Thank you for standing by, welcome to the Evolution Mining Red Lake acquisition conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would like to hand the conference over to Mr. Jake Klein, Executive Chairman. Please go ahead.
Thanks, Izzy. Good morning or good afternoon, everyone, and thank you for joining us at such short notice. Today, we are very pleased to be announcing the acquisition of the Red Lake Gold Mine in Ontario, Canada. I'm joined on the call by Glen Masterman, VP, Discovery and Business Development. Lawrie Conway, our CFO and Finance Director. Bob Fulker, our COO. Paul Eagle, our VP, People and Culture, and a small team of senior Evolution representatives on-site at Red Lake as we speak to ensure we are available to answer any questions that the workforce may have. Today, we'll be talking to the presentation titled Acquisition of Red Lake that was released on the ASX this morning, and I will be talking to slides 5 through 9 in the slide deck before handing over to Glen.
As many of you know, since 2017, we have been actively looking at assets in Canada. We believe the low geopolitical risk, high geological prospectivity, strong mining culture, and skills make it an ideal growth region for Evolution. We have kicked a lot of tires over the past three years, we have not found something that we thought met our strict threshold criteria. An asset that improved the quality of our portfolio, had opportunity for improvement, and was also accretive to our shareholders. We believe we have found this in Red Lake. Our upfront payment of $375 million was derived by taking the reserve case and a conservative view of the conversion of known resources to reserves and applying a very conservative long-term gold price assumption.
We think we have received good value for the current reserves and resources and only pay for the potential upside through the contingent payment mechanism dependent on our success. The acquisition is highly accretive on a per-share basis, increasing our reserves per share by 25% and resources per share by 46%. We also understand and accept that it is the cost per ounce side we need to work on to truly demonstrate the value of this acquisition. It is a turnaround opportunity that we are confident will, in time, become a cornerstone asset of Evolution. I'd like to give you some context behind our decision and why we see this as such a fantastic turnaround opportunity. Just like in the property sector where the old adage is location, location, Red Lake is a trophy geological address.
The Red Lake complex we have acquired has historically produced over 25 million ounces at 20 grams a ton, making it the largest highest-grade gold camp in the world outside of South Africa. Our initial interest was amplified when Glen Masterman, our VP, Discovery and Business Development, concluded it was the most exciting geological property he and his team had reviewed. The tenement package we have acquired is 460 sq km. The next appropriate question to ask was how did such a high-grade camp on that drove Goldcorp in its best years to be the world's largest gold company, become a high-cost mine and can it be turned around? Here again, we think there are clear, logical, and rational reasons, with renovation and reinvigoration, this trophy address can once again be a low-cost operation.
If we reflect back to 2015, Goldcorp was coming off a period of significant capital investment after building a number of new mines, including Cerro Negro, Éléonore, and Peñasquito. Red Lake, during that 2015 year, produced 376,000 ounces at an all-in sustaining cost of $906 an ounce. In 2016, Goldcorp announced a 20/20/20 strategy, which was a strategy to increase production by 20%, reduce costs by 20%, and increase reserves by 20%. Our due diligence and discussions with management identified this as a critical juncture for the Red Lake operation. While the strategy may have had merit at other Goldcorp operations, it was not suited to Red Lake. By 2016, the high-grade zone was effectively depleted and a very selective approach towards narrow vein mining was required to ensure profitability.
By implementing a strategy that prioritized volume over value at a time when capital was being directed towards other assets, meant that the mine started suffering from both chasing larger tonnages and not having a proportional increase in investment in exploration and mine development, elements crucial to the sustainability of the operation. Likewise, when Newmont acquired Goldcorp at the beginning of this calendar year, their priorities were appropriately the bigger Goldcorp assets, and for the last 12 months, there's effectively been a freeze on capital expenditure and exploration at Red Lake. That's the position the mine finds itself in today. Behind the proverbial eight ball. High cost and lower production, having suffered from at least five years of underinvestment in capital, development, and exploration.
We see a clear opportunity for a complete reset of the operation, and this vision and view is shared by both Newmont Goldcorp and the site management team. We also recognize it is going to take time. We think it will be a three-year journey. For less than 10% of our market capitalization, we are confident we have secured a cornerstone asset for Evolution that, in time, will be able to produce in excess of 200,000 ounces at less than $1,000 an ounce. It will also take significant investment, hence our commitment to spend over $100 million in capital and mine development and $50 million in exploration and discovery over the next three years, formed a key and important part of our proposal to acquire the asset. The key elements are in place.
First and foremost, the operation has an outstanding safety performance, which is a great credit to the team on-site. There is a sound reserve base as at 30 June 2018, totaling 2.1 million ounces, and a large resource base totaling 7 million ounces grading 11.2 grams per ton. It should be noted that this is before depletion for the period and also does not apply the conservative gold price assumptions that Evolution uses. Nevertheless, it is a significant high-grade mineral inventory. Newmont Goldcorp share this view, and hence their strong desire to retain exposure to this exploration upside via the contingent payment mechanism. There is also recognition and acceptance that to turn the site back into a low-cost, high-margin, profitable business will require change.
