Evolution Mining Ltd
ASX:EVN
Earnings Call Analysis
Q2-2024 Analysis
Evolution Mining Ltd
The company has initiated a deleveraging process and reports solid momentum in cash generation, boasting a significant improvement of 19% in cash flow before major capital to AUD291 million. Despite a hike in all-in cost margin per ounce of 30%, the net mine cash flow increased by 85%, attributing gains to multiple operations, especially Ernest Henry and Northparkes. Looking ahead, they anticipate all-in sustaining costs (AISC) per ounce to converge towards the full-year guidance of AUD1,340, adjusted by plus or minus 5%, thanks to production increases and ongoing cost control efforts.
Bob, a key executive, is scheduled to leave his position at the end of March, with internal transition plans already set in motion. Concurrently, a search for his successor is underway, with related announcements expected to be made in due course.
The company faced operational challenges with delayed commissioning of the paste plant and seismic issues at Red Lake. However, they achieved better-than-expected performance from the commissioned paste plant and plan on accelerating mining to enhance production in the third and fourth quarters. Red Lake encountered disruptions due to an ore pass issue and a seismic event, but these have been resolved, and access to the affected areas is expected soon, which will assist in increasing production and lowering costs.
The Cowal paste plant has transitioned from commissioning to ramping up, now functioning at or above nameplate capacity, resolving earlier quality issues. This progress supports increased production estimates for the third quarter, aligning with the initial plans and completing its commissioning at the end of Q2.
Management is prioritizing reliability at Red Lake given the asset's history of variability. They have made a strategic decision to focus on improving stability and costs rather than pursuing aggressive production expansion. This could include forgoing immediate opportunities to chase higher ounces at the cost of financial prudence, emphasizing a sustainable path to cash generation.
Northparkes has been integrated into the company's portfolio, performing safely according to plan and showcasing self-sufficiency. The asset's working capital is expected to be stable without foreseeable burn-through in upcoming quarters. While Red Lake's performance remains a priority, the company is open to assessing additional North American asset opportunities, although no significant acquisitions are anticipated in the current calendar year.
The company acknowledges a challenging labor market, particularly on the West Coast, though the turnover rate has decreased and current conditions have improved compared to the previous year. On the exploration front, efforts are being directed towards delineating the potential of Bert at Ernest Henry, which could complement the existing mill operations. A concept study is in progress, which will help outline future plans based on further resource updates.
To conclude, the executive team recognizes that the quarter presented a mix of challenges and achievements. Their commitment is towards improving controllable areas with an emphasis on margins and balance sheet strengthening. They highlight the positive developments in cash generation and successful integration of Northparkes, and they eagerly await sharing full financial results and an update on the Mineral Resource and Ore Reserve (MROR) in the next month.
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Thank you for standing by, and welcome to the Evolution Mining Limited December Quarter 2023 Results Conference Call. There will be a presentation followed by a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to Mr. Peter O'Connor, General Manager, Investor Relations. Please go ahead.
Thank you, Mel. My name is Peter O'Connor. As Mel mentioned, I'm General Manager, Investor Relations for Evolution Mining. Welcome to today's call. This morning, we posted 2 releases to the ASX platform. They include the December quarter 2023 quarterly report and update, and also a separate release on exploration entitled Exploration Success Continues at Cowal and Ernest Henry. These releases are also available on the Evolution website.Speakers on today's call include our Managing Director and Chief Executive Officer, Lawrie Conway; our VP of Discovery, Glen Masterman, and might add Glen is calling in from Canada this morning, he is on annual leave and more importantly has a very deep case of COVID, so thank him for taking the time out to do that for us; and our Chief Financial Officer, Barrie Van Der Merwe as well.And with that, I'd like to hand over to our Managing Director and Chief Executive Officer.
