot prices when comparing next year to this year. The achieved copper price for the quarter of approximately AUD 15,000 ton was AUD 2,000 higher than that achieved in December.
This is the result of a higher price achieved on sales for deliveries in the quarter and contractual price adjustments for deliveries made in previous quarters. Turning to our cost performance. all-in sustaining cost per ozt of AUD 1,291 per ozt for the quarter remains at sector leading levels. Prior to the weather event at Ernest Henry, Evolution was tracking below the midpoint of all-in sustaining cost per ounce guidance of AUD 1,240 per ozt. As pointed out in our updated guidance, loss of copper by-product revenue is a major factor that is expected to move our all-in sustaining cost for the full year outside of the originally guided range.
As Bob remarked earlier, underlying operating costs remain well controlled. Total capital expenditure of AUD 194 million was in line with the December quarter. Sustaining capital for the full year expected to be at or below the lower end of guidance of AUD 190 million, and major capital at the bottom end of guidance of AUD 530 million-AUD 600 million. Closing cash balance of AUD 164 million after the final payment of AUD 200 million to Glencore for Ernest Henry, as well as a debt repayment of AUD 45 million during the quarter, was achieved through positive group cash flow of AUD 96 million.
As a reminder, the fully franked dividend of AUD 0.02 per share, an aggregate payment to shareholders of AUD 37 million that was declared earlier this quarter, will be paid on June 2nd. This is Evolution's 20th consecutive dividend for a total of AUD 1.09 billion since 2013. The committed revolving credit facility of AUD 525 million remains available and fully accessible. Providing total liquidity of AUD 689 million. I would also like to remind you that more than 60% of our debt is repayable between the 2029 and 2032 financial years at a fixed interest rate of 3.6% per year.
This is an important consideration in assessing our balance sheet and liquidity position. With unaudited gearing of approximately 31%, following a period of major capital investment, our balance sheet position is strong, flexible, and improving as the business commences its transition to net cash generation. I will now hand the call back to Darcy to facilitate your questions. Thank you.
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, Barrie and team. Thank you for the opportunity. The first one is on Red Lake. I was just looking at the guidance for next year and the 1.1 million ton, yeah, mining rate that's required to fill the mill. If we back solve a bit for the grades for next year, seems like, you know, we get to a range of about 5.2–5.3 gm a ton. I wanted to get some color about the optionality or the upside in that grade for next year, largely on the back of the fact that at about 7.5 gm a ton, what could potentially lift production higher at Red Lake next year? Are there some critical items that you can perhaps change? That's the first one.
Thanks, Rahul, for the question. I'll hand it over to Bob to comment further. When we look at next year, the greatest upside we have is the mining rates that we can achieve at Upper Campbell, which is where the higher grade material is that you are referencing in the question. That's really where we see the upside. Bob, do you wanna add to it?
I agree. The average grades, if you put them across the three different operations, Campbell or Upper Campbell is the higher average grade. The more tons we can get out of there, the average grade will then increase. That's the lever we have.
I mean, is there any particular reason then why we're sitting at 160– 180, which would back solve to a 5.2 type grams per ton next year in terms of grade? I mean, is it fair to say it's just rather being conservative in the sense that you're still following through on those cultural changes, et cetera, for next year?
Yeah. Rahul, it's, we're still getting into the meat of the Upper Campbell areas. It's taking us time to actually get in there and open up the areas and all the rest of it. It's really about getting that stability back into the delivery of the mining areas and making sure that we're average or weighted across the three operations equally. Back end of the year, we'll be getting more Campbell than the front end, we've already started stoping in Upper Campbell, it's slow as we develop into it. Lawrie, did you wanna add to that?
Yeah. The only thing to add there, Rahul, is that we're, you know, when we look at the three different areas that we're mining from and the mills that they will go to keep those mills filled, that's where you'll get that averaging down of the grade. We can't mine the full year only at Upper Campbell grades from Upper Campbell and keep both those mills filled. It is a balance, as Bob said, how we keep both mills filled from the three mining areas, and they've all got different grades.
