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Thank you for standing by, and welcome to the Evolution Mining December 2021 Quarter Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Martin Cummings, General Manager of Investor Relations. Please go ahead.
Thank you, Darcy. Good morning, and welcome to the Evolution Mining December 2021 Quarterly Conference Call. As Darcy mentioned, my name is Martin Cummings, and I'm the General Manager, Investor Relations. This morning on the call, we have Jake Klein, our Executive Chairman; Lawrie Conway, our CFO and Finance Director; and myself in our group office in Sydney. Bob Fulker, our Chief Operating Officer; and Glen Masterman, our VP Discovery and Business Development, are dialing in. It has been a tumultuous couple of years. And as expected, gold's role as a safe haven during those times has been demonstrated. As the pandemic was breaking in early 2020, we saw gold rise from the low 1,500 per ounce to an all-time high around 2,070 in August that year. We started 2021 with the gold price down from its peak at just under USD 1,900 per ounce. The economies were surging as they emerge from COVID lockdowns and equity markets were printing new highs. Bitcoin was continuing to generate a lot of interest with some touting it as a new digital gold, and exposure to any metal that ended up in a Tesla was highly sought after. Gold couldn't catch a bit in early 2021, and the sell-off was brisk, down to $1,680 by March. Gold equities would follow. And by the end of September, the GDX index of senior gold companies had fallen about 20% year-to-date, with the GDXJ Junior index even lower, down around 30%. Within the last 3 months, things have turned. Developing economies are now dealing with soaring inflation with the Federal Reserve now indicating it will need to respond with rate increases soon. The Omicron COVID-variant spread quickly, leading some countries to reintroduce or extend lockdowns and restrictions. And recently, Russia and Ukraine tension has Europe on high alert. Bitcoin had an incredible journey in 2021, but has now given back most of those gains. Gold's role as a safe haven is returning, and we now trade back up around USD 1,820 per ounce. For Australian gold miners, the Australian dollar gold price also went on a wild ride, but we currently sit within 10% to 15% of its all-time high. These really are great prices to be selling our product at. And of course, copper had a standout year, too, rising around 25%. Evolution is well placed to benefit from this with our copper production materially increasing from this month. With that, I'll now hand over to Jake to introduce the December 2021 quarterly report.
Thanks, Martin. Good morning, everyone. Welcome to the call. Thanks for joining us, and happy new year. Despite the industry headwinds, COVID, labor shortages and unseasonal rainfall, our teams did extremely well to manage the impact. As planned and first articulated to you in July, we anticipate the second half of the year to be materially better than the last 6 months and are on track to deliver our guidance.Given the first half performance at Red Lake, we expect to be in the bottom half of the production range and between the mid and top end of the cost guidance range. Last quarter, our portfolio was significantly improved by securing 100% ownership of the iconic Ernest Henry copper-gold mine. We also concluded the sale of Mt Carlton to Navarre Minerals. And whilst retaining exposure to the future of the operation, the sale allows us to focus on our larger, higher-margin assets. We continue to be consistent and diligent in the implementation of our strategy of improving the quality of our portfolio and being laser-focused about putting ourselves into a position where we can generate sector-leading returns on the capital we deploy. In our view, this is the holy grail in our industry and is the true measure of a gold company's performance over the long term. I visited Ernest Henry last week and left very confident that in the December quarter, we concluded what is likely to prove one of the most transformative deals in Evolution's history. It is an outstanding operation with a great team and terrific geological upside. We look forward to hosting a number of you there for a site visit in due course. The foundations for the transaction were put in place in 2016 when we secured the economic interest in the asset, and since then, have built a strong and mutually respectful relationship with Glencore that allowed us to negotiate this deal on a bilateral, exclusive basis over the course of a few months last year. Our economic interest delivered $79.5 million in cash flow last quarter. And now with 100% of the operation being included from 1 January, we expect its impact to be even bigger going forward. The cave extension pre-feasibility study will be a priority. And with intersections 400 meters below the study area and still open below that, Ernest Henry has a long and very exciting future. Cowal performed extremely well and managed to deliver to plan in spite of unprecedented rainfall and COVID interruptions. The underground project, which will grow at Cowal's production to 350,000 ounces per annum remains on schedule and budget. I was also fortunate to be able to visit Red Lake in November last year. Due to COVID travel restrictions, this was my first visit since we took ownership of the asset in April 2020. Red Lake is one of the best commercial opportunities I've seen in the gold sector in my career. For the combined purchase price of USD 650 million being Red Lake and Battle North, we have secured a district-scale tenement position with 11 million ounces of resource and significant exploration upside, 7 kilometers of prospective strike with associated mining infrastructure, 3 mills and $700 million of Canadian tax losses. In time, this asset will be transformed into a plus 350,000 ounce a year low-cost producer. This is how value is created in our sector. As you will hear from Bob who has just returned from his third visit in the last 5 months, progress is being made. Last quarter, we consistently achieved over 1,200 meters of development each month. As a result of this and other improvements, we are confident of a material and sustainable improvement to production in the next 2 quarters. We expect this higher production to drive the cost per ounce lower, and I'm looking forward to visiting the operation again with Lawrie in the next few weeks. Frustratingly, Mungari remains the only asset in our portfolio that we cannot currently visit. We are fortunate to have a good team in Western Australia, have led the Kundana integration, which has gone well, and we are growing increasingly confident about the future and the potential of this operation. Mt Rawdon was impacted by heavy rainfall and was forced to process the low-grade stockpile material. Strategically, we continue to assess the potential at Mt Rawdon to be converted into a pump hydro generator, which could be a significant contributor of renewable energy to the Southeast Queensland grid at the end of its mine life. This last quarter, the highlights for the Discovery team were good intersections at Cue in Western Australia and also more intriguing and exciting intersections at Red Lake, where there is plenty of open space and interesting geology to discover another high-grade zone. Glen and his team are also plotting and planning the next phase of drilling at Ernest Henry. Whilst we are managing industry headwinds, we should not ignore the significant commodity price tailwinds, the gold price of over AUD 2,500 in a copper price, which going forward will represent around 20% of our revenue of over AUD 13,500 per tonne. Evolution is well positioned to benefit from this. I'll now hand over to Bob to provide some more detail on the operational performance.