Our extensive due diligence has also identified a number of areas for operational improvement and productivity changes. In summary, it's a high-potential operation that desperately needs a reset. We see many elements in this operation as similar to many of the other successful assets that have been acquired from majors. Lots of recognized upside, but not able to get the attention, focus, and allocation of capital needed to revitalize the operation within the larger organization. Newmont Goldcorp understand and agree with this upside and turnaround potential of the asset, recognizing that in their portfolio, it would not have the priority required to achieve this. They have been exceptionally good to deal with since the process began.
They are committed to helping us succeed at the operation and have agreed to give us access to the wide range of skills and knowledge within their organization to support our success at Red Lake. I am also optimistic that this will lead to other opportunities for Newmont Goldcorp and Evolution to work together. The next exciting chapter in Evolution's history has begun. Before handing over to Glen, I would also like to acknowledge the outstanding effort of our team to get us to this important milestone. Right throughout the company, from our extensive technical and legal due diligence, commercial contract negotiations, securing debt funding, finalizing the announcements and presentations, our people have stepped up.
As I jokingly said to one of my colleagues, "If the Wallabies had worked as hard as our team has, we would be the rugby world champions today." With that, I'll hand over to Glen.
Thank you, Jake. Good morning, everyone. In Bob's absence, I will start this morning on slides 9 to 11, which provide an overview of the asset and touch on a number of the turnaround opportunities we've identified that will unlock value with the goal of restoring Red Lake as a highly profitable, low-cost operation. Following this, I will describe what we see as the future resource growth opportunities across the large, highly prospective land position, which will be covered in slides 12 to 14. The Red Lake gold complex is located 180 km north of the town of Dryden in northwestern Ontario, Canada. Red Lake is accessible by sealed highway connecting to the Trans-Canada Highway, 175 km south of the mine. Commercial air services operate from Thunder Bay and Winnipeg. Gold was discovered at Red Lake in 1922, with production commencing in 1949.
Current operations consist of the Red Lake Campbell and Cochenour mining complexes, serviced by five underground shafts, two mills, and an autoclave. Operations employ predominantly a local workforce and have developed an impressive safety culture over the last four years. Turning to slide 10, mining operations consist of a combination of long-hole mechanized underhand or overhand cut-and-fill techniques with backfill of open stope excavations as required. Evolution's plans consist of introducing a number of operational enhancements, including improved geologic data management, improved drill and blast practices to increase mining recovery and reduce dilution, improvement in fleet efficiency and effectiveness, rationalization of material movement, and increases in resource definition drilling to convert the large resource base to reserves. The bottom line is that the underground operations have been restricted from capital required to invest in critical development to establish access to future production areas.
As a result, we're committing to a significant investment in development of the underground in order to reestablish that access, and to bring production back up to the 200,000 ounces per annum run rate and beyond over the next three years. Turning now to slide 11. Cumulative processing capacity between the Red Lake and Campbell plants is 1.1 million tons per annum. Increasing production from the underground will allow us to start bringing the mills back to our long-term objective of over 900,000 tons per annum. The Evolution turnaround plan considers optimizing processing plants and consolidation of the facilities. Installation and commissioning of the Acacia Reactor to improve gold recoveries, strategic blending of the mill feed, improvements in utilization, and the potential application of ore sorting. Moving now to slide 12, onto the exploration opportunities we've identified.
I want to firstly provide a brief geological overview of the Red Lake gold complex. The underground mines consist of lode gold deposits hosted by Archean greenstone rocks of the Red Lake Greenstone Belt. The belt hosts a variety of gold deposits, including the Red Lake, Campbell, and Cochenour mines, the past producing Madsen mine, and other nearby deposits such as Phoenix and Hasaga. The most prolific and highest grade mineralization is hosted in mafic and ultramafic volcanic rocks, which are structurally repeated in multiple positions across the camp. These volcanic rocks were deposited over a period of 300 million years, starting 3 billion years ago. Gold mineralization was introduced 2.7 billion years ago into a series of veins, sulfide disseminated and free gold-bearing lodes along a series of structural corridors, which have been mined over the last 70 years.
One of the reasons we like Archean greenstone gold settings is because of their ability to generate deeply developed high-grade mineralization that persists at great depths. The Red Lake complex is certainly one of these types of systems, with mineralization starting at surface and extending over two and a half kilometers deep. As Jake mentioned, the Red Lake gold complex has produced more than 25 million ounces at a grade of 20 grams per ton since the 1940s. We are confident there will continue to be high-grade discovery opportunities that have the ability to restore Red Lake to its former glory of a high-grade, low-cost producer. We will invigorate exploration with an aggressive drilling program over the next three years, where we have committed to invest in $50 million, which will see us complete up to 100,000 meters of drilling in each of those years.
Mineral resources and ore reserves reported in this morning's announcement were derived from Goldcorp's June 2018 National Instrument 43-101 technical report. Resources are currently stated as 7 million ounces grading 11.2 g per ton and include ore reserves of 2.1 million ounces grading 7 g per ton. Evolution intends to revise these estimates using JORC compliant estimation methodology, which will consider removal of the Palmer tailings, mining depletion, grade estimation revisions, recovery factors, and other changes. The overall impact on reserves and resources will potentially result in a downward revision in the range of 30%-40%. Although we expect a downward revision in the MROR over the short term, we will commit aggressively to exploration drilling in the next three years.
