Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining Half Year 2020 Financial Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Jake Klein, Executive Chairman. Thank you. Please go ahead.

Thanks, Miles. Good morning, everyone. Thank you for joining us. We do appreciate it. I'm joined on the call by Lawrie Conway, CFO and Finance Director; and Glen Masterman, our VP Discovery and Business Development. I'm going to make some brief introductory comments and then hand over to Lawrie to discuss today's half year financial results and our plans for Red Lake. We'll then hand over to Glen, who will speak to the highlights of the annual mineral resource and ore reserve statement we released this morning. So I'm going to start on Slide 3 titled clear and consistent strategy. As almost all of you know, Evolution is a young company. Last November, we turned 8. Over that time, our strategy has remained the same: To relentlessly focus on improving the quality of our portfolio of assets and occupy the space that we know delivers the best returns for our shareholders, being a globally relevant mid-tier gold company. This last 6 months has seen a number of significant positive steps towards being able to improve our portfolio and also grow our production base going forward. Turning to Slide 4. Today, the numbers speak for themselves. Record profits, cash flow and EBITDA and also a doubling of our interim fully franked dividend to $0.07. This is the 14th consecutive dividend paid by Evolution and also our largest to date. The Red Lake acquisition is scheduled to close at the end of March, and we are off to a flying start. With the support of Newmont, we are implementing an interim operating plan and transitioning the assets to a safe and sustainable long-term future. As you will hear from Lawrie later in the presentation, we have a clear strategy and plan to transform this asset into a long-life, low-cost cornerstone asset for Evolution. Drilling at Cowal has increased the underground resource by 77% to 2.5 million ounces. Deposit remains open along strike and at depth, and we currently have 6 drill rigs operating with a very optimistic view of future resource extensions. We expect to declare a maiden underground reserve at Cowal this calendar year, and we are very confident this will allow a significant underground mine to be developed, which will deliver a step change increase to production at this fantastic asset. Since acquiring Cowal in 2015, we have added 6.6 million ounces to the mineral resource, which now stands at 8.6 million ounces. Adding historic production means that the Cowal endowment now exceeds 10 million ounces, and we're of the view that there is still much more to be discovered. We are excited that the first mine life extensions at Ernest Henry below the 1,200 RL level had been declared with 3 new levels included in the reserves. This is ahead of the 18,000 meter drilling program that is currently being carried out at the asset, targeting additional further extensions to both the resource and reserves. I started the December quarterly conference call by saying that our job was to safely and efficiently turn ounces in the ground into dollars in the bank. Today, with the release of our financials and MROR statement, you see evidence of the success we are having in this regard. Turning to Slide 5. As you know, it is not all about what we do, but equally important is how we do it. We recognize and accept that sustainability performance is becoming an increasing focus of shareholders. It is one of the reasons we have elevated the general manager sustainability role to our leadership team, and we are delighted that Fiona Murfitt has joined us in this role. On Slide 5, we detail our sustainability principles that clearly define how we operate our business. Slide 6 reflects the highlight we have achieved in this area over the last 6 months. Importantly, we have been included in the Dow Jones Sustainability Index Australia, one of only 2 gold companies that qualified for inclusion. Our graduate program is one of the initiatives I'm most proud of at Evolution. We are training and developing some of the best and brightest young talent to undoubtedly be future leaders of our industry. We seem to live in a country of fire and droughts. And in the last few days, it's turned to flood. We do hope that our donation of $3 million to fire and drought relief will go some way in supporting the very many rural Australians that have been affected by these devastating events. Turning to Slide 7. Whilst we are pleased that there has been some drought relief through the recent heavy rainfall and the Wyangala Dam has started to rise, we are determined to stay committed to our focus on environmental stewardship and water efficiency, particularly at Cowal by reducing our dependence on surface water. This is currently less than 20% of our daily requirements at that mine site and with the further initiatives we are putting in place from increasing pumping capacity to increasing our recycling of water to identifying and commissioning additional saline bores, we are on a path that we believe will, in time, make us self-sufficient and eliminates our need to draw surface water. With that, I will hand over to Lawrie.

