Evolution Mining Limited (EVN) Earnings Call Transcript & Summary

[Operator Instructions] I would now like to hand the conference over to Mr. Martin Cummings, General Manager, Investor Relations. Please go ahead.

Thank you, Nirav. Good morning, and welcome to the Evolution Mining FY '22 Financial Results Conference Call. Joining me on the call this morning are Executive Chair, Jake Klein, and Finance Director and CFO, Lawrie Conway. We'll be talking to the presentation released to the ASX platform this morning. As you can see, the results we've released today are in line with what we've released recently in our business update late June and our June quarterly report released in late July. We now look forward to hosting investors and analysts at Red Lake next month, where attendees will see firsthand the extensive infrastructure in place. The improvements we've made to date and the opportunity we have at the operation. We're pleased with the strong interest shown but if anyone is interested to join the group, please let me know. With that, I'll hand over to Jake.

Thanks, Martin. Good morning, everyone. Thanks for joining us, again. It does feel a little like deja vu as this is the third time in 6 weeks we are speaking to you. I'll make a few opening comments before handing over to Lawrie Conway, our CFO and Finance Director, who will take you through the FY '22 full year financial results in detail. Since we formed Evolution in 2011, which is now almost 11 years ago, our strategy has remained the same. Build a great team, focus exclusively on the Tier 1 jurisdictions of Australia and Canada, have a small, concentrated portfolio of high-quality operations in well-endowed geologically prospective gold districts and continually seek opportunities to improve the quality of our portfolio of assets. In that context, these last 12 months have both been extremely challenging but truly transformational for Evolution as we have achieved a genuine step change in the quality of our portfolio. With significant external and internal challenges, we do acknowledge that we have fallen short on operational delivery over these past 12 months. Encouragingly, whilst early days, we have started the year well with our portfolio performing to plan, and we are determined to sustain this throughout this year. Now I'm going to turn to Slide 3. Our approach to sustainability is that it is integrated into everything we do. This is seen through a human-centric lens, which incorporates health and safety, both physical and psychological. The environment and the community, including our First Nations partners. We acknowledge that we, as a company, like the rest of the industry have work to do in ensuring the psychological safety for all of our people. In essence wise, this means a workplace where people believe they can speak up and that is inclusive and diverse. We're at a minimum, it is free of any form of bullying, prejudice or sexual harassment, we are absolutely committed to doing this. We have demonstrated resilience and strong risk management through the COVID pandemic. Protocols were developed to minimize the risk to our people and the communities that also allowed safe production during this challenging time. Notwithstanding this, we, like every other business, understandably experienced high levels of absenteeism that adversely impacted our performance during the year. Our commitment and focus to a net zero target by 2050 resulted in a 7% improvement in our carbon emission intensity per tonne mined. This is encouraging progress on this important journey. With the shifting ESG landscape and in the mine for renewables, we are also looking at our mine life cycle differently. In this regard, we are fortunate to have a truly unique opportunity at Mt Rawdon to create a multigenerational infrastructure assets. Our plan, which is advancing rapidly is to convert the open pit into a 1 to 2 gigawatt pump hydro battery at the conclusion of mining. We are working with Ironstone Capital Australia, who originated the concept some 3 years ago and will be co-owners of the project with each party having a 50% share. We have now reached a stage where we are engaging potential offtake parties. Encouragingly, there has been very strong interest with a number of parties in the data room. We are growing increasingly confident of the potential to demonstrate this as both a model mine closure as well as creating significant value for Evolution shareholders. The value of this type of renewable storage has been demonstrated recently with the takeover bid for GenX Power, which valued the company at an enterprise value of around $500 million. Turning to Slide 4. It has been a very busy year and we have ended the year with our portfolio transformed and very well positioned for the future. We acquired the balance of Ernest Henry from Glencore. We consolidated the Mungari district through the acquisition of the Kundana and east Kundana joint venture from Northern Star, and we sold Mt Carlton to Navarre Minerals. We have a portfolio that is in the lowest cost quartile and was able to generate an EBITDA margin of 44% for every ounce we produced. We like our increased exposure to copper, which helped us generate almost $900 million in operating cash flow. We are well positioned for growth with good progress being made on the Red Lake transformation with all physical metrics having improved to the level we need them at full delivery for our FY '23 guidance. And the Cowal Underground project remains on schedule and budget. These 2 projects alone will increase our production by 25% over the next 2 years. And importantly, this growth is coming from operations that have 15- to 20-year mine lives ahead of them. We also have a number of organic growth studies underway. None of these projects have been committed to, and we will be disciplined in our capital allocation, but they also do give us good options for future growth. As you will hear from Lawrie, our balance sheet is strong, and we were particularly pleased that our investment-grade rating was recently reaffirmed by the rating agency in their annual review. Turning to Slide 5, titled Delivering Value. I think we can all easily agree that the value of a gold company is largely determined by its mineral inventory, its resources and reserves, both the quality and the quantity. Discovering more high-margin ounces that are ultimately able to be safely mined, processed and converted into cash in the bank is the true test of value creation. It has been a core pillar of our strategy. The most important call on any acquisition or exploration program is the geological call on the discovery potential. We are very pleased that 3 weeks ago, we released an updated mineral resource estimate for Ernest Henry that captured 119 new drill holes resulted in a 28% increase in the contained copper to 1.13 million tonnes, a 24% increase in contained gold to just over 2 million ounces. If you think about Ernest Henry in terms of gold equivalents equates to a total resource of about 7.5 million ounces, making it a very large mineral system. Whilst these additions have not been included in the charts on this slide, it continues our track record of being able to add ounces of resources to our inventory at a sector-leading very low cost of $35 to $40 an ounce. The reserve additions delivered at $50 to $55 an ounce. In summary, these last 12 months have been challenging, but they've also demonstrated that our people are up for the challenge. They have shown incredible commitments, strength and dedication to navigate these difficult circumstances, and I really believe this is what makes Evolution a unique and special company and provides us a great platform for the future. Thank you, and I will hand over to Lawrie.