Thank you, [ Rocky ], and good morning, everyone. I hope you had an enjoyable holiday season. We're able to get some downtime with family and friends, and I do wish everyone a healthy and prosperous '24.The December quarter was a mixed one with some really positive outcomes in areas where we really need to keep on improving. Firstly, our production of 161,000 ounces at AUD1,618 per ounce was lower than planned, driven by the lower production at Red Lake and weather impacts in December at Cowal and Mt Rawdon. Notwithstanding these shortfalls, a full review of the plan for the second half has confirmed that we'll be within the group guidance range for the year of 789,000 ounces at AUD1,340 per ounce, plus or minus 5%. I'll talk to the details on that shortly.On the sustainability front, our recordable injury frequency rate increased to around 9. While the incidents were minor and they were in the holiday period, it is a slight increase that we're not happy with and it's not where we want to be.On the positives, we generated nearly AUD80 million of cash flow before debt, dividends, and any acquisition funding for Northparkes. This was an increase of over AUD105 million from the September quarter on the back of an 85% increase in net mine cash flow to approximately AUD132 million. It shows we are deleveraging the balance sheet and momentum is expected to build in the second half of the year. Our cash balance at the end of the quarter was AUD191 million and the AUD525 million revolver facility is undrawn. The closing cash balance includes approximately AUD80 million of opening cash at Northparkes on acquisition. This provides us with AUD716 million of liquidity.We successfully completed the Northparkes transaction in December and in the first 2 weeks, the operation safely delivered around 1,200 tonnes of copper and over 1,000 ounces of gold. We made a concentrate shipment in late December and the result was a positive cash flow of AUD9.5 million post this Triple Flag Stream commitment. Work is progressing well on the mineral resource and ore reserve statements in Northparkes, which we intend to release next month with our half-year financial results.Ernest Henry continued to demonstrate its quality and it is back to normal operations with consistent production and around AUD104 million of net mine cash flow, including an initial insurance reimbursement of AUD18 million for costs associated with the March 2023 weather event. Cowal's performance was in line with the last quarter but less than expected due predominantly to high rainfall events in December, which restricted access to the open pit. While the grade increased, the weather reduced open pit tonnes by approximately 1.3 million compared to the September quarter. This resulted in about 7,000 ounces of lower production.The underground continued to ramp up with its annualized mining rate averaging 700,000 tonnes in the quarter and it is expected to increase to 1.4 million tonnes at the end of the March quarter. The paste plant is in the final stages of commissioning. The operation delivered over AUD138 million of operating cash flow and AUD50 million of net cash flow and this will build as we move forward and the underground ramps up.Mungari and Mt Rawdon's performance for the quarter was in line with the last quarter, although weather did reduce Mt Rawdon's production by over 3,000 ounces. The Mungari 4.2 project remains on budget and on schedule.At Red Lake, the previously detailed materials handling constraints at Cochenour ore pass impacted the quarter. It required us to move all of the material out there, which added to dilution during the quarter. It was resolved by the end of the quarter, including the new permanent raisebore in place and the issue -- and we also had an issue at the Reid shaft. Restriction at mining at Balmer due to a seismic event continued during the quarter. These issues combined reduced production by approximately 13,000 ounces. While these operational issues were unplanned, Red Lake has not yet demonstrated the reliability that we need to see and that we are achieving at our other operations.As I've said many times, Red Lake must be more reliable in production as well as generating positive cash flow. Margin is more important than just ounces at this operation. Therefore, the team has worked on optimizing the plan for improved productivity and lower expenditure for the second half, which is anticipated to improve Red Lake's cash position. As a result, Red Lake's FY '24 production has been changed to 125,000 to 135,000 ounces.In terms of group FY '24 guidance, all operations except Red Lake are planned to produce at the midpoint of guidance or better. Cost reduction plans across the group continue to be executed to ensure that we offset the impact of the lower output at Red Lake. Therefore, our group guidance of 789,000 ounces at AUD1,340 per ounce in a range of plus or minus 5% is maintained and we have no changes to our capital guidance.Lastly, we announced today that after 6 years with Evolution, Bob Fulker, our COO, has decided to leave. Bob has been instrumental in the transformation of the company to the portfolio of assets we have today. Bob has faced many challenges, including the COVID pandemic, flooding events, fires, multiple seismic events and the integration and the divestment of various assets. We thank Bob for his contribution to the company and wish him and his family all the best for the future.I have not touched on the exploration results, which are continuing to deliver across the portfolio and excite us about both near-term and medium-term growth and extension potential. I'm going to leave that to Glen who will provide those details now.
