Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Aurelia Metals FY '20 Financial Results Call. [Operator Instructions] And just please be advised that today's conference is being recorded. But I will now hand the conference over to your first speaker for today, Mr. Dan Clifford. Thank you, and please go ahead.

Thank you, Myles. Welcome, everyone, and thank you for your time this afternoon. I have Ian Poole, Peter Trout and Adam McKinnon with me. I'm going to make a short start with a key overview from the strategy through the FY '20 execution, and then hand over to Ian to guide us through the financial results, and we'll move into guidance, particularly at an asset level with Peter. That guidance and looking forward informed us of our early next steps with the business, particularly across Federation, our current assets and the strategy beyond the assets we now operate. In reviewing FY '20, particularly in the light of the stated strategy last year, execution was pretty much on plan across the board covering our operations, returns, including amount of dividend during the year, infrastructure and unlocking of prospectivity in the region. Two of the key areas that the company remains focused on in the execution of the strategy, particularly this year, was around our health and safety performance and the headwinds against our all-in sustaining cost structure for the company, particularly in the light of base metal volumes. This has allowed us now -- this performance has allowed us now to extend our views for the company beyond the shorter-term horizon. In shifting to a longer view, the durability and longevity of future growth in returns has and will be continued to be underpinned by the energies applied to the drivers of that sustainability. These are covering our impacts to the regions we operate in, the well-being of our people and those communities in which we operate and our environmental impacts. An early indicator of the outcomes and the results from our sustainability drive has been on a year-to-date basis. We're already seeing a 20% decrease in the injury frequency rate across our operations. On the ground and financial outcomes across the successful completion of the Peak circuit development investment and other activities drove an unplanned gold position for the year, stable mine cash flows and EBITDA. The successful combination of investment into the future of our infrastructure, mine lives, some compelling exploration success and returns to our shareholders will continue with the current asset base now focused wholly and solely on margin and throughput. Group gold comes off with Hera. About a 30% lift in Peak and the shaping up of Federation and a view beyond the next 3 years with investment criteria is making for a compelling future focused on returns, a portfolio approach and returns growth. With that being said, I'd like to hand across to Ian now to take us through the financial results summary.

Thanks, Dan. The company's results for FY '20 reflected on strategy execution for the year. Our revenue increased during the year due to coal prices and a significant contribution from base metal byproduct. The EBITDA was solid and stable at $103.4 million. We received a solid net profit after tax of $29.9 million, and we did make our investment in the business for the future. With the Peak lead/zinc circuit upgrade, you can see that in our mine cash flow investment compared to prior year. We also invested in our regional exploration concerting our group cash flow is down as well as closing out hedge positions from the prior year. We also made return to shareholders of $7.5 million, and we're able to declare a $0.01 dividend for FY '20. So we go to Slide 8, the revenue, the most significant contribution to our improved revenue with the gold price, which averaged $2,325 an ounce compared to $1,750 an ounce in 2009. This contributed an extra $59 million in gross revenue. This is partly offset by reduced gold sales due to lower head grades at Peak and Hera. The decrease in gold volumes was offset by higher base metal volumes. The company's improved base mill performance is at both Peak and Hera. Peak had increased base metal production in the fourth quarter due to the upgraded lead/zinc circuit, and Hera has benefited from improved base level head grade throughout the year. We will continue to see improved base metal performance as we see the benefits of the upgrade tenant since fall of '21 as done by Dan. On Slide 9, net profit. The net profit for the year was $29.4 million. The benefits outlined in the previous slide were due to the additional gold revenue of $90 million and the byproduct revenue of $17 million, which is really largely offset by the larger -- by increased operating cost, which is volume related at Peak and on both the mine side of things as well as the increased processing costs. And at Hera, as we had higher volumes of concentrate, that improves our processing costs there as well. On Slide 10, the cash flow. The company closed the year with a healthy net cash position of $79 million. When we consider cash, we look through a lens of maintaining our balance sheet strength, investing in opportunities and making returns to shareholders. And as you can see from our cash flow, we invested $36 million in growth projects, primarily the upgrade of the Peak plant from which we're already benefiting. We also invested $12 million into exploration, primarily at Federation as well as exploration, seeking more regional targets in the highly prospective region we operate in the Cobar region. The Federation prospects will be also discussed later by Adam in the presentation. So we also made our return to shareholders of -- with a maiden $7.5 million dividend in October, and we'll be making a second dividend payment in October this year after the Board declared a dividend yesterday of $0.01.