No, I understand. Okay. Thank you for that. Second, and final question, around your costs. Yeah, absolutely, very good cost control there, and, you know, firmly tracking below that guidance level. Can you help us perhaps understand some of the key changes made and how you've been able to achieve this? Obviously, you know, last year, we saw very high costs across the sector. We were still expecting a bit of a tail in the inflation side of things, but you seem to be doing quite well on the cost side. How should we think about costs going forward? Any sort of key things to call out for that you've really performed well on?
Yeah, look, I mean, it's an interesting one in that in the inflationary environment for a number of our inputs, the inflation impact is immediate, and on some of the others, there's a lag. You know, when we look at it, you know, our power contracts for Cowal, Mungari, and Mount Rawdon, we're locked in until December. That means it will flow through the second half of the year and then into FY 2024 and beyond. The labor, you know, was instant. We saw that around the 5%- 6% this year. Oil prices have come off. Shipping rates have come off. That's where we've seen benefits.
It is a mix, and it's really what each of the sites have been doing through the year, is how to manage those costs. I think as we go forward, you know, we will see some inflationary impacts that flow into FY 2024. We had allowed for some of that in our FY 2024 outlook. We're also seeing some of those costs ease from where they were through the first half of the financial year.
A bit hard to sort of pinpoint anything specifically other than that what we have seen across each of our sites is a strong focus on it, managing it through a capital-intensive period, and making sure that we took advantage of the high metal prices that we've been able to achieve, which is what's given us that performance in the March quarter.
Understood. Okay. Thanks a lot for that, team. I'll pass it on.
Thank you. Your next question comes from David Radclyffe from Global Mining Research. Please go ahead.
Oh, hi. Good, good morning, Lawrie and team. My first question's on capital spending. Obviously, you've significantly reduced planned spending this financial year. It looks to be especially at Cowal and Red Lake. I was wondering if you could provide some more color on those two operations, specifically about, you know, where that spending saving has come from. Then how should we think about that going forward in terms of does that deferred spending just slip into next year? Is it spread over a few years, or is some of that spending now being canceled?
Thanks, David. Look, in terms of major capital this year, you know, we're tracking in the sort of mid to low end of the major capital range. One of those drivers has been when, for the Cowal underground project, you know, the project team was planning to have everything that was needed to be done by June this year. Through the course of the year, the reviews that Bob and the team have done is working out what needed to be in place as we started production and what needs to be in place at—you know, there's probably been anywhere between AUD 35 million-AUD 45 million of capital that actually wasn't needed as we commissioned, that will move into the first part of next year.
That's been the main change in major capital for this year. We look at sustaining capital, I think it's really been the sites, again, having a look at their cost control and where they can save their capital. We're tracking towards the lower end of our sustaining capital. We don't see a material shift into next year. Current indications through our plans, we're right in the middle of those. The planning cycle now says that we're still in the range of AUD 190 million-AUD 240 million for FY 2024. That's really, it's a combination of the sites managing their capital extremely well this year. They have identified some projects that don't need to happen.
They have identified some projects that need to be deferred, and the main one has been the Cowal underground surface that's being pushed into FY 2024.
Thank you. As a follow-up, just in terms of Cowal, obviously you had the plant shut there, but you're still mining well above what you're processing, and looks like you've built some pretty significant stockpiles this year. Given you've been trying to manage cash flows a little bit across the group, and you've now got the underground obviously ramping up, will you sort of look to slow volumes from the open pit, or is this part of the mine plan to mine a lot harder than what you need in the short to mid-term? Or dare I say, do you actually start thinking about using the fact that you've got a much higher permitted rate for processing?
Yeah. A really good question, David. If you're asking a finance person, they always would say, "Why do we outmine the mill?" If you ask a mining engineer, they would say, "We need to get the highest grade through the mill first." The rehandle at Cowal is not that an incremental cost. The plan has us continuing to, you know, we will outmine the mill by about six million tons per annum this year. That'll happen again next year. Our focus there is feeding through the highest grade at the earliest possible time.
When we do look at it, you know, it's easy to say in hindsight, but if you look at Cowal with the stockpiles we have there, through that six to eight month period of extreme wet weather, we are able to process and process at higher grades than if we hadn't have had that strategy in place. It does give you some benefits in those periods.
All right. Brilliant. Thanks. I'll pass it on.
