Evolution Mining Limited. (OTCPK:CAHPF) Q3 2022 Earnings Conference Call April 20, 2022 9:00 PM ET

Company Participants

Jake Klein - Executive Chairman

Lawrie Conway - Chief Financial Officer & Finance Director

Glen Masterman - Vice President, Discovery & Business Development

John Penhall - General Manager Cowal Operations

Conference Call Participants

Matt Greene - Credit Suisse

Mitch Ryan - Jefferies

David Radclyffe - Global Mining Research

Al Harvey - JPMorgan

Daniel Morgan - Barrenjoey

Alex Barkley - RBC

Andrew Bowler - Macquarie

Matthew Collings - Morgans

Kate McCutcheon - Citi

Stuart McKinnon - The West Australian

Michael Bennett - AFR

Operator

Thank you for standing by and welcome to the Evolution Mining March 2022 Quarter Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would like to now hand the conference over to Jake Klein, Executive Chairman. Please go ahead.

Jake Klein

Thanks Omni. Good morning. Welcome to the call and thank you for joining us. We do appreciate it. Bob Fulker, our Chief Operating Officer is taking a well-in break from todays call, so Im joined by our Finance Director and CFO, Lawrie Conway and our VP Discovery and Business Development Glen Masterman.

At a macro level, this quarter inflation in the U.S. rose to 8.5% its highest level in 41 years, while unemployment rates in the U.S. and Australia are at historic lows. Russia's invasion of Ukraine is now entering its third month, with the conflict showing no signs of reducing, and COVID continues to wreak havoc on people's health, workforce availability and supply chains.

Closer to home in February and March, the Australian East Coast was battered by heavy rainfall and flooding that tragically killed 21 people and required thousands of people to evacuate their homes. Against this backdrop, gold has been fulfilling its traditional role as the best hedge against inflation and geopolitical uncertainty. Regrettably for the world, I expect these issues to continue.

Turning to Evolutions quarterly reports and our performance and starting on slide three of the presentation. There are many highlights in today's report, but three are clear standouts for me. Firstly, our portfolio has been transformed into one which is amongst the highest quality, lowest cost cash generative, growth oriented portfolios in the gold sector. 148,000 ounces of gold produced an all in sustaining cost of A$990 an ounce was US$770 an ounce is a 27% reduction quarter-in-quarter and makes us very close to being the lowest cost gold producer of scale on the planet.

Operating mine cash flow increased 33% to $269 million. Net mine cash flow increased 135% to $124 million, but the bulk of the $144 million of capital being spent on our most important organic growth opportunities at Cowal and Red Lake. We paid our 18th consecutive dividend of $55 million bringing total dividends paid to shareholders to $1 billion.

Secondly, the impact of 100% ownership of Ernest Henry and the transformation at Red Lake. In the last quarterly report conference call three months ago, I said that I was confident that by securing 100% of Ernest Henry, we had concluded what is likely to prove to be one of the most transformative deals in Evolutions short history. Today's quarterly report is proof of this. The numbers speak for themselves.

Copper production more than tripled to over 13,000 tonnes resulting in an all in sustaining cost of negative $2,000 an ounce and the mine generated $185 million in operating cash flow. Gold sales were higher than production at 39,000 ounces due to an additional 20,000 ounces of gold that was sold to the to -- due to the cancellation of the previous economic interest.

Excluding the impact of those sales, operating cash flow for the quarter would have been $137 million and all-in sustaining costs would have been negative $4,200 per ounce. The transformation at Red Lake gained very important traction this quarter with a 67% increase in production to 33,000 ounces. We expect to improve this to over 40,000 ounces in the June quarter. It is testament to the significant efforts of our people at Red Lake and the operations team under Bob's leadership. We still have lots of work to do, but we are making tangible progress in creating value in this operation.

