Evolution Mining Ltd. (OTCPK:CAHPF) March 2016 Quarterly Results Conference Call April 21, 2016 9:00 PM ET
Jake Klein - Executive Chairman
Lawrie Conway - Finance Director and Chief Financial Officer
Mark le Messurier - Chief Operating Officer
Roric Smith - VP Discovery and Chief Geologist
Aaron Colleran - VP Investor Relations and Business Development
Michael Slifirski - Credit Suisse
Cathy Moises - Evans and Partners
Tess Ingram - Australian Financial Review
Thanks, David, and good morning and welcome to the Evolution March Quarterly Conference Call. We appreciate you taking the time to listen to the update.
My name is Jake Klein, the Executive Chairman of Evolution Mining. I'm joined by my colleagues, Mark Le Messurier, our COO; Lawrie Conway, our CFO and Finance Director; and Roric Smith, our VP, Discovery.
This morning, we will be talking to two important and exciting announcements made on the ASX platform, being the Quarterly Report and our Annual Mineral Resource and Ore Reserves Statement. The format of the call will be the same as the previous quarters. We will first provide some brief commentary around the announcements and then open the lines for questions.
I'm very pleased and proud of our performance this quarter. By any measure, I think on all fronts, Evolution has delivered an outstanding performance. Firstly, the foundation of our business is built on our capacity to produce gold safely and profitably. This is only the third quarter we have operated Cowal and Mungari along with our other five operations and to be again able to deliver record production of 208,000 ounces is a significant achievement.
Remember, this is a company that for the last financial year, for the full 12 months to June 2015, produced 437,000 ounces. Importantly, we continue to make inroads in our cost profile and we are able to mine operating cash flow of AUD154 million and net mine cash flow of AUD106 million. As Lawrie will highlight, this enabled us to pay down AUD80 million in debt, bringing our total debt repayments in only seven months to AUD207 million and also pay our sixth consecutive dividend of AUD12 million this quarter.
Cowal had an outstanding quarter and is proving to be the cornerstone asset we always knew we needed to acquire, generating over AUD50 million in free cash flow in the three months under review. The benefits of having a portfolio of assets is clearly reflected in these results.
We know and accept there is an opportunity for improvement at both Edna May and Mt Rawdon, which both had quarters below their usual high standards, largely due to stockpile of lower-grade material being processed through the plant as access to higher grades lowering the pits was restricted at both sites. We expect both operations to demonstrate improvements this quarter.
Our confidence in our operations is underlined by willingness to forecast that in spite of a record March quarter, we expect the June quarter to meet or exceed this production record. Cash flow will be held by our current capital expenditure forecast that is now anticipated to be at or below the bottom end of our original guidance.
Secondly, we have been able to add ounces to the most important physical asset of any mining company, our reserve inventory. As you will see from our annual mineral resource and reserve inventory statements, even after accounting for depletion of 979,000 ounces of our reserve ounces – sorry, our sorry, our reserve ounces increased by 12% from 5.2 million ounces to 5.85 million ounces, that's after the depletion of 979,000 ounces. This means that effectively if you take the numbers prior to depletion, there has been an increase of 1.7 million ounces.
Importantly, none of these ounces were added as a result of a change in the gold price assumption, which remains at AUD1,350 per ounce. We have deliberately decided to remain disciplined in spite of the current gold price being materially higher than this.
Thirdly, and potentially even more importantly, post the release of or the cut-off of the resource and reserve statement, which was done as of December 31, we have had multiple exploration successes across our operations, largely attributable to an improved geological understanding of our ore bodies and an aggressive exploration program that has 17 drill rigs operating across our subs.
As Roric will highlight, significant ore-grade intersections below the current defined reserves at Mt Carlton, Cowal and Mungari give us confidence in our ability to add to our reserve inventory. The potential for an emerging discovery at Johnson's Rest is a standout highlight. The best intersection returned 8.7 meters estimated true width grading 22 grams per tonne and supports our interpretation of the system plunging to the south.
