Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Evolution Mining Limited Full Year 2026 Financial Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead.

Thank you, Darcy, and good morning, everyone. I'm joined on the call today by Frances Summerhayes, our CFO; and Peter Rocky O'Connor, our GM, Investor Relations. Today, we released our FY '26 full year financial results on the ASX, including a presentation, which will be the reference point for the call. Fran is excited to go through the financial results. In our first year at Evolution, so many new financial records have been set and she is delivering a bumper record dividend. We also announced changes to our Board Tommy McKeith, who has been a director since 2014 will be retiring at our Annual General Meeting, and John Vann will be joining the Board on 1 December. Tommy has been an invaluable contributor to the Board, Evolution and me personally. His knowledge and enthusiasm for the industry and almost every ore body is amazing. As Jake commented in the release, it is fitting to acknowledge and recognize the lasting impact he has had on our business, culture and success. Tommy will leave an enduring legacy, and we are extremely fortunate to benefit from his counsel, vision, wisdom and friendship throughout his tenure. John is a geoscientist with more than 3 decades of experience across global mining businesses. I'm sure he will be a valuable addition to our Board and look forward to working with John when he joins us in December. Turning to the results and starting on Slide 3. Our record results reflect the quality of our portfolio and above all the dedication and efforts of the entire Evolution team. We are generating high returns and delivering on our commitment to shareholders. The record financial performance is on the back of safe, consistent and reliable operational delivery complemented by our disciplined approach to cost and capital management. As mentioned on the quarterly call last month, we delivered FY '26 safely with our total recordable injury frequency of 5.9 remaining low. Today, we also released our inaugural climate report under the new reporting standard, highlighting the positive work being undertaken throughout our business to leave a lasting sustainable legacy. Our high-margin business is generating significant cash flow with a record cash flow of nearly $1.4 billion. The updated dividend policy with payout rate of targeting 60% of annual group cash flow is sector leading. This means a record final dividend of $0.21 per share. For context, the total FY '26 dividend of $833 million is more than our market cap was in early 2015 when we made our first major acquisition. The multiple projects at Northparkes, Ernest Henry and Cowal will generate high returns and further improve the quality of the portfolio when completed. We are set to continue our safe, reliable performance in FY '27 with guidance expected to sustain our high margin, high cash generation position. I will cover the guidance details later in the call. Moving to Slide 4. This slide demonstrates our disciplined allocation of capital to drive sustained high returns. Our balance sheet supports our strategy through the cycle, be that for value-accretive acquisitions high returning organic growth investment or dividends. We adapt our allocation depending on market situations in the different stages of our mine plans. It is always done with a view to maximize our shareholder returns. While we've been mainly focused on advancing our organic growth pipeline in the past couple of years, we have not ignored accretive deals for our shareholders. Over the past year, the allocation of funds between organic growth opportunities and dividends is almost a 50-50 split at around $830 million to $850 million for each of them. We have also done accretive deals. At approximately $250 million, this is smaller in scale than normal, yet they are just as important to the portfolio. It clearly shows that we have the capacity and flexibility to allocate into all 3 areas to sustain the high returns for shareholders, which Fran will demonstrate. With that, I'll hand over to Fran.