Thank you, Lawrie, and good morning, everyone. I'd like to turn your attention to the exploration announcement we released this morning, describing the continuation of exciting drilling results from Cowal and Ernest Henry, along with the completion of 2 new earn-in exploration joint venture agreements in Queensland and Ontario.At Cowal, the results are expected to further expand the mineral resource in the underground mine across to the newly named Edradour zone. At Ernest Henry, drilling results received during the quarter confirm extension of the near-surface Bert orebody expands Ernie Junior along strike and establishes continuity between the main orebody and Ernie Junior. Importantly, the results described in this morning's announcement were received after our data cutoff for the December 31, 2023 calendar year MROR update. As such, these results will be incorporated in model updates at the end of the 2024 calendar year and will not be represented in the 2023 MROR statement we will release next month.The Edradour target at Cowal, which we've named in keeping with the single malt theme adopted for our other underground ore bodies, returned results in the quarter, which highlight new potential to increase metal in areas adjacent to planned development. The drilling is returning very thick intervals of mineralization at the northern end of Dalwhinnie, which extend this orebody towards Edradour at similar grades to the underground ore reserve.Pleasingly, these wide intervals typically host a zone of higher grade within the core of the intercept, which is illustrated nicely in hole RDU0062 in figure 1 on Page 2 of the exploration announcement. Adjacent at Edradour, we are receiving excellent results showing potential for very good underground mining grades in this relatively undertested area between Dalwhinnie and Regal. Further drilling is designed to test continuity of mineralization across the entire Edradour target, which if successful, will drive additional ounces per vertical meter in this area of the mine very close to planned development on either side at Dalwhinnie and Regal.Turning to Ernest Henry. The significance of the results received from Ernie Junior outlined in figure 2 on Page 3 of this morning's announcement is an expected increase in the mineral resource proximal to the footprint of the feasibility study. This continued delivery of exciting drilling results from Ernie Junior has driven a decision to expand the scope of the feasibility study, which is now designed to incorporate the additional metal being delineated in these results.Elsewhere at Bert, mineralization remains open down-plunge and signifies a significant resource growth opportunity that can be potentially extracted independently of the shaft. Drilling is planned to further delineate the opportunity at Bert to inform potential options for future incremental production growth.Lastly, we recently entered into 2 -- into new earn-in joint venture agreements on 2 early-stage exploration projects. The first is located in North Queensland, not far from our Ernest Henry operation. The project is known as Cloncurry North, and we will be exploring undercover geophysical targets in rocks similar to those hosting copper-gold mineralization at the mine. The target, if successful, has potential to unlock incremental production growth with the aim of utilizing latent capacity at the Ernest Henry processing plant. Evolution can earn an 80% interest in Cloncurry North by spending AUD8 million over 4 years along with staged cash payments totaling AUD200,000 over the term of the agreement.Our other new project is October, which is located 100 kilometers southwest of Timmins in Ontario. What we like about this opportunity is that it represents a rare example of an underexplored land position on an extension of the Larder Lake-Cadillac break, which is one of Canada's most prolific gold-bearing structural corridors in the Abitibi Greenstone Belt. This is a rare opportunity indeed and we are very pleased to have secured such a prospective land position. Our Greenfields pipeline is now fully recharged with 2 new projects located in excellent geological addresses. I look forward to updating on progress of these exploration opportunities in future quarters.With that, I'll hand over to Barrie.
Thank you, Glen, and good morning, everyone. During this quarter, we started to deleverage and cash generation has gained momentum. The revolving credit facility was fully repaid and we have AUD191 million in cash and available liquidity of AUD716 million. All operations contributed positively to cash flow before major capital of AUD291 million, increasing 19%. The all-in cost margin per ounce increased 30% from AUD520 per ounce to AUD676. Net mine cash flow continued its positive trajectory and was up AUD60 million, an 85% increase.Ernest Henry continued its steady and predictable delivery and strong cash generation and Northparkes contributed AUD9.5 million to net mine cash flow after allowing for stream commitments of AUD2.3 million. AISC per ounce at Cowal, Mungari and Mt Rawdon were lower than last quarter. Group AISC was flat quarter-on-quarter at AUD1,618 per ounce, despite planned increases in sustaining capital expenditure of AUD65 and 6,000 ounces less concentrate sales at Red Lake that benefited the previous quarter by about AUD60.The favorable impact of production increases in the second half, as well as our continued focus on cost control, which is starting to show positive signs, will drive AISC down to full-year guidance of AUD1,340 plus or minus 5%. As an example of our cost control focus, at Red Lake, mining and processing cost in Canadian dollars is well below plan, and savings will continue into the second half.As mentioned by Lawrie, the Cowal underground mine is ramping up well. It is expected to reach commercial production at the end of March when it will achieve an annualized mining rate of more than 1.4 million tonnes, which is 70% of its targeted mine design capacity, and be generating cash long-term prices. At the start of the year, we said we would assess this at the half year. The slower-than-expected ramp-up of the paste plant has contributed partially to the delay in commercial production. However, gold production of 20,000 ounces is expected in the March quarter, which at the year-to-date realized price results in a breakeven operating mine cash flow.Group cash flow for the quarter was AUD80 million, AUD105 million improvement from last quarter. We paid our dividend of AUD37 million in the quarter and Northparkes had cash of AUD80 million at acquisition. Quarter-on-quarter liquidity improved by AUD213 million and the cash balance is AUD191 million with no amounts drawn on the revolving credit facility, which is fully available and committed until October 2025. As outlined in the announcement of the Northparkes acquisition, there are approximately AUD100 million in stamp duty and working capital adjustments, which will be paid in the second half of the year. As expected, major capital was AUD10 million higher with the Mungari 4.2 project execution ramping up. The project remains on schedule and budget.You may recall that our 120,000 ounces were hedged at an average price of AUD3,185 per ounce over the next 2.5 years to cover the Mungari 4.2 project. The first 20,000 ounces will be delivered in the second half at the price of AUD3,100 per ounce. This is our only hedge and more than 95% of our production is fully exposed to the spot gold price. With production increasing materially and cost improvements in the second half, cash generation momentum is expected to increase and deleveraging to continue.I will now hand you back to Mel to open the line for questions. Thank you.
