Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Evolution Mining FY '21 Half Year Results Financial Call. [Operator Instructions] I would now like to hand the conference over to Mr. Jake Klein, Executive Chair. Please go ahead.

Thanks, Melanie. Good morning, everyone. Thanks for joining us. We really do appreciate it. This morning on the call, I'm joined by Lawrie Conway, our Finance Director and CFO; Glen Masterman, VP, Discovery and Business Development, both of whom will be talking to the presentation. Bob Fulker, our COO, is also available here to answer any questions. By any measure, the releases we have made on the ASX today are outstanding. I have the privilege of introducing them to you. But before launching into details about the very measurable things like profit, cash flow, resources and reserves, I want you to know that the most valuable asset this company has, by far, is not measurable and is our people and our culture. We are fortunate to have a group of passionate, hard-working, talented people who together make Evolution a special company, who have made these exceptional announcements today possible. Our culture revolves around the characteristics of humility, respect, belief and empowerment. Continuing to develop this culture is core to Evolution's ongoing future success. Turning to the announcements and starting on Slide 3 of our presentation. At Evolution, we seek to differentiate ourselves by focusing on delivering the best long-term sustainable returns via both capital growth and dividends. Our strategy recognizes that we are investing our shareholders' capital. And for every dollar we spend, we need to achieve an appropriate risk-weighted return. If we cannot be confident of delivering this, we should not be making the investments. We predominantly focus on bottom line metrics rather than top line production growth because it is the bottom line where shareholder returns are created, not the top line. So it is with pride that today, we report record statutory net and underlying profit for the 6 months ended 31 December 2020. These results have allowed us to declare a dividend of $0.07 per share fully franked, our 16th consecutive dividend. This brings our cumulative amount of cash return to shareholders via dividends to $851 million over the past 8 years. Our strategy is centered around our ambition to be the premier global mid-tier gold miner operating 6 to 8 high-quality assets in Tier 1 jurisdictions. At the core of our DNA is a belief that quality and margin matters most. Not all resources and reserves are created equal, and that is behind our relentless pursuit of continually seeking to upgrade our portfolio of assets. In the past 5 years, we have acquired 4 assets and sold 3. Focusing on quality also drives our decision to estimate our resources and reserves using a very conservative gold price of AUD 1,450 per ounce for ore reserves and AUD 2,000 per ounce for mineral resources. Today's announcement of a 74% year-on-year increase in resources to 26.4 million ounces and a 49% year-on-year increase in ore reserves to almost 10 million ounces is a reflection of the strategy of upgrading the quality of our portfolio. Importantly, the increases in our resources and reserves are coming from our highest quality assets. We are incredibly pleased to announce today the first JORC reserve at Red Lake of almost 3 million ounces. There is the strong potential for further reserve growth in Discovery, and we continue to be excited about our future at Red Lake. Reflecting this, the Board has approved the development of a new decline into the Upper Campbell area of the mine, which will allow access to the 1.85 million ounces of reserves grading 7.4 grams per tonne. We anticipate the decline will allow in excess of 1 million tonnes of ore to be mined annually from these new mining fronts, which are separate to and independent of the current lower levels of the mine which are constrained by the shaft infrastructure. At Cowal, the mineral resource base is now 9.7 million ounces and reserves of 4.6 million ounces. The underground reserve has grown to an excess of 1 million ounces, and there is good potential for more. For those of you who may recall our acquisition of Cowal in 2015, we acquired the mine with 1.6 million ounces in reserves, and it was scheduled to stop mining in 2020 and process stockpiles until closing in 2024. With investment and exploration success to date, we have produced 1.7 million ounces of low-cost gold and, notwithstanding this depletion today, have a reserve base of 4.6 million ounces. Cowal and Red Lake now have a reserve base that places each of them in the top 5 gold deposits in Australia and Canada, respectively. At Ernest Henry, the drilling program completed in 2020 confirmed that the ore body extends below the 1,200 level at similar copper and gold grades and remains open. A significantly increased budget for drilling is approved and scheduled for 2021 with the aim of allowing these levels to be included in future resources and reserves. Evolution has a 49% interest in all copper, gold and silver added to reserves below this level. This asset has and will continue to be a fantastic one for Evolution. Since Evolution was formed almost 10 years ago in 2011, we have grown our resource base by 283% to 26.4 million ounces and our reserve base by 186% to almost 10 million ounces, after taking into account depletion of 6 million ounces. On Slide 4, we highlight a number of achievements we have delivered in the important area of sustainability. We are fortunate that we continue to navigate through the COVID pandemic successfully. However, we remain very conscious of the impact that this is having and have sought to assist and support our host communities with over $2 million of support. With that, I will hand over to Lawrie to take you through the financial results.