One of the exciting moments that came out of our due diligence was the feedback amongst my team concluding that Red Lake was the best asset we have evaluated over the last three years for its exploration and upside potential. To quote another one of my geologists, "There will be stuff here to find well into the future, and it's easy to imagine mining operations here in 20 years' time." One of the unique qualities of the Red Lake camp is the ability to host extremely high-grade mineralization in very small geometric footprints. For example, the High Grade Zone, which was discovered in 1995, produced 7 million ounces grading 64 g per ton.
Total ore mined from the High Grade Zone was approximately three and a half million tons, which occupied a horizontal footprint of approximately 100 by 50 meters inside a pipe-like geometry with a plunge length reaching 1 km long. We believe there are more high-grade opportunities to discover that remain hidden across the 450 sq km land package. Focusing in on the near mine environment, slide 13 of our pack this morning shows a composite long section from the Red Lake underground on the right-hand side through Campbell and across to Cochenour on the left-hand side. As you can see, Cochenour is connected to Campbell and Red Lake by a 5 km haulage drift, from which additional exploration positions can be accessed for drilling. The red panels represent mineralization in wireframes supported by mineralized drill hole intercepts. These panels can also surround grade blocks from the resource model.
The gray-shaded shapes are existing mine development and stope voids. A number of tangible, high-confidence targets with material upside potential exist at the Upper Main Zone in Cochenour, the Aviation Zone near Red Lake, and at HG Young, which is located 1 km north of Campbell. Each of these targets remain open either down plunge, up plunge, or in both directions, with potential extensions of up to 500 m. There is a highly experienced and talented technical team in place with numerous ideas ready for investment. A major breakthrough was achieved in recent years with application of Watson AI to develop a fully integrated data and GIS platform that, for the first time, has incorporated over 70 years of historic geological information into a unified digital platform that is only just beginning to reveal its full potential.
We feel very excited about future predicted targeting opportunities with numerous Watson targets inside the operating footprint yet to be tested. Finally, to slide 14. In addition to the excellent exploration potential in the near mine environment, Evolution is acquiring a highly prospective regional land position in the 450 sq km of exploration tenements. The properties include six joint venture projects located within 20-30 km of the Red Lake mills. The best deposits in the Red Lake camp are generally located proximal to the unconformity, separating the Balmer assemblage volcanic rocks, which host mineralization from the overlying Bruce Channel sedimentary assemblage. These spatial associations are evident across the entire tenement package and will help guide and prioritize regional exploration work in the years to come. I'd like to finish by recapping on some of the key growth opportunities we've identified at Red Lake.
It is a highly endowed greenstone gold camp, which has historically generated some of the highest-grade production in North America. There has been limited exploration investment over the last several years, which implies a significant opportunity remains to grow resources with significant space to explore, as indicated by historic depths of development of the main Red Lake ore bodies. There is an experienced team in place with new target ideas developed from the recently created Watson AI platform. The small footprint of the 7 million ounce high-grade zone implies the camp remains highly prospective for additional high-grade resources, and Evolution is committed to reinvigorating exploration by investing US$50 million over the next three years. With that, I'll hand over to Lawrie.
Thank you, Glen. Good morning, everyone. This morning, I'll cover off on a few key areas around the Red Lake acquisition with regards to the pro forma metrics, where Red Lake will sit in the portfolio, and how the balance sheet will be positioned. Firstly, I think it's important to remember that as Jake and Glen have mentioned, Red Lake is a turnaround opportunity which will need considerable effort and money over the next few years to return to being a high-quality, long life, lower-cost asset. For the next three years, Red Lake is likely to be cash negative or neutral as we undertake the turnaround. After the turnaround, we are aiming for Red Lake to produce in excess of 200,000 ounces at less than $1,000 per ounce. Turning to slide 15, which highlights some of the key metrics on a pro forma basis.
In terms of production and AISC, Red Lake is expected to add 160,000 ounces per annum in the first year before ramping up to in excess of 200,000 ounces from FY 2023. During this three-year period, we expect Red Lake to have an all-in sustaining cost of $1,600 per ounce before trending down. In the near term for Evolution, this will take our production to over 900,000 ounces and increase our all-in sustaining cost to approximately $8,200 per ounce. At a high level, assuming a successful turnaround at Red Lake, Evolution would be producing around 900,000 ounces at an all-in sustaining cost of AUD 1,100 per ounce, keeping us as one of the lowest cost gold producers in the world. Due to the timing of Red Lake coming into the portfolio not being a firm date at this point, we will update our FY 2020 guidance once the transaction completes.
We see a significant improvement in our mineral inventory and mine life through the Red Lake acquisition. We will increase our ore reserves and mineral resources on a per share basis by 25% and 46% respectively. Red Lake will contribute over 20% of the group reserves and be around a third of our resource base. Importantly, though, Red Lake will have a positive impact on the production contribution mix, whereby we will have a 22% increase in production from assets with a reserve life of eight or more years, moving the contribution of those assets to 56%. Turning to slide 16, which shows where Red Lake will initially sit in the portfolio before any benefits of the asset turnaround and exploration success are realized.
