Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us. I do have a bit of a cold, but fortunately tested negative for COVID last night. I've got a feeling we may be feeling a little bit like the Queensland Rugby League team is feeling this morning. Joining me on the call is also our CFO and Finance Director, Lawrie Conway. We've just completed our extensive forward planning and FY '23 budgeting process and thought it was important to provide you with a detailed update on our business and also answer any questions you may have. Strategically, we have positioned our business for the inflationary cost conditions we are currently confronting in the gold industry. We have a concentrated portfolio of high-quality assets positioned in the lowest quartile of the cost curve. A strong balance sheet and good organic growth, which will create genuine value for our shareholders. A continued focus on margins over volume on return on capital and only allocating capital that is accretive for our shareholders. That is, in our view, the pathway to shareholder value creation. Having said that, we do acknowledge that we have fallen short on operational delivery over the last 12 months and assure you that we are determined to address this. Today, we'll be talking to the presentation released on the ASX this morning titled Business Update and the areas we want to cover outlined on Slide 2 and include -- actually maybe Slide 3, a brief summary as to how we are closing out the current financial year, an update on each of our assets, our production outlook over the next 2 years and our cost outlook in detail on some of the drivers impacting our costs. Lawrie will talk to our cost position and drivers, and then we'll open up the lines for questions. Turning to Slide 4. We'll finish this quarter with production of around 170,000 ounces, which is 15% higher than the previous quarter, but does fall slightly short of where we expected to be. May was a particularly difficult month at Cowal with rainfall making planned material movement very challenging. At Mungari, since the borders to Western Australia opened in March, over 30% of our 500-person workforce has been absent from site while isolating for at least 7 days. We are pleased that our people are all in good health, but this absenteeism has exacerbated the already very challenging labor market conditions at that operation. Whilst we were on track to achieve the upper end of our cost guidance, we do have 4 Ernest Henry copper shipments open at any time that will need to be revalued at year-end to account for the recent lower copper price and will result in our all-in sustaining cost being approximately AUD 1,250 an ounce. We have benefited from the fall in the Australian dollar, and our AISC in U.S. dollars is $875 an ounce. These issues, many of which are outside of our control, do cause to shadow on a number of significant positives we have achieved. We know that all eyes are on Red Lake, and I'm pleased that this quarter, we have again been able to increase production by 15% to around 38,000 ounces. Since the borders opened in Canada in the middle of last year, we've been able to make a number of site visits and people who have been on the ground multiple times, including our full Board, we are able to visit the site for the first time a few weeks ago. The momentum and change at this site is apparent, and we feel optimistic about the transformation occurring at this operation. Ernest Henry has generated over $400 million in the last 12 months, which is a fantastic outcome. Our sustaining and major capital is expected to be at the bottom end of guidance and our balance sheet is very strong with around $900 million in available liquidity. Turning to Slide 5. At Red Lake, this quarter, we have been able to achieve a consistent base run rate in the physicals that we require to enable us to deliver the planned 35% increase in production in FY '23 to 160,000 ounces and then plan to increase it to 200,000 ounces the following year. Acknowledging that reaching the 200,000 ounce per annum production rate is around 12 months later than originally planned in 2021 and we still remain confident that Red Lake is