Thank you, Jake, and good morning, everyone. I'm very pleased to report the financial results for FY '22. On Slide 6, we have a summary of the financial results. I will go through a number of these in detail in the coming slides. Our underlying profit was $275 million, while our statutory profit was $354 million. As per the half year accounts, the difference to FY '21 relates to the portfolio mix and the stages of the mine plans at each of the operations. As noted by Jake, the improvement in the portfolio achieved by the end of FY '22 gives us confidence moving forward on the financial performance. I'll go through the drivers to the change in profit on the next slide. From a cash generation perspective, we delivered around $900 million of operating cash flow, and this was with only 6 months of full ownership at Ernest Henry. Our EBITDA margin is strong at 44%. We invested over $600 million in capital projects and pleasingly, these projects remain on budget and schedule as part of our planned 25% increase in production over the next 2 years at a very low all-in sustaining cost of around $1,240 per ounce. We declared our 19th consecutive dividend of $0.03 per share fully franked will be paid next month. Slide 7 shows the movement in net profit between the periods. The main drivers to the change in profit year-on-year have been the acquisition and divestment of assets, higher achieved gold and copper prices offsetting lower production and higher operating costs at existing assets due to increased activities and slightly higher input costs. The increased revenue was predominantly from the extra copper at Ernest Henry, which added over $250 million. Metal prices outside of this added a net $68 million. The acquisitions of Kundana and Ernest Henry added around $250 million to our operating cost base, while increased activities at Cowal and Red Lake added $65 million to the cost base. For Cowal, the Stage H costs did not have an impact on our cash flow as these costs were previously capitalized to the project. We did see input costs increase over the year due to COVID supply chain issues, geopolitical tensions and got general global inflationary pressures. Overall, the impact on our cost base was just under 5%. I'll go through our cost drivers shortly. The increased depreciation and amortization costs were linked to the acquisitions and details of our D&A profile by operation for FY '23 is included in the appendix of this presentation. Two items of note, which relates to statutory profit and not underlying profit, our acquisition costs, including stamp duty, and a gain on the remeasurement of the existing interest in Ernest Henry at the time of full acquisition. The stamp duties will be payable in the first half of FY '23, while the gain on remeasurement is a noncash item. Moving to Slide 8 on our costs and the drivers. There's been no material change to our cost structure with employee and contractor labor costs, making up half of our cost base and our top 7 cost types comprised 93% of our total costs. As outlined in our business update in June, we expect our labor costs will move by 5% to 6% in FY '23. For our employee labor, we continue to bias towards at-risk variable component. While we saw an acceleration in prices for input costs during the second half of FY '22, pleasingly, we have seen oil, energy and steel prices reduced since our update in June. However, our FY '23 guidance included assumptions around input costs, and these were set at the levels in place in June. This gives us comfort at this stage when looking at our operating costs for FY '23. Despite the prices lowering in these recent weeks, our team remained focused on efficiencies to mitigate these cost increases at all operations with further potential at Mungari via integration opportunities and improvements in the cost profile at Red Lake are also receiving appropriate attention. The chart on the bottom right shows how sensitivities are to the main cost and cash flow drivers. We proactively manage