Thank you. Your next question comes from Jon Bishop from Jarden. Please go ahead.
Hi, guys. Thanks very much for taking my questions. I just wanted to bury down a little bit on a comment you made on Mungari and the all-in sustaining cost reductions expected from your expansion feasibility plans there. Just intuitively, clearly, you'll get economies of scale out of the larger processing infrastructure, but I'm just wondering where else are you seeing major cost reductions? 'Cause if I understand Mungari, in order to fill that large plant capacity, you're gonna have to increase the number of mining operations. Is that correct, or have I missed something there?
Jon, look, the first benefit we do get is the economies of scale on the plant. You know, we see that reduction in the processing cost per ton reducing materially, which then flows through to the all-in sustaining cost. The other thing, and we've seen it this year, where Mungari has now stabilized and brought the Kundana, East Kundana operations in to make it one operation. There's gonna be some efficiencies that will flow through, and the project will benefit from that. You know, what it will be , is mining multiple ore sources, but they're able to be sequenced by having the plant expansion.
We do see some benefit in mining costs as we, you know, we start to strip at one as we're mining in the other, and we're finishing at the third. You sort of get some benefits of consistency of ore and getting high-grade material through, which then gives you a benefit on your all-in sustaining costs. You know, the study is coming near conclusion, and when we get to the 5th of June is when we'll spell out the full economics of how this all comes together. The case that's being put together is very compelling for Mungari.
Okay. That's helpful. Thank you. Just in touching on that sort of capital allocation discussion, you've obviously been fairly clear in this quarterly release that, you know, Red Lake needs to stand on its own two feet. You've got the Ernest Henry life of mine extension coming, which you'll deck later this quarter, and Mungari, of course, when you finish that work. How do we sort of view the medium term around your growth? I mean, you've given us a flavor for Red Lake next year, arithmetically at the reserve grade, if you're to get to the 1.1 million tons per annum, that would sort of support 240,000+ ozt per annum.
What's the sort of timeline that we should be looking at in terms of that growth, and how does it look? Should we be sort of thinking AUD 750 million-AUD 800 million for the next tw o to three years? What's sort of a fair outlook from the market's perspective, do you think?
I mean, I think if we look at it, Jon, you know, our capital allocation process will make sure that we sequence these projects appropriately, rather than trying to do them all at once. It was a different circumstance where we ended up with two new underground mines being built at doing the integrated waste landform and a couple of other projects. Our view is that you would see, you know, Mungari is the first one to come up for a decision to go into execution. Ernest Henry has time based on when we get down to the 1,200 level and doing some development there.
Red Lake, really, as I outlined earlier on the call, is it has to earn the right to that capital by getting the mining rates sustained at the 1.1, which keeps the plants full. The upside comes that if we can get efficiencies further at Upper Campbell and get more proportion of material coming through at the higher grade, then you get that without actually needing to invest the capital. You invest when you can see that you can sustain it at the 1.1.
I think the thing that we've gotta be conscious at Red Lake is that if we do the processing optimization, which takes it to 1.8, that mining rate has to lift by 60% almost instantaneously, and that's the other thing that we have to take into consider at when that one gets sequenced. Over the next few years, you know, that production profile, which we'll outline on the Investor Day, is gonna be predicated on when each of those projects get sequenced, which they're in the final stages of study right now.
Okay. That's really helpful. Can I just squeak in one more? Do you have any update on the stamp duty timing? Have you had any sort of advice from the Treasuries in Queensland in particular?
Jon, as I think I spoke to you once about this, we're currently in a mode of one-way communication. It's. We'll wait for them to contact us.
Okay. Thank you very much.
Thank you. Your next question comese from Matt Green from Credit Suisse. Please go ahead.
Hi. Good morning, gents. Just to follow on the FY 2024 outlook at Red Lake. Previously, you were sort of targeting around that million tons, with Upper Campbell contributing about 40% of that feed. Can you just provide some more context as to what kind of change in terms of volumes or the contribution from the different mining areas?
Thanks, Matt. I'll pass that over to Bob.
Yeah. Thanks, Matt. In the midterm, that's still the aim is to get to around 40% from Upper Campbell. Next year, it won't, we'll just fall short of that by a little bit. At the back end of the year, the run rate will close to that sort of rate. It's because of the development and the opening of the new areas, that it's just, it's taking its time to get into all the old areas. Long term, yep, it's about still the same.