Thanks, Jake, and good morning, everyone. The December quarter saw our TRIF stabilize at 9.4. The highlight being a 35% reduction in the 12-month moving average at Mungari. The December quarter gold production is the first reported without Mt Carlton's contribution. The quarterly gold production was 148,000 ounces, with a 5% improvement in the all-in sustaining cost to $1,347 an ounce. Despite the challenges faced with above-average rainfall and COVID, Cowal had a strong quarter, delivering 60,000 ounces at an all-in sustaining cost of $998 an ounce and an operating mine cash flow precapital of $80.6 million. Capital investment ramped up at Cowal with $60 million spend on major projects this quarter. This included $24 million on the IWL and $33.5 million on the underground development. Underground development rates will ramp up in the March quarter with a second jumbo commencing in December, and the selection of the primary mining contractor is on track for the March quarter. The project remains on budget and on schedule. The IWL stage 2 deposition has run smoothly throughout the quarter. Ernest Henry produced 21,000 ounces of gold and 41,000 ounces of copper at an all-in sustaining cost of a negative $882 an ounce. The high AISC compared to the September quarter is primarily driven by lower copper production due to lower mining planned -- lower planned mining tonnes. The net line cash flow remained strong at $79.5 million, another significant contribution to the portfolio. I'm pleased to say this will be the last quarter reporting Ernest Henry as an economic interest. Integration activities are well underway, and I'm excited to have the Ernest Henry team as part of the Evolution family. The pre-feasibility study for the mine extension below the 1,125 RL has commenced and will incorporate the recent drilling results. Indicating mineralization extends further than assumed in the concept study. Completion of the study is expected in H1 FY '23. Moving on to Red Like. Over the past 5 months, I've been on site 3 times. Each time, I see an improvement in step change, in performance and delivery. Although, still a work in progress, pleasingly, many key metrics are moving in the right direction. Red Lake produced 20,000 ounces for the quarter. And although the all-in sustaining cost is not where we need it to be, the operating mine cash flow for the quarter was a positive. And we spent $13.9 million in sustaining capital and $36.9 million on major capital for future production. For the past couple of quarters, I've been talking about development. Pleasingly, during the December quarter, each month was above our long-term transformation goal of 1,200 meters per month. The December quarter was 21% higher than the September quarter. I expect this to continue, allowing additional mining fronts to be opened. Campbell mill continues to achieve new records, and approval has been granted to lift the daily throughput restriction of 2,000 tonnes per day for a limited trial in the second half of the financial year to support the Campbell mill expansion. While still not where we want them to be, there has been significant improvements through the quarter. Stope cycle time has improved by 25%. Stope idle time has improved by 60%. Time to drill per stope has improved by 27%, and slot drilling has halved with the V-30 implementation. Stope extraction quality-focused has delivered a 19% improvement in stope recovery, a 3% reduction in dilution and a 15% increase in our ore mine quarter-on-quarter. And in December, they're grade lifted to 4.9 grams per tonne. Looking forward to H2, we're expecting to see a continual improvement in delivery from the underground and the 2 mills operating. Notable improvements for the second half of the year. Tonnes processed will increase with the Red Lake mill running and the Campbell mill rate extension. Grade mine is lifting as dilution reduces and plans for early ore from the CYD development continue. Increased tonnes from Cochenour, the transfer haulage locomotion or locomotives, performance has improved by 43% last quarter. And replacement locomotives will be commissioned this quarter, further reducing downtime. And increased number of mining horizons and continuing the improvement in stope design and execution to further enhance our ore deliveries and quality. Mungari is moving forward post integration. For the quarter, they produced 34,000 ounces of gold at an all-in sustaining cost of $1,829 an ounce and generated an operating mine cash flow precapital of $20.7 million. Ore grade processed increased 34% over last quarter as a proportion of underground ore in the feed increased from 54% to 67%. Workforce integration is ongoing with a focus on establishing a one-team approach. The sharing of resources across the field has commenced and enabling better deployment of equipment and resources to priority areas, which has been critical as the site navigates high vacancy rates and COVID-related impacts. Mt Rawdon produced 12,400 ounces at an all-in sustaining cost of $1,842 an ounce and an operating mine cash flow precapital of $11.9 million. As previously mentioned, weather significantly impacted access to the pit resulting in reduced ore movements. As a result, stockpile feed increased directly hitting gold grade and production. In summary, some great improvements from Red Lake and Mungari throughout the quarter. The Cowal underground project continues to hit milestones, and the official ownership of Ernest Henry mine has added additional opportunities for the portfolio. Thank you for your time, and I'll hand over to Glen.