Thanks, Ian. So just to shift our attention to the forward outlook for the company. Gold production is somewhat weighed on by Hera, particularly at the gold front. Base metals are rising, although not enough in terms of volume and value to offset an all-in sustaining range, slightly higher than what we achieved in FY '20. Sustaining capital remains stable. Growth capital has, as expected, now dropped right off. But then looking forward to the business, we have recommenced investments into particularly the Kairos infrastructure to bring that high-value ore body online over the course of the first half of the year, Great Cobar preparations and a life extension in the Peak tailings facility to facilitate extended mine lives. Exploration and evaluation doubles as it formed a key link to our strategy beyond the current assets. I'd like to hand over to Peter to talk through the individual assets.

Thanks, Dan, and good afternoon to everyone on the call. At the high level for the group, we're seeing higher gold production at Peak this year, and that's driven mostly by the higher volumes from the mine and through the process plant. Whereas at Hera, we have an impact of the decline in gold grade, which is now tapering towards ore reserve grade and the lower gold recovery to come to that. We will see higher base metal production this year out of both operations and that comes from higher process volumes and also higher [ tonnes ] and grades. Turning to Peak. FY '21 will build on the platform established by last year's investment in mine development, lead/zinc circuit upgrade and also the debottlenecking of the ore handling system in the second half of last financial year. We had a 20% uplift in the mine and new ore tonnage this year, and that will drive a reduction in unit costs over the financial year. And that throughput increase and mining volume increase is a 25% year-on-year improvement compared to last financial year. We also see a higher proportion of lead/zinc ore fed through the plant this year. We're looking at around 40% of the ore feed in FY '21 coming from lead/zinc sources, which is about twice that in FY '20. The underground mine, as Dan mentioned, our major focus is to set up a new mining area at Kairos. We're establishing a secondary egress route through the upper decline, a large ventilation exhaust raise, the necessary power and dewatering infrastructure. We'll be doing stope definition drilling and stope development activities over the course of the year. And we expect Kairos to contribute around 10% of the mill feed over this financial year with first stoping ore due in late quarter 3. Our overall expenditure is slightly higher than the last financial year, and that comes about from higher activity levels as we increase volume and also capital programs necessary for future production, statutory compliance and remediation and rectification work on some aging assets. So this leads to a reduction overall in the all-in sustaining costs, driven largely by higher byproduct credits and gold production in the denominator. Looking now at Hera. We're going to be mining and processing ore that has a lower average gold grade this year. But we will see progressive increase in our base metal grades. Our operating approach at Hera is to maximize our process plant throughput rate and our operating time to partially offset that lower gold revenue, whilst also pursuing other initiatives to sustain our cash margin. Our operating development is falling away now that we have access to most of our stoping areas, and there is a small amount of capital development this year, which will establish an underground drill platform to test the Main Southeast area so that we can assess this area for a potential mine life extension. Our overall site expenditure is expected to be similar to that of the last financial year, with the higher all-in sustaining costs mainly being due to lower gold production done later. Dan, I'll hand back to you.

Thank you, Peter. Then shifting our attention further forward now, I'm moving to Slide 15. Before I go into on the description of the short- to medium-term strategy then beyond the assets, the emerging significance of Federation and particularly recent results, not only of exceptional-grade base metals but the emergence now of high-grade gold, has, I think, unsurprisingly caused a brief pause in our strategy thinking for the company beyond the current assets. With that, I'd just like to hand over to Adam to talk through the particular highlights for the way Federation is shaping up.

Thanks, Dan. So in June this year, the company reported a high-grade maiden mineral resource estimate for Federation of 2.6 million tonnes at 13.5% zinc, a 7.7% lead, 0.8 grams per tonne gold and 9 grams silver. Since that time, intensive evaluation of the deposit has been ongoing. And earlier this month, the company reported new results that are not only the best drilled at Federation to date, but ranked amongst the best ever drilled in an imagery region. The outstanding new results come from within the established inferred mineral resource in the northeast part of Federation and including walls of 21.6 meters at 31.9 grams per tonne gold, 44.8% lead/zinc and 1.6% copper with a higher-grade portion of 6 meters at 111 grams per tonne gold. And a further intercept of 20.5 meters at 17.4 grams per tonne gold, 44.4% lead/zinc and 1.3% copper, including a higher grade portion of 6 meters at 47 grams per tonne gold. So this gold is actually hosted within massive zinc, lead and copper sulfides and occurs in coarse grains and patches up to 4 millimeters. And this is potentially significant because it may highly amenable to recovery through the Hera gravity circuit. The copper tenor of these intercepts is also quite significant, and the company has now moved to investigate potential to improve the margins even further at Federation through the production of a separate copper concentrate product. The new intercepts are directly down plunge of previously announced higher grade gold mineralization, including 15 meters at 10.7 grams per tonne gold, and these appear to have established a trend that they may extend for up to 250 meters vertically. The presence of high-grade steeply plunging gold lens with short strike lean, which is comparable with other high-value deposits in the region, including the Kairos and Chronos lodes at Peak and North Pod at Hera. Taken together, the high-grade maiden resource estimate and the exceptional new gold intercepts, established Federation as one of the most significant discoveries in the Cobar region in the last 40 years. Aurelia currently has 2 diamond breweries operating at Federation and is infilling this gold corridor as a high priority. Further drilling is also testing a depth and a long strike. And ongoing exploration of other high priority targets in the region is now also underway. The latest results will be incorporated into an updated mineral resource estimate and are expected to enhance the high-margin project development options currently being considered in the scoping study. Thanks, Dan.