[Operator Instructions] Your first question comes from Rahul Anand with Morgan Stanley.
A couple for me. Look, the first one is around your guidance. So you've maintained guidance despite the downgrade at Red Lake. I guess the key question then becomes most of the assets are still running below year-to-date run rate required for the guidance ex -Ernest Henry. So where do you see the most uplifts into the second half? That's the first part of the guidance question.And then the second is around your Red Lake comments on no update to cost guidance for that asset despite the production cut. Where do you see the sustainable cost out to be able to come back within guidance and obviously take costs much lower in the second half?
Thanks, Rahul. Look, on the production guidance, in terms of run rate at the halfway mark, Cowal is actually on plan, only slightly behind because the second half, as the underground ramp-up takes place, is where we see that benefit coming through. So it's an asset that will be at midpoint -- better than the midpoint of the guidance as we put into the release. So that is partially offsetting Red Lake.Ernest Henry and -- is on plan at the halfway mark, and that will continue through to the second half of the year. And as we had expected at Mungari, it is weighted to the second half of the year. It's only slightly off at the halfway mark to that midpoint of guidance. And Rawdon was just materially -- sorry, minor impact in the December month of those 3,000 ounces. But it's got access into the pit now that allows it to get back to guidance. And Northparkes remains on track. So what we see, as I said, all of the assets, except for Red Lake, will be at midpoint or better based on their plan for the rest of the year.In terms of Red Lake, we haven't updated every asset's guidance costs. We know that if Red Lake comes down to the 125,000 ounces to 135,000 their AISC will go up. What John and the team are working through and what they have presented to us is a plan that increases productivity and reduces their cost and their spend, both OpEx and CapEx in the second half of the year. But what we're focused on is what is the impact on the group AISC.
Got it. Okay. Perfect. And then, look, final question, I guess, around, obviously, Bob's departure. You're going to run a process. Do we have an interim person in the seat? What's your tilt? Is it going to be more someone internal or is the search largely external there?
So we've -- Bob finishes at the end of March, and then we've got internal transition plans in place as well as the search, which is underway. And those are announcements will be made in due course there, Rahul.
Your next question comes from Levi Spry with UBS.
You there, Levi?
Your next question comes from David Radclyffe with Global Mining Research.
My question is on Northparkes, and look, I'll caveat by saying it's pretty much -- it looks like it's very hard to break out just 2 weeks of data, but it's what we've got. So just wondering if you could provide some more color on that 2-week period to better understand things like the operating costs and the sustaining capital. Because obviously, the operating costs looked like they were running at about AUD60 a tonne of ore, and sustaining costs were running quite a bit about the guidance that you've implied. So just trying to get a bit of flavor for how that period kind of looked to what you're talking about for the rest of the year.
Yes, David, look, that was a difficult one where you have to do 2 closes in a month and work out what related to the 15th of December and what related to the second half. I mean, realistically, our guidance is -- for the second half is what we're really focused on there. And whilst we haven't got that detail yet, our expectation is to be able to provide more of that breakdown into the half-year results.But what we did see in the first half of -- or the second half of the month that all of their costs in terms of mining, processing and the like were pretty well in line with plan. We're happy to get some more of that information for you post the call as well.