Thank you, Bob, and good morning, everyone. Firstly, at our Cue joint venture in Western Australia, we've advised our partner, Musgrave Minerals, that we will be taking full management and operatorship of the project, which occurred on January 1 of this year. Recent results from diamond drilling at the West Island prospect, outlined on Page 15 of this morning's report, importantly confirm the potential for high-grade mineralization within individual lodes. Drilling has also identified multiple new lode structures in the favorable dollar rate host in various locations along strike. The geometric relationships between structures and dolerite imply individual lodes may be limited by the potential strike length that remain open at depth. The aircore drilling program has been very important in further delineating the favorable dolerite host and associated golden [indiscernible] along strike from the original West Island drilling. The results of unlocked new areas with the necessary geological ingredients, the mineralization to occur up to 5 kilometers from West Island. One of the challenges with all of our drilling programs is long delays waiting to receive assay results in time to inform where to drill next. This is an industry-wide issue and is holding back the ability to accelerate drilling programs in the ways we would like to. At Cue, we are still waiting on results from 5 diamond holes and over 70 aircore holes, which restricts our ability to sensibly add additional drilling resources. At Red Lake, 2 deep holes were completed as wide space step-outs from the original intercept reported last quarter on the R Zone extension. One of the holes intersected high-grade mineralization 200 meters away from the first hole with the other hole drilling through the structure. However, it did not return significant mineralization. The results reported on Page 12 are encouraging because they unlock a large area of real estate that has not been previously drilled along the extension of the R Zone structure. Follow-up drilling is currently stepping up the high-grade intercept in hole 69 to expand the potential sale of mineralization in this area. At Mungari, drilling underground at Kundana and East Kundana continues its concentration on small resource extensions and classification upgrades on future mining areas adjacent to existing development. Step-out drilling into the footwall of the K2 structure from the underground at Hornet has returned further promising intercepts of stacked lode style mineralization at Startrek. Follow-up drilling is underway to understand the significance of illuminated vein in hole 2130 reported on Page 14 of this morning's report. The geology is similar to what would be expected on the main K2 structure at RHP, which is where the priority follow-up [indiscernible].At Ernest Henry, we have assessed H2 drilling priorities, which will be focused on developing orebody knowledge for the TFS, along with derisking areas of the resource that require additional data support before production is scheduled. As Bob and Jake mentioned earlier, strong copper-gold mineralization has been intersected at the 480-meter RL and remains open down plunge. With that, I'll hand over to Lawrie.
Thank you, Glen, and good morning, everyone. This morning, I'll provide a brief update on the financial performance for the quarter as outlined on Pages 9 and 10 of the report. The group, we produced 148,000 ounces at an all-in sustaining cost of $1,347 per ounce. This aligns with our guidance where we said the production would increase over the year and the all-in sustaining cost would trend down from around $1,450 per ounce in the first quarter. The AISC was approximately 5% lower than the September quarter. Our focus on portfolio quality is evident in that, on a like-for-like basis, the divestment of Mt Carlton operation reduced our all-in sustaining costs by $28 per ounce this quarter. As our production and cost profile changes in the second half, the cost benefit from this divestment will improve further. Group production and cost guidance remain unchanged at 670,000 to 725,000 ounces at an all-in sustaining cost of $11.35 to $11.95 per ounce. With the performance of Red Lake in the first half, we expect to be at the bottom end of the production range and between -- in the top half of the cost guidance range. In terms of cash flow, we were fairly well in line with plan, excluding the underperformance at Red Lake. We generated $203 million of operating cash flow, which is up 4.6% and 13%, excluding Mt Carlton. On a per ounce basis, our operating cash flow was up 10% quarter-on-quarter. This was against a flat gold price and lower copper revenue, where the higher copper price was offset by planned lower copper volumes at Ernest Henry. Net mine cash flow was $53 million with our capital programs remaining on plan. We invested around $34 million in sustaining capital or major project investment increased to $114 million as projects at Cowal and Red Lake progressed. Group capital guidance remains unchanged at $150 million to $175 million for sustaining and $440 million to $505 million for major projects. We'll see an immediate benefit of the acquisition of 100% of Ernest Henry, where our AISC will reduce materially in the second half of the year. More importantly though, our cash flow will be increasing. Based on our guidance and depending on the copper price achieved in the second half, we expect to realize an additional $80 million to $130 million of net mine cash flow at Ernest Henry. This will be taken into consideration when determining our interim dividend. As previously announced, during the quarter, we successfully priced a USD 200 million U.S. private placement for 9 years at very attractive pricing to partially fund the Ernest Henry acquisition. This will be drawn down next month. We ended December with $1.15 billion of cash and net debt of $450 million. Our unaudited gearing is around 12.6% prior to the payment for Ernest Henry in early January. We are on track to be below the 29% projected at the time of announcing the acquisition, and we expect to quickly be back within our targeted gearing levels and maintain a very strong balance sheet. I look forward to updating you next month on our FY '22 interim financial results. Thank you for your time this morning. And Darcy, please open the line for questions.