Thank you, Lawrie, and good morning, everyone. It is my pleasure and privilege in my first year with Evolution to present our most successful financial results. These financial results reflect the quality of our portfolio, the consistency and resilience of our performance and the benefits of our high-margin operations. Importantly, we have banked the benefits of the higher metal prices, and we have shared this success with our shareholders. We are very proud of what our Evolution team has achieved. We delivered a record underlying EBITDA of $3.2 billion, up 44% from last financial year with an annual record underlying EBITDA margin of 57%. Our costs are sector leading with our all-in sustaining costs of $1,717 an ounce, resulting in an underlying net profit after tax of $1.6 billion, up 63%. This translates into a record group cash flow of $1.4 billion, up 76% from prior year. With earnings per share reaching a record $0.73 per share, up 57% on prior year. These financial results demonstrate that we continue to deliver on our commitments to our shareholders, returning a record fully franked final dividend of $0.21 per share, up 62% and making a total dividend for FY '26 of $0.41 per share more than doubled from prior year and is 60% of our FY '26 group cash flow. Whilst we have degeared the balance sheet and achieved a net cash position, demonstrating that we can simultaneously invest in the business to enhance the portfolio while increasing our shareholder returns. Highlighted on Slide 6. This year, we have achieved a record net mine cash flow of $2.1 billion, more than double from prior year. We invested $1.1 billion of capital into our operations with high returning growth projects that are all on schedule and budget. Across the portfolio, we have had annual record net mine cash flow at Cowal, Northparkes, Red Lake and Mungari. We continue to deliver consistently high EBITDA margins across the portfolio as demonstrated on the right side of this slide, with group EBITDA margin increasing 12% to 57%. Two standout year-on-year performance with Red Lake and Mungari. Red Lake delivered an underlying EBITDA margin of 62% and reflecting consistent and reliable operational execution and cost control in a tough environment. This converts into almost 4x net mine cash flows than prior year. The operation has demonstrated its ability to sustainably generate returns and has earned the right to compete for capital within our portfolio. Mungari was another year-on-year standout, achieving an EBITDA margin of 65%, following the successful commissioning and ramp-up of the expanded 4.2 million tonnes per annum processing plant. The project was delivered 15% below budget and 9 months ahead of schedule. Importantly, this directly converted into a net mine cash flow of $366 million, more than 3x from prior year. These operations highlight the value created through disciplined capital allocation, focused project execution and consistent operational delivery across the portfolio. We enter financial year 2027 with a fully unhedged gold and copper portfolio. Moving to Slide 7. These all-time financial records for Evolution translate directly into record shareholder returns as we continue to deliver on our commitment in rewarding our shareholders. At year-end, the group held almost $1.4 billion of cash with an undrawn revolving credit facility of $525 million, providing us sufficient liquidity. During the year, we have repaid all our bank term debt, and we now only have our low-cost and long tenure U.S. private placement with an average fixed rate of 4.47%. The with the first tranche not due to be repaid until November '28. During the year, we have maintained our investment-grade credit rating, reinforcing the quality of our portfolio, balance sheet, and long-term outlook. Following these record financial results, we are pleased to reward our shareholders with our highest ever dividend. After paying a record fully franked interim dividend of $0.20 per share, the Board has approved a 27th consecutive dividend and a record fully franked final dividend of $0.21 per share. Given our improved financial position and outlook, we have reviewed our dividend policy and increased the payout ratio to a target of 60% of annual group cash flow, a significant increase from the previous 50%. This sector-leading dividend policy is supported by our 17-year reserve life and reflects our confidence in the long-term strength of the business while reinforcing our commitment to rewarding our shareholders. Since financial year '23, we have delivered on our commitment to deleverage the balance sheet, reducing gearing from 33% net debt to a net cash position in just 3 years, while continuing to invest in the business and deliver shareholder returns. Our capital management plan is designed to maximize long-term shareholder value while maintaining disciplined investment to continually enhance the quality of the portfolio and balance sheet. As Slide 8 shows our record financial performance is underpinned by consistent and disciplined capital allocation. We continue to enhance the quality, resilience and longevity of our portfolio through investment in high-return growth opportunities while improving overall portfolio returns. The Board approved projects shown on this slide at half year results demonstrate this approach in action. Now while this is one financial metric we look at, based on the current gold and copper prices, the expected internal rates of return for these projects are materially higher than the original base case assumptions, providing additional value and upside for our shareholders in current market conditions. As we enter financial year 2027, Evolution is in a position of considerable financial flexibility. We are operating in a supportive gold and copper price environment and focused on banking the upside. We have a high-quality and high-margin portfolio of assets a pipeline of fully self-funded, high-return growth opportunities and the financial capacity to execute on our strategy and continue to reward our shareholders. I will now hand you back to Lawrie. Thank you.

