What To Expect From Alcoa\'s Q1 \'18 Results

Evolution Mining Ltd. (OTCPK:CAHPF) Q1 2019 Earnings Conference Call October 14, 2018 8:00 PM ET


Bryan O'Hara - Investor Relations

Jake Klein - Executive Chairman

Lawrie Conway - Chief Financial Officer and Finance Director

Bob Fulker - Chief Operating Officer

Glen Masterman - Vice President of Discovery and Chief Geologist


Michael Slifirski - Credit Suisse

Matthew Frydman - Goldman Sachs

Sophie Spartalis - Merrill Lynch

Peter O'Connor - Shaw and Partner

Bryan O'Hara

Good morning. And welcome to the Evolution Mining September 2018 Quarterly Conference Call. This morning on the call, we have Jake Klein, Executive Chairman; Lawrie Conway, CFO and Finance Director; Bob Fulker, COO; and Glen Masterman, VP of Discovery and Chief Geologist.

After falling for six consecutive months and with negative sentiment at historical restraints, the U.S. dollar gold price came to life last week as global equity markets suffered heavy selling pressure. Gold and gold equity performed their role as a safe haven asset class. And while the ASX 200 was down 5% for the week, Evolution Mining was among the best performers in the index, rising 11% over the time period.

With tax margins among the highest in the global peer group, our reputation for consistent operational delivery and the Discovery program delivering exciting organic growth opportunities, Evolution is well placed to attract new investments should the current stresses in the global financial markets continue. It’s a good time that we’re staying invested to improve the market’s understanding of that story. And from that perspective, we had a busy September with an Investor Day in Sydney, a site visit to Cowal, and we also attended the Denver Gold Forum.

Looking forward over the next couple of weeks; we’re marketing in Sydney post the results today; we’re attending the Sydney Australia conference in Sydney later in the week; and we will also be on the North American road shows next week.

Thanks. And I'll hand you over to Jake.

Jake Klein

Thanks, Bryan. Good morning, everyone. Thank you for joining us. I am really never going to get tired of being able to open my comments to you on a conference call by starting with another great quarter. It's a tribute and a testament to the very talented people we have working at Evolution right across our business and I would like to publicly acknowledge and thank them for this quarter's results. I know when we released our full year results in August, with records being broken across our business they were concerned that this might be as good as it gets for evolution.

I think this quarter clearly demonstrate that it wasn't the peak for us and that our future is looking even better. We had Evolution continue produce a lot of gold at very low cost and high margins. This quarter 200,000 ounces at an all-in sustaining cost of AUD895 an ounce, this translates to 647 an ounce and positions us firmly as one of the lowest cost gold producers in the world.

Importantly to me, we’re demonstrating this consistently and have been over a long period. This quarter you’re also really seeing a compelling demonstration of the value accretive organic growth opportunities we have in our portfolio. The drilling results at Cowal are superb. We are unlocking a province-scale opportunity. Glen will describe it in some detail in a few minutes, so I will only say double digit growth of extensive strike lengths have got us all very excited. Our confidence continues to grow that we will be producing gold from high-grade underground deposits in the coming years at Cowal. It is an operation that is well and truly on track to achieve its longer-term objective of producing over 300,000 ounces per annum.

Mungari operation had a much improved quarter. As you know, we have been searching for some higher-grade discoveries on our extensive ground positions. And this quarter, you are seeing evidence that are exploration program at Mungari continues to build momentum with some great and high grade drill results from Scottish Archer and Castle Hill. And at Mt Carlton, we've committed to the underground development and some plant modifications that will allow us to continue delivering high margin ounces from this fantastic asset.

Last but not least, I'd like to mention that our economic interest in Ernest Henry continues to generate outstanding cash flow for us, this quarter again over $50 million.

With that, I'd like to hand over to Bob.

Bob Fulker

Thanks, Jake and good morning everyone. This morning, I would like to give an overview of our September quarter safety and production performance. The drive to improve our safety culture and to ensure all our critical controls are in place remains our focus. Our results the last quarter was disappointing with an injury frequency rate rising slightly from 5.5 to 5.9.