on the path way to fulfilling our vision of a long-life, low-cost 300,000 ounce plus a year mine. The Upper Campbell mine, which will be a very important new high-grade ore source is on track to start delivering ore, albeit in small quantities to start with next quarter. We are completing a milling optimization strategy this calendar year. The success we have had in increasing throughput at the existing Campbell and Red Lake Mills have allowed us to defer the Bateman mill expansion until at least FY '24. Turning to Slide 6. Notwithstanding the inflationary cost pressures, the $380 million Cowal underground mine remains on the original schedule and budget with all major contracts in place. Underground ore will be sourced predominantly in the next year from development ore with the first stope ore on schedule for the June 2023 quarter. The development of this significant underground mine will grow the operations gold production next financial year to 275,000 ounces and the following year to 320,000 ounces. This is a 40% increase over the next 2 years from the current production levels. Turning to Slide 7. Ernest Henry is a transformative asset for us. This year alone, it has generated over $400 million in cash flow and we are also growing increasingly excited and confident about the deposits depth extensions, which will add to the mine life. An updated Ernest Henry Mineral Resource is scheduled for release in the September quarter. The new model incorporates 42,000 meters of underground drilling completed since the previous model update in May 2021. Overall, we expect the drilling results to extend the copper gold footprint across the main mineralized lenses in the area of the pre-feasibility study and below. Two surface draw rigs commenced in April with the aim of continuing infill and extension drilling in the pre-feasibility study area. Results from this surface program will be included in the 2022 MROR statement, which will be released in the March 2023 quarter. Early indications from the drilling suggests the mineralized zones in the areas drilled to date are potentially broader than currently modeled. Let me turn to Slide 8 now. Labor market conditions in Western Australia have been challenging and disruptive at Mungari. It does feel like we are back to the boom time conditions when commodity prices last peaked in 2011. In our view, these conditions are not sustainable. And whilst we will complete the plant expansion study by the end of this calendar year as scheduled, we have decided to defer any commitment to this expansion and focus on optimizing the current operation. This will allow us to produce approximately 127,000 ounces for each of the next 2 years and mitigate the risks of undertaking a major construction project in the current WA labor and cost environment. The previously reported north wall issues at Mt Rawdon are being well managed, and we expect to produce approximately 75,000 ounces in each of the next 2 years. Progress on the Pumped Hydro project is progressing with our partner, ICA partners, and we expect that we will be able to receive coordinated project status in the coming quarter from the Queensland government. On Slide 9, we have summarized the production outlook over the next 2 years, which will see a 25% increase in ounces produced to approximately 800,000 ounces. We continue to remain focused on margin of ounces and the slower ramp-up at Red Lake is the main cause of the lower production compared to our previous guidance. The main growth is coming from Cowal and Red Lake, which are the 2 sites that will also receive the largest capital allocation. Our other assets are anticipated to operate largely in line with current performance with Mount Rawdon benefiting from being able to have better access to the pits. Evolution's portfolio is already positioned in the lowest cost quartile, and we are in a strong position with good organic growth ahead of us. Given current market conditions, we do intend to be proactive and diligent to ensure that any expenditure, irrespective of whether it is in our plans or not, is rigorously tested again before we commit to it. On that note, I will hand over to Lawrie.

