Evolution Mining Limited (OTCPK:CAHPF) Q3 2016 Earnings Conference Call October 16, 2016 8:00 PM ET
Jake Klein - Executive Chairman
Lawrie Conway - CFO & Finance Director
Mark Le Messurier - COO
Glen Masterman - VP Discovery & Chief Geologist
Michael Slifirski - Credit Suisse
Sophie Spartalis - Merrill Lynch
Brendan Fitzpatrick - Morgan Stanley
Angela Keen - S&P Global
Ben Crowley - Macquarie Research
Tess Ingram - Fairfax Media
Thanks, John. Good morning and welcome, everyone to the Evolution September quarterly conference call. This morning I'm joined by my colleagues Mark Le Messurier, our COO, and Lawrie Conway, our CFO and Finance Director. This morning I am particularly pleased to welcome Dr. Glen Masterman, our VP, Discovery and Chief Geologist, who started during the quarter. And I'm sure you will be very interested to hear from him.
I am very pleased with the start we've had for the new financial year, with our business making progress in all core pillars. Operationally, we have again demonstrated our capacity to produce gold at low cost, generating almost AUD170 million in mine operating cash flow and AUD111 million on a net basis. This quarter we again delivered on our strategy of improving the overall quality of the portfolio by selling our shortest mine life asset, Pajingo, and acquiring an economic interest in Ernest Henry, which will deliver lowest cost, longest life answers. Although with the drilling we are getting at Cowal this is shaping up to be a great competition between our two cornerstone assets.
The economic interest in Ernest Henry is an important acquisition. Had we earned the interest for the 12 months to June 2016, it would have below at 88,000 ounces and all in sustaining cost of negative AUD59 per ounce and produced net mine cash flow of AUD142 million. Importantly given the initial investment in setting up the mine as a highly efficient sub-level cave, it has a current defined mine life of 11 years which we are optimistic can be extended, but it will be also be light on capital intensity and therefore a very good cash generator for our business. We do appreciate the strong support we received from shareholders and lenders for the equity rising and debt underwriting that made this transaction possible. And we expect the transaction to close as planned in the current quarter once if IOB approval is received.
This morning we also announced the acquisition of the Marsden deposit from Newcrest, which we see as an important long term strategic addition to our tenement position at Cowal. I am very excited by the drilling results we are getting across our business. You will hear more about them from Glen, but the new results at Cowal clearly demonstrate the scale and quality of this mineralized system. It is rare to have the opportunity to announce intersections of 71 meters grading 6.92 grams per ton.
We also are making good progress at Mungari with some very encouraging results there as well. Mt Carlton was determined not to be outdone and delivered a very impressive intersection of 11 meters of 21 grams per ton. We paid up seven consecutive dividend of AUD29.4 million, and we were also able to pay down a further AUD19 million of debt, bringing total debt repayments over the last 13 months to AUD412 million. In summary we are in a healthy place of the business. Our balance sheet is strong and the business is delivering in all important areas.
With that introduction I'll hand over the Mark for more detailed update on operations.
Mark Le Messurier
Thanks Jake. We had a solid first quarter after producing a record 216,000 ounces in Q4. With gold production of 205,370 ounces, produced at an average all-in sustaining cost of AUD1,060 an ounces. This is in line with the average production of the last three quarters of 210,000 ounces. Taking into account the completion of the sale of Pajingo at the end of August. Safety results improved and we continue to focus on reducing vehicle incidents and establishing critical hazard controls.
Turning to Cowal on Page 4, Cowal produced 64,032 ounces in the quarter at AISC of AUD907 with good pit movements and lower mill throughput due to the mill shutdown which was brought forward from October. The management did a tremendous job managing the high rainfalls that started in the region in June. Employees had to be transported over or around floodwaters to reach work.
Evolution also provided significant support to the regional community particularly Forbes and Condobolin residents. The Stage H drill program was largely completed in the first quarter with very positive results as announced in mid-September. And a new resource model will be completed this quarter, in preparation for Stage H planning and approval.
Mungari, gold production was 38,295 ounces at a unit of AUD1,091. Some high-grade stopes did no deliver the super-high grades that we expected based on the grade control models. We expect to recover the short fall other coming quarters. Mt Carlton had a very solid start to the year with over 25,500 ounces produced at AISC of AUD779 an ounces. A major TSF lift was completed and processing project work progressed on power factor corrections and the gravity gold recovery.