Okay. Thanks, Bob. I guess just in terms of the reconciliation on those Upper Campbell stopes, how's that sort of stacking up relative to the what? Several half grams a ton reserve grade?
Yeah. The actual stopes, and I'll ask Glen if he wants to add anything from a knowledgeable geological perspective after a mining engineer sort of tries to describe it. The stopes are actually coming out and reconciling nicely to the models. We are having some swings and roundabouts, in some of the zones around the old ore bodies. Generally speaking, it's coming out as you'd expect.
I think you've characterized it very well, Bob. In these narrow load systems, we do expect swings and roundabouts. Some stopes will do better than the model, others not as well. On average, the reconciliations are coming out where we're comfortable.
That's great. Thanks. I guess just lastly on the mill optimization, have you completed the geomet and studies internally, or are they still ongoing?
We have some of the data in already. I actually don't think we're gonna be complete with knowledge that I'll be happy with for a while. We have enough data now to actually start figuring out what's going on with the different ore bodies. That's from a metallurgy perspective. It's the linkage between that and being able to mine the different areas in the right proportion is where we're gonna start getting some of the benefits.
Got it. Okay. I guess, conceptually, and appreciate you're still doing some work on this, how are you thinking about utilizing the mill capacity and existing infrastructure? You know, are we still looking at that 1.8, possibly as a pathway to two, or has the scope changed materially since what you've presented to the market previously?
No, Matt, scope hasn't changed. It's still targeting scenarios that have been run says 1.8 is the right sort of rate for Red Lake. The multiple scenarios are looking at, you know, one plant, three plants, or a combination in between. That hasn't changed from when the optimization study started.
Okay. Just the one plant, is that just expanding one of the existing plants or is this potentially a new plant?
That's what I said. There's multiple. It's either, you know, is it upgrade Campbell? Is it a standalone? Is it the combination of three or somewhere in between? That's why the study, when it finishes at the end of this year, will sort of give us a direction as to which is the right way to go.
Okay, that's great. It sounds like maybe towards the end of this year, we should see some more color on that.
Yeah, I think I'll go back to the earlier point, though. Red Lake's gotta earn the right to get the upgrade the capital investment for it.
Yeah, got it. All right, that's it. Thanks, team.
Thank you. Your next question comes from Alex Barkley from RBC. Please go ahead.
All right, thanks. Good morning, everyone. Just a bit more specific question on the FY 2024 guidance change at Red Lake. It sounds like a lot of the issues were cultural. You've talked about that, but operating procedures, the ore waste pass thing, and sounds like as these issues have come up, you've jumped on them pretty quickly. Just trying to work out exactly what the negative carry-through into FY 2024 is that you're expecting, 'cause it seems like everything's heading in the right direction there.
Yeah, I think if we look at it, Alex, you know, the performance in the December quarter was lower than we had expected. The work that Bob’s outlined has improved through the March quarter, and, you know, when you look at what we're going to be producing in the June quarter, that's at a lower run rate than we had actually planned at the start of this year. As Bob also just said earlier, you know, the Upper Campbell percentages of material that will come through in FY 2024 are a little bit lower than we had expected, as we've been able to access the stopes from those old workings.
They're the main sort of things that are going to impact on FY 2024. I think it's fair to say as, and I'll hand it over to Bob, but, you know, the things that we had seen, that needed to be corrected, over the last five months, we've been put in place, they will deliver through the course of the next 12 months.
Yeah, exactly. Alex, I guess the good example is, we have one pass in at Cochenour, but we need to get this Red Lake. It's planned, signed, it's in the schedule, but it won't actually get in place until probably end of Q1, Q2 next year. That's the Balmer pass. The drill rigs, we've got one drill rig underground operating now. We've got the second drill rig in 28 pieces going down the hole at Cochenour. It will be up and running in the end of this quarter. We're slowly getting these things in place and, we'll see the benefits come when they get operational fully.