Thirdly, I was proud of the resilience our teams demonstrated. As mentioned a few moments ago, COVID and rain events caused problems across the country during the quarter and we were also affected. Over 25% of our workforce at Calow tested positive for COVID during the quarter, which amounted to 199 people. Fortunately, everyone is recovering. This of course excludes the impact of those named needing to isolate as a result of being deemed close contacts. Despite this, not only were we able to deliver a robust quarter at Calow, but the team was able to plan and execute a very logistically challenging seven day Mills shutdown, which required a multitude of contractors around 300 people to assemble on sites. With very strict protocols in place not one person involved in the shutdown tested positive.

The unprecedented East Coast rainfall in the quarter impacted both Calow and mount Rawdon. Cowal managed through it but at Mount Rawdon it did result in some instability in the north wall of the open pit. Although this is being managed, it has had and continues to have an impact on our ability to access higher grade oil from the open pit and also required the crusher to be shut down for nine days.

As you all know, the underperformance of Red Lake in the first six months of the year left us with very little runway on our original guidance and taking these new factors into accounts, we have reduced our FY 22 Production guidance by 20,000 ounces, or 3% from the lower end to around 650,000 ounces. We're expecting a strong fourth quarter with an increase in production of around 22%. There is no change to our sector leading all-in sustaining cost guns of $1,135 to $1,195 an ounce, so we will continue to produce high margin ounces.

On slide four, we have set out the results from Ernest Henry. Being a copper gold mine it is challenging to compare it to other gold mines. The best measure is cash flow. And on this measure, I am confident that they will be very few gold mines in Australia that generated $175 million in net mine cash flow this quarter. We have chosen to treat the copper as a by-product credit which delivers exceptionally low cost of negative $2,000 an ounce. Another lens to look at this through is on a gold equivalents basis. Through this lens, production for the March quarter would have equated to 95,000 ounces of gold, or 380,000 ounces on an annualized basis at a low all-in sustaining cost of A$11150 an ounce.

The charts on slide five tell the story of the transformation that is occurring at Red Lake. I am particularly pleased that we gained momentum through the quarter with March being the strongest month and in many areas breaking all-time records at the operation. Having consistently delivered about 1200 meters of development for the last six months, the Red Lake transformation plan now has a goal to consistently and safely mine 3000 ore times per day. This was achieved in March with 106,000 tonnes mined surpassing the previous monthly record in the history of the mine by more than 20,000 tonnes.

Pleasingly this mining rate is being sustained in April. On-going improvements to mining practices continue to drive reductions in stope dilution that improve mine grades by 17% this quarter. Both the Red Lake and Campbell mills are operating at record throughputs. The CYD decline which will provide an important new source of higher grade all gathered momentum and is on track to deliver the first production ore in the September quarter, only six months away. We expect improved production to over 40,000 ounces in the June quarter with the focus on sustaining this level consistently over the next few quarters. Whilst being a few quarters behind our original schedule, we do remain confident of the potential for Red Lake to be transformed into 350,000 ounces a year low cost operation.

Turning to slide six, the Cowal underground project continues to be on budget and schedule for critical path activity. Major procurement milestones have progressed during the quarter and the award of the primary mining and drilling contract is imminence. This will complete the award of all material contracts. First production ore from the project remains on schedule for the June 2023 quarter when the pace funds is commissioned.

Slide seven shows the significant impact of the Kundana and East Kundana acquisition has made on the future of Mungari. The integration is progressing well with the objective to create what we are describing as one Mungari standardized systems and processes and sharing of equipment and workforce costs what was previously three separately run operations.

One example of the operational synergies that are being captured as in underground maintenance and training teams with three separate units are being combined with significant savings and efficiencies. Recruitment of vacant roles is also progressing well with vacant roles reducing during the quarter despite the tight Western Australian Labor markets.

Turning to slide eight. Earlier this month, I was fortunate to be on site when Mount Rawdon hosted a delegation from the Queensland government led by the Minister of Resources, the honourable Scott Stewart. The visit included an update on the two gigawatt pumped hydro power project and the significant contribution it can make to delivering Queensland's renewable energy targets. As a potential pumped hydro facility Mount Rawdon is blessed by history, topography and location.