While it is still early days and there is a lot more work to be done, this is clearly very exciting. We believe this system extends on to the Phoenix Gold sentiments, where we now have completed the first six holes of a drill program and are awaiting assay results. These and other targets generated by our recent work have the potential to be a real game changer for Mungari.
On that high note, I will hand over to Mark.
Mark le Messurier
Thank you, Jake. 209,000 ounces of gold production, AUD106 million of free cash flow, AISC of AUD1,015 for the quarter, and AUD975 year to date. These are results we’re very proud of and delivers on expectations from the acquisition and integration of two new mines less than nine months ago.
Cowal, slide 6, a very strong operating performance in Q3 on the back of high grades and throughput, resulting in net mine cash flow of AUD53 million and AISC of AUD757. During the quarter, Jason Greive started as GM and moved quickly to set a path for making the mine even more productive and determining the priorities for growth.
We have upgraded the reserve, started resource definition drill programs and established a project team dedicated to extending mine life. We have a major mill shut in Q4 of nine days. Otherwise, we expect Cowal to contribute strongly.
Mungari, gold production was lower in Q3 at 34,000 ounces as we put production in the Frog's Leg Mist area on halt, while further ground support was installed at a cost of AUD3 million. Production resumes from this area this quarter. Despite this limitation, the site still contributed AUD16 million to cash flow to the business and the team went about driving further improvements in growth, such as the successful resource drill program at the base of Frog's Leg [indiscernible] and initiating the growth plan for the Mungari region that now incorporates Phoenix.
Mt Rawdon, significant rainfall in January following the large rainfall in November for the stock to accessing ore at the base of the pit. Production will improve this quarter with Mt Rawdon returning to full production early in FY2017, with normal production profiles and performance expected for the full FY2017 year. We will be in a better position to manage high rainfalls in FY2017.
Edna May, this was a tough quarter for Edna May with additional cost for drilling and delays in production due to rain. We must improve on this. We are now at the base of the pit and we will mine high-grade ore this quarter. Preparations to starting the underground mine are well underway.
Cracow had a consistent quarter and this site has delivered AUD34 million net cash flow year to date. Pajingo had a great quarter and has produced 52,000 ounces and AUD21 million of net cash flow this financial year.
Finally, Mt Carlton, on the back of 6.6 grams through the mill, 29,000 ounces of gold was produced following on from 30,000 ounces last quarter. Cash flow was AUD64 million year to date and AISC AUD665. Overall, the results are very good and we make a strong commitment that both Edna May and Mt Rawdon will improve in the coming months. We continue to focus on extending mine life at all our operations and improving operating performance and margins, as we have done over the last four years.
Thank you, and over to you, Lawrie.
Thank you, Mark, and good morning, everyone. I'll be providing a brief summary of the financial performance for the March quarter as outlined on pages 9 and 10 of the report. Our focus in terms of financial position has been on deleveraging from the level of debt undertaken since the acquisition of Cowal and Mungari were completed.
The March quarter was no different to previous quarters with a significant inroad being made to reducing our debt position. While the performance of each of the sites has been mixed this quarter, the overall outcome at a group level has been very pleasing. Our C1 unit cost was AUD752 an ounce and year to date stands at AUD718 an ounce.
On an all-in sustaining cost and all-in cost level, we achieved consistent outcomes at AUD1,015 and AUD1,125 an ounce, respectively. Based on an achieved gold price of AUD1,614 an ounce for the quarter, we generated healthy margins of between AUD500 and AUD600 an ounce on an all-in sustaining and all-in cost basis.
While the all-in sustaining cost for the March quarter was in line with the December quarter, it is to be noted that higher sustaining capital expenditure added approximately AUD50 an ounce to the March quarter. These were all timing-related costs and at year-to- date, all-in sustaining cost remains very competitive at AUD975 an ounce.
In terms of our all-in cost, this is trending down as our major project and stripping activities start to tail off. In the March quarter, the seven operations generated a record operating cash flow of approximately AUD155 million. After investing AUD49 million in sustaining and major project capital, we generated a record net mine cash flow of AUD105.8 million.