Thank you, Fran. Slide 9 summarizes our FY '27 guidance. Charts on the right-hand side highlights our cash flow potential outcome at the midpoint of guidance at current prices and our sensitivities. Overall, our FY '27 plan will enable us to generate significant cash flows. At current prices, our operating mine cash flow would be around $3.6 billion, which is $200 million higher than FY '26, even allowing for cost escalation in FY '27. If the metal prices were around consensus levels, the cash flow would be approximately $3.4 billion at a range of $3.4 billion to $3.6 billion and allowing for our planned capital investment and other costs such as tax, exploration and overheads, our group cash flow will allow us to sustain meaningful dividends for shareholders. We know the main drivers to our cash flow, as shown on the sensitivities chart and we manage each of these in line with our cost and capital discipline. In terms of the guidance details, our group production is guided at 660,000 to 730,000 ounces of gold and 63,000 to 70,000 tonnes of copper. Outside of Mt Rawdon finishing production this quarter, there is no material change in production capacity across the other operations. Production is weighted to the second half of the year as we complete the access to the second decline at the Cowal underground mine and access new mining areas in Red Lake. The normal semiannual major shutdowns will take place at Cowal and Ernest Henry in the September and March quarters. For the September quarter, we are expected to produce in the range of 160,000 to 166,000 ounces and copper in the range of 16,000 to 17,000 tonnes. Our group all-in sustaining cost is guided at $1,795 to $1,995 per ounce, which will remain one of the lowest in the sector. This is based on a copper price of USD 5.72 per pound compared to the spot price that is approximately 15% higher. As outlined last month, the main drivers to the change in the all-in sustaining cost is the impact of cost escalation assumed at 4% to 5% or $150 or $160 per ounce as well as the decision to invest an additional $50 million to $60 million in sustaining capital on fleet and infrastructure to ensure long-term operational reliability. Our group capital guidance aligns to our FY '27 outlook outlined in our June quarterly report. The main areas of investment for major projects and mine development are on the approved growth projects, namely E22, Coarse Particle Flotation and the expansion study at Northparkes, the open pit continuation project at Cowal the development of Bert at Ernest Henry. All these projects remain within the original approved budget. In summary, on Slide 10, we have a high-margin business and a 17-year reserve life. We are very much focused on delivering sustained returns. The combined effort throughout our business over the past couple of years to deliver safe and reliable performance is set to continue in FY '27. We remain committed to margin over ounces, while at the same time making sure we capture the benefits of the high metal prices. All our growth projects remain on schedule and budget. The balance sheet flexibility enables us to continue executing our strategy with confidence. Out of all of this, we make sure our shareholders benefit and our improved dividend policy targeting a 60% payout rate demonstrates that. For FY '26, the dividend is equal to 20% of our achieved gold price, which is an outstanding return for our shareholders. Darcy, please open the line for questions.

[Operator Instructions] Your first question comes from Kate McCutcheon with Bank of America.

Congrats on the results. Can we just revisit the CapEx again for '27, which you gave us last month. We previously have the $0.9 billion to $1.1 billion to FY '30. So say circa $5.6 billion, '27 to '30. Can you remind me what's in and out in terms of upcoming projects like Northparkes mill expansion, for example, and then I guess I'm trying to work out, do we still think about that same envelope spend for FY '30. And if it's just this year that's lumpier. Like how has that envelope changed? .