Yes, that'd be great.
Your next question comes from Daniel Morgan with Barrenjoey.
Can you just expand on some of the issues at the Cowal underground? So what has delayed ramp-up or delayed commercial production? More interested in the physicals rather than the accounting.
Thanks, Dan. Look, the main thing for the underground was that the paste plant commission was slower than we would have liked and it took a little bit longer than we would have liked. So in terms of the mining, the mining has actually been progressing to plan, if not better. So it's been able to keep up to what we were expecting out of the underground. But obviously, we needed the paste plant running at the same rate as the mine.So we saw that at the -- in the latter stages of the quarter. That's then now building into this quarter, where we will see the ounces go up to about 20,000 ounces this quarter as the mining ramps up to match the paste plant. When the paste plant was running in the back end of the quarter, it was actually going better than nameplate. So that's providing Joe and the team some opportunity to look at how to accelerate the mining into the back end of the third and the fourth quarter of this year. But they were the main issues was around the commissioning of the paste plant.
Okay. And switching to Red Lake. Obviously, bit of a disruptive quarter with the Cochenour ore pass and the seismic issue. You said that these issues have been resolved. So maybe taking the Cochenour ore pass to begin with, like is the new permanent one, is that operating well and in line with expectations?And my second question related to this is the seismic issue. I presume that's the one that happened at the end of the September quarter and then restoring access to those areas has been delayed through the quarter. Can you just expand on that, please?
Yes. Dan, look, I mean, you were there. So you saw some of these things. So Cochenour, as I outlined in the call, that work has all been done now. The old passes have been emptied. That gave us some further dilution to get all of that material out. The permanent pass, the raisebore is now in place. It is operating and operating well. And at the same time, I think it's one area where John and the team have got right, is they've got contingency in that space, and that is working well.The seismic was related to the incident in the September quarter. We had expected -- following all of the work that we needed to do to get back into there, we had expected to get back in by the sort of end of November, early December. We had a prohibition order over that, which actually didn't get released in December. So there were some additional works that the regulator wanted that, therefore, took that material out until this quarter.And then the last one, which -- so that one wasn't the one that we said was resolved. The Reid was 2 incidences within 24 hours in terms of water reporting into pass one and then the Reid hoist became unserviceable because of electrical issues. And those 2 items combining in the same time meant we weren't able to have people in certain areas underground because of no second means of egress. And at the same time, we needed to bring a scoop over to tele remote because of the inrush. And we basically lost about 10 days in that one. But that one was resolved by the end of the quarter.
Just expanding on the seismic event, if I could. I imagine there was some stopes that you were expecting you might be able to fire this -- well, the December quarter, which you didn't have access to. Does that mean that you're set up pretty well for the March quarter once you've got access restored?
Yes. So we expect access this month. So we're finalizing with the regulator. That's Hanging Wall 7 and the like that will then come out in this quarter is what we're expecting, Dan.
Your next question comes from Matthew Frydman with MST Financial.
Sure. I might just carry on from Dan's questions there on Red Lake. And if I look at the implied guidance for the second half, you did about 50,000 ounces of production in the first half, obviously impacted by all those issues that you've just been talking about. Your revised guidance needs you to lift that to about 80,000 in the second half. So just wondering if you can give a bit of a split based on all those factors and the recovery of mining in those areas, of -- how much of that uplift is going to be driven by volume and how much of that uplift is going to be driven by grade.And I guess to dive into a bit more detail, I guess, particularly on grade, but how much grade control exists in the mine plan over the next 6 months? And I guess, how robust is that in your view? Clearly, some of that material that you're expecting to mine has been carried over from those issues in the first half. So potentially, you've got a good handle on that. But just trying to get a sense of, I guess, how robust that mine plan is, particularly if a big chunk of that uplift is going to be driven by grade.
Thanks, Matt. Two parts of that question to unpick. So we do look at it, the second half is predicated on accessing those higher-grade areas in the mine. That is in the plan. So we actually get more tonnes and we also do have the grade. It is access to that area in Hanging Wall 7 is a key thing for this quarter. And then into the fourth quarter, we see the grade lift up. So it is a combination of grade and tonnes into the second half. We would see that in the third quarter, we're expecting to get up to 30,000 ounces and then into 40,000 to 45,000 ounces in the fourth quarter.