Thanks, Adam. Just again, looking forward towards strategy now. And I've split our strategy into 2 discussions, primarily focused initially on our current operations. And then moving on to an approach for the company on a longer-term horizon. In simple terms, the current operation strategy is a combination of, firstly and foremost, the sweating of our mills. This is taking them to full capacity and the combination of that with the discipline of high NSR prioritization to those mills. So that combination is the value lies in the margin for us. And with the exploration lever, like near mine and regionally, lever is the higher IRR life extensions and potential capacity increases of these current assets. Our horizon -- our focus is firmly centered on Federation, Kairos, Peak North and Great Cobar. This value in the margin approach is underpinned by the reliability of our assets. And again, with this combination, forming plus 1.2 million of combined flexible polymetallic mill capacity enables a strong cash generation in the medium term. And then thinking beyond the current assets and the successes from the year that was a balance of reinvestment into our infrastructure, continued investment into the mine in terms of -- both mines in terms of development and capacity, the ongoing exploration expenditure, which is now generating significant upside for the company, and the returns of cash to our investors, our shareholders over the year is allowing the company to think on a platform now with a cash balance, approximately $80 million, and our ability to fund ourselves in terms of development. Our views have now moved beyond these assets to being very much a return-focused company. The strategy outlined on Page 17 is a combination of 3 key areas: the leveraging of the asset base in the Cobar Basin and the maximization of those returns is about sweating the assets, running them hard efficiently and responsibly. The growth profile that will flow from that is going to be fundamentally underpinned by financial discipline and a real tension for the dollar deployed between exploration and future investment beyond our current assets. And that's about directing our dollar to the best return. Our view at this stage is that the company can move into this position. We are investing in ensuring we retain or remain as a gold-dominant business. On an unmanaged basis, our current trajectory is to head towards being base metal dominant. We're going to redirect that. It still allows for high-value base metals and also for the company in the medium to long term to become copper-ready in the view of cyclical movement. Our view is to diversify our footprint, and manage on a portfolio basis an increase in the number of operations we run, either inorganically or organically sourced. And this drive is absolutely focused on driving a group cost and reserve base improvement. Our view with that is that, that will cycle -- with cycle-proved mine lives and a commodity mix and a trusted and sustainable operating presence, we believe, is the key to long-term value and long-term growth in our returns. So in summary, on strategy execution for the year, a margin drive that will continue with the current assets and an extension of our strategy beyond the current assets driving for a gold-dominant mix, we believe, is the key to long-term returns and growth in our returns. With that, I'd like to hand over to questions, please, Myles.

[Operator Instructions] Our first question today comes from the line of Dylan Kelly from Ord Minnett.

Congratulations on a great result. Firstly, just for me, I just want to dig into your strategy progression here because there's a lot of -- it seems like there's some new material. So firstly, when you talk about growth being inorganic and organic, can you delve into that a little bit more? And in light of your mention of saying you want a portfolio approach of 4 to 5 operations, is that -- does that encompass individual sites? Or are you mentioning specific deposits there?

Thanks, Dylan. The -- there's a couple of answers to that question. First of all, the growth profile for the company is going to come via investment. Our view at the moment is that we have -- we're in an extremely prospective region. And I think the results that we're obtaining from our exploration efforts over the last year is really demonstrating that prospectivity. Just go back to think about Adam's comment about the share value lying in the ground at Federation, we're going to continue that drive. There's no doubting it. Our exploration effort from FY '19 to FY '20 doubled. From FY '20 to FY '21 will double again. And the rate of return on that dollar is extraordinary. Although we do take a view that exploration can be seen as high risk. And we've seen many a company put all the eggs in the exploration basket to find a lack of success and the loss of long-term cash flows from operations. We're taking a dual approach here where we are looking at the dollar. It's as simple as after we put the dollar to exploration or do we put the dollar to value-accretive investments beyond our current position. It's as simple as that. We will continue our exploration drive, and it will continue -- our view is that it will continue, and we're showing that now. But we are looking broader than just the exploration in the country we are now. The statement or the view of the strategy of a portfolio approach. That's always underpinned on the basis that we can find value-accretive investment. It's no point to us in bulking up for bulking up benefits, although there is some advantages in the portfolio approach that we can see. And it comes about what we are investing for is it is about returns on the dollar deployed. We're also looking at a countercyclical approach here or ensuring that we're cycle proofed. That is absolutely focused on our cost base and the reserve base, metal in the ground, how long we can mine it and at what cost we can mine it. And from our view is that we see value accretion. If we can reduce our overall cost structure by an accretive bolt-on acquisition, then we will. And if we can see that then get into a critical mass of these 4 or 5 operations, we will start to think about asset turnover with the constant drive to improving our cost base, revenue will be what it is. And picking over commodity, we have to be careful of as well, but this is our view as it stands.