Out of this cash flow, we directed AUD80 million to our debt facility. At the end of the quarter, we had AUD400 million of debt under the syndicated facility, which is down by AUD207 million from when we established these facilities. With AUD207 million of debt repaid and the majority of this being early repayments into the term facility, we are now in a position where we met all of our repayment obligations through until the end of December 2016, effectively nine months ahead of schedule.
Since the end of the quarter, we have given notice to repay another AUD30 million this month. The continued strong cash generation of the business is supporting the emphasis on deleveraging the balance sheet with our leverage ratio now down to 0.63 and our unaudited gearing level down under 20%.
This debt reduction has been achieved at the same time that we've been paying one-off acquisition and integration costs of approximately AUD87 million, which includes just over AUD31 million for the Phoenix acquisition. This cash in future periods will be available to be directed into our debt facility.
With that, I'll now hand over to Roric to discuss our discovery results.
Thanks, Lawrie, and good morning. It's my pleasure to take you through the exploration highlights commencing on page 11 of the quarterly. This quarter, up to 17 drill rigs were active on exploration, resource definition and extension work across our sites and have delivered one of Evolution's strongest hit of quarterly exploration results. Importantly, this work is starting to set us up for the future.
At Mungari, drilling at Johnson's Rest returned high-grade intersection from two of three holes on the [indiscernible]. The deep hole returned 10 meters at 22 grams a tonne as shown in figure 2. The structure is now defined over 1,500 meter strike length. It remains open at depth and to the south. Follow-up drilling to capitalize on this emerging discovery is underway.
The 60 kilometers of #D seismic lines processed at Mungari is providing significant influx into the geometry of major shear zones and the metallogenic potential. This work has generated a significant number of high-quality targets where drill testing will commence in quarter four and FY2017. Resource definition drilling at Mungari has defined extensions to the mist load at Frog's Leg as shown on figure 3 where intersections include 7 meters at 5.63 grams per tonne. Quarter four will see the team focused on defining extensions to the Central, Rocket, and Rocket South zones.
Similarly, at White Foil, drilling has confirmed that continuation of mineralization up to 200 meters along strike and 40 meters below the limits of the December 2015 ore reserve. This is described in figure 4.
At Cowal, drilling continued to test for extensions to the north and south of the nine ore bodies and beyond the mining lease. In addition, an aggressive drill program has commenced in and around the E42 pit to define tangible additional resources and improve resource classification beyond the limit of the current E42 ore reserve.
At Mt Carlton, our improved understanding of the orebody is yielding additional high-grade gold intercepts beyond the V2 pit and includes 12 meters at 3.7 grams a tonne. Our drilling in quarter four and FY2017 is designed to define a high-grade underground resource within the limits of the [indiscernible].
Similarly, encouraging resource definition results returned from the Coronation-loaded Cracow confirmed the depth extension of a high-grade load with intercept including 4.7 meters at 50.9 grams per tonne.
With that, I’ll now hand over to Jake.
Thanks, Roric. Evolution is only 4.5 years old. When we started the journey, we believed there was a strategic gap for the creation of a globally-relevant, mid-tier Australian gold company. Mid-tier gold companies have consistently delivered superior returns to shareholders. Executed correctly that have the capacity to generate material amounts of cash flow from their operations and deliver meaningful growth.
I think our results this quarter clearly demonstrate that we have ticked all of these boxes. Again, you're seeing the benefit of having a portfolio of assets. We have an outstanding group of people at Evolution and look forward to our future with both confidence and excitement.
David, can you now please open the lines for questions?
[Operator Instructions] And your first question will come from the line of Michael Slifirski from Credit Suisse.
I want to start really with Cowal and the really strong reserve growth that you've delivered there. Can you help me understand, please, where that sits within the existing piece and plus what the cost to access that might be? Is there a significant CapEx that will be required or does the strip ratio change from what your guidance life of mine is now, just trying to understand how we add those ounces to our profile and what costs might be required to before that can be achieved?
Michael, I'll hand that over to Mark over to Mark, but before I do, I need to ask whether you have a deal with the conference call company that gets you first in line every time.
Not every time, Jake. There are certain companies that treat me very, very badly.
Over to you, Mark.