The September quarter production was a great result just over 200,000 ounces and an all-in sustaining cost of 885 an ounce. Full year guidance is sound and all our operations are tracking well for the year. Mt Rawdon had an exceptional quarter with close to 30,000 ounces delivered. I'm expecting this would drop back to the run rate commensurate with the full year guidance over the coming quarter as stockpile grades and plant recoveries transacting longer to the metallurgical expectations.

If we turn to Page 4 for Cowal and Mungari, Cowal had a good quarter producing 61.2 thousand ounces at an all-in sustaining cost of $958 an ounce. The plant processed 1.9 million tonnes for the quarter and the operating mine cash flow was close to 53 million pre-capital. Some call outs for the quarter are our Stage H cutback is ahead of schedule. The Float Tails Leach Project will be commissioned this half. The Float Tails Leach platform was lifted into place last week without a hitch, leaving Cowal on a positive note, the Mod 14 approval last week is the next phase enabling our 300,000 operational goal. This is 31% planned increase. It is a combination of a huge amount of work from the site teams and does into come without the community and government agencies' support and collaboration. Work is continuing on the underground exploration access decline reg approval and final design. We are confident development will commence in the first quarter of 2019. Mungari delivered 35,000 ounces this quarter at a reduced all-in sustaining cost of $1,120 an ounce.

Operating mine cash flow was 22.85 million pre-capital. The net mine cash flow improved substantially to 17.4 million as the capital investment in the White Foil open pit declines. The Frog's Leg Underground mine production was 138,000 tonnes at 5.41 grams per tonne of high grade ore during the quarter. And the underground development was focused on the exploration [banjo] decline at Frog's Leg. This will allow the drilling of the lower extensional targets.

Page 5 for Mt Carlton and Mt Rawdon. Mt Carlton delivered just over 26,000 ounces at an all-in sustaining cost of 831 an ounce for the quarter. The all-in sustaining cost was negatively impacted by Stage 5 Tailings Storage Facility lift, commencing in the lower byproduct credits. The operating mine cash flow was 258 million pre-capital. Flotation efficiencies and overall plant recovery is improving due to the continued focus on metallurgical analysis and testing. This has included an upgrade to the concentrate thickener. EI approval was granted for the Stage 4 cutback and this started last week.

The Evolution Board last week also approved the commencement of the Mt Carlton underground mine. This allows production from the high grade linked zone to be brought forward. Mt Rawdon finished the quarter very strongly but did it with just shy of 30,000 ounces at an all-in sustaining cost of $1,168 an ounce. The operating mine cash flow was 25.3 million pre-capital. Mining activities saw some unexpected high grade material from a pitfall but most of the quarter was focused on waste stripping and ground support installation. This work will continue over the next few months.

If we turn to Page 6 for Cracow and Ernest Henry. Cracow produced another sound quarter with 22,000 ounces at an all-in sustaining cost of $12.86 an ounce. Operating mine cash flow of [ph] 14.5 million. The all-in sustaining cost was impacted by capital spend on the East group refurbishment, TSF construction and ventilation upgrades. The TSF and the East group are both completed and the first vent rise is completed. Ernest Henry produced 25.6 thousand ounces at a negative all-in sustaining cost of $617 an ounce. Mine cash flow continues to be very strong at 56.3 million produced for the quarter. Mine and mill production were in line with plan.

On a totally different front, we ran our first take up on our OB camp. This was run by another takeup one out of Perth. Over the weekend, approximately 60 people in 14 teams from different backgrounds worked on working small groups on three improvement opportunities. Firstly, I was intrigued and impressed by the quality of the solutions presented and a great example of our willingness to embrace operational efficiencies. In summary, a good quarter, group producing 200,000 ounces and all-in sustaining of 885 an ounce.

With that, I would like to hand it over to Glen.

Glen Masterman

Thank you, Bob and good morning. We completed a strong September quarter with an excellent result at Cowal following on from the discovery of Dalwhinnie Lode announced at our Investor Day early last month. At Mungari, we continue to build on previously reported results at Ora Banda. And at Castle Hill, infill and extension drilling completed since the recently announced restructure of ownership has returned some very encouraging results. Our group discovery team completed a joint venture agreement with Andromeda Metals, providing access to the Drummond Epithermal Gold Project close to Mt Carlton. And we have kicked off work programs at our 3,500 square kilometer Connors Arc project in Southeast Queensland.