Yes. Thanks, Kate. Look, so the CapEx outlook of the $900 million to $1.1 billion FY '30. The projects that are in there, the OPC at Cowal, the E22 and Bert mine development, the Coarse Particle Flotation and obviously, our sustaining capital. So they are all of those projects. The outcome of the study at Northparkes will determine what we invest in terms of if we expand the capacity there. So the only changes to that previous outlook is the additional sustaining capital that we've outlined today and last month of $50 million to $60 million a year. And we did say that we expect that to be at least for the next 3 years that we'll be investing at that higher rate. And this year, the $70 million to $90 million on studies and works that we're going to undertake for future growth options. So if you look at it, there's nothing in terms of capital inflation that we're building into that. There are no new major projects that we're bringing into that outlook and the existing ones that are in execution are all on schedule and on original budget. Does that clarify it for you? .

So the envelope is still essentially the same for the sustaining CapEx.

Correct.

Yes. Okay. And then we had the Carnaby deal that you announced for another 10,000 tonnes of copper a year. And I know you haven't got the keys to the asset yet, but when do you think you could have first ore to the Ernest Henry mill. And then secondly, there was the third-party tolling agreement with Glencore that you announced there kind of separately. What is the thinking there? Or how should we think about that part? .

So for the Carnaby deal, we expect that to close in November, subject to the Carnaby shareholder vote. We then have said it will be about a 12, 18 months to really close out that feasibility study. And then beyond that, you'd be looking at about another 12 to 18 months. So you are potentially looking up to about 3 years from October, November. In terms of the third-party deal, so that is linked to a project that Glencore has an offtake agreement on the Mt Margaret one. And so if that -- if that project starts, that ore would come through into the plant, given that we've got that capacity. And when we look at the Carnaby deal and that offtake agreement, we certainly have the capacity to do those as well as anything that may come out of the Corella exploration program that we're currently running.

Okay. And the Mt Margaret pit being the one that Xstrata previously mined the satellite? .

Yes.

Okay. Got it. And then just quickly, the noncash component that you've assumed in the Cowal all-in sustaining costs, please? .

Give me 30 seconds. Cowal in the noncash component is about $50 to $70 an ounce this year add to cost.

Your next question comes from Levi Spry, UBS.

Maybe a question for Fran, I guess, just following on from the capital questions, if I think about what's potentially coming next at Northparkes and maybe some of that Carnaby stuff and maybe some more Cowal. Can you walk us through the process to arrive at the 60%? What drives the upper band and maybe you can talk to potentially what other forms of returns may or may not have come into consideration? .

Yes, Levi, I'll get Fran to talk about the capital allocation and dividends, all I'm working on the basis is that since Frans arrived, we're paying a lot more out to shareholders. So she's got to build on that this year. And in the capital as I just said to Kate, all of the projects are in execution and studies are in our outlook. The next major ones really will be the outcome of the study at Northparkes this year. And then at Cowal, it will be the outcomes of the exploration and drilling that we've got going on at E41 and the underground potential for a second underground. They would be the next main pieces of capital. In terms of Carnaby and the Great Duchess project, we believe there's a lot more work to firm up that feasibility study. And so once we take ownership in November, we're going to turn our attention to completing that study. And that's when we'll have the best indication to give you an outlook on what that capital would be. Fran, do you just want to talk on the 60%?

Yes, sure. Thanks, Levi. So our capital management plan is consistent and focused obviously on maximizing long-term -- and what I mean by that is based on our life of mine plans, the quality of our assets, we look at the most economic way to bring our reserves and resources to market. So we're focused on balance and be disciplined investing in our high-returning growth options and opportunities within the portfolio, but also balancing rewarding our shareholders via capital returns. So given our financial position, the confidence in the outlook and portfolio, the highest return outcomes for our shareholders is increasing our target dividend payout to 60% of annual group cash flow. So we'll be balanced in regards to investing in our business, maximize value and also maintain finance flexibility to confidently execute on our strategy. But as we've said before, we don't see value, and we don't intend to accumulate excess cash on the balance sheet. So if the gold or copper prices remain supportive and continue to increase, resulting in, say, cash generation before our -- higher than our business requirements, obviously a good problem to have. We will continue to evaluate the full range of capital management options to reward our shareholders like we have done today.

Your next question comes from Matthew Frydman with MST Financial.