So just digging into the notion of the strategy of acquisitions and growth. This sounds to me more about -- less about filling the mill and taking material that's effectively near field. And more -- am I right in reading this, are you thinking more about adding or acquiring plant capacity?

Well, no. I think I'll split the strategy into 2 for a reason. The current asset base we've got, if you back to what I'm saying there, the life extensions and the exploration lever to extend those mine lives and potentially value-accretive capacity increases remains an absolute central focus to the company. We've been back into those assets. We've been supported on those assets, and we're going to sweat those assets. They will continue for as long as we can find NSR material that gives us a good return. We're taking that approach and in combination with that and the continuation of that drive, looking further afield, and that may come -- mill capacity may become a different region, but it's definitely about improving group cost structure and reserve base.

Okay. Fair enough. That's quite clear. So just turning to guidance for '21 and the discussion around increasing base metal grades -- or sorry, increasing base metal production. If I look at each site, it seems that there's not that much of a material shift for, say, lead/zinc overall. Is that a function of sequencing with Kairos coming in? Can you just walk me through exactly what are the moving parts to show that sort of increase?

It's Peter here, Dylan. I'll take your question. So the sense that we're guiding at the moment is a decent increase over last year's production. And essentially, we're seeing that come through at Peak from Kairos and also from Hera in general through higher grades. And the other driver, both sites, is also the volume through the circuit.

Okay. Fair enough. So you mentioned, what, 20% of the ores coming from Kairos for this year. Is that the right way to think about it?

And I'm sorry, the reference of 20% was that 20% of our feed last year through the Peak Circuit was lead/zinc ores. This year, we'll get 40% of the feed through the circuit will come from lead/zinc ores. That's a volume driver and grade driver. The Kairos contribution over the year will be 10%, slightly under 10% for the full year.

Your next question comes from the line of Sam Berridge from Perennial.

Just curious how has the Peak plant been performing versus its nameplate now that you've had an extra month or so since the quarterly.

Yes. Sam, Peter Trout here. We're very happy with the way the plant is performing. We've had some strong mine production in the last quarter, last financial year, and accumulated a stockpile of ore ahead of the plant. And the plant has been running well this quarter, drawing down that material. I think over the course of this year, we'll be in a mine-constrained position. And the focus on the plant then is tuning our circuit to get good separation between the different base metals and reduce the reporting of metals into the wrong concentrate stream, if you like. So all in all, very satisfied with the throughput we're seeing in the plant and happy with the recoveries, but see opportunity to improve on that.

Yes. Okay. I mean, are you able to say what the throughput assumption is for Peak then for FY '21 behind the guidance?

I think in the graph on the presentation deck, Sam, you'll see a bit of indication there, the range of throughput rates we're guiding for the year.

Okay. Yes, yes, got you. Right. And just lastly for me, in that higher-grade gold zone that you've identified at Federation, I don't suppose you can say what the gold grade modeled was in that zone in the resource that was calculated prior to those high-grade results coming through?

Adam?

Yes. I can take that one. The answer is no. Okay. I can tell you that the -- obviously, the overall average for the deposit is at 0.8 of a gram. And that I would expect that when the new updated model comes out that we will see a significant upswing in the total contained ounces, even just on the back of those 2 results.

Your next question comes from the line of Andrew Hines from Shaw and Partners.

Just following up from Sam's question on Federation. So with that new drilling post the last resource upgrade, obviously, looks really good. When do you think you will release an upgraded resource at Federation firstly? And then secondly, just walk us through what your thinking is now in terms of time lines for Federation? How quickly does that come into production? And how long does the ramp-up take?

Thanks, Andrew. We'll split that answer into 2. Adam, if you can take the first piece and Peter will follow up with the study's progress.

Sorry, can you -- what was the first part of that question? Sorry, I missed that.

Just in terms of timing of when you would release an upgraded resource figure for Federation?

Yes. So at this stage, we are planning to do an update towards the middle of the financial year. But that is subject to change.