Thank you, Jake, and good morning, everyone. It's a pleasure to present financial results for the half year to December 2020. I echo Jake's comments that the results for the first half are outstanding with several financial records achieved. And more importantly, we are banking cash and returning more than half of it to shareholders in a period of high metal prices. Even with the Australian spot gold price being $160 per ounce lower than what we achieved in the first half, our margins and cash generation position remains strong. On top of this, as you will see in a couple of slides, our cost control efforts continue with operating costs only increasing by 1% over the prior period. We will maintain our discipline and priority on margin. Turning to Slide 5, which summarizes our financial performance. Our profit, both statutory and underlying, were records at $229 million and $234 million, respectively. This equates to increases of 55% and 57% and an earnings per share of $0.134. I will cover off the drivers for the increased profit on the next slide. Our operating cash margin is very healthy and increased by 6% to 52%. Our investment in sustaining capital, major projects in Discovery saw our all-in cost margin increase by 30% to $852 per ounce. The 30% increase is against an 8% lower sales and only a 14% increase in the gold price. This reinforces our focus on margin over ounces. At today's spot gold price, this margin would be around $700 per ounce, although the 9-year high copper price will buffer some of this impact if it is maintained for the remainder of the financial year. Group cash flow was down 10%, but this was effectively due to a negative $25 million working capital movement between the 2 periods. Moving to Slide 6, where the drivers to the underlying profit are shown. The sale of Cracow and acquisition of Red Lake essentially netted off each other with a $4.5 million reduction to profit. Overall revenue was up 9%, increasing profit by $21 million net of Red Lake and Cracow. Our focus on cost control remains effective with our operating costs essentially in line with the prior period. Noncash items of inventory movement and D&A were favorable in the period. They were driven mainly by different stockpile utilization and grades at Cowal between the 2 periods and lower depreciation rates as a result of increased mine lives linked to our MROR. On Slide 7, which covers our cash margins and cash flows. Our EBITDA margin is sector-leading at 52%, which was an increase of 6% over the prior period. On a like-for-like basis, where Red Lake was not in the portfolio in 2020, the 2021 margin would have been 56%. Red Lake has started well with a good base of 34%, and we expect this to increase materially as the transformation programs are completed. Our long-life assets have the highest margins at 60% to 73%. After investing $173 million across the business, our net mine cash flow margin is very strong at 36%, while at a group level, the cash is hitting the bank at a rate of 22% of total revenue or $625 for every ounce that we've sold. Even at spot gold prices, this margin would be still a very healthy 17%. Turning to Slide 8 and dividends. On the back of the cash flows generated in the first half and the outlook for the business, we have declared a fully franked interim dividend of $0.07 per share. This will deliver a return of around $120 million to shareholders and is equivalent to a payout rate of 55% of our first half cash flows or 12% of revenue. It represents a dividend yield of around 3.5%. We continue to manage and balance our dividend level and franking credit position to deliver fully franked dividends. We see no change to our policy or payout rates in the near term. Lastly, Slide 9 demonstrates that any changes we make to the portfolio are aimed at improving the quality. This is either through acquisition or divestment and underpins our strategy. Our track record is shown in recent transactions. A fundamental part of M&A is making a return on investment, which means all assets repaying their capital and generating an adequate rate of return. Ernest Henry has repaid all of their investment, while Cowal will reach 100% in this quarter. They have repaid their investment in a short 4 to 5.5 years. Meanwhile, Mungari's turnaround in the last couple of years has been exceptional. In fact, in the last 12 months alone, it has repaid 36% of its investment. I would suggest that this is the highest return in the Kalgoorlie region. These 3 assets have delivered an average of 15% to 25% return each and every year that we have owned them, with Ernest Henry the standout at 25%. It's only early days for Red Lake in the portfolio. But with the transformation plan tracking ahead of schedule and the significant increases in reserves, we expect the rate of payback to improve in the coming years. We've also demonstrated that when we sell assets, not only do we improve the quality of the portfolio, but we sell well with royalty or contingent payment mechanisms. We have received just under $5 million from Pajingo and Edna May to date, and those structures are now delivering payments every 6 months. In conclusion, the results for the first half of the year sets us up very well to finish FY '21 in an even stronger financial position. With that, I'll now hand you over to Glen.

