Evolution Mining Ltd. (OTCPK:CAHPF) June 2016 Earnings Conference Call July 20, 2016 9:00 PM ET
Jake Klein - Executive Chairman
Mark le Messurier - Chief Operating Officer
Lawrie Conway - Chief Financial Officer and Finance Director
Michael Slifirski - Credit Suisse
Jim Pollock - Surbiton Associates
Paul Hissey - Goldman Sachs
Thank you for standing by. And welcome to the Evolution Mining June 2016 Quarterly Results Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your host today, Mr. Jake Klein, Executive Chairman. Thank you, sir. Please go ahead.
Thanks Edward. Good morning and welcome. Thank you for joining us. This morning I’m joined by my colleagues, Mark Le Messurier, our COO and Lawrie Conway, our CFO and Finance Director.
I’m going to keep my opening comments very brief as I think you’re all up to speed as to where we are at as a company following our Investor Day and site visits to Mt. Carlton just a few weeks ago. For those of you who have not had a chance to look at it, the full Investor Day presentation and webcast from June 28 is available on our website.
This morning’s release of our quarterly capsule for stellar year for Evolution: record production this quarter of 216,000 ounces. Record mine operating cash flow of AUD184 million. Record net mined cash flow of AUD119 million and a debt reduction this quarter of AUD115 million bring total debt reduction in the 12 months to AUD322 million which excludes about AUD108 million in one-off costs mainly stamp duty relating to our acquisitions.
By any measure ladies and gentlemen, it’s been a great year. This strong performance has allowed us to double our dividends to 4% of revenue.
At the Investor Day presentation, we also released and have included in this quarterly report our FY17 guidance and three-year guidance which shows that this performance that we delivered this last 12 months is not only sustainable but should get better.
The one thing I think worth highlighting before handing over to Mark are some new recently received exploration results from a number of our sites and which were not in the Investor Day presentation. Many of them are encouraging but particularly those, received at Cowal with the scale of the mineralization in the proposed H-cutback is very impressive and highly encouraging and importantly is identifying new zones of mineralization.
We also received impressive results at Galway which serve to demonstrate the scale of the mineral system we’re dealing with at Cowal.
With that, I will hand over to Mark for a more detailed update on the performance this quarter and some detail on these exploration results.
Mark le Messurier
Thanks Jake. We had a very strong fourth quarter with record production of 216,000 ounces produced in average all-in sustaining cost of AUD1,117 an ounce. This was a culmination of a very good year with full-year production of 803,000 ounces up from 438,000 ounces in FY15.
AISC for the full-year was AUD1,014. With respect to safety we had two loss time injuries in Q4, a back injury and an ankle injury. Our LTIFR rates finished at 1.8 for the year and pleasingly our TRIFR reduced to 9.7.
The high AISC across the group in Q4 was primarily due to higher capital expenditure. On equipment rebuilds and replacements, AUD15 million and accelerated resource definition drilling program AUD9 million and TSF construction AUD5 million.
Now, to move on to the individual sites and I’ll reference our drilling commentary for each site. Let’s start from page 12 of that report. Cowal, Cowal produced 66,000 ounces in the quarter at AISC of AUD915, bringing the FY16 production to 238,000 ounces and AISC of AUD776.
At an average gold price of AUD1,590 for the year, the margin is over AUD800. The mine generated AUD164 million of cash in 11 months. AISC was higher in Q4 on the back of higher capital expenditure, AUD20 million was spent in Q4, a material increase compared to previous quarters.
As said out in our guidance with Cowal, we expect another good year of higher margin productions in FY17.
On the drilling program, we move quickly to start an aggressive drill program at Cowal to confirm and build the current rigs at around AUD842 which we refer to as stage H. Seven rigs are now operating in or on the edge of the pit. The key takeaways are, parent holes are deploying high grade oil by than defined by the resource model. The program is increasing the resources’ confidence from inferred to indicative. And new intercepts are outside what is being defined by the resource block model.
The results of hole 1710 show there was more gold in stage G and H and that mineralization continues outside stage H. The parent hole sits on the edge of the AUD1,800 shell we use to calculate the resource.
As well, the upper part of the hole confirms in added ounces. 1710 holes B and C will likely upgrade from inferred to indicative. Hole 1711, 50 meters away also has three very good intersections. RC holes drilled inside the pit confirm results from directional drilling and will upgrade categories outside stage G.
This program is 37 kilometers of dominant RC holes will be completed in October. The Galway and Regal results from six holes confirm and extend mineralization at depths on a diorite volcaniclastic context.