And Andrew, it's Peter here. Just looking forward at Federation. We're obviously very excited by these recent results and implications for the current scoping study. In parallel with the exploration and resource definition drilling that Adam just described, we're pushing ahead with permitting and approvals for that project and the scoping study, which we expect to have completed at the back end of this financial year. Based on the latest drill results that Adam's talked about, what we're seeing from the scoping study, we're now looking at what the enabling works would be to get started on the ground. And clearly, one of the first things we have to look at was expansion of the camp at Hera to accommodate additional people and also the benefit of bringing forward an exploration decline, which allows the underground get some better orientation for our infill drilling and also gather a small box sample, see how that runs through the plant. So we're starting to do the work now to pull that together, and we'll have more news to share through the course of the year.

Okay. Great. And now perhaps a question for Dan. I think on your last slide there, the strategy progression, you've used the phrase copper-ready, which obviously is a deliberate use of that phrase, which is intriguing. What do you actually mean by copper-ready? And what are you thinking when you put that down?

There's a couple of aspects to that, Andrew. There's 3 things primarily. Gold's at a great price now, there's no doubting it. Our views in looking forward is that there is a countercyclical approach. Our views in looking forward beyond '24, '25, '26 is that there is a supply deficit for copper in the market. So we'll obviously look at that opportunity as to what that means for us. Then looking internally within the business, we have a great copper exposure as it stands. We've got Great Cobar to the north of the current operations. I think at some point in history, it was the biggest copper mine in Australia. It's open at depth, and it's -- and we own it. So getting ready for that approach, we don't want to be sitting on it. So the work going through the course of this year on the study is for in the preparation for it. And you'll see that there's a component of our growth capital is actually Great Cobar. Beyond the current assets that we look at, there is emergence of copper coming through in the most recent drilling results at Federation. And in looking regionally around there, there's no doubt in copper signature. So the combination of positioning our company in the long term to handle commodity diversity and the full utilization or maximization of our current assets, we believe that combination is that a portfolio approach on assets not only cycle proofs the business in terms of mine life, but also commodity mix. So it's a combination of those 3.

Your next question comes from the line of Mike Millikan from Hartleys.

Just firstly on exploration spend for both centers. What's a rough split? Obviously, we should largely going to be Federation in '21. Have you got a split?

Mike, Dan. I'll just give a brief summary on that, and then I'll hand over, if you're looking for more detail, to Adam. In essence, we -- last year, we were looking -- we spent $12.2 million, I think it was, for the year. We were targeting slightly higher than that in the tune of $14 million to $16 million combination, particularly COVID-19 onset that backed off. This year on regional discovery, it's essentially $15 million. The additions above that $15 million primarily go to infill drilling in and around Federation. So I'll hand over to Adam to give a more defined split.

Yes. We are looking to spend somewhere in the order of 40% of that budget in and around the Federation area. We'll be doing some associated work around separation, and that's some of the -- along strike, Dominion, but also in the imagery here at Federation region as a whole. And also a significant proportion off in the Peak line of lode as well. But to answer your question, around 40% of the budget will be around the Federation area.

Dividend policy, is there a stated policy you guys want to put out? Or what should we expect going forward?

Well, we haven't got a stated policy. And I think in the short term, it will probably remain that way, Mike, I think. Our view is this, there's uses for cash within the business. Off in my mind, there's 3 uses of that. And the volumes within those buckets will ebb and flow as the company progresses. But in simple logic, we are return focused. I think that's evident now, 2 full year dividends in a row, $25-odd million payout as a percentage of our revenue, that's north of 2%. So we look at it in that. We want to be recognized in that we are a returns-driven business, it's as simple as that. We pay a debt bill all the time. We think an equity payment is appropriate as well. That means looking forward, though, having certainty in our numbers and operating cash flow for the business. The 3 uses of funds we see are ensuring that we have a prudent level of cash on the balance sheet to shore up the business in the event of headwinds. Secondly, that cash balance will need to grow as the company grows and having cash as one of the capital levers for investment in the business is also an important preparation for growth. And this is all on the basis that we're funding ourselves in development of our own assets and exploration and ongoing sustaining investment back into the business. And then beyond that, the third bucket being in returns to shareholders, primarily dividend or share buyback. So that's our uses. I think in the absence of a stated dividend policy, I think it's our actions that will show that we are returns focused.

Great. And just quickly on the growth projects as well. Is there any planned spend at Great Cobar, Peak North in '21? Or we should assume that's coming into '22?

Mike, Peter here. I'll take your question. There's a minor amount of expenditure this year at Great Cobar. You're looking at dewatering the old workings, historic workings. So that derisks development. No planned mine development at this stage for Great Cobar, and we are doing some more evaluation work through the pace of the year as well. Just to position ourselves for recommencement of the decline and establishment. We're also going through the permitting process. We continue that exercise. And we have received now feedback from the local community, from the environmental regulator, and we have to bring that into our thinking and our planning for Great Cobar.