Mark le Messurier
Michael, we're doing work on the planning of the pit. At the moment, we are presenting budgets and life of mines in the next couple of weeks. The CapEx back towards the crusher, but this next level of CapEx doesn’t take out the crusher, so we still have work remaining.
And as far as the strip ratio goes, I don't want to correct that number at the moment. We are still calculating that and then looking at the best way to attack it with pit designs, but it won't be – all I'll say it’s not going to be materially different from what the site has experienced.
I just want to add, I mean, this reserve increase adds the potential of another up to 5 years mine life to Cowal. I think we have increased the reserves by well over 1 million ounces since taking over the operation late last year. So, we are finding that this is just an outstanding asset as you can see from the AUD50 million of cash flow generated this quarter. It really is that cornerstone asset, which we have been seeking out for the past few years.
But we just have to be patient in terms of guidance and I'm really not sure how to add those ounces, I can see how to add the ounces, but in terms of capital required, if I sustain the same all-in sustaining cost, there is still presumably some sort of amount of capital and you’re suggesting we just need to be patient.
Yes, although expect mine life extensions at Cowal, without that, I think in the Investor Day in June, we'll try and give you some detail around that.
And your next question will come from the line of Cathy Moises from Evans and Partners.
Excellent result and I've got a couple of questions following on from Michael's which I was going to ask the strip ratio also, but I guess grade profile and it's a fantastic increase, but at a lower grade, so do we flatten the grade profile or do we drop off to a low grade towards the end of the mine life? And the other question relates to the positive reconciliation at Mt Carlton, which I understand isn't flowing through to the resource statement at this stage and any feel for what that's continuing to track at?
Mark le Messurier
Missed that second part, Cathy, but the first part with Cowal, we've forecast before the grade from the Cowal pit and through the plant will be about 1.3 grams for the next three years. We do have lower grade stockpiles to trade in a life of mine plan as it stands at the moment. And the second part of your question, sorry?
[indiscernible] and I guess – just I saw your note out this morning, there is no attempt to kind of high grade at Mt Carlton in any way. The positive grade reconciliation is coming through the normal mining sequence that we're getting by these bonanza grades that we are finding in the deposits.
Now, I wasn't thinking of high grade and sometimes in mine sequences, there might be some higher grade and I was trying to work out how it affect [Edna] and as I said the other question I had was, from my understanding, it's not climbed through the reserve resource upgrade at this stage. So we probably need to be factoring something else if we want to be getting the forecast close to your grade. I was wondering if you can give us any guidance as to the [indiscernible] versus your expectations with relation to the current reserve resources there.
Yes, this year, we are in the eastern end of the pit. It is a bonanza area as we refer to it. It is above our reserve grade. Our reserve grade has improved following further grade controlled drilling and more mapping and more modeling of the ore body. But the average, there has been some increment in the reserve grade. The average of the pit is seen in the reserve. We are not prepared to apply any practice to our grade at Mt Carlton.
[Operator Instructions] And your next question will come from the line of Tess Ingram from Australian Financial.
Jake, this is a question for you. Do you think with the Australian dollar creeping up, there is any cause for concern I guess within the gold industry for investors? Do you think the industry has done enough to lower costs or has it relied too heavily I guess on these external tailwinds?
We are still finding that we're able to make inroads into our costs. Just this quarter, we've led a number of quite significant contracts for consumables and have found that we have been able to achieve quite material reductions to the prior contract prices. So we still feel comfortable that there are gains to be made from a cost perspective.
As you've seen from our performance across our portfolio, it was a mixed performance. We see opportunities to improve the performance of some of the assets which didn't deliver to their usual high standard this quarter. So from an Evolution perspective, I’m very confident of the future. You heard Lawrie articulate and highlight that we've made another AUD30 million debt repayment just given the bank’s notice to make it this month. So still generating large amounts of cash flow and see that continuing into the future.
And at this time, there appears to be no further questions in queue.
Okay, David. Thank you Tess, Michael and Cathy for your questions. We assume our announcements and commentary have answered everyone else's questions, but as usual, we remain available if you want to contact us. I’d look forward to updating you in the future about our future successes. Thanks very much.
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