Okay. No, that's helpful. Just one more on Red Lake. The comment about consistently reaching 1.1 million tons per annum mined before you think about the mill expansion. I would've thought with Upper Campbell, I think mining capacity you mentioned maybe it can do one on its own. It would be more a case of just waiting until Upper Campbell ramps up rather than getting consistency across the whole site.
You know, given a year or two, I would've thought you'd easily reach 1.1 and then, you know, maybe even have to throttle that back, the tons coming out of the mine, as you say, until the milling jumps up. Just why exactly did you make that comment? It seems like it's just a matter of time before you hit 1.1.
Yeah, I think that's—you’ve got to take it in the context of everything at Red Lake and everything in terms of Evolution as a group. You know, it's fine to say, yes, we can get to the 1.1, and we possibly go above that and incrementally increase our milling capacity. To take it from the 1.1 to the 1.8 means you've got to invest in the capital on the processing side, and you've got to also invest on the mining side in the mine development.
For an asset that at the moment hasn't delivered sufficient cash returns, then go and compete for the capital within the broader group, we've got a number of other projects that are probably showing up as more compelling right now, and you've got to have that confidence that you can lift, as I said, the mining rate by 60% to fill mills that are already able to eat up all the feed that comes through.
Yeah. Okay. sorry.
The bit.
More just meant reaching that 1.1. Yeah, it shouldn't have been. You're right. The step up does need the extra bit.
Yeah, I agree with you there that we can achieve the 1.1, and if the mix is coming more from Upper Campbell, that's actually higher ounces at a cost and a higher margin. That is an avenue that we're targeting towards for Red Lake. As you'll see this year, we're not gonna even achieve a million tons through the plant. You know, that's what we've gotta get to as that next step. Get more of the higher grade ore through, and then justify the expansion and beyond one point.
Okay. No, that's helpful. Thanks very much.
Thank you. Your next question comes from Matthew Frydman from MST Financial. Please go ahead.
Sure. Thanks. Morning, Lawrie and team. Apologies in advance. I'm gonna carry on from the last few questions on Red Lake. I guess, yeah, to just ask it quite simply, is 1.8 million tons per annum of mining still an achievable target in your view, given everything that you've learned about the site and given your increased knowledge of Upper Campbell now that you're mining in that area? Or has that view changed, I guess, given, as I say, you know, your knowledge of the mining conditions or body geometry, geotech, you know, the advanced rates you've been able to achieve, has that changed your fundamental thinking?
Welcome back, Matt, to the calls. I'm gonna hand that over to Bob.
Thank you, Lawrie.
The short answer is yes. That hasn't changed. Bob.
Thanks, Lawrie. G'day, Matt. How are you? Short answer is, I still believe it's achievable, but it's a stability and then proving consistency at the 1.1, and then it's a just getting multiples of that 400,000–500,000 ton range. You know, if we can get or when we can get the Upper Campbell working, we can link in the Middle and the Lower Campbell, which is there's a lot of development to get there. We can actually link in Upper and Lower Red Lake as well. It has to be thought about as multiple mining fronts and mining areas to get that extra tonnage regime.
With that comes the complexity of a large operation, and it's just the systems that we need to get in place, which back to what Alex was saying, we're getting those things in place, but it's gonna take time to get them to be stable.
Thanks very much, Bob. Is it fair to say that if you think about a proportional increase in, you know, in all mining rates from, say, 1.1 to 1.8, you know, proportionally you'd have a similar increase in, you know, amount of equipment and people down the hole, you know, a similar increase in the, you know, monthly development rates that would be required? I mean, would all of those things increase proportionally, or is there sort of scale benefits of having multiple mining fronts?
There will be some scale benefits, but you've gotta take it into consideration of the style of the ore body and the geology. It's always going to be, as Glen was saying, an ore body that it's small, it's [lensing] and it's gonna take a lot of development to get it out. There will be some scale from the size.
Got it. Thanks very much, Bob. Just another one on Ernest Henry, in terms of the remediation work and I guess the potential design changes that you've implemented post the weather impacts. Has that changed your thinking at all or fed into the mine extension study in terms of future-proofing that asset as you go deeper and potentially mitigating future weather events?
