Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Evolution Mining 2021 Financial Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Jake Klein, Executive Chairman. Please go ahead.

Good morning, everyone. Thanks for joining us. We appreciate it. Joining me on today's call is Lawrie Conway, Evolution's CFO and Finance Director. Lawrie and I will be talking to the presentation entitled 2021 Full Year Financial Results, which was released on the ASX this morning. I want to start by recognizing Evolution's most important assets, and that's our people. Time and time again this year, we have asked them to go above and beyond. And each time they have stood up, accepted the challenge and delivered. The anxiety, disruption and challenge that COVID-19 has created should not be underestimated as we have all found, over the past 18 months, those informal conversations, face-to-face discussions and site visits just cannot be replaced by Teams or Zoom calls. I'm frustrated at how Australia has gone from leading the fight against this pandemic to becoming a laggard. In a bitter twist of irony, Evolution has 6 assets, 5 of which are in Australia. And the only asset people from our group office in Sydney can legally visit right now is in Red Lake, Canada. Glen Masterman, our VP of Discovery; and Bob Fulker, our COO, will be there in the next couple of weeks. There is only one solution out of this mess, and that is to get everyone vaccinated. No ifs or buts. It is really important for our mental health, our industry and our country. Shifting mood and turning to some real positive highlights on Page 4. I'm sure you will agree with me that Evolution has ended the FY '21 year in a very strong position: a record net profit, rewarding our shareholders with the 17th consecutive dividend being declared, this one being $0.05 per share fully franked; a materially improved portfolio of long-life, low-cost assets, which will deliver high-margin organic growth; and a very strong balance sheet to support that growth. On Slide 5, we have set out how we believe we at Evolution create value. In summary, we want a concentrated portfolio of 6 to 8 assets, always looking at acquisitions or divestments through the lens of ensuring it will improve the quality of our portfolio and, and it is a big and, is also accretive to our shareholders. Geological upside must be present and is a nonnegotiable. It is the foundation of any due diligence, which we do. And by delivering this upside, we now have an average portfolio of mine life based on reserves of at least 13 years. Reflecting our focus on margin over volume, we continue to estimate our reserves at a very conservative gold price of AUD 1,450 an ounce. We are very comfortable to trade a short mine life asset like Cracow or a higher cost asset like Edna May for long-life, low-cost opportunities like Red Lake and Cowal. In both of these exits, we have retained exposure and upside to the asset post the sale through royalty agreements. We seek deep turnaround opportunities. Red Lake fits firmly in this category. That is why we were able to get it so cheaply. But with 11 million ounces in resource and great geological upside, I am certain that the time and effort required to recapitalize and revitalize this asset is going to create enormous value. We seek genuine synergies. It is why we acquired Battle North, which consolidates the Red Lake district and accelerates our pathway to 350,000 ounces of low-cost annual production at that operation. Yesterday, we closed the acquisition of the Kundana and EKJV interest from Northern Star, a game changer for our Mungari operation, which elevates it to our fourth cornerstone assets. We now have immediate access to significantly larger volumes of higher-grade material and the opportunity to extract significant synergies that were not available to either ourselves or Northern Star in the absence of this transaction. This is one of those very rare deals in the gold sector where both parties can genuinely feel comfortable that the transaction creates value for both sets of shareholders. We also seek out motivated sellers for strategic or other reasons they were motivated to sell. Barrick, Newmont, Glencore and, most recently, Northern Star, all fall within this category. More strategically, and as the world grapples with an increasingly assertive China, particularly in resource-rich developing countries, and also the continued fallout of this pandemic, our view is that investors will need to increasingly pay attention to the location of assets. Our entire portfolio, by careful design and no accident, is located in the Tier 1 jurisdictions of Canada and Australia, amongst the highest-rated countries for investment attractiveness based on the Fraser Institute and the World Bank. Not only are they places where the rule of law can be relied on, but they are very geologically prospective and have talented people with great mining skills. Our approach, which I hope I have been able to summarize, is what we believe will continue to differentiate Evolution well into the future and has been on demonstration again this week as we took ownership of the Kundana and EKJV assets and elevated Mungari to our fourth cornerstone assets. As highlighted on Slide 6, we are really pleased with the strong support we have received from shareholders through both the institutional placements and the share purchase plan, which will close tomorrow. One area I was concerned about, given the heated labor market in Western Australia, was convincing the current Kundana and EKJV employees to join Evolution. I'm really pleased that over 90% have signed up, and we welcome them as our new colleagues. The operations were separated by tenement boundaries, not geology. And we now have immediate access to significantly larger volumes of higher-grade material. Yesterday, as you can see in the photo, the first bucket of Kundana ore was put into the mill. Acquiring reserves that are 3 grams per tonne higher than our existing reserve base is a game changer for Mungari, and I am confident that these assets will underpin many good years of production from the Mungari operation. Our focus in the next 6 months will be on integrating the teams and operations, engaging our EKJV partner, optimizing the mine plan and prioritizing the highest-grade feed. Turning to Slide 7. Another area I believe we can continue to differentiate ourselves is in the area of sustainability. Financial institutions are finding that their investors are demanding more proactive plans and action. As Larry Fink, Chairman and CEO of BlackRock says, "There is no company whose business model will not be profoundly affected by the transition to a net zero carbon emissions economy." That is why we are positioning ourselves ahead of the pack. Demonstrating this is our recent commitment to a 30% reduction in emissions by 2030 and to net zero by 2050. We have a clear path to achieve this. We're also very proud that our MSCI ESG rating has been upgraded to AA. This is the highest rating of our global gold mining peers. With that, I'm going to hand over to Lawrie to take you through the financial results.