[Operator Instructions] Your first question comes from David Radclyffe from Global Mining Research.
So my question is on Red Lake. The commentary around mining rates does seem like they're more optimistic today, which is great, especially with respect to, I guess, the mine efficiencies and dilution and opening up more mining freights -- fronts. So just trying to think how we should think about the high development rates converting it to higher mine tonnes over sort of this year, and if you could maybe provide some sort of quantum of how that comes through over the next couple of quarters. And then on grade, how we should sort of think about those numbers over the year? Obviously, there's going to be the sweetener from Campbell. But when do we -- from the operations today, how do we move closer to that reserve grade of 6 given that currently we're sort of seeing a 4?
Thanks, David. Those are good questions. I mean, I think we are going through a transformation, we call it a 3- to 5-year transformation at Red Lake. The last 6 months have taught us a lot about the operation. We've focused on the development, and we've specifically taken the decision to, I suppose, sacrifice production over development and getting ready and setting the transformation up. And we now feel that we've kind of bottomed, and we're at a point where you're really going to see improvements in that. So the development rates are up. The improvements in mining are getting better. As Bob highlighted and he can talk further to it, dilution has been reduced. We're comfortable that the models are performing. We need to open up some of these higher-grade areas, which are going to be happening over the next few months. So it's a journey. We're on the right path, and you are going to see material improvements to production and lowering of costs in the next quarter and following quarters. Bob, do you want to add to that?
Yes. Thanks, Jake. David, as Jake said, the expectation is that as we get the development into the new areas, and it takes a long time to go out and to open up new areas, and the mining fronts will open up, which will help stabilize and increase the tonnages. We're starting to see an increase in tonnages last quarter through the quarter. Although it's not as high as we need it yet, but it's still -- it's growing. And areas like aviation and the like, they do take a bit of time to set up. So I would expect that over the next couple of quarters, we'll start to see those tonnages come in.As Jake said also on the grade, we are getting a lot better with the reconciliations of dilution and the like, as I mentioned, all the numbers. I expect that over the coming quarters, we will see that continue to improve. Glen, do you want to comment on the model specifically?
Sure, Bob. I think one of the things that we're starting to see, David, is that, particularly with our reconciliation, so are down to grade control and are down to ore reserve, we're starting to see an upward tick, particularly on the grade front, as we improve particularly some of the mining-related factors as Bob has just described, dilution recovery. And we've improved our grade control system, so we are starting to see that upward tick in the grade. And particularly on a 3-month moving average, it's starting to trend into the direction where we need it to be. So we had confidence that the models are performing to plan, and we're just aligning that with the way we're mining, and yes, we're confident that we'll start to see that where it needs to be over the next coming quarters.
I just conclude that, David, with a comment around the fact that we've owned this asset for 21 months. It's only been in the last 5 months that we've been able to visit the operation. But when we bought the asset in April 2019, we said our 3-year goal was to get to a run rate of 200,000 ounces of gold and then a longer-term 5-year horizon of 350,000 ounces a year, and we are committed to delivering that on both the 36-month and 60-month targets.
Your next question comes from Al Harvey from JPMorgan.
Just a couple for me. Just with Ernest Henry and the study, so we've got about 18 months for the PFS. Just wondering if this was going to take on much of the work that Glencore did or if it will be kind of a complete recut, incorporating that -- those further depth extensions. And I think, Glen, you mentioned, it was going down to 480 meters and still open beyond. So where potentially could you -- would you kind of draw the line on those depth extensions and where the study will kind of finish up?