Yeah, great question, Matt. From my perspective, the re-entry and getting the operation back up and running in such a short time has been a magnificent effort from the guys on site. Looking forward out of this one, though, as we go deeper, there's always been a thought that at some stage we need to put additional mitigation strategies below where the emergency stopes are now—that’s some of the work that we're working on as we speak. Obviously, this event's brought it more to the frontal lobe than possibly has been. It's always been a thought process that we should do something deeper down.
Okay, thanks, Bob. Would you expect any material costs associated with that, or that'll just be part of implementing the expansion study if you push forward with that?
I think it should be just part of the actual expansion or whatever we do, Matt. I don't think it's gonna be significant.
Got it. Thanks very much for that. Thanks, Lawrie.
Thanks, Matt.
Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.
Morning, Lawrie and team. First, question, I'll stay on Ernest Henry. Just, you've obviously had Barminco mobilized to site. Can you provide any color on the key milestones for the decline development below the 1,200 RL, and also the associated cost and any color? Is that being capitalized or expensed?
I'll hand it over to Bob to talk about Barminco's performance, but I think they didn't get much of a time on site before we had to suspend. In terms of the cost for the decline, they will be capitalized to the project, the extension project of the Barminco
The question was more about future milestones rather than history because of the weather.
Yeah, no. Bob's gonna touch on those for you, Mitch.
Mitch, the work that Barminco is doing, as Lawrie said, it's been a little bit stopped because of what's happened. The plan is to actually get them to help to accelerate the actual decline into the actual area below the 1,200 and the 1,125. At the moment, they're actually helping out with some other development in the upper areas of the mine until we get back down to the bottom. From a milestone perspective, I'd expect that we'd come out with that when we talk about the actual outcomes of the pre-feasibility study. That's what they're working towards at the moment.
Barminco will and have been helping us before the rain in some of the decline work, which is the extent for our other sub levels, and also starting to think about how we get them involved in the potential of any additional infrastructure for the extension.
Thank you. Just to cause we haven't had enough Red Lake questions, another one for the day. Obviously with the study coming up at the end of the year and your comments that it needs to stand on its own two feet, let's say we get to a point and it isn't standing on its own two feet, do you then think that we could arrive at a point where you're having to look at the carrying value of the Battle North, the Bateman Mill, with regards to that?
No. I mean, at the moment, Mitch, what we do is, well, when the study is finished and depending on where we go with it, in terms of how that expansion would be done, then we assess what the values of the assets. We do that every six-month reporting period. At the moment, there's nothing expected on that. It does depend on when we actually do time the expansion as well.
Sorry, and my final question staying on Red Lake. Just you've started to see some operational improvements. We've seen a few dawns like that, but just what's driving those operational improvements over the last quarter? Are you throwing more people or machines at it, or are you getting better productivity out of the existing machines and people?
I'm gonna hand that over to Bob, who's almost a Red Lake resident. I think there is a combination of things, both around reorganizing the site, getting continued work on the culture and the behaviors, but also has been installed. Bob.
Yeah, no, that's exactly right. The additional thing I'd say is we have been identifying, I'll say internal constraints, and we're focusing on making sure that we put permanent solutions in place as opposed to just band-aiding. A good example is that ore pass. Another good example is the drill rigs. You know, we've been persevering with the old style drill rigs now, and we just had to bite the bullet and say, "You know what? We need to go to the new style to get the uplift in productivity on and cost reduction." It's making sure that we focus on the right things.
The guys on site, they wanna work well, they wanna actually do develop and produce. We just need to put the systems in place around them to allow them to do that.
Thank you.
Thank you. Your next question comes from Trent Allen from CLSA. Please go ahead.
Thanks, guys. I think we probably have had enough Red Lake questions. I'll step back and ask the M&A question. It's very topical at the moment, of course, you know, Newcrest, Newmont. We said farewell to Bob's old friend, OZ Minerals, this week. I don't know if it's accurate, but I read in the papers that the owners of Northparkes might be entertaining offers for that asset. Of course, Evolution grew by M&A and portfolio upgrades, and it hasn't been on the cards for a while, but it feels like with Red Lake finding a level, Ernest Henry back in operation, something you might think about.
I won't ask you if you will consider it because I know you will in the future, but maybe you can remind us of what your criteria are for M&A. How many assets you like to operate, what kinds of operations you look at, and also what state the balance sheet needs to be in before you consider it. Thank you.