Just talking on Kairos. The expectation for stoping ore was late Q3. Was that correct?

Correct.

Yes. Is there -- how is that progressing in regards to -- probably thought that was going to come in pretty early Q3. Is it just a decline development, [ thin rise ] kind of work? Is that kind of what we should see reading between that?

We've still got a fair bit of setup work to do there, Mike, for Kairos. And importantly, that upper decline has to connect through to give us a satisfactory secondary means of egress. But whilst that decline is progressing, we are doing as much work as possible to do -- prepare ourselves for first stoping. And in that, we will be developing in the ore body and getting some earlier exposures to the Kairos material.

Yes. So development ores Q1, Q2 is still the expectation?

Well, ahead of Q3 anyway.

Your next question comes from Mark Fichera from Foster.

Just back on Federation regarding permitting. Can you just give a sort of an overview of how that will pan out? For example, when you would expect to submit the mining plan and then what the government -- how long they would take to turn around that and then any environmental overlay?

Mark, Peter here. I'll take your question. We're currently getting all the baseline data together for what we believe is a mine development. That will take course -- over the course of another year or so to put all that work together, give or take, and depending what we find. We then have to get the terms of the environmental impact study defined, and that is when we hand over to the regulatory agencies. And timing after that will depend on those terms, how much work we have to do. So to some extent, we don't have full control over that process, but we want to do everything that we can to set ourselves up there ahead of time.

Mark, it's Dan. In -- as Federation drilling was unfolding through the course of half 2 last year, that, obviously, that momentum was building. Our views on consenting times within, I guess, reasonably well-trodden path of consenting in New South Wales is always in the terms -- in the vicinity of several years. So that's for full mine development and production. Normal course in New South Wales is several years, 2 to 3 years. That view hasn't changed. We've been quite consistent with that. And our view on that was cast during -- probably during Q4 last year, last financial year. Peter's comment about doing everything we can in the interim is dead right. There are other things that can be done within the boundaries of getting the overall operation consented. And primarily for us, the things we can do in readying the complex of Hera, if you like, readying for that future development and growth within the business, one of those being the exploration decline. I think pragmatically, looking at the guys, if we could put an exploration decline in tomorrow, we probably would because of the cost benefit of drilling from the surface versus drilling underground. I think that -- and proving up of conditions. So that's a separate process and a more accelerated process, getting boots on the ground with an exploration decline. But as Peter said, and I'd like to reinforce, that only allows a bulk sample that does not allow commercial production.

Sure. Okay. And just another question back on the Peak plant. You've got that graph showing the throughput for FY '21. Just to clarify that, is that throughput fully ramped up? Or does that include a ramp-up period in which -- in that case, what would be the final sort of full capacity of that Peak plant?

Yes. So that's...

That's if you've got a rough number you've got.

That's a full year number in that range, Mark. If you look at where we've gone, the ramping up of these assets is really complex asset. The bottlenecks move from the plant to the hoist to the mine. The mine has been invested in with development. 20% to 25% year-on-year capacity improvements over the last 2 years, we're expecting that capacity improvement to continue. If you look at the run rate during the June quarter, FY '20, that was off the back of the hoist work and the commissioning of the mill. We're expecting those sorts of rates to continue on a quarter-by-quarter basis, which ultimately makes FY '21 on a total annual basis. That 20%, 25% are higher than this last year. We would then expect there is still, even with that improvement, there is still headroom to get to that full capacity. But as Peter has mentioned, it is mine constraint, not mill constraint. And that's about investment in development, the reliability and how we've swept that asset as we move its capacity up.

Sure. So depending on how you go with the exploration and mine development, it could go higher, obviously, than that [ 650 ]?

Well, well, I guess, obviously, we're driving for that. I think the guidance range we've given is one uncertainty. I think that -- well, so as I can say that obviously, our ambitions are to run it as hard as we can, and there is the capacity to do that.

Your next question comes from the line of [ Mike Linares ], a shareholder.

I'm a shareholder. Also I'm with the Australian Shareholders' Association. First, congratulations on your mining success, but I'm very concerned and disappointed at your commodity derivative losses. Now last year, you lost $16.9 million. This year, you've lost $14.4 million. In 2 years, you've now lost $31 million hedging. Your net profit this year is only $29 million. I mean, these are disastrous figures. Now I know hedging can go both ways. But in this climate, shareholders buy a mine like AMI because if they see the gold price go up, they want those profits, not to be hedged out to the merchant banks. The merchant banks are making a fortune from you. They're laughing at you. It's a disgrace. So my question is, stick to mining, which you are very good at, I'm happy to say. So when are you going to stop this ridiculous commodity derivatives play so that shareholders know where they stand?