Thank you, Jake, and good morning, everyone. I'm pleased to be able to present the FY '21 full year financial results today. Overall, the financial position of the business is in great shape, with the operations generating cash at healthy margins and the balance sheet well established to support the business. Following the discussions of our results this morning, I will then outline the detailed FY '22 guidance, which is a breakdown by operation of the group guidance we released last month. On Slide 8, we have a summary of the key financial outcomes for the year. We achieved several records during the year, including statutory profit, earnings per share and dividends paid. Our statutory profit before and after-tax were up 21% and 14% to $496 million and $345 million, respectively. This flowed through to a record earnings per share of just over $0.20. Underlying profit after-tax and EBITDA were down to $354 million and $914 million, respectively, with the main drivers, from an asset perspective, being lower production at Cowal, the sale of Cracow, partially offset by a full year's contribution from Red Lake. Essentially, the other assets negated each other. I will talk through the drivers to the profit in more detail on the next slide. Our margins are still very healthy at around 50% cash margin and at $673 per ounce all-in cost margin, which has flowed through to mine and group cash flows of $555 million and $327 million. As mentioned by Jake, we have declared a final dividend of $0.05 per share, which is again fully franked. This is in line with the range of $0.04 to $0.06 we guided in our June quarterly results in July. Turning to Slide 9 and our profit, which was a record $345 million and an increase of 14% over FY '20. This was achieved against an achieved gold price of only a 4% improvement year-on-year. The higher copper price was the main contributor to the 27% increase in byproduct revenue. During the year, contribution from copper moved to just under 13% on which is up from just under 10%. As shown here, the full year of Red Lake added $51 million, but this did not fully offset the decrease of $82 million from the sale of Cracow. The lower gold revenue is driven mainly from the lower sales and production at Cowal, which is expected to increase in the coming years as our growth plan is executed. The most pleasing aspect of the profit is the cost outcome. The price impact in our costs was only 1% higher with increases in labor and maintenance consumables, partially offset by lower fuel, power and grinding media costs. The main driver of the increase in activity costs was a full year of underground mining production at Mt Carlton, which commenced in the June quarter of 2020. In terms of noncash items, increased inventory values at Cowal and lower group D&A due to increased resources and reserves resulted in an improvement to profit of $71 million. Moving to Slide 10 and our margins. While we did see lower margins through the year, we are still delivering higher margins across the business. It also shows the benefit of a portfolio approach, which focuses on margins as opposed to ounces at any cost. At an operating cost level, we are delivering margins of 50% and 30% after all operations have invested their sustaining and major capital. This is resulting in a net margin, after all expenditure, of around 18%. We are seeing high margins continue at our long-life cornerstone assets, with Cowal and Ernest Henry delivering in the 60% to 70% range. When we acquired Red Lake, we knew that in the short term, it would be a higher cost, lower-margin asset. This is reducing our group EBITDA and operating margin by approximately 2% to 3%. However, once the turnaround at Red Lake is completed, our margin will materially improve and that will flow through to our group margin. The recently completed acquisition of the Kundana and EKJV assets adjacent to Mungari will deliver an uplift in margin for that asset, which is already sitting at the 50% level. On to dividends, which is shown on Slide 11. We declared a fully franked final dividend of $0.05 per share. This will be paid on the 28th of September with the final amount estimated at $91 million. This amount is subject to the final outcome of the SPP, which closes on Friday, and shareholders who take up that offer are eligible for the final dividend. The full year dividend of $0.12 per share equates to a payout rate of 64% of our group cash flow for the year. In assessing the final dividend, the Board took into consideration the proceeds we received from the sale of Cracow, and we have included these proceeds in our full year dividend. Our policy is very much aimed at delivering returns for our shareholders, and the chart on the bottom right reflects this position. As our portfolio and margins have improved, we are returning in excess of $300 from every ounce produced to our shareholders. Moving to Slide 12. We have continued to strengthen our balance sheet. This has been achieved through our operational performance during the year and the changes we made to our debt facilities last week. We finished the year with low leverage of 0.5x EBITDA and modest gearing of 15%. A revolver of $360 million remains undrawn. In recognition of the work we have done on the balance sheet over the past few years, we received an investment-grade private rating, which allowed us to price a debut debt placement on the U.S. private placement market. Key benefits of the change to the debt arrangements are lower funding costs, increased average maturity out to 7 years and no material repayment obligations until FY '26. Upon completing