Drilling also continued in extending the resource outside the current optimized peak shelf. Mt Rawdon production improved in the quarter to 24,878 ounces at AUD764 an ounce and cash flow was at the AUD10 million, which is a great start to the year and sets the platform to the operation to return in 100,000 ounces a year production levels.
Edna May produced 20,012 ounces at AUD1,472 an ounces. Inefficient operation of the mining fleet at the base of the pit and on the north CapEx lead to low material moments 30% below plan and higher than planned mining cost. As stated in the report, we are completing a technical and operational review and we and we have appointed point two very experienced people at the operations, general manager Richard Carlton [ph] and mining manager Michael Glint [ph]. The main issues which have been impacting mining are being addressed with in-pit dewatering bore 6 being decommissioned and geotechnical remediation on the north wall of the pit completed.
The underground development progressed satisfactorily with the rehabilitation of the existing decline well underway. Cracow produce 21,554 ounces at AUD1,253 ounce and cash flow was over AUD10 million. During the quarter more drilling and planning was completed for the mining of the new coronation deposit, while further drilling was completed in adjacent structures. Project work on fine grinding to improve recovery also progressed, a good start to the year for Cracow.
Pajingo produced 10,991 ounces at AUD14.22 an ounces to the end of August when the sale was completed. Pajingo was an important asset in Evolution's creation and growth. The operation considering strongly last and the process of sale was timely and successful.
In summary the first quarter of FY ’17 was a positive start in many ways, with good progress on advancing what we refer to as our provincial plans, which in summary is extracting maximum value from our assets over the long term by testing. In this regard we pushed our drill program to key sites particularly Cowal and advance projects that will increase production and/or deliver more production over the long term.
Thank you, and I'll hand over to Glen.
Thank you, Mark. It is a pleasure to be presented with this first opportunity to speak with you as the Head of Discovery at Evolution. Over the last two and half months I have had the chance to visit our operations and to get across many of exploration projects. This has provided a great opportunity for me to learn what I needed to know about the business and I would like to share my following first impression.
During my travel to the sites I have had the pleasure of meeting our discovery and geology teams and I am pleased to advise that we have some of the best and brightest geoscientists in the business. Our teams are very capable. They use the latest and greatest technologies which in conjunction with applying our hard-earned knowledge, will position us to deliver future success. An important aspect of any exploration program is the quality of the portfolio. It's exciting to hit the ground running with such well-endowed land positions around our operations. At Cowal we are unlocking potential value through our commitment to investing in resource definition and step-out drilling.
The results of this work will allow us to assess the full scale of the resource and to understand the implications on future development. Our Mungari land position in Kalgoorlie remains in my view a highly prospective greenstone belt, despite a long history of previous work. Much of this historic activity was directed at discovering near-surface oxide mineralization. While oxide resources still remain a valid target concept, we are strongly focused on exploring at depth where we believe there is the high potential to discover new high-grade veins that were perhaps overlooked in previous work programs.
We are continuing to advance the number of Greenfield projects targeting high-grade ironstone-hosted mineralization at our Tennant Creek joint venture with Emmerson Resources. We have also narrowed in on a geologic setting at our Puhipuhi project in New Zealand, which is permissive of hosting high-grade, low-sulphidation epithermal vents. Drilling is ongoing at both projects and we are continuing to work on building depth and quality in into portfolio. I look forward to the opportunity to share results with you on future calls.
I would like to spend a few moments reinforcing a number of results we disclosed this morning. Starting from Page 10 in our quarterly report. As Jake mentioned earlier we released some very strong new results from the Cowal Stage H resource definition drilling program. The 71-meter long intercept of 6.92 grams per tonne in holes 7A and 11F is continuing to confirm the presence of high grades in the Stage H pit. These grades potentially extend beyond the limits of the design pit, as seen in hole 1717 in figure 4. We have initiated a 6-hole follow-up program to further outline this zone of mineralization, develop our geologic understanding and to assess the impact on grade tenor in this part of resource.
Turning to Mungari, we have drilled two quartz holes, one at East of the Frog's Leg operation and encountered a new high-grade laminated vein. One of the veins returned a very encouraging intercept of 0.4 meters through-width grading 34.3 grams per tones at about 300 meters depth. We are encouraged by the results because the quartz vein shares characteristics similar to the Raleigh deposit in the Kundana camp. We are currently completing geologic modeling and follow-up geophysics to sharpen up the target before moving the rigs back in to continue drilling. Resource definition drilling at Mt Carlton continued to demonstrate the continuity of strong grades versus the pit.
The results are providing -- are proving our concept that mineralization extends at depth and these new results will be assessed to further evaluate mining options that that access the deeper and higher grades.