Thank you, Jake, and good morning, everyone. Today, I'll update you on our cost outlook based on the production outlook just outlined by Jake and current market conditions. Slide 10 shows our cost outlook. We will finish the year FY '22 at around 1,250 AUD ounce or USD 875 per ounce. While the lower production is having a slight negative impact, the main cause to the change has been the downward movement in the copper price. The final reported AISC for FY '23 will largely depend on the closing copper price for June. This is because we normally have 4 concentrate shipments at Ernest Henry open and subject to copper price at any point in time. The price has moved lower by around 15% in the last 8 weeks. This negative impact will result in the group AISC being above the guidance range of 11.35 to 11.95 per ounce. The outlook for FY '23 and FY '24 is an AISC of approximately AUD 1,240 per ounce or USD 870 per ounce. This is in line with the current year. The increased production outlined by Jake is offsetting the inflated cost market we are currently experiencing. I will outline the main cost inflation drivers on the next slide. While the growth in production is good and helps us with the unit cost, we are continuing to be vigilant on our cost position and remain focused on margin over ounces. We are not planning on bringing on production, which merely erodes our margin. Obviously, we do not know when the input costs or copper prices are going to move in the next couple of years, and these will have a material impact on our group AISC position. We have assumed AI -- AUD ,250 per tonne, AUD 12,500 per tonne, sorry, copper price to calculate our all-in sustaining cost outlook. The lower ramp-up in production at Red Lake and the rapid cost increase in the last 6 months are the main drivers of the increase over the outlook provided in November 2021. Moving to Slide 11, where we'll see the impact of the main cost drivers. The key inputs, which have moved most are labor, diesel and power. These 3 items comprise approximately 63% of our operating cost base. Firstly, looking at labor. At the time of our half year results, we're expecting labor rates to increase by 4% to 5% and now are planning on them moving 5% to 6%. This is likely for both our employee labor and contractors. For our employee labor, we continue placing more weighting to the variable component at all levels of the organization. Diesel, which comprises 5% of our operating costs have been impacted by the rising oil price. The price is currently 130% higher than the start of the financial year. However, as you'll see on the top right-hand chart, the largest increase has come since January 2022. Our sensitivity to a USD 10 per barrel oil price movement is $ 5 million of cash flow and $7 per ounce on AISC. Power, which comprises 8% of our total operating costs will be impacted later this year as our current contracts expire. Given the current market prices, which, for example, in New South Wales, have risen by 180% since the start of the financial year with the biggest increase coming in the last few months. We will be renewing contracts for Cowal, Mt Rawdon and Mungari this year. The acquisition of Ernest Henry has resulted in power costs becoming a higher percentage of our total operating costs since power represents approximately 16% of the operations costs. We are finalizing the contract for Ernest Henry with the rate expected to increase by 25% from FY '23. Turning to our capital outlook, which is on Slide 12. Sustaining capital for the next 2 years will be in the range of 190 million to 240 million. This is higher than the previous outlook with FY '23 driven mainly by the partial replacement of the mobile fleet at Ernest Henry on the back of a positive view on mine life extension. This will avoid higher maintenance costs into the future for this fleet, and we have taken advantage of availability of production slots. We have also seen delays in delivery of capital items in the last part of FY '22, which will flow over into our FY '23 capital. The main driver to the change in FY '24 is at Cowal and relates to higher underground mine development rates linked to the latest mine plan. The outlook for major capital remains unchanged for [indiscernible] at $530 million to $600 million, with the Cowal projects comprising most of this at AUD 325 million to AUD 360 million. Of this amount, the underground project comprises AUD 260 million to AUD 280 million with the project remaining on schedule and within the AUD 380 million budget. Red Lake will invest AUD 130 million to AUD 150 million in FY '23 with the main areas being development of the Upper Campbell mine, optimization of the Campbell mill at the higher processing rates and mine development at the existing operation. The capital outlook is lower than the previous outlook, which is a perfect example of our capital discipline. The projects which have been deferred are the McFinley mine and the Bateman mill expansion, and this is due to the improvements we have made in recent quarters on mining and processing. These projects will come through in the mine life, but when the investment is warranted. Meanwhile, the outlook for FY '24 has been lowered to AUD 330 million to AUD 380 million predominantly due to lower capital at Cowal. Lastly, on Slide 13. In summary, the latest plans we have just finalized position Evolution to remain of the lowest cost gold producers. We plan to increase our production by 25% over the next 2 years, following the investment in building the underground mine at Cowal and continuing to invest in the transformation at Red Lake. Our all-in sustaining costs during this period is expected to be around AUD 1,240 per ounce or USD 870 per ounce, which means our increase in production is more than offsetting the current and expected cost inflation. Importantly, if the cost inflation reduces during these next 2 years, our unit cost will decrease and margins increase. However, we are still exposed to further inflation and we hope that this doesn't continue for an extended period. During this planning period, we are very cognizant of the market conditions, and therefore, our focus on margin means a prudent and gated approach to capital spend was even more important. We have taken decisions to defer capital projects but have committed to the required studies so that when market conditions change, the projects which generate adequate returns will be allocated to capital. The balance sheet is strong with around AUD 900 million of liquidity, including AUD 540 million of cash and the plans demonstrating that we are able to fund our projects. We know what our sensitivities to cost and metal prices are and proactively manage these impacts. Thank you for your time this morning, and I'll now ask Harley to open the line for questions.