It has a huge head start in about in that about a billion dollars has already been spent mining 200 million which has been processed for gold production over the expected 25 year period of its life. That billion dollars has created a big hole which can be used as the lower reservoir of the pumped hydro scheme. In addition, the topography of the surrounding region also delivers Mount Rawdon a great natural sight for the upper reservoir.

In terms of location, fortunately, Mount Rawdon it's only 25 kilometers from major power lines connecting Queensland southern and central grids. And on top of that, the timing of the mines closure lines with Queensland decarbonisation strategy, with the state due to close the 700 megawatt Callide B coal-fired power station in 2028. The study work remains on-going and is due for completion in June 2023.

With that, I'll hand over to Glen to provide an update on our exploration and discovery activity.

Glen Masterman

Thank you, Jake and good morning. This morning I'll update on exploration progress achieved across the discovery portfolio in the March quarter, which is set out on slide nine. Key takeaways I'd like to draw to your attention are firstly, the positive drilling results returned on the key joint venture, which have expanded the mineralization footprint at West Island and confirm the presence of very good grades at this emerging discovery.

Secondly, at Mungari and Red Lake, drilling results continue to reinforce our views on underground upside potential, particularly at Kundana where we are delineating new areas of high grade mineralization very close to existing development.

Turning now to highlights in this morning's report. Commencing with our Cue joint venture in WA, we completed our first full quarter of managing and operating drilling activities after taking over from our partner masquerade minerals at the beginning of January. We recently switched analytical laboratories, which has reduced assay turnaround times from well over 12 weeks to a more manageable five weeks. Faster analytical turnaround times give us the confidence to accelerate diamond drilling, with a second core rig expected to arrive on the project during the June quarter. This will increase to three the total number of rigs on the JV ground in which we are earning 75% interest.

Encouraging results from the diamond program in the quarter are highlighted on page 11 of the report. Pleasingly we identified additional mineralized loads along the west Island trend, which has also extended 500 meters in recent aircore drilling to 2.1 kilometers long. The June quarter program will focus on drilling extensions of non-structures to understand potential scale of the mineral system and to test other targets styles that may be important to hosting high grade gold.

At Mungari, drilling results outlined on page 14 extended the structure that hosts the Christmas hanging wall load at Kundana. This mineralisation is located 35 metres from the main Christmas ore body which we're currently mining. The results signify that the important ore bearing structure remains open along [Indiscernible]. The next round of drilling will target the high grade quartz load within the structure with the aim of potentially expanding the high grade mineral resource.

An exciting implication of the recent Christmas results is the realization of untested potential and the hanging wall of the stress load where this structural position is modeled to continue. At Red Lake, drilling retained high grade results own extension of the ozone at lower Campbell, as summarized on pages 12 and 13 of this morning's report. The results confirm great continuity at the local scale and highlight an opportunity for significant resource potential between these deep intercepts at the bottom of the lower Campbell mineral resource. Future drilling will be planned at short step outs from adjacent development to extend the mineral resource into the 500 meter gap identified on the ozone corridor. I look forward to sharing the results of the June quarter drilling programs at our next opportunity in July.

With that, I'll hand over to Lawrie.

Lawrie Conway

Thank you, Glen. Good morning, everyone. This morning, I'm pleased to update on our financial performance for the March quarter as shown on slide 10 of the presentation and outlined on pages 9 and 10 of the report. We're in a very strong quarter of cash generation with operating cash flow up one third to $269 million and we delivered a $125 million of net mined cash flow. This was an increase of 135% from December. We invested $144 million in capital comprising $33 million in sustaining and 111 million on major projects.

At Group Capital guidance remains unchanged at $150 to $175 million for sustaining capital, and $440 million to $505 million for major projects. Group cash flow for the quarter was just under $22 million. Jake mentioned are excellent all-in sustaining cost performance for the quarter, and the $990 per ounce equates to a margin of around 60%. We remain on track to deliver our group all-in sustaining costs within the guidance range of $1135 to $1195 per ounce. We did see some higher costs come through in the quarter and these were in line with what we outlined with our half year results.