And with that I'd like to hand over Lawrie.
Thank you, Klein and good to have you on board and good morning everyone. Today, I'll provide the summary of the financial performance for the September quarter. This will be about some information outlined Pages 8 and 9 of the quarterly report released this this morning. The September quarter benefited from a good operational performance across the group as outlined by Mark. With the Jake consult 205,000 ounces at an all-in sustaining cost for the AUD1,060 per an ounce.
We delivered about 30% of the production into the hedged book at a price of AUD1,576 per an ounce and 70% into the stock market at around AUD1,760 per ounce. We generated operating cash flow at this we are AUD170 million and net mine cash flow of AUD111.4 million. All sites were cash flow positive for the quarter after investing in sustaining capital, major projects, and all capital waste stripping or development. Edna May, while only showing just about breakeven for the quarter it did include AUD2.8 million for the development of the undergoing mine.
Excluding the underground development capital this was an improvement on the June quarter. However, as outlined my Mark we’ve put in place a number changes in programs to improve the financial performance at Edna May. At Mt Rawdon, we are starting to see the benefits of the nearing completion of the Major cutback programs with net mined cash flow lifting from AUD2.1 million in the June quarter to AUD10.5 million this quarter.
The cash flow for the September quarter was more than the full FY '16 cash flow at Mt Rawdon. The all-in cost for the quarter was AUD996 per ounce and remains on track to be significantly lower than in the FY '16 result of AUD1,471 per ounce. We saw consistent cash flow performance again from Cowal, Mungari, Mt Carlton, and Cracow.
Capital expenditure of around AUD58 million is in line with our guidance range gardens range of AUD195 million to AUD250 million for the FY '17 year. From the net mined cash flow and the cash proceeds from the sale of Pajingo we continue to reduce our debt with AUD90 million in repayments in the quarter. As well as that, we paid our final dividend for the year of AUD25.6 million net of the DRP.
Excluding the recent equity raising for the Ernest Henry transaction, our unaudited gearing has now reduced to below 10%. In preparation for the financial close of the Ernest Henry transaction. We finalize all terms and condition of the new remain debt facility. On the back of the good performance in the September quarter and outlooks of cash generation across the business we reduced the amount of the term line for the Ernest Henry transaction by AUD25 million, today at AUD475 million dollar facility. This facility will be five years out until October 2021.
The updated amortization profiles of both term loan facilities are outlined on Page 9 of the report, importantly we have only AUD30 million of repayment commitments remaining for FY ’17. Although we will continue to focus on bringing the gearing level back down after we closed the Ernest Henry transaction.
Overall, the business continues to focus on cost reduction and productivity initiative, cash generation and debt reduction as means to keeping the balance sheet in a healthy condition.
And with that now hand back to Jake.
Thanks, Lawrie. Thank you. I trust you found that summary from our executives useful. Sean, can you please open the line for questions.
Thank you, Jake. [Operator Instructions] Our first question comes from the line of Michael Slifirski from Credit Suisse. Your line is now open. Please go ahead sir.
Thank you, I've got two questions, if I may please. First of all, Mungari, the grade shortfall compared to expectation. I think there was also a comment in the quarterly about paste dilution impacting recovery. Were those two things related? Was there some sort of failure or unanticipated operational problem that resulted in both dilution and lower growth?
Michael you never disappoint us with getting in first. I'm going to let Mark answer that question.
Mark Le Messurier
Mick this is Mark and we’ve just been looking at a range of things with the mining process there, but we believe the top cuts that we used on some of our models just need to be contained a bit more and we believe we’ve got a better handle on it and we’ll be able to recover the answer at the coming quarter.
And the paste dilution, was that just a one-off thing or is that something that you, with the high stress that you are likely to see more of?
Mark Le Messurier
It was just to do with the final removal of the retreating pillar at the mist end of the ore body and we’re done, that’s complete.
Thank you. And then secondly, with respect to Ernest Henry, two questions there. One I guess perhaps is a little unfair in that it's long term, but the resource beyond the reserve and the depth extension that might take you beyond 11 years. Conceptually how do you think about what underground production you could achieve beyond that time? Could you maintain the current production rates with a depth extension without a shaft extension, perhaps for a conveyor? Or should we think of it as anything beyond the 11 years as being truck haulage and perhaps at the lower rate?