Red Lake has a reserve life of 13 years, and as mentioned earlier, is likely to have a negative to neutral margin for the first few years. However, we have committed over US$100 million of investment for the next three years to improve productivity and increase margin. At the same time, we've committed US$50 million in exploration programs to add new resources and convert reserves to extend mine life. We anticipate that in time, Red Lake has the potential to be our second longest life asset with similar margin levels to our shorter mine life assets. An added benefit here is that the planned increase in production at Red Lake will offset any declines in the shorter-life assets. Moving to slide 17. I won't spend a lot of time on this slide, as it's been mentioned a number of times on the call.
What this shows graphically is that the Red Lake acquisition will enhance our position as a leading mid-tier producer with annual production rates of 900,000-950,000 ounces at an all-in sustaining cost margin of $800-$1,000 per ounce, or a 37%-47% margin at current gold prices. Turning to slide 18 and the balance sheet. The ability to fund the Red Lake acquisition is due to our relentless focus over the years on costs and margin. This focus has ensured that the cash generated has been banked and the balance sheet was strong. We've always said we are comfortable to leverage up the balance sheet for acquisitions, so long as we have a pathway to de-leverage quickly, as evidenced by the Cowal and Ernest Henry transactions.
For Red Lake, it's a little bit different in that the current strength of the balance sheet will mean that our gearing will only be a modest 13%. We expect to have in excess of A$600 million of liquidity on the closing of the Red Lake acquisition. We've fully funded the acquisition via debt with a five-year, AUD 600 million term loan, where the amortization profile has been matched to the required investment in Red Lake. Since we have moved to net cash in FY 2019, and that net cash position has continued to increase in FY 2020, we've taken the decision to pay out the Ernest Henry term loan upon completion of the Red Lake acquisition. This was on the basis that there was no benefit in maintaining both facilities and the associated costs.
At the same time, we have established the required performance bond facility for Red Lake, as well as renewing our revolving facility and performance bond facility for the existing assets for a further three years. The cash generation of the existing portfolio of assets, as well as the funding structure for Red Lake, will ensure that there is no change to our dividend policy. We plan to continue paying our dividends based on a percentage of free cash flow before debt, with a targeted payout rate of 50%. From a finance perspective, it's pleasing to have a balance sheet which supports our business strategy by being able to fund organic growth opportunities, fund growth acquisitions, and invest in turning around a long-term quality asset while consistently paying dividends. Our balance sheet strength is a critical component to our strategy execution. With that, I thank you for your time.
Izzy, please open the line for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset before asking your question. Your first question today comes from Levi Spry with JP Morgan. Please go ahead.
Yeah, thanks guys. First question, can you take us through the assumptions behind your 30%-40% reserve downgrade that you said is pending, and what the impact there could be also on the resource base?
I'll let Glen answer that one, Levi.
Yeah, sure, Levi. A number of factors will come into play here. We're looking at removing the Palmer tailings from the reserve and resource profile. We need to also deplete the 2018 statement for the mining production. We are also looking at revising resource estimation grades, that potentially will have an impact on bringing down that production. We're also going to be applying what we feel are realistic mining recovery factors, which will also have an impact in that space as well. They're the assumptions that we're currently factoring or considering in terms of the work we need to do.
Just to add to that, Levi. Notwithstanding the revisions that Glen's talking about, it's still a very significant mineral inventory. Also, to be clear, when we built our valuation models, we included all of those factors into our valuation. As I said earlier, we paid for what we believe are the reserves as of 1 January 2020, and a conservative conversion of resources into reserves, and then applied a very conservative gold price to that. That's how we arrived at the $375 million.
Yes. Thank you. Thanks for the detail. Just to confirm, so is it going to be driven both by tons and grade? You're talking about mine dilutions and things like that?
The short answer, Levi, is yes. Both tonnes and grade will be revised in the work we'll do over the next 12 months.
Okay. Thank you. Just in terms of the contingent payment for resource additions into the future, I guess you're going to reset it lower first.
Yes. We're going to do a JORC resource estimate as of 1 January, 2020, any increase in that resource will effectively count towards the contingent payment mechanism. That said, the JORC resource will be based on our price assumptions, which are currently 13 50 and AUD 1,800 an ounce.
Okay. Thanks. Maybe just last one. You talked about 900,000 tons per annum being the capacity you're looking at back there in three years' time. Can you maybe just take us through the dollar to ton costs, get you from $1,600 back to $1,000?
Yeah. I mean, where we see the processing plant at the moment, in AUD terms, it's running over AUD 100 a tonne. Between the capital we'll invest in getting the plant throughput and recoveries up in the next couple of years and then also optimizing those plants, we'd expect that to drop in the order of 20%-25% within the first three years. Obviously, further optimization once we've got that to a steady state by FY 2023. We do see that it's an efficient plant, both plants, the way they're operating today.