Thanks, Mike. I'll handle that one. I think the hedging discussion has been one that has been heard a number of times on these calls over the last 2 quarters. And I think the Board, myself and the management team are pretty clear on this, that if there's a need for hedging to protect the company, then we will. At this point in time, we don't see that need for hedging. And I think, frankly, some of your comments there are hindsight in mind, I must say, then that we've seen gold now at a 10-year high and has been escalating now for probably a year, probably easily a year constantly. There is a place and a time for hedging within a business. For us, that is a Board decision and we are acting on behalf of shareholders. We're aware shareholders invest for gold exposure, and we take that all into account when we're making those decisions. If we think or we -- there is a need for hedging, then that's when that discussion will happen.

Your next question comes from the line of Joshua Hain from REST Investments.

Just, I guess, following on from a couple of previous questions around Peak, and I guess, the plant throughput. So where we ended a couple of questions ago was sort of talking about the -- becoming mine constrained as throughput rises. But giving your comment to Sam before about actually having sort of stockpiles now at the plant and being able to do close to 700,000 tonnes per annum in the June quarter, I guess I can't reconcile not being able to sort of commit to 700,000 for the year at Peak. Or is the mine, is there something that I'm not understanding about the mine not being able to deliver that sort of level?

Joshua, just to expand on that side. The nameplate capacity of the plant at Peak will depend on the type of the ore. So copper versus lead/zinc. But it is already about 100-odd tonnes per hour, which lead to 750,000 to 800,000 tonnes per annum, thereabouts. We're on a ramp-up trajectory to fully utilize that capacity. To do that, we need to have sufficient mining areas opened up. So there's enough to production to deliver reliably into the plant. And with that, we have to balance the different types of ores to compare the copper ores and the lead/zinc ores. So the development that went in last year has opened up a number of new stoping areas, and we've started producing from those, and we're starting to get into a rhythm, into a cycle in those areas. We're also pushing half for Kairos, which will bring in another mining area for us. So over time, we will see that progressive increase in mine production, and that will fill that capacity that we see available in the process plant.

Yes. Okay, okay. So that's still a bit of a work in progress then. Yes. No, fair enough. I guess then just a couple of other quick ones. Just the exploration figure, you called out $22 million, $26 million. Just trying to think, is that all expense or is any of that capitalized? Has it ever hit the all-in sustaining cost number? Just trying to understand where that sits.

It's Ian speaking. In the first instance, it will be capitalized. Then as we come into each reporting period, we undertake an assessment of the exploration on our books and whether we're going to continue to explore or not to explore. But given that a fair chunk of the expenditure is at Federation and the results that we're seeing in Federation, you'd expect that to be capitalized.

Yes. Okay. Fair enough. And yes. And then just another quick one. I apologize, I might have misheard, but thinking at Hera, you were talking about to the operating development falling away and the only CapEx envisaged to set up the underground drilling platform and the like, but I can't see any growth CapEx forecast forever. So you're expensing all that in that all-in sustaining cost number?

Yes, yes. Sustaining capital works there for a limited amount of development, which gives us a real platform, get some better angles into that particular zone and test the grades there, see if they justify mining and the potential life expectation for Hera. So that's in sustaining capital.

Your next question comes from the line of Stuart Dodd from Renaissance.

Look, I guess I can't get away from the guidance. So Slide 13, and it's Peak. And you can hear from the questions that I'm just trying to work out. You did a run rate, the last -- the exit run rate of 680,000 tonnes at about $240. And there, you're calling lower numbers. And that's the backdrop to my question. If I look at that slide, in 2 years, the throughput has gone up by 45% and the costs are going to come down less than 5%. I would have thought given some of the fixed costs, et cetera, you would have seen a better cost trajectory than that. Can you perhaps shed some light on that for me?

Yes, I can. Stuart, it's Dan here. At a higher level, the -- we've got to remember in the underground, in particular, where a vast majority of our costs lie, we're on a schedule of rates on a contract-driven underground operation. So for the major developed, the tonne hauled, hoisted, tonnes go up, so does the expenditure on that unit, right? So we don't see a direct flow-through to a reduction in the cost per tonne. Added to that, that cost per tonne there does have sustaining capital in it as well, just not the growth capital. And additionally, in terms of adding to a cost structure there has been almost a doubling, if not higher, of our infill drilling to get stope certainty and predictability further into the future than we currently had.

Okay. And so just on the scheduler rates, as you do more activity, does the year at rate not fall at all? Is it the same fixed rate all the way?

Same fixed rates, too.