Michael, when we did our technical BD, we felt there was good opportunity to extend the mine life. We said conservatively we thought that between three to five years was a relatively conservative assessment. We haven't really got down to what raises the production and that type of thing yet, but we’ll certainly keep you informed as we get to know the asset better
Okay, thank you. And my final one, I did say two, but there were a couple of parts I guess. Is the whole tax treatment of Ernest Henry? I'm still a little bit confused to what the various outcomes might be with that prepayment of trading stock. Can you help me understand that just a little better, please?
Let hand it up to over to Lawrie.
Morning, Michael. So the tax treatment, the way we have gone into this is there is prepayment for metal stock whereby the AUD880 million acquisition will be amortize over the life of the mine. And the way we see that at the moment is that it will be anyway between 9% and 11% per annum, based on the units of metal that get delivered, the gold medal.
So, where we are is that we’ve launched initial documents with the ATO, we have had ongoing discussions with them about this and so the part that we expected over next two to three months to come to a resolution on that treatment, indications to date are nothing major has been fed back from that but it will take some time. The path we then go down is, if there is a different outcome we would have to wait until we finish this year and lodge our return on that basis, but it would also depend on the feedback we get from the ATO in our account discussions.
Okay. Is there a precedent in any other company for that sort of tax treatment or is there something more interpretive that you think is achievable?
No its not, it's really along the lines of streaming arrangements and prepaid metal stocks or prepaid trading stocks do actually have precedency in Australia, but not specifically around mining and certainly not to the structure that we have put in place. So in that regard we are confident that the structure and the setup of the transaction is in line with that.
Great, thanks a lot. That's very helpful, thank you.
[Operator Instructions] The next question comes from the line of Sophie Spartalis from Merrill Lynch. Your line is open, please go ahead.
Just following on from Michael's questioning around Ernest Henry, have you confirmed the way you are going to account for that? Is it just going to come through as one line on the P&L or are you going to push it through all the individual items?
And then just secondly, as I've been putting the numbers through the model it does look like admin and selling costs across the majority of the operations are up in the quarter. Is there anything there that you pushed down from a corporate level or the rationale behind the increases, please?
Lawrie, you're popular this morning. Go ahead.
So the first one, the accounting for -- our intention is to report the production and then the cost of production for that in the byproduct credits that we received from the copper. So as much detail as we can, we have been working with the team on the ground Ernest Henry over the last four to six weeks to work out how much information we are going to be able to extract, but our intention is to report it that way. And then the amortization of the prepayment will come through into the P&L on the DNA line.
And then on the corporate costs, now, there hasn't been any extra charges back to the sites. Mark wouldn't let me, so that’s not happening. The change I would say in the quarter versus the June quarter 216,000 ounces down to 205,000 ounces this quarter. In terms of the fixed overheads being allocated over those ounces would be the main driver to the change because we haven’t seen any major changes across the business.
The next question comes from the line of Brendan Fitzpatrick from Morgan Stanley. Your line is open, please go ahead.
Great to see some of those drill results coming through over at Cowal. I was just looking at I was just looking at page 11, that Figure 1 image, the positioning of the drill holes. And although they do go back to the north under the pit, is it too soon to have the discussion about the limits on the pit wall steepness and how far you can progress the pit towards those pads in the existing facilities that are already in place and how much of the intersections that have been down can actually be accessed?
Mark Le Messurier
There is a number of things that we have to evaluate. We want to test how far this ore body and then we have to determine whether it’s worth moving the crusher. If we deem that the crusher is a limitation and we try and maximize the size of the open pit, we cannot go any steeper than with currently the designing on the pit walls we believe. We’d have to start and reduce the boom with which I think it would be unrealistic. And then the other option is, obviously, to assess underground mining and we are hoping for some continuity in the whole grade reserves.
And Brendan, the first step for us is obviously to drill these next six holes really to see what we’re dealing with in terms of how far these depth extensions go and what grade they are. But very encouraging in terms of the grades we are intersecting.
Okay, great. I guess we'll keep watching it over the next quarter or two and see how things unfold.
Yes. The feasibility study on the H cutback is scheduled out for the first quarter next year.
Okay, I'll keep my eye out for that one. Thanks very much, gentlemen.
[Operator Instructions]. Our next question comes from the line of Angela Keen from S&P Global. Your line is now open. Please go ahead.
I'm just wondering, in terms of exploration, obviously there is some concern from the gold sector in particular that some -- if the decline -- supply is going to dry up [indiscernible] harder to supply and new discoveries are not getting made as fast as they are needed. What do you think needs to be done on that front to encourage companies to accelerate exploration and get out there and start making these new discoveries?
Mark Le Messurier
Angela you told about specific to Australia or globally?
Sorry, Australia in particular, yes. Australia, yes.
