Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

[Audio Gap] A pivotal and transformational transaction for Mungari that established it as the fourth cornerstone asset in our portfolio. Joining me on the call today is our CFO and Finance Director, Lawrie Conway; Bob Fulker, our COO; Glen Masterman, VP, Discovery and Business Development; and Kirron Schmidt, our Business Development -- General Manager of Business Development are all on the call to answer any questions you may have. Before launching into the presentation released on the ASX this morning, I do want to pause and acknowledge the enormous effort from both Northern Star and our Evolution team in getting us to this point. It's taken a superhuman effort from a broad range of people across both of our organizations as well as our respective corporate and legal advisers to get this deal done. I'm now going to start on Slide 11. The first 10 slides, I think, are legal disclaimers. Evolution has long coveted these assets. This is because the combination through the acquisition makes industrial and commercial sense on every level. Our Mungari mill is a modern and highly efficient mill, albeit confronting a declining production profile, as the high-grade Frog's Leg mine nears depletion and more low-grade material is processed. On the neighboring tenements, Northern Star has been successfully operating several high-grade underground mines, but trucks its ore effectively past our Mungari mill to be processed 55 kilometers away at Kanowna Belle. The consolidation of the district is a game changer for Evolution and the eastern gold fields. As you can see from the diagram, the tenements are contiguous. And most importantly, we now have immediate access to significantly larger volumes of higher-grade material and the opportunity to extract material synergies that were not available to either ourselves or Northern Star in the absence of this transaction. Mungari is now elevated to become a fourth cornerstone asset of Evolution, joining our other long-life, low-cost operations of Cowal, Red Lake and Ernest Henry. Slide 12 summarizes what we are acquiring and how we are financing it. I'll cover both of these topics in some detail as we go through the slides. I doubt anyone on this call who looks at this transaction is very surprised, largely because it really was so strategically logical and is very consistent with our previously communicated strategy. The highlight for me on Slide 13 is that not only does it transform Mungari into a long-life cornerstone asset for Evolution, but the acquisition is accretive on the most important metrics for us, net mine cash flow, production and mineral resources, all measured on a per share basis. Importantly, from the moment the transaction closes, Mungari becomes a much better operation: its all-in sustaining costs reduce, its cash generation increases, its production rises and its mine life extends. In many ways, this graphic on Slide 14 summarizes the journey Evolution is on, a concentrated portfolio of long-life, high-margin assets in the Tier 1 jurisdictions of Australia and Canada. This is, in our view, the pathway to building a unique gold business that will prosper through the cycle. The graphic highlights that this transaction extends Mungari's mine life to an impressive 13 years and also enhances its annual production to a near-term target of over 200,000 ounces per annum. Mungari is set to become a strong contributor to the broad Evolution portfolio for many years to come. Turning to Slide 15. Last week, we provided our 3-year outlook. Now only a week later, we are changing it. And the good news is it is all for the better. Our production base expands. We have assumed production from the acquired assets contribute from -- to our 3-year outlook from the start of September. We have purposely been conservative, recognizing that we want to get the integration and optimization right. Transaction will not change our already sector-leading low all-in sustaining cost position. We do see a reduction of Mungari costs by 4% to 6% initially, and as we optimize the mine plan, complete the plant upgrade and further realize potential synergies, the benefit to Mungari will increase and flow through to the group all-in sustaining costs. There is no change to our major capital outlook. We have prided ourselves at Evolution on doing deals only when they are accretive to our shareholders. And on this particular opportunity, it meets this hurdle on the 3 critical drivers of short-term and long-term shareholder value. We will now shift our focus to the assets we're acquiring. Slide 17 sets out the investment highlights, most of which I've already touched on, but a few things on this slide are worth pausing on. The resource grade of the operations we are acquiring is almost 3x the resource grade of our existing operation at Mungari. These high-grade ore sources will now be prioritized. We estimate our mill to be about 30% more efficient than where the ore is currently being treated, and there is an immediate cost saving of not having to truck the ore an additional 50 kilometers. We'll also be able to reduce net carbon emissions of the combined operation by reducing road haulage and fuel consumption. Combining the tenements delivers a mineral resource of 4.6 million ounces, which can be optimized and deliver benefits on day 1, but also support the mill expansion to 4.2 million tonnes per annum and deliver us a clear path to 200,000 ounces of sustainable production. We shouldn't walk past the exploration potential, which our discovery team believes exists within the tenement package we are acquiring, particularly, and most valuable to us, extensions to the