Thank you, Lawrie, and good morning. It gives me great pleasure to explain what we have been able to accomplish in 2020 to grow our mineral resources and ore reserves. But before I do, I want to acknowledge the hard work and effort by all of our people involved in delivering the excellent results I'm about to describe. I'd like to direct you to Slide 10 of this morning's presentation, which shows that our mineral resources increased 74% to 26.4 million ounces with the addition of 11.2 million ounces after accounting for depletion. Or in other words, resources grew by a total of 12.1 million ounces exclusive of depletion. Reserves increased 49% to 9.9 million ounces, up by 3.2 million ounces inclusive of depletion or 4.2 million ounces before depletion. The results we've released this morning are illustrative of the strong platform we've built that will allow us to continue converting our large resource base and extending known ore bodies beyond existing resource boundaries. Pleasingly, our MROR growth was delivered by our most important assets, which validates our strategy of improving portfolio quality by acquiring assets in well-endowed geological terrains where we can significantly improve and extend mine life. We continue to shape and position our portfolio to deliver future resource and reserve growth. We have the technical teams and budgets in place to continue improving knowledge of our ore bodies with the potential to make discoveries across our portfolio of high-quality brownfields and greenfields targets. I would like to kick off MROR highlights from our operating assets with developments at Cowal, which is shown on Slide 11. We have increased resources to almost 10 million ounces and reserves to 4.6 million ounces. Exclusive of depletion, resource growth at Cowal exceeded 1.7 million ounces as a result of drilling additions to the underground and open pit resources. The illustration on Slide 11 is an oblique view of the operation looking across from east to west. The gray shapes are the mineral resource models with the red shapes representing reserves. Pleasingly, the underground and open pit resources remain open along strike and at depth in the directions of the arrows and provide exciting future extensional drilling targets. Our journey at Cowal over the last 3 years has been a very rewarding and gratifying one to be part of. We have built the resource inventory commencing at the Regal end of GRE46, where we declared a maiden underground resource of 600,000 ounces at the end of 2017. With over 120,000 meters of surface and underground drilling in the 3 years since, we have grown the resource to over 3 million ounces and discovered the high-grade Dalwhinnie mineralization, which has driven some of the more spectacular drill intercepts at Cowal in recent years. We have also converted over 1 million ounces of the large resource base to an underground reserve at GRE46 in that time. Development of the Galway decline will commence during the current quarter with further underground drilling due to commence in the June quarter. The short-term drilling focus will be infilling the resource, where recent grade control drilling simulations have demonstrated positive grade reconciliation to the resource model in areas corresponding with early years of the production schedule. Turning now to Ernest Henry on Slide 12. Glencore completed over 24,000 meters of drilling in the 2020 calendar year. The drill program consisted of both expansion and infill drilling. Further drilling is programmed in 2021 with new data to inform a concept study of the extension opportunity below the 1,200-meter RL during the current half year. A prefeasibility study will possibly commence late in 2021. Red Lake is a clear highlight of our year-end 2020 MROR statement. We have declared our first ore reserve of 2.9 million ounces, which is reported in accordance with the JORC code. I refer you to Slide 13 of the presentation, which shows the distribution of the 11 million-ounce resource shown in red shapes that we announced following our model update last year in August. The reserve shapes are colored in blue with over half the reserve located in the Upper Campbell mine, which extends from surface to 1,200 meters deep. The big opportunity at Red Lake is to continue converting the large resource base that will position Evolution to bring forward production in our operating plan to achieve a production target in the range of 300,000 to 500,000 ounces per year. With this in mind, I turn your attention to Slide 14 and our ASX announcement this morning, where we are pleased to advise that we received approval from the Board to advance development of a surface decline. We have named the decline the Campbell Young Dickenson, which will provide near-term access to the Upper Campbell mine, hosting reserves of 1.85 million ounces grading 7.4 grams per tonne. Regulatory approval is already in place for the CYD decline, which we expect will drive in excess of 1 million additional ore tonnes per annum, independent of our shaft hoisting infrastructure. We estimate the capital investment to be in the range of AUD 60 million to AUD 70 million over a 3-year period. Two new mining fronts will be established, with one to access production in the Upper Campbell and the other to eventually access the 430,000-ounce resource at HG Young. Box cut development is due to commence this quarter with first ore from Upper Campbell anticipated by the June 2022 quarter. I will now pass back to Jake, who will take you through an update of the Red Lake transformation plan.