Yeah. Trent, I think, you know, it's fair to say as the consolidation in the industry's been happening at an elevated level at the moment, you know, our view is that it does provide an opportunity where assets will come onto the market. Kirron and the team are continuing to assess what opportunities may arise. I mean, from our perspective, we've said we believe operating up to eight assets is a good size for us as an organization. We've got five at the moment, of which one will transition out in the next couple of years in terms of Mount Rawdon, either as pumped hydro or finishing mining.
You know, we've got capacity from that perspective. You know, in terms of asset quality, you know, we want assets that are long life. You know, we're looking for +10-year mine life, high margin, similar to what we've got. As long as it's improving the quality of the portfolio, they're assets that we would certainly have a look at. I think, you know, with the Ernest Henry transaction back in 2016, it shows that we're willing to look at joint ventures as well as owning assets 100%. Our focus in Tier 1 jurisdictions hasn't changed.
Okay, thanks for that. This is always a cheeky question, but do you have any plans to raise capital in the near term? Thanks.
No.
That's what I thought you'd say. Thank you.
Thank you. Your next question comes from Tom Prendiville from Canaccord Genuity. Please go ahead.
Morning, Lawrie and team. Thanks for the presentation. Maybe I'll just follow on from Trent's corporate related question and just dig a little deeper into your comments around hedging. Clearly, your hedging's rolling off quite quickly, and you'll be completely unhedged by the end of this financial year. Obviously, this will give you full leverage to a near record high gold price. My understanding is Evolution only really hedges if you undertake M&A. I guess my question is, you know, can we assume with the hedge book rolling off that you won't jump straight back into hedging? Or what is the strategy over the near term?
It's a good M&A question by stealth. I'd say that, you know, our hedging has been used as a capital management tool. You know, we have not only done hedging in acquisition mode. You know, Red Lake, when we acquired it, we knew we had to do a lot of development to get it back to an improved operating state, so we did some hedging there, you know, on cutbacks. Major cutbacks for open pits are other examples of where we've done hedging. Our view is, you know, where we are right now, where the balance sheet sits, going forward, as Barrie explained, our position is to remain unhedged.
When we do M&A, we always look at the total mix from a balance sheet, debt, equity and hedging all have a role to play.
Okay, great. Thanks. I'll pass it on.
Thank you. Your next question comes from Paul Kaner from Ord Minnett. Please go ahead.
Good morning, gents. Thanks for taking my question. Nothing on Red Lake, just one on your balance sheet. Appreciate that sort of 60% of your balance sheet or your debt, sorry, is longer dated, and that there is this optionality there with the revolver. Is there any sort of earnings or gearing ratios on the other facilities that could impact your confidence? For example, if you were sort of go above that sort of 35% gearing mark, would anything need to be renegotiated?
No. In terms of the two term loan facilities, you know, there's a number of covenants there, and one of them being tangible net worth, we're within our tolerances truly covered on interest and the like, debt servicing. They're not any issues for us. In fact, on all of them, we're very comfortable with where we're heading because what we sort of see, as Barrie outlined, the final payment to Glencore has been made. We've got AUD 164 million in cash that covers, you know, debt repayment this quarter and stamp duty should rise. We're ready then the dividend in June. We are moving into that cash generation to start delever, which further improves the balance sheet position.
There is nothing that— what we look at that either restricts us on drawing the revolver or having any renegotiation on those two facilities.
Perfect. No, that's good. Thank you very much. That's it from me.
Thank you. Your next question comes from Al Harvey from JP Morgan. Please go ahead.
Yeah, good day team. Can we just have a quick update on the Mount Rawdon pumped hydro study, just the timing for that, and I guess whether or not you think that'll be a material event for the stock when that comes out?
Al, Jake will be glad that you asked the question. We had to wait to this part of the call. Look, the study's going well. I mean, there's two key milestones. Later this year is really finishing the technical feasibility study to make sure that through all the works that it shows that this is actually technically viable. That's progressing well and then is giving us a lot of confidence that will be the case. The second part of it, which will be in the first half of next calendar year, is when you sort of get to that commercial study piece being finished, 'cause you've obviously got to make the decision on the size of the facility.