To Mungari, gold production rebounded strongly in Q4, following the grand support program in Q3, with production of 43,000 ounces at all-in sustaining cost of AUD944 an ounce, down from AUD1,227 an ounce in Q3. FY16 production was 137,000 ounces and cash flow of AUD84 million. The strong results confirm that our investment in Mungari will deliver significant rewards.
On drilling, exploration work continued at Johnson’s Rest and a broad prime work program over the Zeleke area. In respect to new mine drilling, we continue to add programs to extent the pros leg resource with 10 kilometers of diamond drilling completed in the quarter.
Mt. Carlton, as highlighted at the Investor Day, this mine delivered 113,000 ounces of production and AUD100 million of cash, an exceptional year. Key Q4 results were 29,000 ounces of production and AISC of AUD917. The team there continues to chase every opportunity with an improvement in recovery of 2% in Q4 and mill throughput stabilizing at 110 tonnes per year. And further reductions in concentrate transport costs were realized. This year, we are after further improvements in recovery.
On drilling, we had good intersections, 200 meters east of the mine B2 pit which provide encouragement to continue the search for high-grade signs at depth well away from the pit. The bulk of the program focused on pinpointing high grade blocks adjacent and underneath the high-grade B2 pit.
Mt. Rawdon, production improved in the quarter to 22,000 ounces at AUD1,082, so lift production to 85,000 ounces for the year produced in all-in sustaining cost of AUD1,024. This year was an anomaly for Rawdon and we are planning to produce 100,000 ounces for the next five years.
Edna May had a disappointing year reflected in the low production of 71,000 ounces and AISC of AUD1,504. In the quarter, production was 18,000 ounces at AISC of AUD1,554. Access to the base of the pit was established with a high-grade pit. And therefore grade and gold production will improve remarkably.
More attention will be paid to long-term planning fundamentals going forward. As the mine becomes more complex, we’re confident Edna May will be a valuable contributor to Evolution. The underground portal excavation started this month.
Cracow had a slightly softer quarter of 21,000 ounces at AISC of AUD1,366 with 91,000 ounces produced for the year at AISC of AUD1,065. Cash flow was very strong with AUD41 million.
On drilling, results from Coronation of building confidence, but we have a solid resource of 100,000 ounces with an average grade of 8gms at 2.5 meters width. 35 holes are drilled into Coronation in the quarter bringing the total to 153.
Pajingo had another good quarter producing 16,500 ounces at total AUD1,058 an ounce and produced nearly 69,000 ounces for the year and a substantial AUD27 million of cash. On drilling, we extended drill drive at Canon Bay last quarter and drilled and developed the high-grade zone of the western end of Camembert. The drill program from the extended drive will confirm the surface holes and that work will start this quarter.
So, in summary, despite lower than normal production at two mines, the group once again delivered to be within guidance on cost and production. The all-in cost of production was AUD1,142 an ounce, including exploration costs and major capital. This compares to AUD1,293 an ounce on opening cost last year. We invested in our future through various capital and resource drilling programs and increased our reserve base to 5.8 million ounces.
Our provincial and like to mine planning certainly provided the clear direction for development and investment and highlighted the opportunities we have to continue producing consistently, reliably and at low cost for Evolution shareholders. Thank you.
And I’ll hand over to Lawrie.
Thank you, Mark and good morning everyone. This morning I’ll review with you the financial performance for the June quarter and FY16. The results are generally in-line with the details we released on the 28 June as part of our Investor Day. We will be releasing our full-year financial results next month at which time we’ll go into more details about the performance for the year.
The summary I’ll provide this morning is based on the information outlined on pages 10 and 11 of the report.
As has already been touched on by Mark and Jake, about the June quarter and full-year for 2016 has seen excellent results with many records broken. From a financial perspective, the June quarter rounded out an exceptional year for the company.
We had record operating and net mine cash flow of approximately AUD184 million and AUD120 million respectively. It was pleasing to see all seven operations return to being cash positive for the quarter, despite high levels of capital expenditure.
Significantly, Cowal, Mungari and Mt. Carlton generated more than AUD100 million of net mined cash flow in the quarter. The capital expenditure of just under AUD65 million was higher than the March quarter but this was basically the plan as we expected sustaining capital trend up over the year due to timing of the capital programs, while major projects’ capital trended down predominantly due to the transition and waste dripping at Mt. Rawdon.
While the sustaining capital was slightly higher than the AUD100 million estimated in our release on 28 June, this was due to the few projects, namely, the unplanned purchase of land at Cowal, better than expected resource definition drilling meters and opportunistic purchases of low-cost second-hand equipment for Mt. Rawdon and Mungari.