Thanks, Glen. This significant gold endowment we have announced today makes us very confident about Red Lake being a core long-life, low-cost asset in our portfolio. When we acquired Red Lake a little over 10 months ago, we announced a stage 1 transformation program with the objective of delivering annual production of 200,000 ounces at an all-in sustaining cost of less than USD 1,000 an ounce within 3 years. I'm really pleased to advise that the stage 1 transformation is tracking ahead of schedule and on Slide 15, we have outlined some of the substantive changes that have been made. We have already discussed in detail the significant resource and reserve base that's been defined. We also identified the lack of mining inventory as a key bottleneck to production. So we set about both reducing the number of mining horizons and also focusing on increasing the amount of development meters so as to build some mining stocks. This has paid off, and we now intend to restart the Red Lake mill before the end of this quarter to process ore, as the Campbell mill is already at full capacity. We also made an early decision to invest in the reliability of the Campbell mill, and this mill is now operating at 97% utilization. Simplification has been a key theme to our first phase of the transformation. I mentioned reducing the number of mining fronts. At the same time, we have decommissioned 70 pieces of underground equipment. We are automating 2 of the shafts, have rightsized the workforce with a 26% reduction and also introduced a performance-based bonus program that has proved to be very successful across our other sites. There's lots of work ahead of us at Red Lake, but I am confident that we are well on our way to restoring the operation to being one of Canada's premier gold mines. Melanie, with that, can you please open the lines to questions?

[Operator Instructions] Your first question comes from Nick Herbert from Crédit Suisse.

Jake, Lawrie and Glen, good to see the Cowal reserve growth. On Red Lake, can you talk through the plan for additional resource conversion? And with regard to the Upper Campbell decline, beyond the ore access, that 1 million tonnes per annum you talked to, can you also discuss what that does for your drilling program? How much is the resource in that zone that's not currently in reserve? And then secondly, just on mill expansions or the study that's ongoing there. Will that be made on the reserve that you've come out with today? Or are you going to be factoring some additional growth expectations?

Thanks, Nick. I'm going to hand over to Glen, who can answer the question on the resources. And then Bob has been here waiting patiently for a question. I can answer the question on mill expansions.