A couple more following up from similar themes. Maybe firstly on Carnaby. Can you comment at all on the structure of the consideration? Obviously, all scrip offer, you've got $1.35 billion in cash and pretty low cost debt, as Fran outlined. I know it's a very, very small amount of dilution, but wouldn't it be better for your existing shareholders to put some of that cash and balance sheet to work rather than issuing more equity. I guess, just wondering how you think about the structure there. And also how that relates to any other sort of bolt-on opportunities in general across your portfolio, whether you see any other opportunities for that sort of M&A? .

Yes, Matt. Look, I think when we look at it, we've got to also consider what was the Carnaby's Board and team's preference in terms of the transaction as well in that by us offering them scrip they can continue to participate in the upside on the project through taking shares in Evolution. I think the other thing -- and we do try to limit issuing the stock. And this is 1%. I think when you look at it, that is the best use of our scrip at the moment in this transaction. And then as we look at other things going forward, if you look at all of our other acquisitions, we've always used a mix of cash, debt and equity. And we will always do that depending on the size and the scale of it.

And maybe any other opportunities across your portfolio for similar sort of bolt-on acquisitions. Obviously, Ernest Henry has the benefit of latent mill capacity. But yes, how do you see that across your portfolio?

I think if we look across the portfolio, Cowal, we're able to keep that plant filled similarly at Red Lake, Ernest Henry, we've got the land at Corella as well as now looking at Carnaby, Northparkes, I think we've got enough ore bodies there to fill that plant, be it at current state or expand state and Mungari is probably one that's got capacity, but there's not a lot of options right now for us to bring something in that will improved the quality at Mungari.

That's helpful. And then maybe just following up on the sort of capital management plan questions. Obviously, the company has a pretty enviable track record on dividends, and you've increased that further today with an update to the policy. So I do feel a bit like I'm complaining that maybe the view is a bit too cold. But with the cash on the balance sheet, I guess, what made the Board reluctant to consider, I suppose, a broader range there or perhaps a special dividend or something to really sort of accelerate those shareholder returns in the current environment, current metal prices, current outlook?

Yes, Matt, I said over the last 6 months, no matter what capital management plan that Fran and the Board end up with. We're not going to please every shareholder. If we try to please everyone, we're probably going to please no one. I think when you look at $1.4 billion of group cash flow, we're paying out over $830 million of that back to our shareholders. I think that's an incredible rate of return. And then we could have easily gone higher than that, but I think that's a good step from a 50% to 60%. We've always said, and as Fran said just earlier, yes, we're not going to build a lot of cash and we can't control. If the metal prices stay where they are, as I outlined with our guidance, we will make significant cash flows this year. . And if the prices are higher, therefore, the dividend cents per share will be higher for our shareholders. And then in the next 12 months, if they do stay there, Fran has got another good problem of set a new record for dividends and work out how much more to give back. And is that given back through specials, is it given back through buybacks or a higher payout rate? Sorry, we didn't please you.

No. That's a very pleasing outcome. Thanks, Lawrie.

Your next question comes from Daniel Morgan with Barrenjoey.

First question just on Ernest Henry. Obviously, cycling down in production of that and spend stepping up. Is this just for FY '27 or is this sort of the multiyear impact of developing down to get the life extension infrastructure? And just sort of trying to understand the production and spend outlook a bit more at Ernest Henry.

Yes, Dan, it's actually a combination. So as we know from the weather event when we were out of production through the March quarter and where the water ended up was down at the development level. So we've got to catch that up. We've got to put additional ventilation refrigeration. And then we do have the trucking back up to the existing materials handling system. So some of that, as we said, as we get to the second half of the year and we get the ventilation and everything in place and we can therefore lift the productivity. You'll see some of that come back through. And the other thing to note is that in FY '26 and '27 is we're going through some areas in the cave where there is no -- there's waste in with the mineralized ore. We've got to take that with us. So that is obviously displacing ore. Once we get through that zone, you then start to see it come back. So it is a combination of both of those. You'd likely see what we've got this year, we get ventilation back next year. We go a little bit deeper. So production '27 and '28 would be pretty similar, and then you start to get into it where you get Bert, you get back into more ore out of the cave. And hopefully, not long after you get Carnaby coming through. I should be calling it Great Duchess.