These few projects combined the credit to AUD8.8 million of expenditure or AUD39 an ounce for the quarter. Some of this expenditure was planned for FY17 but is not material enough for us to change our guidance at this stage.
As noted in the report, the high working capital movement in the quarter is driven by the timing of capital projects in June, which will be paid during the September quarter. For the year, we have achieved a record operating cash flow of AUD628.4 million and record net mining cash flow of AUD428.2 million. This has been achieved on the back of high sales, up 92%, a higher achieved gold price up 7% or AUD108 an ounce and lower all-in costs down 12% or AUD160 per ounce.
Taking into consideration, our all-in costs, our interest costs and dividend payments for the year, we have achieved a net cash margin of approximately AUD418 an ounce based on our achieved gold price for the year of AUD1,597 per ounce.
We have used this cash to reduce our debt by AUD322 million over the year including AUD115 million in the June quarter. This has reduced our debt facility AUD285 million as at the end of June.
In addition to reducing debt, we have paid around AUD108 million in one-off costs associated to acquisitions and integration during the year with approximately AUD21 million paid in the June quarter.
The balance sheet is now in a very strong position and we continue to prioritize retirement of debt from our surplus cash flows. Given the position of our balance sheet and as announced on the Investor Day, we have changed our dividend policy to double our payout ratio to 4% of revenue.
We plan to apply this to our final dividend for FY16 and further to this, we expect to be in a position to commence franking out dividends from the end of FY17.
With that, I’ll now hand it back to Jake.
Thanks Lawrie. Edward, if you can now open the lines for questions.
[Operator Instructions]. Your first question comes from the line of Michael Slifirski. Your line is open. Please go ahead.
Good morning, thank you very much. There is not lot to ask because you did give us a lot of data just a few weeks ago. But I wanted a bit of help if you could please on outlook for depreciation. So when I look across each of the operations and look at the dollar prints of depreciation and compare that to the dollar prints of additional capital going in, specifically if I look at something like perhaps Mt. Carlton where they’re running AUD500 an ounce but the reinvestment of AUD173 an ounce and expectation of significant ounces to be added.
How should I think of that forward-looking depreciation for Mt. Carlton specifically and the other operations more generally?
Michael, I’m going to hand that one quickly over to Lawrie.
Good morning Michael. Yes, look, what we’re doing right now is part of our finalization of the FY16 accounts is running through the latest resource and reserve statement and the capital planned for FY17. So, in the FY16 full-year results we’ll give an outlook for each asset in terms of depreciation. So, we haven’t signed off on all of those as yet. We don’t expect there to be material movements in the rates that you saw for FY16 at Mt. Carlton in particular but at some of the sites we do see some upward trend there.
Mark le Messurier
Your next question comes from the line of Ranjita. Your line is open. Please go ahead.
Yes, hi good morning Jake. I’m Ranjita [ph] here from Bloomberg News in Singapore. Just two questions, firstly, just last month you were saying that you think that gold prices, gold could very well be the safe haven of major gold market given that prices are come off a little bit right now. Do you still see, I mean, do you still see gold are you still bullish on gold? And secondly, as Evolution Mining plan on any asset divestments?
Thanks for the question. I do remain bullish on the outlook of gold. I think this is a minor correction and I think in fact in some ways it’s healthy. I think if you look at some of the events which have occurred since I made those comments about a month ago it seems to have added what to the cracks that have appeared on a geopolitical and financial perspective. In the world we’ve had Brexit, we’ve had a potential coup, a failed coup in Turkey we’ve had a number of other significant terror attacks, very unfortunate terror attacks.
So, in many ways I still believe that the thesis of gold being a safe haven asset and one which is getting additional increasing interest from investors is still very much intact.
On the asset divestments, I’m not going to comment specifically on any assets but I will say what I’ve consistently said that we see our portfolio as being appropriate as having 6 to 8 assets, we currently have 7. But we will continue to look at improving the quality of our portfolio and that includes both investments and divestments through the lens of improving the quality of our portfolio. I trust that answers the question.
Thank you. Your next question comes from the line of Jim Pollock. Your line is open. Please go ahead.
Hi, thank you. Jake, you can flick this on to the appropriate person. Just looking at Cowal, the recoveries, metallurgical recoveries there improved from 83.2 to 83.7. That is still low, it may not be low for the particular project but what are the reasons, why is that the lowest recovery that you’re getting out of all of your operations?
Jim, I’m going to hand it over to Mark. Just before I hand over, you may have seen in the Investor presentation that one of the projects that we do have earmarked for Cowal is an improvement in recoveries that has the potential to improve recoveries in the order of 5% to that site. But it requires some additional capital and some additional test work.
Yes, that’s 5 percentage points or is it 5%?