I think you've just got to look back on the history of that operation. In 2018, the costs were below $1,000 an ounce. 2019, when you speak to the management team and you speak to Newmont Goldcorp and our due diligence, there are very specific reasons as to why the costs are so elevated this year. The one was a drive for production in the last quarter of 2018, which definitely depleted the plan for 2019. There were also some safety issues identified in the Cochenour area, which suspended production for three months, which was in the plan. That's all now being addressed to Newmont Goldcorp's satisfaction. Also you add on top of that, the exacerbation of a sustained period of underinvestment in exploration and development meant that there were really no options when production had to be curtailed in that Cochenour area.
A mine that had really been sort of on the back foot for a long period of time culminated effectively in 2019. We are realistic that there is a reset required, but are very confident that 2019 will prove to be an outlier and an anomaly rather than a go-forwards view.
Yep. Thanks, guys. Thanks, everyone. Thank you.
No worries.
Thank you. The next question comes from Michael Slifirski of Credit Suisse. Please go ahead.
Yeah, thanks very much. I'm not sure if I heard correctly, but are you planning to use your AUD 1,350 price assumption for the operation?
Yes. At this stage.
Okay. Thank you. How do we think of that in terms of your aspiration to get to $1,000 an ounce? If we divide that by spot currency, gets you to about $1,600. On your depleted reserve, pricing of what you've paid is another $400. It gets you to close to I haven't done the math, well over your $1,350 an ounce. How do we think about that, please?
Sorry, I am not sure I follow that question. I am looking around the room.
Yeah, sorry. Look, I haven't done the numbers. You're saying that you aspire to get to less than $1,000 an ounce. In AUD terms, using spot currency, that's close to AUD 1,500. You're just paying AUD 400 an ounce for the reserve if you lose 30%-40%. Put all that together, and you're getting close to a cost of AUD 2,000 per ounce and a future reserve price assumption of AUD 1,300 an ounce. I'm not sure how to think about that math.
I'm not sure you add up on the $400 of cost on the reserves, because that $1,350 is the envelope. We've used less than $1,000 an ounce. The mine could do better than that, it should do better than that. I think we want to be realistic in the turnaround and conservative as to the potential of it. We'll be driving costs as hard as we possibly can.
Yeah. Okay. Thank you. In terms of the, I think, $100 million you'll spend over the next three years to recapitalize the mine, is that just development or is there some fleet replacement required open above that? Or does the $100 million incorporate capital development, anything for fleet and so on?
I mean, Michael, the first part of the loan that we've got is we'd be looking at anywhere between AUD 45 million and AUD 60 million a year in actual mine development. We've got a fair bit of work there to do in the next few years to open up enough ore sources. That would be the majority of the spend. You'd see sustaining capital around AUD 10 million-AUD 15 million a year, and res dev around AUD 5 million-AUD 10 million. What we do have is in the order of AUD 25 million-AUD 30 million of major projects, which will be around equipment and process plant improvement opportunities to get the throughput rates and the recoveries up. That would sort of be where we'd be spending the money.
I think just also to add to that, Michael, there are a number of operational efficiency improvements that Bob will be working with the site team through this integration process to identify what is the reason there's very low fleet utilization numbers at the moment. There are relatively high numbers of people employed. There are two plants which are currently being operated and not being filled. There are five operating shafts at the moment. We do see an opportunity for a significant rationalization of the infrastructure and equipment.
Okay. Thank you. As a mine that's been operating for a great many years, albeit in recent years by global majors who do a very good job with environment, are there any sort of environmental legacy issues from historic mining, or has that been well managed by the recent owners?
It's been well managed by the recent owners, and I think you can be very confident Newmont Goldcorp have the highest environmental standards around.
Okay. Thank you. Last question with respect to some new technologies that maybe as a group you haven't been exposed to, autoclaves and underhand cut and fill. Is there any exposure within Evolution where people have previously worked with that sort of technology or mining method?
Yeah. Bob's very familiar with that.
Terrific. Thanks very much.
He's going to be leading an oversight of the operation, of course, as the COO, and will be spending considerable time in 2020 at Red Lake. He's there today.
Okay. Thank you. That's it. Thanks very much.
Bye.
Thank you. Your next question comes from Daniel Morgan with UBS. Please go ahead.
Thanks, Nick and team. A couple of questions. The mills you've outlined on page 11, or two mills, have a total capacity of 1.1 million tons. Your long-term objective is to lift that up to 900,000 tons. I was just wondering why the gap between the 900 and the 1.1?
I think that's a target which Bob thinks is realistically achievable. I think one of the areas which he's going to be very focused on is dilution. At the moment, the minimum mining width, I think, is 2.3 m. At Cracow, we're doing 1.6 m at this stage. I think the view was that 900,000 from the current close to 600,000 tons is an appropriate uplift given the opportunities available to us.
Thank you. The cost base aspiration you've outlined to get below $1,000 U.S. an ounce. The cost base is in U.S. dollars, not Canadian dollars. Is that because most of the costs in an underlying sense is driven by U.S. dollar cost factors? Can you give us an idea of the split between U.S. dollar and Canadian cost drivers?
Yeah, Dan, we've just reported in U.S. as it's either normal custom to report that currency or a dollar for our assets. We didn't go into the Canadian. In terms of the cost structures, we'll come back. The majority of them are actually Canadian Dollar costs.