Firstly, at Cowal, our drilling programs continued this quarter with over 14,000 meters of diamond core completed between GRE46 and E41 West. Pleasingly, our geology team at Cowal has painstakingly remodeled the dip geology in the footwall GRE46, and established that the geologic position hosting the Dalwhinnie Lode extends well beyond the area of the initial discovery. This is important because the environment hosting high-grade at Dalwhinnie is continuous to actually nearly 1 kilometer, which increases the potential to help additional shoots of high grade mineralization.

Five holes were drilled into a new target along trend of the GRE46corridor, 750 meters south of the main resource area. The objective was to follow up some interesting results in historic drilling on southeast side of E42 where mineralization looked to be lining up with the GRE46 corridor. We are delighted with the results in the first of these holes, which returned a 7 meter true width interval, grading 11.7 grams per tonnes. We believe this result highlights the strong growth potential at Cowal for additional high grade mineralization in the GRE46 corridor, which we can now confirm is present throughout the 2 kilometers of strike length.

At E41 West, the first results from infill drilling inside the $1,800 resource shell have returned white zones up to 30 meters true thickness at similar grades as those predicted in the results model. Several resource extension holes were drilled below the resource shell with one of them intersecting a true width interval of 4 meters, grading 11.7 grams per tonne. Mineralization in this hall is associated with the Killara structure where we have previously intersected high grade in numerous halls. We believe an opportunity for an underground resource is potentially developing at E41 West.

Turning now to Mungari, where recent infill drilling at Ora Banda is continuing to extend high grade down dip at Scottish Archer, as well 20 halls were completed at Castle Hill with the purpose of upgrading classification of resources in the model, concerning geologic continuity of high grade near the base of the $1350 gold reserve shell and along with drilling for extension at the resource below $1,800 resource shell. Result from Hall 17 and 11 illustrated on Page 13 of this morning's report returned some very high graded base of the $1,800 shell and remain open at depth with further potential to grow.

All-in-all results across the discovery portfolio, particularly at Cowal and Mungari reinforce that we are putting the necessary building blocks in place to deliver on result expansion and grade opportunities that we envisage will deliver into our into our exploration and production growth at both operations.

With that, I would like to hand over to Lawrie.

Lawrie Conway

Thank you, Glen and good morning everyone. As Jake, Bob and Glen said before me, the September quarter was a great way to start FY19. From a financial perspective, the same applies and our balance sheet is in excellent position. The summary of the financials is on pages 7 and 8 of the report. The all-in sustaining cost for the quarter was $885 an ounce. This was lower than guided due to the higher production at Mt Carlton, Mt Rawdon and Ernest Henry and a slow ramp up in sustaining capital across the group.

There will be variability in the all-in sustaining cost each quarter depending on the mix of production source, copper volumes and price and the spend rate of sustaining capital. However, we remain on track for full year cost guidance of $850 to $900 per ounce. On the back of the strong production performance, operating mine cash flow was 197 million. This was slightly lower than the June quarter, mainly due to lower gold sales and lower achieved metal prices, with copper down by AUD1,000 per tonne.

Capital investment for the quarter was 67.6 million with majority invested in major projects for future production. This included Stage H waste stripping, the Float Tails Leach Project and capital waste stripping or the development across the sites. Sustaining capital and major capital remain on track for full year guidance. Net mine cash flow for the quarter was 129.3 million with all sites cash positive again after funding the capital investment programs.

Pleasingly, Cowal and Mungari substantially increased cash flow this quarter, while Ernest Henry maintained an annual run rate of approximately 220 million with just under 54 million for the quarter. Group cash flow was 73.3 million prior to dividend return to 68 million, debt repayment of 20 million and 12 million for Castle Hill mining rights. Cash on hand at the end of the quarter was 297 million with net bank debt of 78 million and unaudited of gearing of 3%.

With that, I will now hand you back to Jake.

Jake Klein

Thanks, Lawrie. Before opening the lines for questions, I just want to remind you that our business strategy and approach remains the same as it has been since we set out on the journey of building this business almost eight years ago. We want to build a gold company that prospers not only when the gold price is going up, but one that prospers through the cycle. And that means when the gold price is up like it is today at above AUD1,700 an ounce, we need to be banking these high margins and that’s exactly what we're doing; a consistent and focused strategy that has been rigorously implemented and we are not going to deviate from; we want to continue to deliver as a highly profitable dividend paying globally relevant low cost mid-tier gold company.