the placement in November, we will have a balance sheet which is able to fund our strategy, be that via organic growth or business development opportunities, while, at the same time, maintain flexibility on our dividends and be able to withstand any negative impacts should metal prices decline significantly. I'll now move to our detailed FY '22 guidance, which starts on Slide 13. Firstly, it is important to note that at a group level, our FY '22 guidance remains unchanged from what we announced last month. That is, we plan to produce 700,000 to 760,000 ounces at an all-in sustaining cost of $1,220 to $1,280 per ounce. The drivers to our production guidance are higher production at Cowal and Red Lake, with Cowal benefiting from the higher-grade Stage H ore while Red Lake will deliver higher grade and increased throughput. Mungari's increase is not as big as the other 2 sites but is still important as the higher-grade ore from Kundana and EKJV will offset the declining Frog's Leg's ore tonnes. On costs, labor remains the biggest input cost for us at around 53%. And we are planning an increase of 3% to 4%. We are not expecting any material increases in our other operating costs. The driver to our all-in sustaining cost this year is that some mines, like Cowal, have transitioned from capital waste material movements to ore movements. This transfers costs to operating and all-in sustaining costs but does not adversely impact on our cash flow or our all-in cost position. As we have extended the mine life at Cowal and Red Lake, it is the right time to invest in those assets. On a sustaining capital basis, this will add $45 to $50 per ounce to our all-in sustaining cost in FY '22 when compared to FY '21. Turning to Slide 14, which has our FY '22 guidance on capital. As with the guidance on production and the all-in sustaining cost, the group level capital guidance remains unchanged from what we released last month at $125 million to $155 million for sustaining capital and $440 million to $510 million for major capital. In terms of sustaining capital, the majority of the investment will be at Cowal and Red Lake. This is directly linked to extended mine life and the age of existing infrastructure and equipment. The major capital investment is, as we detailed in July, with the growth projects at Cowal and Red Lake. These are outlined on this slide. The major capital at the other sites is mainly linked to mine development. Moving to Slide 15. From a guidance perspective, we felt this year, it was worthwhile providing some context as to how the year will look on a quarterly basis. This is because we have a number of different projects, which are in execution, and the mine plans at the sites are at different stages. Our production will ramp up from 22% in the September quarter to 25% in December and March quarters and then 28% in the June quarter. The main drivers to this are at Cowal where the grade will increase during the year as we access ore from Stage H, which will then displace lower-grade stockpile material. At Cowal, we have also just completed a major planned shutdown of the plant in August. At Red Lake, the production will be driven by the mine development rates that are aimed at lifting our processing throughput rates to 1 million tonnes. And at the same time, the grade profile will increase quarter-on-quarter. Lastly, at Mungari, we will see the benefits of the Kundana and EKJV acquisition flow through from Q2 onwards. The lower production rate in the September quarter has a flow-on effect that our all-in sustaining costs will be elevated at around $1,450 per ounce for the quarter and then trend down each quarter to meet our full year guidance of $1,220 to $1,280 per ounce. Lastly, to Slide 16. In conclusion, Evolution has delivered and achieved a lot throughout FY '21 in what Jake described earlier as a disruptive and challenging environment. As someone who is accountable for shareholder funds, I want to take a minute to mention our move into Canada. In the last 18 months, we have invested over $900 million to acquire Red Lake and then Battle North, without any of us from Australia being able to spend any time at this site since March 2020. The team at Red Lake has delivered on their guidance, exceeded expectations in the mine life potential and commenced integrating the Battle North assets into their operations. They did this with a lot of support from many people throughout the business, and this reflects everyone in Evolution's commitment to delivery. It also links us to what we are trying to build, and that is a gold company that prospers through the cycle. We have upgraded our portfolio quality in the last 12 months and have a multitude of growth opportunities. That said, we will maintain our discipline to invest our capital to grow long-life assets and focus on margin over ounces. By doing this, we will generate high margins and be able to continue to return funds to our shareholders. Lastly, before turning over to Darcy to open the line for questions, I would like to reiterate what Jake mentioned about the amount of effort that people have done in putting these full year financial results and presentation together. And not only that, it's also to acknowledge Bryan O'Hara who today is his last Investor Relations call for us, who then is leaving us shortly to go off into new endeavors. On behalf of Evolution, and myself personally, I'd like to thank Bryan for his valuable contribution to the company and making sure that our relationship with our investors is as strong as it is today. With that, Darcy, please open the line for questions.