[Operator Instructions] Your first question comes from Kate McCutcheon from Citi.

Can I start at Red Lake, please. Just on the guidance for next year and then looking to '24, with the reserve grade of 7 grams per tonne, how do I get to 160 for next year? What else can you tell me about tonnes or grade that you're expecting noting that Upper Campbell has got the higher grades?

Yes. Thanks, Kate. So I think that's the key to it. If you look at our reserve statements that was released in March this year, you'll see that the various ore bodies at Red Lake different grade. So the highest grade material is in the Upper Campbell area, and that's the new mine we're effectively developing. We have tried to provide you with some detail as to when you can expect to see ore from those sources. And you can see that really over the next couple of years is when it starts to really ramp up in terms of access to the ore. That is on Slide 5. So in terms of the physicals that we're achieving -- we achieved in the last quarter, that sort of largely required in order to deliver the 160,000 ounces, noting that the ore will come largely from Cochenour and the Lower Red Lake and Balmer mines with some coming -- starting to come from the new MMTP and aviation zones. But largely what we've done in the last quarter as we start to develop the decline into the Upper Campbell area, you're going to start to see us access, particularly in FY '24, higher-grade material out of there.

Ok. So would 1 million tons for next year and then ramping up be fair in '24?

Yes, that's roughly correct.

Yes. Kate, it will ramp up through the second half of FY '24. But the reality is that FY '24 sees the grade increase again over the second half of FY '23 as we get more tonnes coming from Upper Campbell and displacing the lower grades out of Red Lake. So that's how we see them transition from this year to next year and through to FY '24.

Yes. So is there ever a point where that global mining grade is around the average of 7?

Yes, as we move towards the 300,000 ounce a year on, it will start to get close to the 7 grams a tonne. I would say that we have done a lot of looking at the resource and reserve models and are very confident that the areas we're mining are performing to the reserve grade that we expect.

Okay. And then can I move to Western Australia's Mungari. So I think at the start of the year, you added in with a 250,000 ounces to the reserves and that was in part driven by the lower processing costs from the mill expansion study and now it seems like you're deferring that with the pressure that you're talking about. How do we think about that material now that's coming to resources and reserves?

I think our resource and reserve numbers are calculated basis, the AUD 1,450 an ounce. So that should still stay in reserves and should be in reserves. I think we are doing the study, but prudently, I think it's right in this current environment to defer a decision to commit to that capital. We're not confident that given the number of capital projects that are being undertaken in Western Australia that the pricing or the deliverability of a project like in Mungari mill expansion can be done on the basis of pricing, which is historic. So I think we are going to do the study. It does still look like the best option for the operation, but it is only prudent to do it once the heat has come out of the capital cost items.

Okay. Yes. And then my final question. So I think the last 3-year outlook, you had Cowal trending to 350,000 ounces in 2024 from Stage H in the underground. Is the outlook now a little bit softer at Cowal in '24 or?

We've been a bit more conservative in the ramp up.

Of the underground rather than [indiscernible]?

Yes. Yes.

Your next question comes from Mitch Ryan from Jefferies.

I just want a clarification. More recently, you've been talking about Red Lake at the potential to get up to 350,000 ounces. But then in your comments today, you've said repeatedly 300,000 ounces. Is that a change to your thinking? Or have I misunderstood that?

No, it's not a change to our thinking. It's -- Mitch, we're really just trying to be more conservative in the outlook. It's -- Red Lake has the potential, and our ambition is to produce 350,000 ounces.

Okay. Are you just being a bit more conservative in the guidance? Okay. And when I'm looking at Slide 5 and maybe the quality of the document or the pixelation, but there appears to be some FY '23 stopes, the minus 200 RL, so coming through in '23. That seems like a lot of vertical development, if I'm seeing that correctly and goes past between 4 sort of stopes. One, am I seeing that correctly? And two, can you talk me through the rationale for that, if that's the case?

Bob is here, so I'll let him answer that question. Do you want to [indiscernible].

Sorry, Mitch, you're looking at Slide 5.

Yes, that's correct. The Upper Campbell development. So it looks like there's some green FY '23 stopes at roughly the minus 200 RL and if I'm reading the correctly, they would be coming through in '23. I'm just wondering, that appears like quite a lot of vertical development to get to those stopes.

So the stopes in '23, the blue on that picture is actual as built. So it's currently installed. The blue decline. The pink is actually a new decline. And so FY '23 stopes are basically around the area that we're at FY '24 stopes by the end of FY '23, the plan is to actually have the decline broken through to 14 level. So, that's why that -- those yellow stuff to come in.

Yes. No. So in the document that I'm looking at. So then that's fine. I can see that the built to sort of the 200 RL. Then you go to the 0 RL and that's where your 24 stopes are and then if I keep going down to the 200 RL step up to the right, there's a couple of little green spot there in the slider version that I'm seeing, but I'm just seeing it. I must -- we'll take it offline, it's not relevant.