That's helpful. And then in terms of your confidence around that higher grade material in the fourth quarter, how extensively would you say that that material has been, I guess, grade controlled relative to best practice or to where you would like to have it in terms of operating that mine sustainably going forward?
Yes. Look, I mean, the grade control in talking with John and the team, that is well planned and well done for the second half of this year. So there's a high level of confidence there. I think, where John and the team have to get better at, which we didn't see in the first half, is that mining to plan, avoiding the dilution, and basically then resulting in the lower overall grades coming through. What we saw in the December quarter was a much better reconciliation to grade based on the grade control. So John's confidence in the second half is a little bit better than where it was in the first half.
That's helpful. Maybe just quickly, the weather impacts that affected you at Cowal during the quarter, is it fair to say that they're mostly or fully resolved at the moment, there's no lingering access issues in the pit that are concerning you, obviously, in the absence of any further bad weather?
No. Look, I mean, the weather forecast for the next 3 to 6 months, I can't give you that. What I can say is that the triggers that John and the team are operating under does depend on the intensity of those rainfall events. So we're actually -- in December because of the intensity of those rainfalls, we actually had to stay out of the pit for a longer period than we normally would have. If it was normal rain, then certainly, we're getting back into the pit a lot quicker. So in the second half of the year, depending on how that weather performs, we'll determine how Cowal has access to that open pit.I think the thing that we look at with Cowal as well, though, Matt, is we've got a significant amount of stockpile material. So, we will make sure it's safe to get into that pit. And if it isn't, we'll process the stockpile material. Yes, it'll give us lower production, but it certainly doesn't impact on the cash outflows for the operation in that period.And then when we look at Mt Rawdon, Mt Rawdon goes into the final stages of the pit in the second half of the year. So as you imagine, it's quite narrow at the bottom of the pit. So it doesn't take a lot of rainfall there to put us out of that pit. Now, it's been okay through January to date at Rawdon, but with all the storms and everything they keep predicting for Queensland, it depends how much impact that has there. But again, at Rawdon, they have stockpiled material that allows us to keep the processing going.
Yes. Yes, for sure. And also at Cowal, obviously, you've got the added benefit of the underground ramping up, which presumably is a little bit more resilient to wet weather. I'm assuming you don't have any issues accessing the portal, even if you have weather events at Cowal.
Not at the moment, as I touch wood, Matt.
Yes. Yes, fair enough. Okay. And I haven't heard Bob on the call yet, but yes, I just want to say thanks for his engagement, particularly on these calls over the years and good luck for any future endeavors. I'm sure we'll chat soon.
Thanks, Matt. He is listening.
Your next question comes from Jon Bishop with Jarden Group Australia.
Hopefully, you are on the mend soon, Lawrie. And best wishes to Bob, of course, moving on. Just a couple of questions just around the paste plant. It may well be semantics, but I noticed in the quarterly release, there is some comments saying that it's still commissioning. And then there's another comment further down in the release saying that it has commissioned. It may be semantics, but can you just qualify that it is now fully operational and quality is on specification?
Yes. Jon, thank you. I hope to mend well soon as well. The paste plant is operating, as I said, to nameplate or better. So we have got it to that point. The quality issues during the commissioning have all been resolved and essentially, it's in those final stages of commissioning. So it was commissioned. It's been ramping up, and it's now in the final stages. And effectively, as we come into the March quarter, it's starting this quarter as essentially fully commissioned.
Okay. So you're able to obviously feed it sufficiently to deliver the pace requirements. That's what we should take away from this.
Yes, yes. And that's what's giving us the lift-up in production in Q3. Against our plan in Q2 we had actually originally expected the paste plant to finish commissioning in Q2 and it was finished at the end of Q2.
Great. And just around the Red Lake timing. Obviously, I think in the context of things are relatively material downgrade to full -year guidance. Are you able to give a bit more granularity around the timeline that led to that decision? I guess what I'm driving at is, you've obviously announced the Northparkes transaction a week or so prior to Christmas. You've retained full -year guidance and then [ pro rataed it ] with Northparkes. You've reiterated that today.I guess, intuitively, to take Rahul's question, it feels like you're going to be hard-pressed to meet that midpoint. And I'm obviously targeting at the low end of guidance range. It just sort of feels intuitively that perhaps the Board might have taken a view just to reset things and set the low end of the original guidance as the midpoint. I'm just wondering what the decision-making was and the timeline driving it.