And I know it is a small deal, but you've just done a deal on -- with Arizona Gold & Silver. Just trying to -- if you could maybe outline what you're trying to achieve through this investment, both the investment itself and how you've structured it .

Yes. So look, that's a new opportunity that Glen and the team identified. And so the area that where we've picked up with Arizona Gold & Silver, is highly prospective, but historically, it's only been considered for shallow drilling to do leaching operations. But this deposit, as we've seen some deeper drilling is certainly showing some really good grades and grades over an extended area. So that's the reason why we've sort of got interested and invested in this, and it is allowing then Arizona Gold & Silver in their drilling program. So we've farmed into it via just under 10% of the company with some warrants to acquire more of the company. And then certainly, as the program progresses. If it proves up, we've then got the option if we want to make a decision to take out that project or take out a further percentage of it.

[Operator Instructions] Your next question comes from James Redfern with RBC.

Most of my questions have been asked already, but maybe just maybe a question on the AISC guidance, please for FY '27. You mentioned it's based on a copper price of USD 5.72 a pound with spots around $6.60 which would indicate that maybe the AISC is flat year-on-year. Just wondering if you have any sort of sensitivities around AISC in relation to copper prices? And also, what are you seeing in terms of costs inflation in the industry outside of diesel costs? .

Yes. Sure. James, I'll hand to Fran in terms of the cost sensitivities outside of labor and diesel. But if you do look at Slide 14 in our presentation deck that we've released today is the AISC sensitivities. And so the copper price of around AUD 1,000 a tonne, therefore, about $0.30 a pound is worth $90 to $95 per ounce and every 1,000 tonnes of copper is worth about $25 to $30 an ounce. So in short, yes, if you saw the current price -- copper price sustained for the whole year, you're potentially looking at about $190 to $210 an ounce benefit, which would sort of bring you back in towards what we achieved in FY '26 and hence why -- and I do think when you look at the disruption in the copper market at the moment, we're a little bit more optimistic on the copper price and what it could do for our cash flows and AISC. Fran, do you want to touch on the cost drivers?

Yes, sure. Thanks, James. So in terms of cost drivers, obviously, our biggest cost driver being labor at 50%. We are seeing that increase around the 4.5%. And particularly pressure in Western Australia in terms of retention and absenteeism. So we're doing what we can there around employee engagement. Our next biggest part is a cost driver would be maintenance parts. And we're seeing that there's -- between about 3% and 10%, but we're focusing on our maintenance strategies and what we can do in regards to the cost pressures in maintenance. Our next cost base would be electricity at about 9%, but we're pretty much locked in there for long-term contracts and big one focusing on lower costs and lower emissions to supply electricity there. And as you mentioned, diesel, but just remind you that diesel is low for us in terms of only 2% to 3% of our cost base, and that's mainly at Mungari and Cowal. Yes. But other than that, it fits within the envelope that Lawrie quoted to the 4% to 5% and reflected in our guidance.

Your next question comes from David Radclyffe with Global Mining Research.

I thought I'd ask you a similar question to everyone else about really, I guess, the link between capital and the production outlook. Maybe using Red Lake as an example, where we've got lower production going forward, and we've got more capital. So what is the way forward here for say Red Lake. If we take this is one that we don't get as much attention, and it does feel like a little bit, but we're still sort of stuck in the past. Is there any sort of optionality being opened up here from the extra development spend this year? I know you've talked about the tailings upside that maybe just seems still incremental, given that it's still very large, very high-grade resource. And maybe if there isn't sort of a way forward in this one, is it still core to the portfolio?