higher-grade ore bodies, which are currently being mined. We have tried to summarize on this Slide 18 the significant opportunities available to us on completion of this acquisition. Mineral resources and reserves at Mungari will double. But as the old adage goes, grade is king, and at Mungari, this is especially true. When talking about the asset to investors in the past, I have often said that the difference between an ordinary quarter of production and a good one at that operation can be 0.5 gram extra on the head grade. Acquiring reserves that are almost 3 grams per tonne higher than our existing reserve base is a game changer, and I am confident these assets will underpin many good years of production from Mungari. Our focus initially will be on integrating the teams and operations, optimizing the mine plan and prioritizing the highest grade feed. We'll be completing the prefeasibility study for a mill expansion to 4.2 million tonnes per annum this quarter. You may recall that we included $80 million to $90 million in FY '24 towards completing this expansion in our major capital outlook that we released last week. The prefeasibility study to date indicates there are no -- there are material gains to be made by scaling up the mill's processing capacity. We expect the feasibility study will be completed by the end of this financial year. This is one of those very rare deals in the gold sector where both parties can genuinely feel comfortable that this transaction creates value for both sets of shareholders. And this is because of the previously unrecognized value that can be realized through the synergies available as a result of the asset combination. Some of them are set out on Slide 19 and include: the Mungari mill is 5 to 8 kilometers away from the EKJV and Kundana, equating to a more than 85% reduction in haul distance. Mungari mill processing cost per tonne are currently materially lower than the Kanowna Belle mill. The reset cost base and proximal infrastructure gives our team plenty of opportunities to think differently about Kundana and the EKJV to maximize gold recovery, identify more economic resources and ultimately further extend the mine life of these assets. There are also potential unit cost savings in corporate overheads and the site G&A expenses. Importantly, the assets we're acquiring have a highly skilled workforce, and whilst our turnover rates at Mungari have been better than most in the area, the visible long mine life and improved career opportunities will eliminate the biggest reasons why some people switch roles to new mining operations. Turning to Slide 20. Beyond the operating mines that now make up the combined Mungari operations, there is also a very substantial and full pipeline of exploration opportunities available to us across our consolidated land package of over 1,000 square kilometers. Importantly, we now have secured a contiguous land position along the most prospective portion of the incredibly well-endowed Zuleika Shear Zone. Optionality provides opportunity, and our due diligence identified a number of areas we believe provide the potential for further discoveries, particularly high-value extensions to the existing high-grade operations. The assets we are acquiring are listed on Slide 22. We have operated Mungari for 6 years, and Frog's Leg, Mungari's high-grade underground mine, is on the same geological structure as the operating mines we are acquiring. We know the area, the terrain and the mining conditions. The deposits shown in yellow are the 100% owned Kundana operations, and on the right-hand side of the diagram, the deposits of the 51% owned EKJV are shown in green. We could have extended this long section a little further to the right and shown Frog's Leg ore body very close by. The EKJV partners 2 companies being Tribune, which owns 37% of the EKJV; and Rand, another company, owns the remaining 12%. We have a 21% shareholding in Tribune, an interest that we acquired in 2019. Turning to Slide 23. The Kundana operations have 3 current production areas to source ore from: Millennium, Pope John and Moonbeam. The future production areas include the Barkers, Centenary, Strzelecki and Arctic ore bodies. Mining is via traditional sublevel open stoping, and the average reserve head grade from these areas is 4.4 grams per tonne. The EKJV operations are essentially adjacent and currently source the majority of its ore from the Rubicon, Hornet and Pegasus areas. Future ore sources are scheduled from the Raleigh ore body, which is currently on care and maintenance, Golden Hind, Hornet and Falcon. These areas are mined the same way as we mine Frog's Leg, with paste fill going into the stopes. The reserve grade from these ore bodies is 5.1 grams per tonne, so it clearly is a near-term priority for us. The carbine deposits will not be a near-term priority, but does provide an interesting longer-dated, lower-grade opportunity. Turning to the funding section, which is Section 4 on Slide 27. We are funding the acquisition with an underwritten share placement of 103 million shares, representing 6% of our share capital and will raise $400 million. To provide retail investors with an opportunity to participate in the raising, we'll also be doing a share purchase plan capped at $50 million. I do encourage investors to read the ASX release and presentation for more details of the fundraising, and the timetable is set out on Page 29. In summary, this acquisition transforms Mungari into a much better operation. It is on strategy. It is accretive. And from day 1, the operation will have better cash flow, lower cost per ounce and a longer mine life. With that, Zoey, can you please open the lines for questions?