5 percentage points.
Good. But why is it so poor?
Mark le Messurier
There is not a simple answer to it. The mine has been running for 10 years and that has run at an average of 80.5%, 81%. And it’s picked up in the last 18 months to 83% through a combination of changes to the circuit. Its pyro metallurgy basically, that locks up that gold and makes it difficult to recovery. We float there at Cowal and we use that stream and we put it in the CIL. But we are looking at a process to recover gold from the Cowal stream and that work will be going on this financial year.
Yes, look, I’ll be brief. Is the gold locked up in the sulfides, did you just not get all of it out or is it partly refractory, partly free-milling?
Mark le Messurier
There is some pre-milling material to it. But it is locked up in the sulfides put simply.
And Jim, that’s what this new test work is trying to determine whether we can get it out of the tail. And the mine was built on the basis of 80% recovery and that has been operating for the last decade. But as we’ve operated for the last 11 months, we have some ideas which potential could improve recoveries by, as I said the 5 percentage points.
Good, okay. I’ve got another question but I’ll leave that to later.
Thank you. [Operator Instructions]. Your next question comes from the line of Paul Hissey. Your line is open. Please go ahead.
Hi guys, look I wasn’t on the trip couple of weeks back. Can you just remind me of the news flow at Cowal over the next 12 months? Obviously there is quite a lot of activity going there, just what can we expect upcoming with relation to exploration results and feasibility studies and then I guess capital decisions on top of that please?
Sure, thanks Paul. So this program of drilling will take us out to October/November. And you’ll see news flow through that. It’s quite a significant program. I think that was one of the most impressive sites which visitors saw were these 7 drill rigs drilling away. So that’s October/November with a feasibility study planned out for the first quarter of next year, which will allow us to make a decision on the cutback.
All right, thanks.
Thank you. We have a follow-up question from the line of Jim Pollock. Your line is open. Please go ahead.
Fine thanks. Just looking at Mt. Carlton you still only quote the gold production as payable gold it would be really nice if you would actually quote the ounces produced even if you don’t get paid for them. How much should I bump that 29,481 ounces of payable gold up to get gold actually produced?
I think Jim, as you know, that we sell a concentrate to customers in China that’s how the mine was set up. And we think that representing it as payable is the best method given that there is some smelting charges that represents gold production effectively.
How do I gross it up, any rule of thumb?
Jim, it’s on a pay-ability of around 83%.
83%, that’s good, fine, okay.
Mark le Messurier
And just following on from Jake, it is industry standard to report payable as production, not mined or recovered, for concentrate.
Sorry, could you say that again please.
Mark le Messurier
I mean, if you look at most producers have concentrate they will report payable production as their statistic.
Mark le Messurier
Anyway that answers the question Jim.
Okay, I’ll see you at Digger’s then.
Look forward to.
Thank you. Your next question comes from the line of James [indiscernible]. Your line is open. Please go ahead.
Hi Jake, thanks guys. Jake, just a quick question really on labor and the outlook over the next 12 to 18 months in terms of how you think the direction for wages and turnover, I guess for Evolution and the sector more broadly?
Yes, thanks, your question was very soft. But as I understood it, it’s wages and the outlook for wages over the next 12 months?
Correct, and if you’re seeing anything in terms of turnover, I guess, I’m just trying to think, we’re seeing a reduction in demand over the last couple of years and that’s helped to reduce cost and improve efficiency. So, I’m just wondering are we at the bottom or do you expect that to change.
Good morning James, its Lawrie here. Look, in terms of labor costs, we’re now in a position where basically all of our sites have rolled off, enterprise bargaining agreements that have got guaranteed minimum increases in them. So we now have majority of the sites with no increases guaranteed.
We see the movement in the next 12 months of around 2% for our workforce. And that’s probably going to be at that level for a period to come. We’re seeing our turnovers in the 15% to 20% rate which has come down materially from eyes of 30% to 35% couple of years ago. So the workforce has certainly stabilized.
And then in terms of our contract labor we’ve seen in recent negotiations over the last 12 to 18 months, certainly reductions in rates there that we’re not seeing any pressures going upwards in the near term.
Perfect. Thank you.
Thank you. There are no further questions at this time, sir. Please continue.
Thanks Edward. And thanks everyone. I hope we’ve been able to convey just how proud we are of the results we’ve delivered this year. We are excited about our future. And we do look forward to keeping you updated on a regular basis as to our progress. So, thank you very much for taking the time to listen to the call. We really do appreciate your interest and do not take it for granted. Thanks very much.
Thank you, sir. That does conclude our conference for today. Thank you for participating. You may all disconnect.
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