Mark Le Messurier
Okay I think as the large couple of years you've seen quite a significant increase in exploration with some emerging success coming through both a Brownfield side and some Greenfield success. So I think obviously exploration takes some time for results to come through, but you know we're optimistic that there is still plenty of growth to be discovered in Australia.
Yes look and I’d like to add to that Angela, but I think in many ways success breeds success and with a new generation of discoveries coming through that will reinvigorate investment. So one of the approaches we’re looking at is obviously advancing resource growth around our operating assets, but also in the arena of innovative joint venture with exploration companies that we’re partnered up with. So I think there is a number of aspect that will continue to draw. That hopefully we’ll deliver the results we are looking for. Hello?
Just to finish off on Glen's comment Angela, the most intriguing thing I've found from this site visits that he has come back and debrief the leadership team at evolution, is you think that the Mungari tenement position is one of most mining most well-endowed and prolific mining areas of Australia would have been regarded as mature and heavily explored, and yet the perception and the feedback coming back is that, most of the exploration has been targeted at the oxide mineralization in the upper levels of the district and therefore the opportunity exists still at in a district which certainly have a lot of attention over many year.
On the regulation side, do you think the government needs to -- is there something the government needs to do to help encourage companies to explore more or make new discoveries?
I think Australia represents a very good place to be explore.
Also, in terms of the gold obviously -- in terms of the gold price, obviously the unpleasantness [ph] in the economy at the moment I sort of think that [indiscernible] and you've got safe haven. How do you think -- what do you think is happening with the gold price over the middle of 2017, over the next year or so?
We remain optimistic on the gold price, it is still up quite materially from the start of the year, a setback over the last couple of weeks and some volatility, but we remain optimistic that gold in a very low interest rate environment -- unprecedentedly low interest rate environment. It’s going to be an asset class that continues to get investment from the private and public sector.
Thank you. The next question comes from the line of Ben Crowley from Macquarie Research. Your line is now open. Please go ahead.
Just if we could go quickly back to Edna May and the review there, just wondering if you can give us a bit more color around how long maybe you think that that review is going to take, what the main areas of focus are there, and obviously dependent on the outcomes to the review, what you think the timeline is to getting Edna May back to where you want it to be?
Thanks Ben, I mean look we’re not happy with the performance at Edna May, that as Mark highlighted has resulted in a number of changes at the operation, we’re going to go through and look at the long term outlook and operation improvements that can be made over the next few months. And then deliver that to the Board, either late this year or early next year. But we think the operational performance can be improved materially.
Okay. Thanks, Jake. And that would really be sort of open pit, sort of exclusive of the underground?
Well both, because the underground obviously, it forms an opportunity to look to grade potentially, that’s going through the mill and we have committed to the underground and that’s going along quite well, but certainly it will be looking at it in totality and where the improvements can be made. Mark has articulated that few the operational improvements have been made in the short term that we expect to see coming through which would give us a bit more capacity and access to the ore in the open pit. But I'll go back to a lack of comfort or happiness with the results from Edna May and the leadership team and Evolution executives are very committed to trying to fix that.
Okay, okay. So sort of early next calendar year you think we might have a bit better, a bit more of an idea then?
Yes, I think so.
Next question comes from the line of Tess Ingram from Fairfax Media. Your line is now open, please go ahead.
Just back on the exploration of things, we saw the news this morning that AngloGold has entered into an agreement with Saracen to do some exploration around their tenements. I was just wondering Jake, whether you think that perhaps we’re seeing some of the international producers that already have a bit footprint in Australia starting to look a little bit more as some of the Aussie producers and their tenements as their own exploration potential dries up a little bit?
Morning Tess, I still haven’t caught up with that news. We were a bit focused on delivering -- on getting our quarterly finalized and preparing for this call. Look, I think you are seeing the emergence of some very interesting new mid-tier groups in Australia that I think will lead the way in this what I've been saying is the reintegration of the Australian gold industry. Certainly, I hope you see from our results that the things which are in our control we’re delivering on and doing well at.
And I guess just a little bit more broadly then do you think that these is interest from international groups in more of -- picking up more or having a better look at some Australian graph?
That’s a difficult trend to identify from what I've seen today.
There are no further questions in the Q&A queue. At this time I would hand back to the speakers for any further remarks.
Thanks, Sean. I think we will leave it at that. As we’ve said throughout the call, very pleased with the way the business has performed, very happy with the implementation of the strategy and the things which we are in our control has gone very well this last quarter.
So thanks very much for your interest and we look forward to updating you in due course.
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