You've got to then work out what offtake parties would be willing to commit to it, who then also need to know what the terms of those offtakes would be. That's in that period. By the middle of next calendar year is when you sort of have a conclusion on it. That's when we would know what we would be doing with that project. As Jake has alluded many times, it's a range from zero to AUD 1 billion, of which we've got 50%. Until these two parts of the study finish, we really don't know exactly what that value is going to be.
Yep. No, fair enough. Just one final one maybe for Glen. I guess we saw Musgrave Minerals release their study earlier this week on Cue. I mean, that's outside the joint venture that you have with them. I guess just wanting a quick update on West Island. I assume you've reached the farm-in threshold and where you're seeing the potential for that project to go.
Oh, Al, I was hoping you'd really ask the question on Ernest Henry Drilling, but I can talk about Cue. That's fine. Look, we did announce last quarter that we'd completed that earning, so that takes us up to a 75% interest on the joint venture ground, which is north of the 100% owned tenements that Musgrave described in their, you know, in their update earlier in the week. I think, you know, in terms of where we're at, look, we are, you know, we're in the final phase of completing resource modeling on two main targets there.
West Island's one of them that you mentioned. The other one's A Zone, which is a little bit to the south. Yeah, when we have that information, that's going to sort of guide, you know, where we go next on the JV.
Thanks, guys.
Thank you. Your next question comes from Daniel Morgan from Barrenjoey. Please go ahead.
Hi. A quick one on accounting of all things. There was a large lift in D&A apportioned to Mungari. Any driver there? I know it can be lumpy, but, you know, is there any change there or something that we need to be aware of?
Dan, look, the main thing there would be, probably in the in this quarter will be a true-up as we finalized all the acquisition accounting, the fair value uplift, that then's being, starting to be amortized related to Kadana and East Kadana. We can certainly get you the breakdown on that and the position on it going forward.
Sure. I mean, sorry to just return to Red Lake. I know there's been a lot of questions, but the CYD decline, my impression is that's supposed to link up with the lower levels of the mine, and that's a big catalyst for the operation. When is that projected to occur?
I'm gonna hand that over to Bob because that is a good news piece at Red Lake at the moment.
The actual decline from the surface then is at around about five level and still going down. 11 level has opened up. We did the final stripping into the shaft about a week and a half ago, and all went well. We now have a five and a half to five and a half drive from the Reid Shaft all the way around to the Campbell area and to the location, not quite to the actual decline up and down location, but to the location on the level where we can start developing upwards as well. That leaves just that level between sort of around five to five and a half level to 11 level. That's around about going full tilt six months of development.
Yeah. Right. To be clear, from the end of this year, you're gonna be able to, what, drive equipment down and access all areas of the mine? Is that am I on the right path?
The milestone to be able to get everything down, CYD is a little bit later because we need to go from 11 level down to 14 level. From a 14 level down, we've got a four before drive. We can drive everything basically down and across into Red Lake, into Lower Campbell, et cetera, et cetera. We won't be able to drive it up into Cochenour at that stage until we get the decline at Cochenour broken through to the 52 level. That is around about nine to 12 months to get that Cochenour one through.
Super. Thank you for your answers. Cheers.
Thank you. That is all the time we have for questions today. I'll now hand back to Mr. Conway for closing remarks.
Thank you, Darcy, and thank you everyone for your time today. We do appreciate you making the effort to join the call. As I commented in the release, you know, it was a pivotal quarter for us at Evolution this quarter. It allows us to continue the transition to net cash generation and grow production in FY 2024, which is gonna be further enhanced as we move to being fully unhedged at the end of this quarter to take advantage of the higher metal prices. We have a number of engagements coming up in the next couple of months at the Macquarie Conference in early May, Bank of America conference in mid-May, prior to our Investor Day on the 5th of June, which includes site visits to Cowal and Ernest Henry over subsequent days after the Investor Day.
If anyone's needing any information on that, feel free to reach out to Rocky and Taryn. Lastly, I do wanna pass on our appreciation to Taryn Chua in Investor Relations, who's finishing up with us at the end of this month. She's done an incredible job, both in Investor Relations and at business development. We thank her for her efforts and wish her all the well for the future. Thank you and..
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.