Yes. Look, I think there's 2 parts to that, Jon. I think when we look at Northparkes start of December, Cowal and Rawdon were tracking well for finishing the quarter. Weather hit them through that month. So you're essentially going to the [ 161,000 into the 170,000s ]. Red Lake was expecting to have access back into Hanging Wall 7, getting that prohibition order lifted. That didn't happen through the month. So that's sort of what has happened through December.And then in early January, when we had the results for the quarter and the half, we did a review of what the second half looks like. And I think it's fair to say that when we were looking at Red Lake and given that they haven't got to the stability and reliability that the other assets are doing, there was a plan that was put forward that could certainly give us more ounces than we've guided to today. Then there's the risk of, do we spend money to chase those ounces and -- in an asset that's not delivering as reliably as the others. So in discussion with the leadership team and the Board, we had that reset on Red Lake to say that it's got to get more reliable, but it's also got to get its costs down in that period and get the productivities up to generate more cash. So that's what's happened in the first 2 weeks of January.
That and COVID. Okay. That's my 2 questions. I'll jump back in the queue.
Your next question comes from Kate McCutcheon with Citi.
Just coming back to guidance on Cowal. So you need to deliver 290,000 ounces a quarter to hit [ 320,000 ], which is the midpoint of that guidance and will be a record for the site. Just trying to understand the conviction in that guidance. Is there an open cut grade keep coming through as well or is it volumes in addition to the underground there? Is there any more color you can give on that asset?
Yes. Thanks, Kate. In terms of Cowal, I think in assets where there's a little bit more confidence, that would be one of the higher ones up there with Ernest Henry. I mean, it is, as I explained to Matt, it is going to be determined on the weather for the coming months. But what Cowal has demonstrated, and it did in FY '23, when there was good weather, the productivities were high and they were able to get good production out of the open pit.We'll see in Q3, as we said, 20,000 ounces out of the underground. That will lift materially in Q4 as it goes into full production and goes above the 1.4 million tonne mining rate. So that will then displace some of that material. And then we would expect in Q4, some of the material that didn't come out of the pit in December and early January will come through into the back end of this quarter and into Q4. So you also have to take into consideration in this March quarter is the next main shutdown of the plant at Cowal. So it'll be a slightly -- it won't be at that rate that you were mentioning. It will be slightly lower, and Q4 is actually the higher quarter.But in terms of that confidence level, based on what we've seen consistently over the last couple of years or many years at Cowal, it handles the weather well. If it doesn't have weather impacts, it will deliver to midpoint of guidance or better. And if it does have some weather impacts, it'll still be around the midpoint.
Okay. That's helpful. And then just on CapEx spend, it looks to be tracking a bit lower. You're annualizing [ 313 ]. Guidance cut in half is [ 335 to 382 ]. Are there any revisions to call out or any spend to flag or you're expecting guidance to be 2H weighted?
I think it's fair, Kate, to say that in terms of sustaining capital, it was always H2 weighted. When we set the plan, knowing how we were to start the year and working on the balance sheet, we'll see a tick up there. But where it is actually at the halfway mark, it's tracking below sort of the midpoint. And Barrie and the team at the task of making sure we keep that discipline in place.The major capital as we go forward does ramp up in the second half as the Mungari plant expansion project gains some momentum. So what we sort of see is that there's no change in the major capital and we've got to continue working on sustaining capital from a cash perspective.
Okay. And then last question, although I'm intrigued about the AUD80 million Northparkes just cash tax light on for the quarter. Is there a benefit there to call out and should we think of that as a one-off going forward?
So yes, yes, it was pleasing around the Northparkes opening cash. The good thing is that when we look at the working capital, it's not something that then is going to be burned through in the coming quarters. So that was pleasing in that regard.In terms of tax in Q2, that's normally always the variable one, because our final installments on the prior year tax is due, and we actually received a refund in that quarter. So you'll see the tax payments in the third and fourth quarters revert back to their normal rates.
Your next question comes from Hugo Nicolaci with Goldman Sachs.
Thanks for the update this morning. Maybe just one on thinking around the broader portfolio. You picked up some early-stage farm-ins, including one in Ontario. But in the past, you've touched around the potential to add other North American assets. I mean, do you still see the opportunities around potentially picking up some stranded assets in North America? And I guess, how important is getting Red Lake right before you meaningfully assess those opportunities?