I have to get back to you.

Okay. Okay. My last question then is just all of the pressures that you've seen and related to labor availability, wage pressure, supply chain and that have sort of seen you take a more conservative view on guidance for '23 and '24. What component of those if you continue or expect to continue in that revised guidance? So yes, is this the last one?

Yes. So Mitch, as I outlined on the cost inflation, we've seen labor, we're expecting 4% to 6% in '23 likely to flow through into '24. In terms of diesel and power, it will depend on where we end up contracting rates for our Australian operations outside of Ernest Henry. And the diesel is going to really be predominantly driven by the barrel price. What we obviously need to see how they move in the coming periods. If we look at FY '23, our cost base on gross spend in our all-in sustaining costs versus FY '22, we've estimated the impact is around 7.5% inflationary impact, cost increase. And if you were to do that on a like-for-like, that is taking Ernest Henry 100% ownership for the full year, having 100% of the operating costs as well for the full year. We estimate that it's around a 10% movement, '23 over '22 and then a lesser amount would flow into '24.

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

So my question is on back on Mungari. And if you could just provide some more color on the guidance for '23, '24. If we look back, the guidance seems to be just above the additional ounces from the acquisition of Kundana. So trying to sort of understand a little bit where the outs are coming from over this period. Is it just the nuances acquired from Kundana because the old business was relatively mature we had production still to come from those areas. So maybe if you could provide some color, that would be great.

Yes, sure, David. So the mill is full. Frog's Leg is starting to reach the end of its life, and we always knew that. And hence, we were really keen to acquire the Kundana and East Kundana properties, so the material is largely coming from Kundana. And remember that we only own 51% of the ounces that come from the East Kundana joint venture. So the total ounces produced by the mill are about 145,000 to 150,000 ounces. But the portion that 25,000 ounces or thereabouts 20,000 to 25,000 ounces come from the EKJV, which is the 49% partner. So in total, you're producing around 150,000 ounces of which attributable to us is 127,000 ounces.

Okay. And then maybe just a quick one then on Ernest Henry. There's a sort of throwaway comment there about the mineralization zone maybe being broader. Could you sort of expand on that? And are you thinking now that maybe this will give you the opportunity to obviously increase the inventories you're targeting, but maybe fill the mill eventually?

So Glen, unfortunately, has actually tested positive for COVID the morning and isn't here. But I'll use my best geological knowledge to try and explain it. I mean, look, we've got 42,000 meters, people are very positive and optimistic that you will see an upgrade to that resource. It's still going through its checking and rechecking. But what we're seeing is that there is good continuity of grade. There is some expansion to the mineralized envelope. And then these surface rigs, which Glen has explained to me, basically hit the ore body at a better angle are going to give us a much better understanding of the real depth potential. So very encouraging from the 42,000 meters that is asset and really largely going to be used for this update we're going to give in a couple of months. The surface rigs, visual inspection suggests that the ore body is wider and well mineralized at depth.

Your next question comes from Alex Barkley from RBC.

So just the first question at Cowal on that FY '24 guidance downgrade. You said underground is on schedule and you give sort of 1.3 million tonnes expected versus past guidance of over 1 stage H or the tonnes in the grade, both on schedule. Just trying to work out exactly where the downgrade came from, given that commentary. And you probably needed to mine the open pit sort of well above its reserve grade as you probably would need to do in the subsequent years, maybe not quite as much with the underground going. Should we be thinking a little bit softer than 350,000 ounces per annum going forward in a few years after that as well?

No, I don't think so. I think it all again relates to where we're mining in the ore body. So we've given you the breakdown of the development ore and the stoping ores. Development ore is lower grade than the stoping ore and then that early-stage stoping ore is coming from the areas where we have developed 2 and it is slightly lower than the reserve grade. So we're very happy with the overall global reserve grade but it is going to depend on location of our development. So having now put in the more detailed planning and the more detailed infill drilling. That's where we feel comfortable with. As I say, we have been a bit more conservative in the ramp-up. We do have better knowledge of the ore body, but are confident that there is no downgrade to the long-term outlook at Cowal.