these to ensure our low-cost position and strong balance sheet are maintained. Turning to Slide 10 and our cash margin. We saw significant cash generation during the year at just under $900 million of EBITDA and operating cash flow. This correlated to an EBITDA margin of 44% or the equivalent of $1,393 per ounce sold. We maintained our discipline on capital allocation to ensure we are investing in the right projects to improve the financial performance of the business and to enable we can continue to return to the shareholder. The immediate benefit of the acquisition of 100% of Ernest Henry is visible here with $465 million in EBITDA including $290 million in the second half, which was $115 million higher than the first half. Cowal continued to be a consistent contributor at $286 million. We saw the benefits of the high-grade Stage H ore come through in the second half of the year, although it was partially offset by the impacts of weather and COVID. The contribution from Cowal should build as the benefits of Stage H and the underground mine are realized. While not where we want to see Red Lake's cash generation, the operational improvements in the second half, which generated $35 million more operating cash flow than the first half was a positive change. This is expected to improve again in FY '23. Moving to Slide 10, which looks at our dividends and debt. We've declared a final dividend of $0.03 per share fully franked. This will be paid on the 30th of September and brings our total return to shareholders to over $1 billion. There's been no change to our dividend policy. They key components of our policy are the performance during the year and the outlook for the business. We take into consideration the cash received from divestments. This year, we received around $56 million from the divestment of Mt Carlton and the deferred settlement from Cracow. In terms of the balance sheet, it is in a good position with our investment-grade rating being reaffirmed earlier this month as part of the annual review process. This demonstrates the resilience of the balance sheet and supports our dividend. We have $930 million in liquidity and is able to support our growth projects. It is important to note that we only have 2 major projects in the execution phase. These are the Cowal underground mine and the Upper Campbell mine at Red Lake. Both projects, as I mentioned earlier, are on budget and schedule. This is planned to be our peak year in terms of capital for the next few years. We have 5 major studies in progress at the moment, but none of these have any commitments to development which provides further flexibility to the balance sheet. We are comfortable with our gearing at 27% since it is within our limits and is on track to reduce as the growth projects transition into production. Lastly, on Slide 11. In summary, we finished FY '22 with a much improved portfolio of assets. The operational performance at the end of FY '22 has laid the foundation for a more consistent delivery in FY '23. These assets will further enhance our high-margin portfolio when the growth projects move into production. They will be the catalyst for our production growth of 25% in the next 2 years. We continue to deliver returns to our shareholders even during a capital-intensive period and this is on the back of the relentless work we have done over the past few years to strengthen the balance sheet. Finally, the ability to deliver the business outcomes over the past year takes a significant effort from our entire workforce despite a difficult operating environment with COVID restrictions and weather impacts. Their commitment is to be commended. The number of acquisitions this year has truly complicated the accounting issues and we've had many people working endlessly over the past 6 weeks to consolidate and present the results today. I want to take the time to acknowledge and thank the team for their work. Thank you for your time this morning, and I'll ask Nirav to open the line for questions.