Thank you, Jake, and good morning, everyone. It's a pleasure to be able to present the financial results for the 6 months to December 2019. Slide 8 highlights the financial performance. While we've had some mixed performance from a couple of our operations which have adversely impacted production or costs, the fundamentals of the business are very solid, and we are well placed to continue to deliver superior returns for our shareholders. The underlying financials are very robust in delivering expanding margins. We achieved a record profit after tax, both in statutory and underlying terms, at $147 million and $149 million, respectively. These were up 62% compared to the prior corresponding period, while our operating cash margin, EBITDA was up 23% to over $440 million, which was also a record. On a per share basis, we saw our earnings increase to $0.087. Importantly, these profit and margin results are flowing through to cash in the bank, which further strengthens our position and allows us to reward shareholders. Despite some operational missteps, our operations are sustaining strong cash generation with operating cash flow of $512 million and net cash flow of $352 million after capital investment of $160 million. Cash flow was up 218% to a record $242 million. On the back of this continued strong cash flow and the outlook for the business, we have doubled our interim dividend to $0.07 per share fully franked. At the same time, we moved to a debt-free position. Turning to Slide 9 to briefly cover off on the main drivers to the change in underlying profit. Total revenue was up 19% with the achieved gold price, up 24%, offset by 2% lower gold sold. The higher metal prices, in turn, increased our royalty costs by $5.2 million or 17%. Operating costs were in line with expectations, and I'll cover off on the drivers to these changes in the next slide. At Cowal and Mt Rawdon, stockpiles were drawn down, which reduced profit by $27 million. This is predominantly a noncash charge. Cowal will continue to draw down stockpiles while the Stage H cutback progresses. And at Mt Rawdon, they should process ore from the pit and start building up stockpiles again from the June quarter. Since we have taken the decision not to proceed with Tennant Creek project, we expensed $16.4 million. This also was a noncash item. Moving to Slide 10 and the details of the changes in the operating costs. Mine operating costs increased from $372 million to $386 million. This equates to approximately a 4% increase and just under 3% when royalties are excluded. The pie chart on the right shows the key cost drivers. We've shown this previously, and the breakdown of our cost has not changed substantially. The top 7 categories make up 80% of our total costs, and this is where we place most of our focus. When you break down the movement in costs for the period, labor and royalties make up all of the change at $15.7 million, while the other costs effectively offset each other. As per our guidance in August 2019, our cost per employee increased within the 3.5% to 4.5% range. Meanwhile, our contract labor costs moved up at a lower rate, but we did have increased activity at some sites. Our supply teams continue to focus on cost reductions and efficiencies with opportunities still existing in a number of consumables. Turning to Slide 11. The group and site EBITDA or operating cash margins are high and being maintained over an extended period. Our longest life assets are generating the highest margins of 60% to 70% at Cowal and Ernest Henry. The margins at Mt Carlton and Mt Rawdon are expected to improve in the second half of the year. At the group level, we have a 50% margin, with expected improvements at Mt Carlton and Mt Rawdon as well as the current high spot gold price, we should see this margin go higher in the second half of the year. Lastly, the strong cash generation by the operations is being reflected by the portion of the asset repaid. We have nearly 3 assets fully repaid, while Cowal has repaid almost 80%, even considering the heavy capital investment over the last 18 months to 2 years. Ernest Henry has paid back 27% in the last 12 months. Turning to Slide 12 and cash flow. This, to me, remains one of the most important aspects of the business, making cash and putting it in the bank so that we have options when considering execution of our strategy. We delivered again over the last 6 months with a record group cash flow of $242 million. This is a high-margin cash flow at 27% of revenue, and the equivalent of $640 per ounce sold going to the bank balance. This is being driven by the mine cash flow. And on a net cash flow basis, they are delivering $930 for every ounce sold. At the same time, we're investing in future production with $113 million of major projects at the operations, while our $46 million investment in discovery ultimately underpins our growth in resources and reserves. With the spot gold price being $200 to $250 an ounce higher than what we achieved in the last 6 months, there is further upside to the cash generation in the second half of the year. Moving to Slide 13. This cash generation, the strength of the balance sheet and outlook for the business has allowed us to continue with our dividend policy of paying a dividend based on our group cash flow. This has resulted in a doubling of our interim dividend to $0.07 per share fully franked. On key metrics, this dividend rates very highly with the payout equivalent to 13% of revenue, over 80% of net profit and a yield of 3.6%. The dividend will be paid on the 27th of March. I'll now change topic and talk a bit about Red Lake and our plans for the asset, this starts on Slide 14. In November, we announced the acquisition of Red Lake and expect to complete the transaction at the end of the March quarter. We will fund the upfront purchase price of USD 375 million via a fully committed 5-year term loan with our syndicate of banks. We have not been waiting for the transaction to close before moving ahead with transforming it into a cornerstone asset. Rather, we have mobilized an integration team to ensure we are ready to take control on day 1. At the same time, we have assembled a team which has developed an interim plan for now through until the end of June as well as developing an updated life of mine plan so we'll be able to have the red lake operation producing in excess of 200,000 ounces per annum at less than USD 1,000 per ounce. Just to note that the mineral resources and ore reserves on this slide were not included in our resources and reserves update today. Slide 15 summarizes some of the actions being implemented. In the mining area, we are moving to mining higher productivity zones as opposed to inefficient, tantamount mining in multiple areas. We are increasing development to 1,000 meters per month. This commenced with the start of February with good progress to date. The mine has excess fixed and mobile assets, which will be commissioned progressively over the coming months to reduce costs and improve efficiencies. In the processing area, we are targeting utilization of one mill and that is the Campbell Mill. To achieve this, we will undertake major maintenance in the coming months to improve the reliability of the Campbell Mill and then place the Red Lake Mill on care and maintenance. The Red Lake Mill will be available for batch treating as required. But right now, there's not sufficient ore available from the underground to justify operating both mills. We plan to upgrade the oxygen plant and thickener feedwell to increase autoclave throughput and to reduce cost of consumables. One thing that has been very evident is that Red Lake has continued a workforce based on a 40-gram ore body while producing at 7 to 10 grams. The workforce must be restructured and reduced. We intend to do this in a respectful and timely manner. We are still finalizing the restructure. And once this is done, we'll fully communicate it with the workforce. However, by the time of completing the transaction, we will be in a position to articulate the restructure plan. With that, I'll hand it over to Glen.