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

My first question, and it's obviously very early days of integration. But in terms of Kundana, can you maybe talk to any opportunities or risks you see now that the deal is actually completed? So anything maybe that you are thinking there but you didn't talk about before it was locked away. And maybe within that, whether the teams have actually come up on the ground with any opportunities you haven't thought of. That's my first question.

David, we've had the operation -- the keys for 24 hours. So it's probably a little early to talk about that. But look, we see it as a huge opportunity. As I said in my speaking notes, I was a little concerned about the transfer of the Northern Star employees to Evolution because it is a heated market. But to get a take-up of over 90% has really been very good. Over the past week, our integration team has had 14 meetings with both our Mungari team and the Northern Star team. And the overwhelming feedback has been very positive, constructive. The opportunity is there. We have not had 1 person anywhere push back and say this deal doesn't make absolute industrial, commercial and logical sense. So it's just a case of now getting the integration, making sure that we build a platform because this is now a very long-life asset for us and it's a really interesting opportunity. So very excited about it and looking forward to being able to share all those opportunities that we identified in due course.

Okay. There was a slight comment about negotiations about tolling EKJV ore, maybe if you could expand on that and the timing there. And you've said the mill can do 2.1 million tonnes a year. I sort of assume that it would be full with everything you already had. So would this be displacing stockpiles?

Yes. So we're talking to Rand and Tribune, and we're a 21% shareholder of Tribune, about tolling their material through it. Yes, it will displace their share, the 49% will displace. But that's the highest-grade ore. I think it's around 4 grams per tonne reserve grade. So that's the absolute highest grade. And you may recall we've got this prefeasibility study, which we're completing this quarter, which is looking at an upgrade to the milling capacity.

Yes. And Dave, just to add on to that. So I mean what we're looking at, we'll put some material through in the next couple of months while we're finalizing the terms. And that's just really also to make sure that, that ore, how we're going to process it, we'll have to do it in batches through the year. But so far, we've been able to get arrangements, in principle, agreed to allow us to move forward with that. And as Jake said, we get the benefit of the toll treatment costs, but we also get the benefit of that high-grade material going through the plant.

And it has been, of course, included in our guidance and outlook for the assets.

Okay. Maybe just coming back to your sustainability comments. Are you confident you can quickly come up with a plan and a budget to achieve the 2030 target? Some of your peers are actually quite a bit ahead of you. And then I guess in the market, people have been surprised by some of the costs that people have attributed to delivering this. Is there any sort of low-hanging fruit you can see at the moment?

Yes, Dave. I hope by now you know us well enough to know that we wouldn't say something that we don't believe we have a plan to deliver. So yes, we have a clear plan. So 70% of our emissions are Scope 2 emissions. And the majority of that comes from power and grinding -- the ball mills and SAG mills. 50% of our total emissions come from Cowal, and that's obviously our priority. So if we can achieve getting Cowal onto renewable power, which we believe is doable, then that achieves our objective. In the absence of any capacity to reduce our emissions -- and we see that, that is our absolute priority -- carbon offsets costs, at the moment, it would cost us about $10 million to $11 million.