[Operator Instructions] Your first question comes from Daniel Morgan with Barrenjoey.

Just wondering, firstly, how do you view the price of the acquisition? Like, did you split the synergies that are clearly in this transaction with Northern Star?

Daniel, we feel we gave some of the synergies away, but the vast majority of synergies were retained by us. If you look at this on a consensus valuation, it has a value of somewhere in the order of $600 million. And if you apply our metrics to it, it would be in the order of $700 million to $800 million.

Okay. And on the -- what's the plan with exploiting this opportunity with regards to White Foil? Do you turn off White Foil feed and replace it with this high-grade feed until the mill expansion comes on?

This will definitely take priority in terms of optimizing the grade. The grade will become the priority and in all likelihood, White Foil feed will reduce.

Okay. And the other partners in the EKJV, you do have an interest or shareholding in there. Can you just comment on how this affects the partners or what the opportunities might be there?

Yes. We acquired that interest in 2019. I've met and had a relationship with Anton Billis for some time. He chairs Rand and Tribune. Once we signed the deal, I did call him, and he welcomed us as a joint venture partner, looking forward to working with us, as are we with him.

Okay. And maybe lastly, just if you can answer, why raise money to fund this transaction? I mean, your net debt, if I'm correct, was about $460 million as at 30 June. This would take a pro forma to $860 million if you didn't do an equity raising, which would appear comfortable. Can you just talk about why raise money especially in light of the share price performance recently?

Daniel, Lawrie Conway here. The view we've taken around the balance sheet is we've got this acquisition coming in, we announced last week the capital investment we're making into Cowal and Red Lake to grow those productions, which will be capital intensive over the next couple of years, which we're restructuring the debt around the balance sheet to service those as well. So we thought this was the right mix between debt and equity for our balance sheet going forward. And whilst we've had some run on our share price in the negative in the last week, we still think that it's the right way to fund this acquisition.

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

Just following on from Dan's questions. In terms of working more with Northern Star in the area now that you're more closely aligned, how do you see that playing out over the short to medium term?

That's -- the engagement with Northern Star has been excellent. They've been very good to deal with. To be honest, it's been a fairly frantic run to the line over the year from both sides. I don't think Kirron slept for the last couple of weeks. So we've started a relationship. We know them well. We respect them, and we'll look forward to other opportunities. But right at the moment, our biggest priority is optimizing and integrating this operation.

Okay. Great. And then just in terms of the mill expansion, just to be clear, has that been included in the 3-year outlook that you provided last week?

So the capital was included. In FY '24, we had $80 million to $90 million. It is obviously subject to gates and the feasibility study and everything else. It is not committed capital, but it was included in the outlook.

Yes. And Sophie, that production of over 4 million tonnes per annum would take place from FY '25 onwards. So yes, the capital is in the 3-year outlook, but no impact on production is because it's beyond FY '24.

Okay. And then just in...

Sorry. Sophie, I was just going to circle back to your earlier question and just say that the -- almost all of the employees will transfer across to our operation, and both Northern Star and ourselves are absolutely committed to having a smooth transition. And there's a non-solicit clause in the agreement around us not soliciting and they're not soliciting people from the operations in Kalgoorlie.

Okay. And then just in terms of your comments last week in terms of Mungari and not processing those high-cost Boomer ounces. Does this change that at all? Do you feel as though it's better to have more flexibility with feed sources now? Or that still is the case that you won't be going ahead with Boomer?

Yes, it probably deprioritizes Boomer even further, because when you've got really good grade available in front of you, that's going to be the priority. So that -- we've always said, and I think we've often had the discussion that Mungari needs a 0.5 gram per tonne extra. Here, it's potentially getting more than that, and it really will transform Mungari through these higher-grade ore bodies.

Your next question comes from Mitch Ryan with Jefferies.

You've addressed the majority of my questions. But I couldn't think -- when does the transaction settle?

I'll hand it over to Kirron to just give you the time frame.

Sure. So there's only 1 CP to the transaction, which is ministerial consent in WA. That shouldn't take too long to get. So we're expecting the transaction to settle late August. But the way the structure works is that economic interest will transfer to Evolution from the 1st of August.