Edward, could you please open the lines for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Michael Slifirski from Credit Suisse. Please go ahead.

Michael Slifirski

Just one question from me this morning, but it's probably to both Bob and Glen. I'm really wondering to understand that exciting development at Cowal with the various underground opportunities, so specifically that GRE46 corridor that's defined over 2 kilometers. Now, can you spec out what that looks like more broadly, I think you mentioned width Glen. But the down dip extent so we can try and think about what the tonnage potential might be, recognizing that it's not fully drilled out. But just what parameters you've got down to the extent average widths strike lengths? And then whether it has the opportunity to extend for the same 2 kilometers strike length? And then I guess to Bob in terms of if it pans out the way you've -- that Glen hopes. So what tonnage do you think you could expect from an underground operation place?

Glen Masterman

Michael, I'll step in and answer the first part of the question. So I think there is a I think a couple of ways to be thinking about GRE46, the first is the result itself, which currently sits at about 600,000 ounces grading around 3.2 grams. And as we talked about early last month at our Investor Day, the discovery or recognition of the Dalwhinnie Lode in the footwall of the GRE46 resource. So that's about 30 or so made it into the footwall. In terms of thickness, Dalwhinnie itself, which in the footwall is on average around 3 to 7 meters wide through thickness, but we're seeing as we've mentioned strong evidence of double-digit growth.

On the other hand, GRE46 has a variable width, can be up to 10 to 15 meters wide but as now as 3 meters. And I think just to address your question on depth extent, at this point in time, it's still open. We haven't closed the system off at depth. But bearing in mind that these -- I mean, Cowal is an intermediate sulfidation epithermal style of deposit, so it will have -- these shoots will have a top and a bottom. We had not -- we think we probably worked out where the top is, we just haven't drilled to the bottom of it. A lot of it is drilling is going to take place as we get the decline in the position to drill from.

The other -- I guess the other point to make on Dalwhinnie and I mentioned a little earlier is that we have modeled the geological position of the Dalwhinnie Lode and that’s not to say that we've extended mineralization. But we understand the geological position and we've extended that well beyond the area at the 200 to 300 meter area of the original discovery. So that position, which we call the Dalwhinnie field, has been now modeled over about a kilometer of strike length. So what does is that opens up the possibility in the footwall of GRE46 to identify new shoots.

Now I don’t expect mineralization to be one continuous shoot, epithermal systems, typically have mineralization isolated and shoots style geometries. And we have to get down there now and drill for those, and that’s obviously going to really enhance when we have the decline in place to be able to do it.

Bob Fulker

Hard question to answer at this stage because of exactly what Glen has just talked about with regard to having to get down to drill and to prove up initially the GRE46 resource from it at 600 ounces into some form of reserve. And the other one for me is the Dalwhinnie is in the resource at the moment and its drill holes that we're still actually exploring and still getting more knowledgeable about. Same at the original concepts when we first started talking about the underground -- and this is all, like concept stages, not even in prefeas so very, very early concept stage. But something around at 600,000 ounces, you would expect it to be able to -- and 3.2 grams per tonne, you would be expecting it to be able to handle 750,000 to a million tonnes per year. But we've done no work on the Dalwhinnie. And as Glenn just said, the extent of that mineralization could be extensive as well. So a lot of work to do early stage and underground of circa 750,000 to a million tonnes, so it's not unreasonable.

Michael Slifirski

And then in terms of the timeframe, the decline you hope to start early next year. Can you scope out how long before we could stop drilling off that underground access? How long before the drilling mark to be sufficient to give a broader resource and reserve, and then for lead time to first production?

Bob Fulker

I like how all your questions are one question with multiple questions. The time frame for first drilling, the idea is that we start developing and within three months of development, we'll have our first true horizon or drill platform identified and isolated. So that we can stop drilling while the decline continuous. And as we got it further in, obviously, we'll get more drilling platforms to further drill from. So we're not waiting for the decline to be finished before we start drilling. Tenders are already out but they won't come back for six to eight weeks, and then we've got to award and all the rest of it. And we've got pre-work on the four locations, a whole of other work to do before we can actually start. So, first half of next year, we'll be starting and development will start and commence. What's the next question?