Thank you. Just wondering if you can expand on whether a change to mining method might be envisaged? You've outlined in an answer earlier that you're thinking about managing dilution and minimizing mining widths. Is there a cultural change in mining and mining methods that you're looking to want to institute at some point?
Bob has some ideas as to how we can improve the efficiency and reduce dilution. Our approach in these early stages is really to understand from the site management team. They have a lot of the answers. As when we acquired Cowal, I think it's going to be a very similar situation where when I was there a couple of weeks ago, you talk to the management team. This is a site that is wanting to change. They're wanting a new owner. They know that they've been in a process and in somewhat of a tough situation post the merger and weren't a core asset of Newmont Goldcorp. I think there's a site team that is motivated, enthusiastic, and excited about the change. My sense is that they've got a lot of ideas to initiate and to improve.
Our team is going to be sitting down with them over the next few weeks and matching our ideas that we came up with during the due diligence with theirs, and working forward on a go-forward plan. There is certainly a lot of opportunity there.
Thank you very much.
Thank you. The next question comes from Reg Spencer with Canaccord Genuity. Please go ahead.
Thanks. Just a question over the planned capital investment, that $100 million and the additional $50 for the exploration. Should we just assume that that's an even spend over the next three years, or is that lumpy? Is there a bit of a lead time for that investment to take place? Just wondering if you could provide some comment on that, please.
Yeah, Reg, I think, as I mentioned just earlier, that the majority of the spend will be in capital development in the mine, and we'd see that over the next three years, it's not going to be lumpy. It's going to be fairly flat in that $45 million-$60 million range for mine development. Then in terms of the exploration, Glen, the program's gonna be test-driven in targeted areas.
That's right, Lawrie. It'll be ramped up accordingly, Reg, as one of the things that we need to do is create access from the underground we'll be drilling from. Once we sort of put our plans in place, we'll be able to develop those schedules and gradually ramp it up into next year after we close.
Okay, great. That's all from me. I'll pass it on. Thank you, guys.
Thank you. The next question comes from Matthew Frydman with Goldman Sachs. Please go ahead.
Thanks very much. Morning, Jake. Thanks for hosting the conference call, primarily so we could have a subtle dig at Wallaby. Also congrats to your team for the transaction. First question, I guess, following up on the discussion on the ore reserve reclassification. I guess just for Glen, just wondering what the primary intention in the early days of that $50 million exploration spend will be. Are you aiming to backfill those lost ounces through resource conversion and infill drilling in the near term, or will this require a bit of step-out drilling in order to grow the known mineralization, I suppose? How do you grow that, or how do you backfill that life in the near term?
Matthew, I think it's a combination of both. In the first instance, there are known areas and targets within the operating footprint. We'll obviously prioritize those accordingly, particularly where we see natural extensions to known resources that remain open in various areas of the mine. We'll certainly be prioritizing some of that $50 million spend into those areas. There are also new targets that the site team have been developing over the last several years with the work they've been doing with the Watson technology. These are picking up some very interesting relationships geologically and in combination with historic results that are supporting the possibility of testing brand-new areas within the mine as well. I think it'll be a combination of both. Lawrie mentioned earlier there'll be a commitment of around $5 million-$10 million of res dev drilling.
That will start to sort of focus on resource areas, upgrading classification in those areas, and with the intention of converting to reserves. We see it as a combination of both elements.
Sure. Thanks, Glen. Assuming you take control on March of next year, would you be hopeful to, I guess, have the first fruits of that exploration spend in sort of mid-year MROR update the following year?
Look, I think what we'd want to do is, as quickly as we can, we want to get the drills turning again. Obviously, the update of our MROR into the end of next year will obviously be informed by the results.
Sure. Thanks for that.
If I can just add to that, Matt, is that whilst we expected to close in March, we go to a locked box arrangement on 1 January, whereby Bob and Glen and the team over the next four to six weeks will be looking at what programs we'd like to start as soon as possible. There's a mechanism in the agreement whereby we can fund that through that locked box period so that we don't lose any time when the transaction closes.
Understand. Thanks for the detail, Lawrie. Second question from me. You guys have been quite explicit around the three-year timeframe for the turnaround and I guess your expectations for production at the asset of over 200,000 ounces. Noting that the asset did 276,000 ounces just last year, do you have intentions or hopes that you can achieve something more like that historical level of production? Can the asset get back to 250,000 or 300,000 ounces per annum? I guess is exploration success the primary driver here given the discussion we just had on reserve inventory?
Matthew, the short answer is yes. We had a long debate internally as to what we should set the expectation, and we decided to go on a conservative basis on what we believe was very achievable. Our aspiration is materially higher than that. Hence our commitment to sort of exploration and development. We would like to believe, or we do believe, that getting it back to its historic levels of production is something that we would aspire to do.
Do you think the key driver there will be growing that reserve inventory, coupled with the development investment?
I think Glen just has to find another 60 gram a tonne ore body. I think it's a combination. I think it's a mine that's really struggling now. It's battling in terms of the development areas, and it's really, as I said earlier, behind the 8 ball, in that it's getting small bits of ore from a variety of different sources. Just getting some areas that we can focus on, some development in place, and then resetting the operation, doing the drilling, doing the planning, will get us back to there. I don't see any reason, or there was nothing identified in the due diligence which suggests that is not achievable.