[Operator Instructions] Your first question comes from Matt Greene from Credit Suisse.

Lawrie, I've got a few financial questions to start with. Just on the stamp duty paid in the December half. I just want to confirm this is around $97 million?

Yes, Matt. So it's about $21 million for the Kundana acquisition and around $77 million for the Ernest Henry acquisition.

Great. And just on the interest rate. So 57% fixed at 3%. I was just wondering if you could comment on the floating component. Where is that rate currently? And how often is that adjusted?

So the term loans adjust as the cash rates move. So they're on a floating arrangement. So they've been moving as the Australian rates have changed in the last few months and that's sort of where that sit in line with current cash rates.

Okay. And sorry to ask another question on the QP pricing at Ernest Henry, but Lawrie, you mentioned in the June quarter that your pricing period was around 4 months. But just looking at when your footnotes, you said that this period can range from 1 to 4 months. So just trying to get my head around this. Is this timing range determined by Glencore? And I guess if so, can you just provide some color as to what the mechanisms are that drive 1 month versus a 4-month settlement?

Yes. So Matt, it's basically outlined in the offtake agreement. So Glencore have to nominate what the QP will be. It's either a 1 month [indiscernible] or a 4-month [indiscernible]. And at this point, they've nominated 4 months. So we expect that not to change, but it's certainly at their discretion.

Okay. Is that range sets at every shipments? Or is this sort of a quarterly or semiannual agreement?

It's set on an annual basis is my understanding. It may be semi but I'll just have to double check. It's not on a shipment-by-shipment basis though.

Okay. That's helpful. And just finally on an operational question related to Cowal. July and August been pretty have you seen much disruption. And unfortunately, it seems like we may see another La Nina this spring. If this were to eventuate, are there any measures that you put in place to try and minimize the amount of disruption you'll see that this time around?

So Cowal had a good July. It's operating well and wasn't impacted by wet weather. Mt Rawdon is being impacted by wet weather and continues noting that it's not a material part of our production at the moment. La Nina, yes, we are monitoring and watching the bomb. We are taking every step that we can to ensure that we are well prepared in the event that it eventuate and feel that we have -- we are taking the right steps to address it.

Your next question comes from Levi Spry from UBS.

Just a very quick simple one for Lawrie. Red Lake and cash tax, when do you expect to pay cash tax over there? And can you just remind me how it all works with Battle North, the Bateman plant and their losses, how we can expect that to play out?

Yes, I would like them to start paying cash tax a lot sooner than they currently planned, but that's going to be dependent on performance. But in short, at the moment, we've got AUD 520 million of Red Lake losses that are being recognized on the balance sheet. And then we've got unrecognized losses of about another AUD 300 million. So tax effect on those at 25% is around AUD 130 million and AUD 60 million, respectively. So I think depending on, as I said, performance over the next 2 to 3 years, I'm not envisaging cash tax to be paid in Canada for a little while.

I'll put a slightly more positive spin on that differently. When and as Red Lake hits its straps, we have sufficient cash tax losses, part of which we acquired when we acquired Battle North that we're not going to be paying cash tax for a long time.

And just before we go back, Matt, I did double check on the shipments. And it is actually at the end of each month, sorry, for the concentrated Ernest Henry.

The next question is from Al Harvey from JPMorgan.

Just a couple on costs. So just wanting to know, you've noted that oil energy and steel pricing are down. Do you have a ballpark figure on what the dollar per ounce impact that could be? I noticed the sensitivities in the slides. But yes, if you could just talk us through that and also how you're seeing the labor cost. You also noted there, I guess, that they're still in line with your June view, but any extra detail there would be helpful?

Yes. Look, on the first one, I mean, where we're sitting now versus the business update in June oil is down around 15% and electricity is down around 14%. Sort of what we see is that oil price at $10 a barrel movement is giving us around a $7 an ounce impact on a full year basis. In terms of the energy, we're in the market in the next couple of months to finalize the cost there. So we haven't sort of landed on where that's going to be in terms of the impact on FY '23. But as I said, when we gave the update in the guidance in June, we had actually allowed for a higher energy cost than what they currently are. And in terms of labor, we're finishing our reviews right now, they take effect from July 1. And in the next 3 weeks, we settle that. And as I said on the presentation, we're expecting them to be around 5% to 6%. I mean you're seeing it's more around the tightness in the market. We're seeing a little bit of an increase in turnover at the moment, but it's the availability of resources that we're really trying to deal with.

Maybe just on to Mungari. Can you kind of give us a bit of an update on the study there? Has there been any changes to the scope now that Kundana has been on the books for the last year or so?