Yes. Okay. I'm comfortable with -- yes, there's going to be some variability in learning underground. Has there been any changes to the open pit? Because you probably did need higher than reserve grade in FY '24. So that's no changes, still on plan, and you can still wind?

No changes. So any changes has been related to the location of where we're mining from the underground. And the mix of development ore to stoping ore.

Okay. Just another one on Red Lake. It actually seems like you're doing quite well with the physical metrics. You said Upper Campbell is on schedule. Again, sort of 50,000 ounces down FY '24. Is there sort of a blow to grade in that year or modifying factors or something? It's just -- it seems like your tonnages and everything you've done at the mine has been okay. Pretty good. I'm just trying to work out exactly why the downgrade then?

Well, we said we'd reached -- we said after 3 years, we've reached 200,000 ounces a year and then we'd go to the towards [indiscernible]. We are 12 months later. So now what we're saying is 160,000 ounces. And remember, this comes off the base of 20,000 ounces in the September quarter, 20,000 ounces in the December quarter 33,000 in the March quarter now 38,000. So we are -- you're absolutely right. We're making the progress we need to make to deliver, we are 12 months later, but the outlook is not any different to what we expected other than being 12 months delayed essentially.

Okay. Just a last quick one. You've got a copper price at of the AUD 12,500 just confirming if you used AUD 11,000 in FY '23, '24 previously?

Yes. We previous ones -- so what you're seeing there is in the change is that we had Ernest Henry copper at a higher rate than what is actually going to be achieved in '23 and '24, and they're almost essentially negating each other at the moment, going from AUD 11,000 to AUD 12,500 and going from 60,000 back to the 55,000 and 52,000 tonnes is what's driving that they're negating each other.

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

First question, just on the power, clearly, that's been one of the cost pressures you've been experiencing. Can you just run through in greater detail how you are thinking about recontracting the power which I believe is up -- the power contract is up at the end of this year and whether there's anything you can do to shave your contract, i.e., solar projects or other?

Yes. Dan, look, we've got a number of options that the team -- the supply team are looking at for those contracts. I mean, in the last month, you really haven't been able to do anything. What we're looking at is how long a term of the contract, is there a better option around shorter-term contract to wait for, hopefully, the price to come down and then you're also looking at security. So the team is assessing that yes, every day. We haven't landed on where we're going in terms of timing into the market. In terms of the renewable space, we have looked at all of those. There's not sufficient enough out there that would make a material impact on our costs that we could get security of supply into particularly the biggest one is Cowal. So at the moment, we're not envisaging any renewable piece coming into this contract term, which would be only for a 2-year period anyway at the maximum.

And have you outlined what you've implicitly put in your guidance for what this power contract will be? Obviously, it's a big step up, but have you factored some number in that you're willing to share?

Yes. So what we've shown there is the average -- on that slide, Daniel, and that's the basis on which we formed our outlook for '23 and '24.

Understood. And then given the very high cost environment, can you outline what you're doing on exploration?

Yes. I mean there's no real material change to our spend. It will be about AUD 60 million, AUD 65 million in '23 that we'll spend in the exploration area, which is a mix of both regional and near-mine exploration, and we'll give the breakdown at the results period Daniel.

And on the Bateman mill, it looks like you've pushed out bringing that back online. What does that mean for group milling at Red Lake. So what is your milling capacity going to be with it in and without? And what are your production outcomes with it in and out on timing?

So the outlook on the production that's in the presentation today is based on the Campbell mill and the Red Lake mill operating through both of those years, which will give us 1 million to 1.1 million tonne processing capacity as the Bateman mill comes on, that would step up to about 1.7 million ultimately going to 2 million tonnes once the plant expansion is done. And as I said on the call, the timing of when that happens, will be dependent on the outcomes of the study and when is the right time to execute it.

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

Thanks, Harmony. Thanks, everyone. I appreciate it's been a tough day for you as shareholders, and all of us as shareholders over here as well. I only want to leave you with the message that we are determined to address the issues that have led to our underperformance over the last 12 months. We have a good portfolio. We have a strong balance sheet and are confident of our future. So look forward to speaking to you when we release our results in August. Thanks.