I'd add to that, Matthew, that there is a large resource base that is well-established. Notwithstanding the reset and revision that we'll do over the course of the next 12 months. We do feel that there's some really significant opportunities to build off of that, extend those resources. For us, really the icing on the cake comes with the discovery of a new high-grade zone, and that will certainly be a focus of the exploration efforts over the next 12 months in order to deliver one of those. As I mentioned earlier, the footprints of these types of ore bodies are just really, really small and can be easily missed in the sort of drilling density that we know about at Red Lake.
There's definitely some opportunities there that we feel that we want to take forward over the course of the next year to develop those ideas.
I'd also understand that being involved in all the commercial discussions with Newmont Goldcorp, it was very important to them to share in the upside because they had a strong view of the geological prospectivity of the area.
Understand. Thanks for the detail. Just a quick one finally from me. Just wondering what the rough utilization of each of the two plants is at the moment. Is Red Lake mill still being predominantly idled in terms of that discussion we had previously on the mill capacity?
Yeah, that's right, Matthew. Campbell's the main mill at the moment.
Yeah, sure. In terms of the gap that Dan referred to previously, maybe if you could give us an idea of the split on refractory ore versus normal free milling ore. Is that the key driver behind the difference between the 900,000 tons aspiration versus the 1.1 million tons capacity?
We don't have that split, but we don't think that's the limiting factor to the utilization. It's really ore availability and ore supply. A couple of weeks ago, when I was on site, there was certainly a plan to utilize the mills more effectively that the team had. I don't think it had yet been implemented. You still got both mills running and operating, but utilized much less than their full capacity. Overall, at around 60% of their full capacity at the moment.
Understand. Thanks.
Certainly, Jake on board that 900,000 tons to 1.1 million tons as opportunity. I think Bob's probably listening in on the call and has that loud and clear.
Sure. Thanks, Jake. Congrats again to the team on the transaction.
Thanks, Matthew.
Thank you. The next question comes from Adam Baker with Global Mining Research. Please go ahead.
Yeah. Good day, Jake and team. It's actually Ian Warden here. Just had a question on the process plants. There is a comment in the presentation that you'll be consolidating the processing activities. Given it looks like there's a little bit of separation in distance between the two plants, can you just explain what you mean by that? How well paced and optimized are the processing operations between those two sites?
Ian, it's Glen. Look, I think it's really early days in terms of how that consolidation and optimization is actually going to play out. As we've mentioned, Bob's on the grounds with the team at the moment. We'll start to sort of listen and learn and understand how we're going to move this forward, as well as input our own ideas on that. I think it's just a bit early to understand how that's really going to transpire.
Sure.
Yeah. I think the one thing you'd say is that all of the shafts are connected or that the whole underground is connected, so there's no limitation on where the ore comes out effectively. Bob was certainly keen to see whether you needed all the shafts operating. Certainly, whether you needed all the plants operating all the time, both plants.
Okay. Thank you.
Thank you. Your next question comes from Paul Hissey with RBC. Please go ahead.
Oh, thanks, guys. Just a bit more, you kind of alluded to Bob spending a lot of time over there. Jake, can you speak a little bit more about your plans for integration into the business? Will there be a contingent of secondments from Australia or how do you sort of see that playing out over the next 12 to 18 months?
Yeah, thanks, Paul. I think Bob is committed to spending a material amount of time in Canada next year. We've talked about sort of 12 weeks. We have an integration committee and group that is being headed up by Evan Elstein. He helped us with the Cowal and Mungari integration, and that team is getting formed now. That will take it through to effectively day one. We are looking at how to reorganize ourselves and have a plan with respect to making sure that Bob has the bandwidth and capacity to free up some of his time to spend on this asset, which will take up a material amount of his time. Those plans are in place, and we are confident that we have the capacity and the bandwidth to do that.
Yeah. I think the only other thing I'd add there, Paul, is that we're not planning on seconding a lot of operators or the like into the asset, as may have been done by others. Bob's view is that there's a talented enough team there. It's just giving them the investment into the mine development and getting the utilizations and then productivity up. We're not planning on seconding operation people into the asset.
Okay, great. Maybe the follow-up's for you, Lawrie. Would we expect to see a noticeable change in, or an incremental change rather, in group G&A off the back of adding in effectively another geographic jurisdiction?
No, Paul. I mean, the one thing, in terms of our operating structure, is that each of the assets have got to be self-sufficient, there's nothing at a group level that we expect to see changing here. When we look at the org structure within Red Lake, they've got everything they need in terms of support activities for that asset. Fairly clearly, for Jake, we're not opening up an office in Canada.
Okay, sure. A couple of questions on the balance sheet. Just, I guess, to simplify things on a pro forma basis, I'm not too fussed about what happens to your other assets over the next three months or so, but say we arrive at March 31 at the start of next year. Effectively, you guys will have a fresh, fully drawn $600 facility and no other debt. Is that correct?