As I mentioned that the half year results though, the improvement in metal prices and revenue are more than offsetting these cost pressures. Now achieved gold price was up 3.6% in the quarter. The achieved copper price was down slightly by 1.5% but our copper volume more than tripled. The focus remains on managing the cost pressures across all of it.

The balance sheet continued to strengthen even after the increased debt associated with the Ernest Henry acquisition. Our gearing is sitting at around 23% and is expected to trend down below 20% in the coming months. This is in line with our first target level that we set post any acquisition. We ended the quarter with a cash balance of $538 million and have around $900 million of liquidity.

Turning to slide 11, and a summary of the quarter, delivering an all-in sustaining cost below $1,000 per ounce is certainly sector leading and we will finish the year within our group cost guidance range. The margins we are generating is able to fund our growth plans and still return funds to our shareholders. The immediate exceptional contribution from Ernest Henry is evident in terms of additional copper exposure, reducing our group all-in sustaining costs, and materially increasing the cash flow. The existing mine life plus the expected extensions, we'll see this cornerstone asset generates significant benefits for many years to come. The ability of the team at Red Lake to achieve improvements in all areas of the operation gives us confidence that the transformation is now progressing well and we expect the momentum to increase again in the June quarter.

The other assets are performing well. And throughout the business, we have demonstrated resilience against the extreme rainfall events, and the impacts of COVID especially the isolation requirements for positive cases and close contacts. We are in a very good position to close out the financial year.

Thank you for your time this morning. And Harmony, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Matt Greene from Credit Suisse. Please go ahead.

Matt Greene

Hey, good morning, Jake and the team. My first question is just on Red Lake -- do you think heading in the right direction? My question is around the milling. Can you please provide some context as to how running the Campbell mill beyond the 2000 tonnes per day? Are you getting a sense of what the optimal milling capacity could be? And just to confirm the exception to run beyond that level. I think, I recall you mentioning about it was only for six to eight weeks. Is that the case? Or have you been able to extend it?

Jake Klein

Yes, so the last question first. It's a 12-week trial that we've you can restart, if it's intermittent. So we are confident that we can run it till the end of June and into early July at these higher rates of 2000 tonnes, but we are we're pushing it to the boundaries. I think it was only running at about 17 tonnes or 1800 tonnes a day when we acquired the operation. These are the milling throughput, which it achieved in the first quarter are historic, historic highs as the other mining roads. So we're starting to get the productivity through that we need to convert this into a medium grade higher tonnage operation.

Matt Greene

That's great. Thanks, Jake. And then, development rates are being sustained above the 1200 minutes a month. And if you're able to get 3000 tonnes a day on a sustained basis, what's your thinking around the Bateman mill versus Red Lake mill. I mean its a new mill, are there potential for cost savings there or scale. If you were to go down that medium grade path, it's a transition to Bateman. And what's your thinking around running all three mill?

Jake Klein

Yes, so we're assessing that, Matt now. It is a thing and 11 kilometer distance from the Campbell and Red Lake Mills. We're also doing the, we have the opportunity to do the bulk trial at McKinley deposit, which is near the Bateman mill. But we're working out the milling strategy, obviously, the upper Campbell area, which will come on track in the first half of next year from the CYD decline gives us higher grade and potentially completely independent access to ore [ph] bodies. So, up until now, we've been focusing on keeping the two mills filled, because this is the first quarter, which the Red Lake mill and the Campbell mill have run combined throughout the quarter. So up until now, issues being on mining rates, we're getting that right; we need to start getting consistency and reliability. We feel we're getting there, you can see the trends. But obviously we've had a tough 12 mind set at Red Lake pre this quarter.

Matt Greene

Yes, that's great, Jake. And then just on Cowal changing quarter there with the rain and COVID mentioned the 25% of confirmed cases, if we were to take the close contacts that had to isolate what sort of levels of entities and to the experience of time on site?

Jake Klein

I think I saw that the highest level of absenteeism on one day was about 80 people, 75 to 80 people, it's now down to about 35. So it's reducing, but 80 out of about 400 people is a lot of people off site. That's 400 of total workforce. So if you took that that shift and those who are on break, it would be less than the 400.