Yes. So just to clarify, the study will be delivered in the second half of this calendar year, so first half of FY '23. So we're kind of, say, 9 months away from delivery of that. It will build on the concept study, which was completed by Glencore. I suppose one of the things which we found intriguing as we've looked at the concept study is that it was determined really on the basis of minimizing the capital expenditure, which meant that the depth extent of the concept study went down to as far as the decline could go and you could track material up. So it wasn't constrained or determined by geology. It was more determined by how far can we develop, how deep can we develop, which is kind of a 4- to 5-year mine life extension with the decline development and not needing to spend significant capital. So the priority was really minimizing capital expenditure and extending mine life by -- which constrained it to that 4 to 5 years. So our prefeas will look at that as well, but we'll also look at some longer-dated options as to whether there is potential to extend it even further beyond that, which certainly, from my site visit, there was a lot of optimism from the site team that, that was possible.
Maybe just quickly on Red Lake. You got the approval for the higher throughput trial. How long will that trial last? And then what are the permitting steps that will follow that there?
Bob, do you want to take that question?
Yes. Thanks, Al. The trial is actually -- we're permitted for a 6- to 8-week period of basically unlimited throughput through the Campbell mill, and the reason we wanted the trial was to determine how far we could actually push the mill. So really, it's a short period of time that will allow us to then be able to go and actually seek the approvals for a permanent lift. At the moment, you need an engineering study, and we actually believe that we can actually get all the data we need out of this trial to be able to go and actually seek the permitting.
And if I could just sneak one more in. Just with Cowal, there was a small contribution from the underground this quarter. Thought we were trying -- going to expect that a little bit later. So is this material a one-off? Or can we kind of expect underground to start contributing more and seeing that ramp up over the next few quarters?
Bob?
We're on track for the time frame that we've actually spoken about earlier, Al. There will be minor contributions coming through as we develop through different zones, but it won't be significant in the immediate future, but we're on track to deliver first ore as we said. I'm just trying to remember exactly the time frame. I can't remember, sorry. I'd have to go and check it. Jake?
No. I don't think there was any contribution or material contribution from the underground. It remains on track and on schedule, yes.
Your next question comes from Daniel Morgan from Barrenjoey.
Just on Red Lake, can you just run through on why FY '22 guidance is still achievable, be at the low end of the range? It does imply the next 2 quarters have got a very strong production run rate of over 50,000 ounces. I guess, or at the end of January, so you should have visibility on that data, but it just seems a big lift. What is underpinning that? Do you have high-grade stopes available? Is it running this trial of the plant? Does that give you more production? Just how is guidance achievable?
Yes, Dan. Thanks. I mean we've specifically said that group guidance is achievable. We're not going to make the asset guidance at Red Lake. But we're not feeling that we want to be granular enough to say how much we can produce because all these steps are in place and are showing improvements. But on a group basis, and I think that's what investors should look at, we are confirming that we will make our guidance range.
All right. I might have misinterpreted the comment, but it was a great comment. Apologies. Just on Red Lake, maybe taking a step back. Could you maybe break out what are the critical elements that need to be in place for the turnaround to occur? Because obviously, a lot of these are not in place at current, whether that's equipment, whether that's the access to the upper Campbell or the mill throughput. Can you just unpick when these pieces to the turnaround will be in place are expected to be in place? And when we can expect that?
Sure. Bob, you've just recovered from jetlag from your latest trip there. So over to you.
Thanks, Jake. And thanks, Dan. As we talked about earlier, the big one to start with was getting the development to open up new areas. But post that, we have actually been working on the stope turnaround cycle. And the time to initial -- from initial development through to filling of a stope, so we're going to keep the sequence going for the next stope, which comes along right beside the previous field stopes.So we've been working on long-haul drill rates. We've been working on paste fill placement. We've been working on reentry times as well as stoping and turnover of the actual stopes. So all those together is really -- is what is enabling the lift last quarter of our ore tonnes by, I think, it's about 15% from the previous quarter. So that comes around because we can actually get into the stopes quicker and more regular. If we actually look at the additional mining funds, what it enables us to do is actually spread the mining fleet out, so that interruption and the disruption from interacting activities is limited even further. So that allows us to actually turn the actual cycles quicker because we actually don't have the same disruption factors. A big one for the coming quarters is Cochenour. And the last quarter, the high-speed tram or the locomotive that takes the ore from Cochenour across the [ Red chart ], that improved significantly from the previous quarter. And that is one of the main things that allow us because Cochenour has got a good turnover cycle of its stope [indiscernible]. Did I sort of try to answer it?
When is access coming to the upper Campbell, for instance?
Bob?
Sorry. Go ahead.
Go ahead.
I was just going to say the upper Campbell -- so the CYD is actually accessing the upper Campbell, and we're already down into that area with the CYD. First stope ore was always said to be around about 12 months after. So -- and that still is on track. We will get minor amounts of development ore early, the same as at Cowal. I mean as you go through areas, you'll intercept some sort of minor ore zones. But anything from a [ stope ] will still be within that 12 months from first starting. Jake, do you want to add anything to that?