Yes. So just to be clear, ounces won't be accounted for in our production numbers, but there is a locked box mechanism until settlement, which is -- we've taken production in from early September.

Okay. And so you ran through the structure of the EKJV, but can you speak to the WKJV? And who owns the other 25% there?

Yes. Again, Kirron.

So WKJV is 75% GEM, which is the Northern Star ownership and then the other 25% is owned by Tribune. So Rand and Tribune who own the 49% of the EKJV, only one of those parties is party to the WKJV. That's currently just an exploration joint venture, and there's no resources on it.

Okay. And then...

And that -- Mitch, our 21% interest in Tribune via the cross holding through Rand gives us a look-through interest into the EKJV of about 10% or 11%. We're not going to equity account that or bring those ounces to account, but it does mean that we effectively have a bigger ownership in the EKJV.

[Operator Instructions] Your next question comes from David Radclyffe with Global Mining Research.

Just got a couple of questions. So firstly, when we look at Frog's Leg, is there any immediate upside there on the old boundary between Frog's Lake and Hornet to extend Frog's Leg beyond just this year?

Glen is dialing in remotely. But Glen, hopefully, you can answer that question.

I can, Jake. Happy to take it. David, look, I think the limiting factor between Hornet and Frog's Leg is the Mary fault. And so we've mined pretty close to that boundary through -- that geotechnical boundary on the Mary fault on the Frog's Leg side and Northern Star has on the Hornet side. So really limited potential across that zone. And so we'll, obviously, look at it, but I would expect not a lot to come from that area in between the 2 undergrounds. On the other hand though, we are pretty excited about the opportunity to expand underground resources, both on the EKJV and also on the Kundana assets as well.

Okay. Next one would then be in terms of the mill as it sits today, pre-expansion, it hasn't really been pushed that hard. So now that the pressure is on the mill, how much do you think the mill could do? And then what should we assume and how you actually build it over the next couple of years? I think the Kundana and the share of EKJV sort of in the order of 1.5 million tonnes. In terms of what that displaces, is it the lower-grade open pit ore you've been mining?

And I'll let Lawrie answer that question.

Yes, Dave, look, I mean we've taken the plant from 1.6 million to be able to get it sustained at 2 million. I think the site team believes they can possibly get that to 2.1 million, 2.2 million without any major capital investment required while the study proceeds. So we don't see a lot more upside from that. And in terms of feed, White Foil, we finished mining that soon and we'll process some stockpile material. So the first thing that will be displaced is that stockpile material going through the plant. We'll continue with Frog's Legs coming through. Then we've got Cutters Ridge that we're currently developing now. That's probably the next source that would get displaced. And our priority will be to the high grade feed through that 2.2 million, bearing in mind that we do, as we process the EKJV, lose some of that to 2.1 million to 2.2 million material to a toll treating arrangement. But overall, that's still a better outcome for us. As we go through the next 6 months, Bob and the team will be doing a review of the mine plan to come up with what's the right feed at the right grade to optimize that mill.

Your next question comes from Matthew Frydman with Goldman Sachs.

A few questions from me, please. I guess, firstly, just on the cost structure of the Kundana assets you're acquiring. I was just looking at Slide 14 and in that sort of pro forma, you're showing no margin improvement post the acquisition. And also, obviously, in your multiyear outlook, you've given, I guess, no real change in all-in sustaining cost guidance at the group level. I guess that's all despite the fact that, as you've rightly pointed out, the Kundana assets are 3x the current grade at Mungari. So I guess how should we be thinking about the cost structure of these assets versus, I guess, your existing production out of Mungari? And why are you suggesting here that it's not going to drive the margin improvement? Or is it just not willing to give any sort of guidance around that yet?

Matt, what we're saying around margin improvement is really at a group level. And if you could understand that Mungari sits above our group average $1,215 an ounce in FY '21, Mungari was a few hundred dollars an ounce above that. So at a group level, yes, we're bringing in 30,000 to 65,000 ounces a year over the next 3 years and -- which will average really at about 60,000 ounces a year. That gives us a flat to 2% increase in our group AISC over the next 3 years. But at Mungari, we see an immediate reduction of 4% to 6% in their AISC by merely bringing in high-grade material through the plant than what we're currently putting through. So we see Mungari cash generative from day 1 and margin improvement at the asset. What we would then see is the planned upgrade as all of the synergies are realized over the next few years. And as Bob and the team optimize that mine plan. From FY '24, '25 onwards, you'll see an even further improvement in that margin at Mungari, which will flow through to our group all-in sustaining cost. Then if you look at the group all-in sustaining costs, we've only moved our sustaining capital outlook over the next 3 years by about $5 million per annum, and that's really sustaining capital that will come in with the acquired assets. But that's not material in terms of the group perspective. But probably what was more important for us is that from day 1, there's no major capital required on these acquired assets. And given that we've already got in our plan, the plant upgrade that Jake mentioned in FY '24 capital outlook, that's where we see the real benefit that, over the longer term, you'll get a much better margin both at the asset and at a group level.