Okay. And in terms of the sustaining, which is probably, I guess, principally underground development, is that high in fiscal '21? Like I'm just trying to think, should I -- am I seeing that trend because you actually are still doing a fair bit of development in '21 that might fall in '22? Or is '21 fairly representative, do you think?

I think it's quite representative of the forward picture on development. I think, Stuart, one of the key issues for us is that the nature of the Peak or the Cobar ore bodies is that we are what I'd call in a different life term, perhaps others is that it's -- we're a bit vertically challenged. These ore bodies are quite narrow on strike and go to depth. So as we open these up, we will see that, I guess, impact coming through, particularly on a sustaining cost basis.

Your next question comes from the line of [ Glenn Risen ].

I guess my question is on the same theme, but I'll sort of ask it a little bit differently. In your F '20 operating costs, we've particularly seen mining costs and processing costs materially higher, and that's put down to development meters and increased volume throughput. So are we going to see the costs at that higher level for FY '21? Or are they going to come down? I'm thinking particularly of the development meters or -- but either/or?

[ Glenn ], it's Peter here. Look, in high-level terms, expenditure will increase at Peak in FY '21 over FY '20. And it's all the reasons Dan identified. And there's other activities we've got as well. So we're using more submitted backfill now in our underground stope, so we can extract more of the ore. So that adds to the costs. With the treatment of more lead/zinc, we have higher reagent consumption in the plant. There's more material going through the float circuits. So that helps drive up costs as well. We've also got standing targets in place for the reverse osmosis plant that we bought on-site last year to address the water shortage. And there's also a program in place to refurbish elements of the process plant without being corroded. So there's a host of different activities going in across the site to make sure we can reliably deliver on these planned production rates. The overall driver though is to push that mill hard, feed as much as we can because it helps drive down our unit cost as well as the things we're doing to manage the direct expenditure.

So I'll add to that, Glenn, it's Dan. There's -- we are planning on seeing cost reduction on a per tonne basis beyond this year. There's no doubting that. That's the emphasis. I alluded to that in the strategy beyond year 1 of the guidance. And coming back, I guess, to Stuart Dodd's question to a degree there, too, that there's -- as volume goes up, we will see more and more leverage towards cost reduction as that volume goes through over this next year to 2. So the expectation is that we will see a cost reduction. And that probably goes on even further beyond the next couple of years as well in that we know this mine is going to be volume driven. We can see that from a long way away. And additionally, getting the higher-grade gold is probably what comes on top of the base metal baseload. So we are driving at costs. We are planning on seeing a reduction in cost structure over the period of the next couple of years.

And your final question for today comes from the line of [ Bill Murray ].

A couple of commercial questions. Zinc concentrate treatment charges have come down. Are you taking advantage of that? Or are you on a yearly contract and you want to take advantage of that for next year? First of all.

So we are taking advantage of the lower treatment charges at the Peak. At Hera, we've got a longer-term contract. So we -- so the answer is yes and no. So we are taking advantage of the Peak operations. And at the Hera operations, we've got a 1-year contract, so we haven't taken advantage of it there.

And secondly, at the peak mine, the payability for zinc concentrate, in particular, has been rather poor compared to the actual production, but also silver. Is there any prospect of the payability increasing in the next little while?

No, we can't see a catalyst for any material change in that.

Why is that? Is that because the zinc is going to the other materials or what?

We've not got out in the market penalties on zinc sales or zinc con sales. So we can get back to my answer. I think we can't see a change in what that -- what those catalysts are. We are continuing -- we have a mixture of short, medium and long-term offtake agreements with our con and that is to allow us some flexibility between the benchmark setting. And what I'll recall at the moment, some reasonable short-term volatility in the base metal pricing and particularly on TCs.

But the actual normal terms for zinc concentrate would be you pay for 85% of the material and you're getting about 63% at present.

Bill, are you taking that as a combined number across both sides because...

I think that's combined actually. But the actual zinc for the Peak, going on my memory, has been rather poor over the years. But I think you were producing a combined lead/zinc in those days, but you've got a single zinc concentrate now, don't you?

That's correct. So in the last quarter, we started to reduce a separate zinc and lead concentrate, and that is a change from the past. We have had the bulk con, we get the lower payability, and we get paid on traditional terms there.

There are no further questions at this stage. So I'll hand back to management for any concluding remarks.

Thanks, Myles. Thank you, everyone, for your time. I think we've covered a bit of ground today. The Board and the management team absolutely committed to both short, medium and long-term strategy. And we look forward to some future updates. Next real information catalyst for us will be the release of the September quarterly production report in mid- to late October. So thank you, everyone, for your time, and we will reconvene off the back of the quarterly production report. Thanks very much.

Ladies and gentlemen, that does conclude today's conference call. Again, thank you all for participating. You may now all disconnect.