No. Other than that, you were walking around it last week, and you feel positive about the outlook over there. I mean I suppose the thing that I would add to all this commentary on Red Lake is that each time someone's been there, and particularly, Bob has made several trips, there are no red flags with respect to our delivery of this. It's getting our operational efficiency bedded down. And I still believe this is, as I said in my commentary, this is an amazing commercial opportunity where we've acquired assets that need transformation. It's going to take some time. We've had a few hiccups in the last 6 months, but there are no red flags with respect to delivery and transforming this operation.
I guess, Jake, on that comment about the ore tonnage or the potential or within that Campbell zone, Daniel, I walked 9, 11, 14 and a few other levels this time, and it's ripe for the taking. There's just [ strip ] of access, we've got to get there. So that's what's taking the time.
And last question is probably a bit simpler. Just Mungari, just the numbers on Page 4. Can I just get a confirmation on whether these are equity numbers? Or do they have JV production in them? I just want to make sure I'm treating like with like here.
Lawrie?
Yes. Dan, so the physicals up the top will be 100% of what's processed when we're talking about gold production, silver production. That is our equitable share. So we're wanting to show what the actual mining and processing has been able to do.
Your next question comes from Levi Spry from UBS.
Can I just follow up on David and Dan's question around Red Lake? Well, do we get the tonnes and grades for the second half? And do I assume that the 3-year 200,000 ounces means that we're going for a 50,000 ounce per quarter run rate in sort of 12 months where we [ all expect ] it to be by month?
I think before Bob answers that, I've had a good -- happy New Year, Levi. Yes is the answer to your last question. To get to 200,000 ounces, we need to get to consistently doing a run rate of 50,000 ounces per quarter. We'd prefer not to kind of break down into tonnes and grades for the next 6 months because we just feel we want to build confidence ourselves. On a group guidance basis, we are comfortable we'll make the guidance range, but we'd prefer just to give us another couple of months to just get comfortable that these changes that we're seeing are going to be repeatable and consistently deliverable.
Your next question comes from Alex Barkley from RBC.
First, a quick one at Cowal. It seems like sustaining CapEx is maybe running a bit low on an annualized basis. Is that -- is there a reason for that? Or should we be expecting a lift in the second half?
Lawrie?
Yes. Alex, it is just basically timing more than anything. We expect that the second half will lift. I mean the primary focus in the first half was getting the underground and the IWL projects continuing. And in the second half, you'll see some sustaining capital come through.
All right. No problem. And a quick one at Red Lake, just to follow up on what's been asked. So for the second quarter, can we confirm that there was no grade reconciliation issues?
Yes. There was dilution, but that was improving. And in the month of December, we felt very comfortable that we'd addressed some of the issues that we're getting in terms of both dilution, and we feel confident that the models are performing to plan.
Your next question comes from Matthew Frydman from Goldman Sachs.
I don't want to labor the point on Red Lake, and you did kind of just touch on it there, Jake. But I'm just wondering, you've highlighted on the call and in the report a number of ways that tonnes are improving, and volumes are improving. We can see mining rates lifting, development rates lifting. But obviously, grade keeps falling. You've been underperforming the reserve grade for a year now. So I guess does that mean we'll see an overperformance at some point? Is there a need to rethink some of the dilution assumptions and other factors that underpin that reserve grade? You said you're comfortable with the way the model is performing at the moment. But I guess is another year of data on this asset now, I guess, lead to any sort of expectations or anything that we should think about at the next mineral reserves -- sorry, mineral resource or reserve update? Anything to think about in terms of that?
Yes. Thanks, Matt. I mean good question again. And Bob and his team have been doing a lot of work on understanding that. And again, we came to the -- we are of the view empirically that the models are performing to plan. But Bob, maybe you can give some color as to some of the issues and then hand over to Glen to just give some guidance on the MROR.
Yes. No problem. It's just -- how are you doing, Matt? The number that I quoted when I was speaking, that was the December number. So the number in the report is an average for the quarter of 3.95. And in December, it did lift to 4.9, which is starting to show out some of the dilution issues that we -- I spoke about being under control. It's also showing some improvements in drilling accuracy and the like within the stope. So it's actually starting to improve significantly. And that's why what Jake said about, we're pretty confident on the models. We're working on all those things. Are we where we need to be? I still think we've got improvements to be had. So I still think that there's further uplifts to come, but it is actually all moving in the right direction. So it's pretty pleasing. Glen, did you want to talk -- comment on the model?
Yes. Thanks, Bob. Yes, Matt, I think just really, I guess, a bit of a preview on our MROR update, which will come out with mid next month. As you will recall, when we did the sort of, I guess, the evolution update to bring it into compliance with JORC, we consolidated the models from over 130 to 19 principle models. In the last 12 months, we've had new data and mining from 6 of those models. So they are the ones that we're going to be revising into the MROR annual update. We're not seeing really any material movement in the resource, and that's from a tonnes and grade perspective, and assuming that the same cutoff rates, as we previously had, which is around about 3.5 grams per tonne on a mineral resource basis. We do -- what -- the new data that we're collecting is really confirming some of the geological interpretations. There are some small changes. There will be swings and roundabouts in areas where we didn't have as much data support as we would have liked, but that's to be expected. So I think all in all, we're not expecting to see any material change sort of year-over-year in terms of the actual geological model and how it informs the resource estimate.