Matt, I'll also add, too, that you're talking to a team that's feeling pretty battered and bruised by market beating over the last week. So we have been purposefully conservative.

Yes, sure. No problems. I guess that's Slide 14, where you show the pro forma for Mungari at the asset level, you're potentially leaving a bit on the table there in terms of the sort of 4% to 6% improvement that Lawrie was talking to.

Yes. The only thing I'd just add to that, Matt, is that we've got a life of mine plan that's been done through the due diligence phase. And realistically, now that you've got the mill, which is our mill that we're going to feed, you change your profile. The guys will work in the next planning period to make sure that optimizes. And I think what you'll see next time is an improvement over the full life of mine from this acquisition for Mungari and the group.

Yes. Yes, sure. I guess, again, just following up on some of the questions around the mill expansion. You've given some detail there, you said you expect the feasibility study will be done in FY '22. Is it fair to say that, again, that guidance that you've given at the group level out to FY '24, that's assuming no mill expansion? And then, obviously, potentially assuming a successful outcome from the study, it seems pretty likely that you'd be able to execute that mill expansion within that sort of 3-year outlook, if that's fair to say.

That's correct. Our plan -- the prefeasibility study is finishing as we speak. It will go through the toll gates in the September quarter to move into feasibility this year. In the December quarter, that will run through for about 12 months and finish that work. The difference is that the study team now need to take into consideration the different ore sources that they're going to have available. The only thing that then would say is we have some flexibility of whether we do that execution of the plant upgrade in FY '24 or we start it a bit earlier. As we currently sit, we think that FY '24 is still the right timing for Mungari, but this certainly gives us a bit more optionality there.

Yes. Great. I guess last question and just picking up that point on some of the different ore sources. Castle Hill, in particular, I mean prior to this acquisition, that was really potentially going to underpin the new processing capacity in the region. How do you think about that deposit now in terms of the order of priority?

Priority will be great, and that means Castle Hill is likely to be deferred.

Your next question is a follow-up question with Mitch Ryan from Jefferies.

Traditionally, you have used a lower reserve grade or reserve price in coming up with your assumption relative to Northern Star. Can you talk to what DD you've done -- when you're doing the DD, how you look at the reserves and what price you used?

Thanks, Mitch. I'll let Glen answer that question and then Bob can add. Glen?

Thanks, Jake. So Mitch, look, we've gone through and done the analysis with our reserve gold price assumption of $1,450 an ounce. And what that shows to us is that the cutoff grade, by the time you take into account the synergies or synergy valued at the time the acquisition will deliver, particularly around the processing and haulage costs, the cutoff grades are fairly closely match between, say, the Evolution gold price assumption for reserves and Northern Star's. So therefore, we're not anticipating any material shifts around reserves and resources as a result of that. Now I turn over to Bob for any further thoughts.

Mitch, it's Bob speaking. I have nothing to add from there. But I think when we get in there, we'll just -- we'll put it into our normal annual review as well. So that's the only thing I'd add.

Your next question comes from Nick Evans with The Australian.

Just a quick one, and apologies if it was covered off before, but were there any, as part of this, sort of 3-way negotiations in terms of extending your stake in Rand and Tribune so as to consolidate the entire lot?

We haven't had a discussion around that. We own 21% of Tribune. I did mention that we've had an engagement with Tribune post signing this deal, and it was very constructive and positive.

And then given your sort of raising view, should we sort of assume that you -- it's unlikely that you might sort of move to take out their stake in the East Kundana ones as well?

At this stage, it's not on the horizon.

There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.

Thanks, Zoey. And thanks, everyone, for attending. I know it's a busy day. Again, thanks to our team and the Northern Star teams for getting this done. It has taken a huge amount of effort. Appreciate your input as well and look forward to speaking to you over the next few... [Audio Gap]