Thanks, Jake. Nick, on future resource conversion, particularly in the Upper Campbell area of the mine, one of the things that we've done with the resource that we've declared this morning is applied very conservative modifying factors to that reserve. And the reason for doing that is because it's going to be a new area that we access for mining, where we don't have previous experience, along with the fact that this reserve is positioned adjacent to sort of older areas of mining. So we need to be rather cautious with our approach to accessing the ore bodies in these areas. What I expect -- as we start to commence production in the Upper Campbell and under -- our ore body knowledge continues to develop, I expect we'll be able to be more optimistic with our modifying factors. And that's going to enable us then to convert more of that resource in that area to reserve. The drilling is pretty thorough in that area. So we're not expecting to do a whole lot more drilling. It's pretty densely drilled at the moment. So we believe we have the data in place. It's more about sort of mining performance and how we deal with access as we get into the Upper Campbell. Bob, did you want to talk to the expansion?

Thanks, Nick. On the mill, the first goal that we have is to get that 200,000 ounces, and that's using the installed capacity that we currently have. It's around 1.1 million to 1.3 million tonnes of capacity in the 2 current mills. The study that we've got going on is actually to see how do we optimize the processing path into the future and how do we actually, as Glen has been talking about, use more of that resource and how to get more converted into reserve in the future and really lift that up. But that will be at -- in the back end of this year.

Nick, there's probably just one thing worth adding is that the HG Young area currently is not in reserves, and this decline has the capacity to reach that as well.

Your next question comes from Daniel Morgan from UBS.

Sorry, I was on mute. Just looking at your aspirational target of 300,000 to 500,000 ounces at Red Lake and looking at the reserve grades today and particularly the Upper Campbell, it would appear to me that you will need a mill expansion or perhaps a new mill will be needed. Can you just provide your perspectives on that question or challenge?

Yes. I think you're right, Dan. And we are going through some studies at the moment as to whether it's better to expand our mills or to build a new mill. There's actually a study occurring at the moment. So during this calendar year, we expect to come up with a solution to that issue as to how to best optimally increase the throughput rates.

And your concept study is -- if memory serves us out, is due out later this year. So that will be part of that scope. Can you just broadly talk about the scope of what will be in that study and what we will learn in calibrating the pathway to 300,000 to 500,000?

The big one there, Danny, it's Bob speaking, sorry, is the actual mill size and fixing the -- or setting the mill size to actually optimally be able to process the ore. The decline gives us access to a totally different mining front. We have to put that into the equation for the scoping study. We still have the 2 hoisting shafts, so I have to put that into it. As Jake just said, the decline actually gives us access also to HG Young. So that's also a possibility of trucking it to the surface, which is separate to the underground via the shaft. So it actually de-constrains all that. So the scoping study is looking at all that to try and determine what is the most optimum processing and processing path and rate.

And just the last question I had was, can you just remind us or perhaps give us an update on your latest thoughts on what the shaft haulage realistic capacity, could be 1 million tonnes per annum?

I'll answer that poorly. So just -- I'm going to excuse myself before I finish the answer. Look, I think we can get the 1 million to 1.1 million quite easily out of the shafts that we got at the moment. I don't think we've optimized the actual shafts, Dan. It's been running okay. We've got other things that we're working on first. That is in the plan to look at. We are automating the shafts, and that will help in the optimization. But it's down the track a little bit to truly try and test those shafts to see what the actual capacity is.

Our next question comes from Levi Spry from JPMorgan.

So just following on from the same sort of questions at Red Lake. So I think you're telling us from the June quarter '22, you'll have haulage capacity of plus 2 million tonnes per annum but milling capacity of that 1.1 million to 1.2 million, and that's what the study will give us the answers on. Is that right?

Levi, that's well summarized.

Okay. So okay, looking forward to that study. Question for Lawrie, D&A. The D&A looks -- I normally ask about accounting, but D&A looks a little bit higher at Red Lake. Can you just talk us through that maybe half-on-half and what to expect in '22?

Yes. So the -- for that, the half -- first half was pre getting the initial reserves. So that will drive a lot of the D&A. And so what we'll have to do in the second half of this year in line with the new reserves, we'll look at the updated life of mine plan that the team will finish in May, June, and that will give us the insights into next year. So I would expect the second half of the year will be lower than the first half in FY '21. And then in FY '22, we'll update in -- with our guidance once we've seen the updated life of mine plans. So we'll update them in May, June.