Good luck to Bryan.

Thanks, Dave.

Your next question comes from Mitch Ryan from Jefferies.

It's Mitch Ryan here. The question just relates to Cowal. You called out that you've had a major planned plant shutdown in this August month. And I guess that's on the back of the 12-day shutdown that you experienced in the June quarter. I just wanted to sort of get some clarity on how long it was down for in August and, I guess, just if there's anything we should be thinking about or concerned about as an ongoing issue or if this was 2 separate issues?

Yes, Mitch, Lawrie here. They are 2 separate issues. So when we go to March and April was when the site was putting their plan together. And the major shutdown, which was around 1.5 weeks, was to do a lot with the status and everything in the mill. And we had that into our plan. The breakdown in the June quarter was the unplanned piece. And so what we were able to do, we're able to hold some of that work that we had to do in the June quarter for the unplanned and did that in this planned shutdown. But everything for this one was basically the major shutdown that we needed to do, which will get us through to the next major shutdown, which will be in the first half of FY '23. So that's really nothing that's out of the norm.

Okay. Great. And second -- well, another comment. Lawrie, congratulations on the restructuring of the debt. That was obviously well flagged but good to see that get away. Just wanted to know if you could comment, with hedging out for the next 2 years, only out to FY '23, should we expect to see some additional hedging being put in place for FY '24? Do you continue to roll that forward? Or will you just sort of let it roll out?

No, Mitch, our current plan is to not add any more hedging to the book. We've looked at our mine plan over the coming 3 to 5 years and match that with the balance sheet. We don't see any need for hedging at this point.

Your next question comes from Al Harvey from JPMorgan.

Just on the portfolio structure. So you've got the 4 cornerstone assets now, but I guess that puts the spotlight on the smaller assets that don't have those attractive long-life and low-cost criteria you pointed out. So how are you thinking about Mt Carlton and Mt Rawdon now and their respective contributions to production and cash flow going forward?

Yes. Thanks, Al. I mean we're always looking at our portfolio. It is true that we now do have 4 cornerstones. But we continue to assess it and look at market conditions and see how things are going. And at Mt Rawdon, we really like the opportunity to deliver a potential pumped hydro scheme. So that is a low management-intensive asset. That's from a group office, not from a site team, because they're very effective on that site. Mt Carlton is providing a smaller contribution, but it's operating pretty successfully at the moment. And Anton Kruger and the team there are doing a good job at delivering well at that site. So continue to evaluate things but nothing to advise you of at the moment.

And just a quick follow-up. What is the medium-term production profile at Mt Carlton? Can we kind of project forward FY '22 guidance once Crush Creek comes online? Or should we have that tapering down? Is there any hiatus between Mt Carlton finishing and Crush Creek coming online?

There isn't any hiatus planned. When we looked at it last year, we targeted a number of areas to make sure we didn't have a hiatus, and Anton and his team have been able to successfully do that. Production-wise, it will depend on a couple of activities that we're doing this year. You won't see a material drop away from current year's guidance for the next 18 months to 2 years. And then the third year is going to depend on the outcomes of Crush Creek this year and timing of when we bring that on.

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

Congrats on a strong and clean result. I just wanted to focus on capital management. You talked around the dividend. You paid 17 consecutive dividends now. Balance sheet is in excellent condition. Yes, you've got a bit of CapEx coming up. But how should we think about the payout ratio going forward?

I'll leave that to Lawrie. But the number of compliments we're getting, I'm pleased that his performance review is done a few weeks ago.

Thanks, Jake. Sophie, look, our approach on the capital management is to really make sure that the balance sheet can fund all avenues that we need, which is investing in the business, investing in anything that Kirron finds and returning to the shareholders. Our dividend policy is not changing, which is a percentage of cash flow. What we will do, obviously, this year and next year, we have to balance up the capital investment for the growth and then we will look at where the balance sheet is at the half year and the full year. But our expectations is that we'd see dividends staying at around the current level of our final dividend, absent anything else happening.

As a percentage of cash flow.

Yes. For the full year, when you take Cracow proceeds into consideration, I think we ended up at 51%. Depending on when the major capital gets spent through the course of this year, at the half year, you may see that it's above 50%. And at the full year, it trends back to 50%. But yes, we're still targeting 50% of cash flow going forward.