Correct, yeah. We've got $250 owing on the Ernest Henry facility now, which will be paid out. We'll have that net cash position as the delta, and we'll have the $600 million loan fully drawn.
Okay, great. Just wondering from a balance sheet perspective, what, if any, kind of environmental liability you might be incorporating with this asset?
We've established a CAD 125 million performance bond facility that we'll need to put in place. The current performance bond that exists for the asset is lower than that's because they're partway through resubmitting a new mine closure plan. Based on the DD and the information in the data room, we expect that we'll be using the majority of that CAD 125 on the transaction closing.
Great. Thanks. Just one last question, perhaps for you, Jake. Do you think this has any sort of, or provides any other pathways to further rationalize your portfolio now? I mean, you've added something, you spoke about helping to offset potential production losses from other assets. Would you say on balance, that the next move could be perhaps to pass on some of the smaller, higher-cost contributors in Australia?
Thanks, Paul. I'm just a little nervous as to how I answer this question as to how full my inbox will be from investment bankers. We continue to review our portfolios, is how I'd answer that. We've been very open in saying that we continue to look at that. Six to eight assets is the right number. This takes us to seven, but it doesn't rule out any other rationalization of the portfolio.
Okay, thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Peter O'Connor with Shaw and Partners. Please go ahead.
Good morning, Jake. Congratulations. This deal is very interesting. It's pretty clear your very conservative narrative has come through, so on. I like to underpromise and overdeliver. A few questions for Lawrie, and one for you, Jake. I think it's Lawrie. Just from an accounting perspective, once you complete, and we think about, I guess, the second half of FY 2020 and beyond, accounting for this asset, will you do it in USD terms and translate it back to AUD, or will it be for AUD accounting for this asset? How should I think about that from a modeling perspective?
We will be doing it in U.S. dollars converted to Australian dollars and reported in Australian dollar terms.
Got it. Just on the closure questions asked before, the closure costs you're running is CAD 125, effectively for that bond?
Yeah. That's the current indications in looking at the mine closure plan that Red Lake was working through as we were doing our due diligence.
On the dividend, you mentioned the dividend policy, no change. Thanks for that. Thinking about your comments about Red Lake and the free cash flow is likely out of the first two years as you're working to integrate and improve. If it's free cash flow flat or free cash flow negative, all things being equal, the dividend sitting now in the market would not change given that free cash flow number shouldn't change. Is that how I should think about that? Is Red Lake not going to contribute for the next two years?
Yeah, that's a fairly simplistic way to look at it, Peter, is that the dividend really is going to be based off the existing asset over the next few years, and what we can do to make sure that Red Lake's negative cash position is minimized.
Okay. Jake, just for you, your final teasing comments in your opening remarks, you talked about maybe a more deals Evolution Newcrest really wants to work together on. Could you flesh that out a little bit more for me?
Only that, we've found it very constructive to work with them. I first approached Randy Engel at a conference in February this year to see whether they were interested in selling Red Lake. They weren't at that stage. They were still assessing it. Through the process, we found Newmont Goldcorp and Randy and his team to be exceptionally good to deal with. We've built a constructive relationship with them, and I know that they are open to engaging with us on other deals, and certainly, we would be very open to working with them.
The lens you would look at is very much as you've spoken about before. It's about the jurisdiction, the risk, location, and within that 6-8 asset portfolio. Is that, again, how you're thinking about it?
There's one thing we're not changing, and that's our strategy, which we started from day one, Peter.
Got it. Thank you, Jake.
Thanks.
Thank you. We have a follow-up question from Mr. Paul Hissey. Please go ahead.
Oh, hi, guys. Sorry to bug you again. Just one follow-up. Obviously, Newmont's got a big investor day this week. Obviously, with the layout, some of it perhaps a bit of a medium-term outlook. What are you expecting them to say about Red Lake from, I guess, from a production perspective? Do you think they're likely to omit commentary altogether given the announcement this year?
I can't speak on behalf of Newmont Goldcorp, but we'll be watching their investor day. I don't think Red Lake will feature heavily other than that fact that they've sold it.
Yep. Fair enough. Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks, Izzy. Thanks, everyone, for getting on the call. There will be a webcast of it on our website shortly. I just want to wrap up by just saying that this is where we see true value in the sector being created. This is a turnaround opportunity, undoubtedly, and we are going in with our eyes wide open that there is going to be a lot of hard work to get it turned around. It has the elements. It has that geological upside. I take great comfort from Glen and his team viewing it as highly prospective for resource and reserve additions and discoveries. I take a lot of comfort from Bob's view and the whole teams on the DD that there is significant operational turnaround, and I know that that is shared by the site management team.
To me, those are the core attributes of a deal that makes money for our shareholders, and that's what I'm very confident that this deal will do. Finally, just looking around the room over here, I see some very tired people. I think Kieran Schmidt hasn't slept for two days, Brian for at least one night or two nights, maybe. These guys and the team have been working extraordinarily hard, and I just again want to reflect on that and credit them for getting us across the line through an incredible amount of hard work. Thanks very much. We look forward to talking to you about the deal in the next few days or the next few hours. Speak soon.
That concludes our conference for today. Thank you for participating. You may now disconnect.