Yes. Okay. And can I just confirm the timing on a couple of your studies, the Cowal underground and also Mungari and the Phoenix ground?

Sure. So the Cowal underground, due to be released, the feasibility study, mid this year. The approval is the factor that will sort of determine the rate determining factor. We're still confident, given that the public hearing process is completed. There was overwhelming support for the project that will get momentum within the government departments of New South Wales to get approval. So we're really ready to go pretty much as soon as we get those approvals.

Yes. Great. And just Mungari, the update there on the sort of milling exploration?

Third quarter this year, third calendar quarter, the September quarter.

Your next question comes from Sophie Spartalis from Bank of America.

I've got a few questions. Just in terms of CapEx going forward, I appreciate you've got a lot going on and subject to a lot of studies. But can you just give us a sense of sort of the expected CapEx rate we can expect over the next couple of years?

Yes. That's a good question for Lawrie, who's got his -- the keys firmly in his drawer locked up to the bolt.

Yes. Sophie, look, I think FY '21 and FY '22 are going to be fairly similar capital spends. And what we'll see there is as Stage H winds down, IWL is fairly consistent at Cowal, and then the underground comes into play there. We would see that the Red Lake will -- between the transformation this year, then going in now to the CYD decline would sort of start to offset each of that to see similar capital. When you look at Mt Carlton, Mt Rawdon, they're pretty well consistent capital spend profiles over the next few years, and Mungari will be determined based on the outcomes of the study that's underway now. Through the next few months, we'll get a bit of a feel for the capital. That would be the only real change at Mungari. So -- and then Ernest Henry's fairly consistent around that $15 million per year. So as I said, this year, next year, fairly similar. No change to our 3-year outlook that we had at the Investor Day other than a little bit, as I said, more capital possibly required at Red Lake once these studies on the processing capacity are completed.

Okay. That's great. And then probably to Glen next, just in terms of the sensitivity to gold price for your reserve and resource modeling. You pride yourself that you use a very conservative gold price of that $1,450. Do you do any analysis or do you understand how sensitivity is at spot pricing?

Well, I'll take that first, Sophie. It's Glen. It's -- look, we do sensitivity analysis across the full range of price assumptions from our reserve up to our resource and really to understand the opportunities that we do have in our pits and our undergrounds. Bob, do you want to add anything more?

Just we do that when we're doing the reserve calculation and the draw for the economic test as well, Sophie. So that's where that sort of comes in and really see if that's all good. Yes, does that answer the question? Or...

Yes. Look, that's fine. I just wanted to understand at different price points, what's the leverage to gold pricing, that's all, on your reserve resource?

Well, I think the best way to answer that is that at a $1,450 price, our reserve is at 10 million ounces, and the resources are constrained at $2,000 an ounce and 26 million ounces.

Okay. Okay. And then just in terms of exploration assets, you bought 4.5 million during the half. Can I just ask where you're buying those assets?

I think it was Crush Creek that we acquired the balance, the -- like 30% of that. So it was mainly related to Crush Creek, which is near Mt Carlton.

Okay. Yes. Yes. Sure. And then just a sustainability question, appreciate the slide in the pack. Just in terms of your power sources, green electricity, are you making any inroads there? Or what's sort of the near-term focus for the company?

Yes. So the near-term focus is on our big consuming assets and longest life assets, so Red Lake and Cowal. Particularly Cowal, we're doing some studies right now as to what are the options in reducing emissions and what commitments can we make once we've got an understanding of what that could do. So very aware of it, very conscious of it and very aware of the sentiment that we need to start identifying and articulating those outcomes.

And just to add to that, Sophie. So they're coming off grid, but the one that has any sort of potential in that area is at Cowal, which where we've got work being done on solar capacity as well.

And Red Lake uses some hydropower.

Okay. So Red Lake uses hydro, did you say, Bob?

Yes. I don't know how much percentage, Sophie, but it's predominantly on hydro or so.