Michael Slifirski

Timeframe to really get a -- to do what to get to first mining if all goes as you expect, so…

Bob Fulker

We've 2 kilometers of dry leach to do to start with in single heading. So we're talking 15-18 months to get to the end of that, maybe 24 months with the drilling. And then we've got to do all the geological interpretation and then we've got to start to get the actual infrastructure in place for an underground operation. Don’t forget, we’re only asking for an exploration approval at this point in time.


[Operator Instructions] Your next question comes from the line of Matthew Frydman from Goldman Sachs. Please go ahead sir.

Matthew Frydman

Look probably just a couple for Bob on the mills, in particular, first on the mill at Cowal. Now that you’ve got approval for up to 9.8 million tones, clearly, you’ve already demonstrated over last three or four quarters that you’re running that mill at more like 7 or 8 -- 7.8 million or 7.9 million tonnes per annum. How much capacity do you see to continue to create that even before you start looking at your options in terms of additional crushing capacity? And then just quickly secondly, and if Ernest Henry on similar theme, clearly quite a strong quarter in the mill there, 7.4 million tonne per annum annualized run rate, excellent utilization. Does that give you confidence around the remainder of the year that asset, given the guidance that you’ve given? And is there anything, in particular, that’s going to bring that throughput back down given the plant capacity, which is 8.5 million tonnes per annum? Thanks.

Bob Fulker

I’ll start with Cowal. We are doing work at the moment on the options of the mill expansion and what we have to do. But planning to have that in the next -- first half of next year and as soon as we get that, we’ll bring it forward to you. You’re right. I mean the current run rate of 1.9 million tonnes per quarter does take us up. So I mean, there’s instantaneous things that we can do, which we’re looking at. With regard to Ernest Henry, we’re very happy with the way we’re running. The plant that we’ve got for the rest of the year is pretty sound. And when does the next forecast -- towards the end of the year something like…

Lawrie Conway


Bob Fulker

Well, there's more information around the end of this calendar year…

Matthew Frydman

So you’re expecting that but in December on the plant for the remainder of the year?

Lawrie Conway

Yes, they run on the calendar year. And the only thing I’d say is that they are really more restricted by mining capacity than million. So it was more driven by timing of shutdowns and availability at the mine at about 6.9 annualized rate…

Matthew Frydman

Maybe just quickly running back to Cowal. And so from the comments there, Bob, you're basically indicating you would expect to be able to sustain the current milling rate given the current plant configuration?

Bob Fulker



[Operator Instructions] Your next question comes from the line of Sophie Spartalis of Merrill Lynch. Please go ahead.

Sophie Spartalis

Just returning back to Cowal and following on from Michael’s question, just in regards to the 300,000 ounce operational goal. Can you just maybe just provide some color around the recent exploration commentary and how that fits into that 300 number, or the upside that exists to that number?

Glen Masterman

Sophie, it's Glen. I'll take that on, and hand over to Bob for some support. So, I think we’re always starting to see particularly with GRE46 and now Dalwhinnie in the footwall is the opportunity to elevate the average greater of the overall resource. And we feel that that’s where one of the opportunities exists to be able to deliver into that 300,000 ounce exploration. I guess, the exciting aspect this quarter for us was that drilling to the southeast side of E42, which is quite a long way from where we’re focused, recent work on resource definition drilling at GRE has reinforced the potential for that corridor to exist for the full two kilometers.

And so we’re feeling genuinely excited about the possibility of multiple shoots in that part of the world, and that’s very early days in the sound end. We’ve got five holes in results from one, we've a lot of work to come and obviously some results to assess in the future. But I think it’s baked very well for the growth potential along that corridor. And we feel that that addition of high grade into an underground production scenario gives us the ability to lift the average growth of tonnes going through the mill, and that’s why the opportunities whereby we can deliver into the 300k exploration.