And I think from sort of looking at this in a great amount of detail, Bob and his technical team and Glen and the [ resource ], we are confident that we are addressing the mining issues. And with good mining practice, we should be able to get the grade that is in the models.
Got it. Just secondly, on Ernest Henry. And obviously, congrats on the team on closing that transaction over Christmas and the New Year. I hope they did manage to get some kind of a holiday. But just wondering in terms of -- you mentioned that the copper production during the quarter was a bit lower than -- sorry, the lower copper production during the quarter was, I guess, to plan, and potentially that's attributable to lower grades quarter-on-quarter. That asset is still mining above reserve grades for copper in particular. I'm just wondering when we should be thinking about a roll off back to reserve grade for that asset. Did we see that in the December quarter? And then, I guess, similar to the last question, anything to think about in terms of incorporating that reserve and resource into your next update now that that's being reported on a 100% basis? I believe it's already a JORC standard resource. But yes, any movements there to think about now that it's fully Evolution ownership?
Yes. Thanks, Matt. Glen, do you want to just comment on the resource?
Yes. Sure, Jake. So on the resource, Matt, we -- yes, we will be providing an update mid next month, which really incorporate information up until about May last year, which will be when Glencore did their last resource update. So there will be an update reflecting that point in time, and it won't incorporate all the drilling information that we've collected between May and December. So that will obviously be rolled into our MROR cycle as we go ahead this 12-month period to really incorporate all that information in addition to the new drilling that will be -- that is in the plan for this year.
And Matt, just on the production, it was a combination. So in the quarter, we had a shutdown, which was a planned shutdown, and it also a shutdown in the mine. So we did end up with some lower grades coming through. And as we look at the rest of the year, you do see that the average grade being mined is coming back down, certainly from where the first quarter was. And the second thing that did impact on copper in this quarter were some finalizations of the previous quarter's concentrate sales. So that did have a bit of an impact on the copper piece in particular. .So it's -- what you'll see, if you look at it as a half, you're going to see that then flow through into the second half is pretty, well, a like-for-like once you gross it up to 100%, obviously.
The next question comes from Mitch Ryan from Jefferies.
Quick question with regards to Red Lake, the more of a longer-term dated question. Just wondering if you could provide an update on Battle North and the acquisition there, specifically around the milling capacity. Out of the rationale for that was to potentially bring that milling capacity online. Can you give us an update on the permitting processes for that? How much tension is actually being able to be spent on that given the focus on just, I guess, consolidating the base level of production in the existing Red Lake operations?
Sure. Bob, over to you.
Yes. Thanks. So the Battle North processing plant, it's there, it's operational if we wanted to start it. We are replacing some parts that need replacing. The big issue at the Bateman plant is the TSF, and we're working through that at the moment. For the next sort of 12 odd-ish months, our capacity at Red Lake and Campbell are going to be enough, so that's what we're doing the permitting and all the work to bring it in on time when we actually need it. From the rest of Battle North, we're still doing work in the underground. We're doing some drilling that Glen can talk about. So we've done some grade control drilling over there just to grow our knowledge on the -- on the orebodies as well.
Your next question comes from Stuart McKinnon from The West Australian.
Just intrigued by the -- you mentioned in the quarterly about up to 15% of your workforce being effectively knocked out at Red Lake and Cowal at various times because of COVID. Obviously, COVID hasn't been sort of awash in the community as it has in those other places, Canberra and New South Wales, in WA. Are you expecting that eventually, you're going to have those -- have the same challenges at your WA operations in terms of COVID and managing your workforce as you do at Red Lake and Cowal? And how much more of an impact is that going to be given that you're already sort of short on workers given that the WA situation with the labor market shortage just generally in the resource industry?
Yes, Stuart, that's a good question. Look, we're obviously watching it and monitoring it very closely and trying to put in the contingency plans and the learnings, which we've got from managing it, and we've managed it effectively at Red Lake and Cowal. But unless there is -- someone finds a cure for COVID, which does not seem to be the case because people who are triple vaxxed still seem to be catching the Omnicron (sic) [ Omicron ] variant in New South Wales and Canada and around the world, then you'd have to think that at some point in time, if Western Australia opens up, Omnicron is going to spread through Western Australia. So we are going to do our best to put in contingency plans. But if you couple that with a skill shortage, it does put the whole mining industry in Western Australia at some risk.
Your next question comes from Nick Evans from The Australian.