Thank you, Lawrie, and good morning. Turning now to Slide 16. Drilling at Red Lake commenced under the Evolution operating plan in the first week of February. Five rigs are currently active underground with drilling focused on the lower Red Lake and Cochenour areas of the mine. Resource definition drilling is prioritizing extensions of ore bodies that will support the operating strategy. Discovery drilling will focus on identifying more continuous ore bodies with potential for large resource additions. We expect to complete 40,000 to 45,000 meters of drilling up until the end of June. And our plans are continuing to take shape for FY '21, which, at this stage, are pointing towards a combined res def and discovery program, in the range of AUD 20 million to AUD 25 million for over 100,000 meters of drilling. Early results from drilling completed in the Cochenour area of the mine are very pleasingly confirming our views on the opportunity to discover and add more high-grade resources to the future mining inventory at Red Lake. Turning to Slide 17. Key highlights in this morning's annual mineral resources and ore reserve statement are the very strong growth of the underground mineral resource at Cowal, the addition of 3 new sublevels at Ernest Henry, along with our expectation of very good things to come in resources and reserves at Red Lake. Group mineral resources at the end of the 2019 calendar year are 15.2 million ounces of gold and 934,000 tonnes of copper. Group ore reserves are 6.6 million ounces of gold and 532,000 tonnes of copper. Firstly, at Cowal, mineral resources grew 1.2 million ounces to 8.6 million ounces, inclusive of 3.6 million ounces of reserves. Growth was driven by significant additions in the GRE46 underground resource, which increased 1.1 million ounces to 2.5 million ounces. Almost 700,000 ounces were added by our drilling programs over the last 12 months. The balance of growth at GRE46 was achieved by moving to a higher gold price assumption of AUD 2,000 per ounce, enabling optimization of our MSO outlines to cut-off grade of 1.5 grams per tonne. Approximately 660,000 ounces have been upgraded to indicated classification at an average grade of 3 grams per tonne. Application of a 3-gram per tonne cut-off rate raises the average resource grade to 4.5 grams per tonne for over 1 million ounces of gold. The resource base will inform the underground pre-feasibility study, which commenced in the December 2019 quarter. Our aggressive underground infill program is continuing with the aim of converting more inferred resource to indicated classification. We expect to continue growing the resource and to be able to deliver a maiden ore reserve in excess of 1 million ounces upon completion of the pre-feasibility study during the 2020 calendar year. Moving to Ernest Henry on Slide 18. The addition of 3 new sublevels to reserves below the 1,200 meter RL has extended mine life. The commencement of drilling in the December 2019 quarter to improve the geologic understanding [ and ] the resource beneath the 1,200 meter RL will continue this year in 2020, with 18,000 meters to upgrade resources and expand reserves. Evolution's interest moves to 49% in all gold, copper and silver below the 1,200 meter RL. Ernest Henry finished the 2019 calendar year with mineral resources of 1.3 million ounces gold and 356,000 tonnes of copper, including ore reserves of 0.4 -- 0.7 million ounces gold and 150,000 tonnes of copper. With that, I'll hand over to Jake.