Bob Fulker

Sophie, just to I guess round up what Glen is saying. From an operational goal perspective, improving the plant throughput by 31%, getting a higher recovery through the Float Tails Leach by 4% to 6%, increasing the head grade going into the plant by [X%], which is just a weighted average from the open pit, the open pit and the underground, the underground whatever it is. You can quite easily do a -- strike math calculation to get to that number. So, therefore, from a reasonable perspective, I think it’s like a -- it’s a decent goal to have and quite easy to see and we can get it with those improvements.

Jake Klein

And maybe just to add to Bob’s comments. We’ve now, in this asset for three years, we’ve made a lot of money out of it. It was scheduled to close in 2024 when we acquired it. It’s now 2032 at least. We’ve now got commission to increase throughputs to 9.8 million tonnes,a 31% increase. It’s fair to say that these geological results and discovery results, which Glen is and his team and the Cowal team are delivering, have really reshaped our thinking about the future of Cowal. And hence that confidence in talking about 300,000 per ounce -- ounces per annum as a reasonably near term goal is really predicated on all the success that we’re having right across that operation. But from a transformative perspective in terms of what we acquired and where it is today, I couldn’t be prouder and more pleased of what teams have delivered.

Sophie Spartalis

But it seems as though again following on from Mark's question, it seems roughly three to four years away before any of these drilling results tending to production or phase through the mill. So in terms of then the timing, I understand the confidence around getting to the 300,000 ounces. I guess, can we just maybe talk through then the potential timing of getting there?

Jake Klein

I think you’re right in terms of probably new source of material. But you've got to look at this potential upgrade to plants, which we'll deliver in the results of the feasibility study in the first half next, which we definitely not all constrained at current grades, because there is a bunch of material and stockpile as well. So that could provide the nearer term lift potentially.


Your next question comes from the line of Peter O'Connor from Shaw and Partner. Please go ahead.

Peter O'Connor

Just two questions, one looking at the three levers that drive Evolution; so one is Ernest Henry, Cowal and Mungari; and knowing the superlatives that you've described, Ernest Henry and Cowal with an excitement you've clearly got; Mungari seems good, but not quite right up there yet. So how does that fit within the context of those superlative backdrops for Ernest Henry and Cowal? And separately, the balance sheet, we talked about this at the Investor Day last month. You'll be net cash by Christmas, I guess. So given your comments about dividends and gearing through the cycle and giving back surplus cash. Could you just refresh us on how we see that play out in the next six to nine months?

Jake Klein

I mean, I think you did leave out Mt Carlton as well when you described the drivers, because I mean it really has delivered phenomenal cash flow, and with this underground it will continue to do so. But it's still at $100 million net mine cash flow in each of the last three years. I don’t think we've been shy in saying that Mungari to-date is dependent -- has been somewhat disappointing in terms of our capacity to discover additional high-grade replacement long-term feed for the Frog's Leg ore-body. But I think we're doing the things now, and Glen probably would say that it's been doing it for the past 12 to 18 months. I mean, it's now starting to get some of the results that give us confidence that we are in a very prospective field.

We've restructured the Castle Hill deposit. We're now in a 100% of it. Clearly, those grades that we've got at the end of the quarter are very encouraging. The Ora Banda results are encouraging. And then we're putting in place this declined developments that we're drilling below into the Frog’s leg feed. So we certainly recognize that Mungari, yet it is not the high margin ounces that Cowal, Mt Carlton and Ernest Henry is at the moment, but it's a full part of our portfolio and one which we are hopeful that the investment and discovery is going to reap the results.

On the balance sheet, we've said that we’re not planning to build huge cash balances. And if the gold price holds up and if we land in a position where we have loads of cash on the balance sheet and Lawrie will have what I'd describe as a good problem to have, which is what to do with it. But we’ve said in the past that we’ve not intending to just hold it on the balance sheet forever.


[Operator Instructions] There are no further questions at this time. Please continue sir.

Jake Klein

Thanks Edward. Thanks everyone for joining the call. I'm looking forward to seeing some of you today and those in North America next week. And great way to start the quarter and again reflecting the fact that Aussie gold producers are in great shape, and Evolution is one of them. Thanks a lot.


Thank you very much. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect. Thank you.

Source : https://seekingalpha.com/article/4211747-evolution-mining-ltd-cahpf-q1-2019-results-earnings-call-transcript