Our view still remains although there was someone who presented at Diggers that said that gold is going to $2,000. So when he was on site with some people, they were asking if the project could be brought forward. Our view is that the project remains in a study mode because we do see that the risk of cost escalation on construction projects and availability of quality resources, so there's no movement. The study is on track. It'll complete during this year, and then we'll make that decision at that point whether it goes through the gate to the next phase.

Your next question is from Mitch Ryan from Jefferies.

Just wanted to clarify, you've made a very clear one you've got liquidity to support current growth projects. Just wanted to clarify, does that include the likes of, I guess, the Kundana project, which remains in study mode and Ernest Henry expansion and also the capacity to pay back -- to pay the next -- the final installment for Ernest Henry?

Short answer there, Mitch, is yes. I mean, when we look at it, we finished the year, $574 million of cash. We've got the revolver available to us. We've got obviously good operating cash flows that will be generated through the course of this year. We've got -- as we get to the end of FY '23, as I said, this is sort of our peak year. Underground at Cowal comes onstream first -- end of FY '23. So as we go into FY '24, we expect the cash flows from Cowal to increase. The improvements we're targeting for Red Lake this year should deliver the Upper Campbell as well that their cash position changes into FY '24. As we said, just to hold there, the growth project isn't coming forward. So that's been delayed into FY '25. And Ernest Henry, as that study finishes, we'll look at what the capital requirements are and when they need to be staged and a lot of that capital predominantly will be around mine development spread out over a period of time, except for the materials handling, which we'll assess when the study finishes. So the answer is we've been positioning the balance sheet, knowing these projects coming through, and we'll allocate the capital as and when those projects justify. Jake?

And just to add to that, I think that was the rationale behind going to the private placement markets. You look at the tenor of the debt that we've put in place and lock that in at 3% at investment-grade rating, that's a very cheap cost of capital, very comfortably matched with the mine lives at Cowal and Red Lake and the rest of our portfolio. Ernest Henry obviously getting mine life extensions with this drilling success that we're having. So we now really are getting a portfolio of long-life assets, and the balance sheet is appropriately positioned for that. 3% debt in the private placement market is terrifically well done by Lawrie and his team.

Next question is from Alex Barkley from RBC.

Jake and Lawrie, I sort of going to ask a similar question on the lines of sort of gearing and ability to delay projects. I think you've given some good color there. Just for FY '23, probably most of the spending at Red Lake and Cowal, which is underway, so a bit tougher to defer. Is this sort of a difficult point with regard to commodity prices, when you could see issues arise? And is there much flexibility remaining in the year, maybe some of that growth exploration spend?

Yes. I have seen your notes on concerns around liquidity. But as Lawrie has outlined, our liquidity is strong. The only 2 major projects we've committed to are at Red Lake and Cowal. We have over $900 million of available liquidity. So I guess it may be helpful to provide a bit of context as to where that concern is.

I think as you've said, you can defer Mungari and Ernest Henry that's okay. I was just wondering for outcoming FY '23, if you do see any issue with the gearing. But I mean, if not, that's okay.

No. The only things we've committed to are the Red Lake transformation and the Cowal underground project. The Cowal underground project is on track and on schedule. Red Lake is progressing to plan. All the other studies that are underway are discretionary and capital will be allocated with regards to the return and the balance sheet capacity. But as Lawrie said, all of those could be accommodated in our long-term full costs. Without taking a very aggressive view of the gold price our life mine plans and budgets are being run $150 lower than the current spot price of gold. Lawrie, do you want to add to that?

No, I think you've covered it, Jake. I mean we deliberately -- and when we gave the business update on the 27th of June, it said that there are projects that right now don't measure up in an inflationary environment, and we are going to delay those, we've got flexibility. And if we look at Mungari with the amount of ore sources we've got there, there is no pressure to bring that plant expansion forward or absolutely do it. I mean if you talk to the team on site, they'd love for that to come in place because they get cost efficiency, and it allows them to open up some other ore bodies, but that also then requires more capital. What we've said is that Cowal underground and Upper Campbell in this year are pivotal projects for us as an organization. We've committed the funds to those, and they're on track. Everything else will go through the studies, but we've got capacity to pull those forward or push those back, not really based purely on where the balance sheet is, but also how those projects stack up economically.