Thanks, Glen and Lawrie. So just turning to Slide 19, which is the summary. Really, I think those -- it says it all. As Lawrie articulated, we're delivering sector-leading financial returns and remain one of the lowest-cost gold producers in the world. We are excited by the pending acquisition of the Red Lake operation and are very optimistic about the early stages of what we're seeing over there. And of course, the drill bit is delivering, and it's delivering at our most important, highest margin assets at Ernest Henry and Cowal particularly. I want to finish off before opening the lines to questions by just calling out our most valuable asset in this company, and that is our people. The very many talented, hard-working people we have in this company whose -- who without -- whose energy, passion and commitment, none of this would have been possible. Miles, can you please open the lines for questions?

[Operator Instructions] And your first question today comes from the line of Daniel Morgan from UBS.

Jake and team, just a question on the underground resource at Cowal. I understand to do this work, you need to cut off what's included or not. You have had -- in your latest quarterly results, you had a continuation of good, high-grade hits that were outside the old [ resource shell ]. I just want to hear about what you've -- where you had to cut off what was included in your current estimation and [ weather ] hits that you've had recently [ about up in your resource shell ] as well?

Daniel, that's definitely one for Glen to answer.

Thanks, Jake. Daniel, so our cut-off date for data included in the resource estimation informing this result was at the end of November in -- over our last calendar year. So drilling that we have disclosed in the last couple of weeks in our December quarter end was not included in that update. But we are expecting to run 2 more updates over the next 6 months that will inform the PFS, final PFS and ultimately a reserve. So those results that we were describing a couple of weeks ago will be included in the next update.

And then just an update on Mt Carlton. Obviously, you've put out the latest on the resource and reserves. And just wondering how you're planning to mine and blend the stockpiles because you have declared a stockpile reserve now, which you hadn't last year. Just wondering how it's going to be mined and blended over the next few years. Do we have 2 to 3 years of very high-grade production and then it tails off, obviously, as you put through the stockpiles? Or do you blend the mine operation with the stockpiles on a more even basis?