Matt Greene

Yes, got it. Okay. And then do you expect things to ease with the recent, these recent changes on close contacts by the government.

Jake Klein

On John Penhall, the general manager of Cowal is sitting in the room. Yes, he's nodding his head. But what none of us are pandemic experts. So we're hopeful. Yes, Cowal has dealt with the brunt of it. And they've dealt with it very, very well. I mean, getting 300 people onto site for a shutdown was a pretty remarkable achievement without getting infections.

Matt Greene

Yes, I appreciate it. Okay. And look, if I could just squeeze one last one on Mount Rawdon there, perhaps a longer dated question here. A lot of a lot of gold miners wanting to become net zero on emissions. What's your thinking on this pump hydro project, could this be a project that you participate in the future and look to maybe, I guess, generate credits to offset carbon elsewhere in the portfolio? And they're just on the scale, how did you arrive at the 2 gigawatts for 10 hours?

Jake Klein

So I think the scale has been determined really by the reservoir capacity on the pit. It is a multibillion dollar project and we are not power operators and we don't intend to become them. But yes, there is, the opportunity which I've described, can we have some ownership of the projects, it would be small, and a disproportionate amount of carbon credits to me would be a structuring outcome that would be fantastic for Evolution. It's, we haven't yet been able to test it. The first priority is to make sure that this project is feasible and economic. The prefeasibility study says that it is, the meetings with the Queensland Government suggests that it fits and aligns exceptionally well within their requirements. The more I read about pumped hydro and deep battery storage, the more compelling Mount Rawdon becomes. But fundamentally Matt Evolutions priority is twofold; one is to do the right thing by the community and the remediation of the mind. The second thing is to maximize the value of the project and the pumped hydro has the potential to be a very significant and valuable project for Evolution shareholders.

Matt Greene

That's great. Appreciate your time. Thanks Jade.

Operator

Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.

Mitch Ryan

Good morning, Jake and team. First question. This one's probably Lawrie we'll have some on page 10 of your quarterly working capital build of roughly $67 million during the quarter. That seems high relative to previous quarters. I'm guessing it's got something to do with the Ernest Henry Acquisition but just wondering if you could please provide some color on that quantum of movement.

Lawrie Conway

Yes, Mitch it's exactly that I mean what happened in the March quarter is we closed out the joint venture. So we get the gold sales. So that was a positive working capital movement. But we then moved to 100% of the concentrate, which works on either a three or four month, quotation or period. So in this very first quarter of owning 100%, our working capital will increase, and it increased by over $40 million on the receivable side. And that was the major impact on our movement in working capital in the quarter.

Mitch Ryan

Thank you. And my second question. And understandably, you've softened the guidance for FY 22, given the events during the quarter. Just wondering if there any drivers for that change that are likely to flow into FY 23 and ended up potential risk of impacting sort of the guidance out there for FY 23 currently?

Lawrie Conway

I think Mitch the real risk is on Red Lake. We had guidance out there for 200,000 ounces for next year. We are really looking at that. We are likely to need to downgrade that in due course, as the final budgets and loans come in place. But it is, at 40,000 ounces is the next hurdle and then 50,000 ounces that caught up from there.

Mitch Ryan

And then I guess on that, then can you provide a bit of clarity on Red Lake with regards to that 40,000 ounces? My the way I would think about it is that that's the new base once you've achieved that in the fourth quarter, is that the right way to be thinking about it? Or is it a running hard in the fourth quarter and may come down in 1Q FY 23?

Jake Klein

No, what we saw, when we had this debate around reducing guidance in the range, we've made a conscious effort to try not to push the sights in the fourth quarter and fall off the edge of the cliff in the first quarter next year. So we are very driven by the fact that we've recognized our missteps at Red Lake. We need to build confidence and we need to get credibility. And we are going to be trying to build a base and then step up from those bases.

Mitch Ryan

Thank you. That's it for me.

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Evolution Mining Limited (CAHPF) Management on Q3 2022 Results - Earnings Call Transcript - Seeking Alpha