Just a follow up to Stuart's question, Jake. Just in terms of New South Wales in particular, how are you sort of thinking about the spread of Omicron in New South Wales? Do you think that sort of Cowal or your operations there have seen the worst of it? Or were you expecting this kind of level of absenteeism to continue for some time? And just in the terms of WA, I thought I detected a sort of a note of frustration in your voice when you talked about not being able to have -- not being able to visit it. I mean do you think that in terms of dealing with the inevitable split in WA that the state government should have bit the bullet and done it now? Or do you think there was some benefit to delaying the reopening in WA?
Thanks, Nick. I'll answer the second question first. Yes, our preference would have been to have the Western Australian Border opened earlier. It just seems like you're, in some ways, deferring the inevitable by keeping it closed. As I said earlier, unless there is a cure, which is not on the horizon, it is going to be present, and it is going to have to be dealt with at some point in time. Even if it is deferred, it's not going to be eliminated. It does feel like other places like New South Wales and Ontario and the rest of the world is learning how to manage this. And certainly, at our operations, while it has been a big distraction, we have been able to manage through it, and we are getting more comfortable that we can manage it. It has distracted the management teams a lot. But with proper process and proper protocols, it can be managed effectively.
Your next question comes from Jim Pollock from Surbiton Associates.
Jake, I think it was you who said in your introduction that the second half of the financial year would be materially better. I was just wondering where we can expect to see material improvements, in which operations.
Yes, Jim, thanks. There are 2 areas which I'd say you should look out for. The one is Red Lake that was spoken about at length on this call. We expect to see a material improvement in production and reduction in costs over there. And the second one is the acquisition of Ernest Henry will be fully incorporated into our results on a 100% basis from the 1st of January, and that will also have a material impact.
All right. Good. I wasn't going to ask -- well, I thought I'd be a little bit different and not ask any question on Ernest Henry, but thanks for including that answer. Given the rain problems you've had in New South Wales and Queensland, just for example, in -- at Mt Rawdon, what tonnage of material, low-grade material, do you have a stockpile that you can keep the mill running on?
I think we have very significant low-grade stockpiles. That's not the issue. The issue is more, we want to access the more profitable lower-cost ounces in the pit.
Right. But there's -- if you had to depend -- this is a hypothetical question. If you had to depend 100% on stockpiled material, you have many years ahead of you, I assume, many years life left.
Yes, we do.
Right. Okay. What's the situation at Cowal? Large stockpiles there?
Yes, very large stockpiles there as well. That's what we are treating before the -- we got into the Stage H cutback, which we're now treating all grade materials, so very comfortable there as well.
Yes. Good. Okay. Finally, look, I've been asked to ask you, what's your best contact -- way of contacting you? [ Dr. Sandra Close ] did attempt to -- well, did try to contact you or did contact the office before Christmas, but got no reply. What's the best way of her getting something to you?
I think if you go through the website, we will respond to it.
Your next question comes from Anthony Barich from S&P Global.
I'm just wondering, you mentioned early on about some of the headwinds, it seems to be front of mind. Just wondering, just for the gold sector, how much of a front of mind in the context of what's going on in the bigger picture? And are you -- I'm not expecting any crystal ball for the gold sector or anything here. But are you overall more optimistic than not for the coming year?
Yes. I'm very optimistic. I mean we've repositioned our portfolio to be profitable right through the cycle, as we've said. We -- if you'd take our portfolio 12 months on from the beginning of 2021 to the end, it's materially better. We did the Mungari transaction, the Kundana consolidation. We did the Ernest Henry transaction, and we did the Battle North transaction to consolidate Red Lake. So from our perspective, the strategy remains the same: focus on quality over quantity, return on capital and benefit. The gold price is over AUD 2,500 an ounce. I did reflect on the fact that when I started in the industry, it was $300 an ounce. So if we're not happy at $2,500 an ounce, we need to find another sector to operate in. We're excited and happy about it. The Fed Reserve meeting this morning told everyone what they knew. Interest rates are going to go up. I didn't see anything that people should have been surprised about in that meeting.
So now I guess my question about overall optimistic, I was more referring to, yes, that's our macro picture. So when you refer to the U.S. Fed there, you're obviously saying that -- implications are that for the gold sector, that's obviously looking good for the coming year, [indiscernible]?
I think the question which everyone is asking, Jerome Powell, the Fed Reserve Chairman, made the point this morning that inflation is way higher than they target and they need to start raising interest rates and manage it and reducing their balance sheet. Yes, that's the question. Is the Fed going to be able to do that and do it in a way that is not disruptive? And yes, if I was someone and I -- who needed insurance, I'd be buying gold and gold stocks like Evolution.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks. Thanks, everyone, for participating. Appreciate it. It won't be long before you speak to us again with the release of our interim results in the middle of February, so I look forward to updating you then and look forward to being able to, hopefully, with travel restrictions reducing, to be able to take you to Ernest Henry, take you to Red Lake and also visit Cowal, where a lot of change is happening because seeing is really believing. So thanks.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.