And another one for Glen. I just wanted to add one more thing to his response on the Cowal drilling. Having sat through a Board presentation yesterday on the Cowal drilling, the answer to your -- last part of the question was, are we getting drill result outside of the resource envelope? And that is definitely the case. Glen?

Thanks, Jake. So referring to Mt Carlton, the stockpiles that have been put out there this morning consist mainly of around about -- it's 80,000 to 90,000 ounces in the Tailings Storage Facility, which will be processed towards the end of the mine life. What we're doing in the interim as well, Daniel, is we are about 40% of the way through a resource definition drilling program, at which we have very little assay results at this point but that drilling is targeting the underground resource in order to fill in a number of gaps in the model that are still evident, and in addition to that, to grow it. So what we're expecting to do is to be able to sort of bring the resource and the reserves upwards again in the underground. But -- so stay tuned to those results. And lastly, what I'd also just sort of share with you is that we do expect to be commencing drilling in the June quarter at our Crush Creek project, which is located 30 kilometers to the southeast of Mt Carlton. Crush Creek is a low-sulphidation epithermal target. It has a mineral inventory, which does not qualify by our resource standards at this point in time. So the drilling program is targeting to confirm the historic drilling and then extend some of those areas in the directions which were open -- are open. And with the objective of being able to be in a position to extend the mine life at Mt Carlton with resource and reserve from Crush Creek.

Thanks, Dan.

Your next question comes from Matthew Frydman from Goldman Sachs.

Firstly, I guess, just a question on the MROR update at Ernest Henry, specifically. You called out the fact that you've added 3 sub levels there. Is it fair to think about that as around 1 year of additional production for that mine? I'm just wondering how much additional drilling below the 1,200 has been done to yield that result? It looks like it's just the 10 holes from the last quarter, if I'm sort of reading that correctly. And then, I guess, the extension of that is, it sounds like you're doing a great deal more than that for the remainder of this coming year. But is it fair to think of the additional drilling that you're doing as mostly targeting extension versus, obviously, the early benefit you've had from resource conversion?

Another one for Glen, I think.

Matthew, no problem. Thanks, Jake. Look, the -- Matthew, the -- I guess the addition of the 3 new sublevels were brought in early. In fact, the -- and the reason we were able to do that is that they have a sufficient density of drilling below the 1,200 to [ call it for that ] resource then to convert to reserves. So that's the reason why that's been brought in early. Approximately 4,000 meters has been completed since the commencement of drilling last quarter and then another 18,000 meters to come this year. The objectives of that program will be to continue infilling on the resource below those 3 new sublevels, along with some deeper step-out drilling to expand that resource.

And just to add to that, and it does add approximately another year to the mine life. And there's potentially another 5 sublevels, which could be mined without significant infrastructure development. It could be [ trucked ] in the view of Glencore to the crusher. So that would add between 4 and 5 years of reserve mine life, and then there's this resource drilling, which is going materially deeper than that. But will require capital -- significant capital to develop it. And the results will inform how to develop that.

Sure. Secondly, on Red Lake, maybe one for Lawrie to address. But just wondering if you guys can provide a little bit more detail on some of those, I guess, early productivity targets that you've set during this transition period. Particularly, I'm looking at some of the things you've called out in mining. You've talked about higher productivity zones, wondering exactly what that means. Does that mean wider development headings but potentially lower grade? Or does that just mean more productive areas of the mine that are, I guess, already quite developed? And then secondly, wondering what's driving the increase in development rates, what the plan has been since that program started at February. Is that around redesigning your development, again, to be wider and more productive? Or is it about changing the amount of resources that have been allocated to that task versus the other tasks in the mining process? I guess just wondering what the drivers are behind some of those productivity improvements.