Hugo, thanks. I'll answer the second part first. And getting Red Lake right is the absolute priority, but it's not the gateway to asset acquisitions. It's actually about getting what we need out of that asset. In terms of North American assets, I think digesting Northparkes, getting that, delivering to plan, getting the other assets, doing what they're doing, remains the primary focus, and then we'll assess those other opportunities as they may come up. We're not expecting much in terms of this calendar year, based on what we've heard about other assets that may be looking at getting divested.
Great. Most of my [ professional ] questions have been asked. So I'll pass it on.
Your next question comes from Mitch Ryan with Jefferies.
My first question relates to Northparkes. So I guess you've had the case for all of 1 month, but just wondering if you could comment on any positives or negatives relative to the DD that you conducted on that asset and what you're seeing now that you're looking under the hood.
Yes, Mitch, I think it's fair to say within the first month, the positives are that it's safely delivering to plan. The team is excited about the transition into the company. In the DD, we were of the view that it was a self-sufficient asset, and it has shown that. So it's been able to operate the way it was before we took ownership. So that's been pleasing.There hasn't been anything really negative that's come out of it. I'd even think and whether Glen wants to add to it, there's some real opportunities that he wants to look at in terms of starting some drilling programs out there as well. But in a month, it's probably hard to determine any sort of negatives, but there was nothing that was surprising against what we saw through the DD.Glen, anything you want to add on the exploration front?
Yes. Look, Lawrie, I'll keep my powder dry for now, but just to suggest or indicate that there is some drilling programs ongoing. They're underway pre-acquisition. And look, we want to sort of assess the results that we're seeing, but there's some encouragement there that as we wrap our arms around this and sort of understand what those full opportunities are to continue investing in some of these growth areas that are looking pretty interesting, and I'm hoping we'll be in a position to report on those in the next quarter.
My second question relates to Cowal with regards to guidance. I know you sort of -- you're quite comfortable and we've built on them quite a lot. But you caveat it with the fact of weather. Is it that really high intensity of storm activity we should be mindful of impacting access to the pit? Or is it, if you get a prolonged period of weather, how much buffer do you have in inventory in stores and acces to -- and water storage, et cetera? How should -- what should we be mindful of, I guess, is the question with regards to weather.
Yes, Mitch, the intense weather ones that give us the most impact in terms of access to the pit and how long we're out of it. The steady ones don't impact us as much there in terms of what we've got of stores and water and all of those sorts of things. The site has always been able to operate through extended periods. I think if you look at the second half of calendar year 2022, where there was just constant rainfall there, road blockages, we were able to handle that. And we do have over 40 million tonnes of stockpile material there if we are out of the pit for a period. And as I said, that -- yes, it impacts the production, but it does give a benefit that you're using stockpiles and not consuming cash mining the pit. So there are some trade-offs there.But I think, as I said to Matt, as we came out of that event in November 2022 and then had a dry run, the way the site was able to finish that year was an example of what they do at the site quite well.
Your next question comes from Nick Evans with The Australian.
Yes. Just a couple of quick ones. Firstly, just on Red Lake. We're sort of 4 years on from the acquisition, and the mine still isn't producing what it was under Newmont. Has the board given any consideration to Evolution just cutting its losses and putting the asset on the market and moving on?And secondly, Lawrie, I wonder if you could just get some sort of broader commentary on where the labor market is for you guys at the moment, particularly in WA. Is it still as tight as it was sort of a year ago or it's easing up a little bit and sort of -- and just general commentary in terms of, I guess, broader cost pressures in the sector?
Yes. Look, yes, we're 4 years in and we haven't got it to where it needs to be. What we have -- we have to get it as reliable as the other assets. Having moved through a number of cultural issues and dealt with all of those, you're now dealing with operational issues. But the thing I think that Red Lake has to get to as we have at the other assets is you've got to have contingency in the system, you've got to be able to handle those issues and you've got to be able to rebound from them quicker than what they have been able to. So our view is we still think that the asset can get to where it needs to be. There's certainly been more urgency over the last 6 months, and that will continue into the second half of this year. So that's what we see. We've got to see it deliver a lot more reliability than what it has.In terms of the labor market, yes, look, WA still remains tough and tight. I mean I think we were fortunate. We awarded the contract for the plant expansion, the EPC, where the contractor actually had the workforce in place. So that's worked well in our favor. We're in the market at the moment around tendering for the open pit mining areas and the different mining centers that we will have for Mungari. The contractors we're talking to say that they're coping well with the labor market in WA. And then when we look at our own workforce, the turnover rate has reduced, but it certainly still has a higher turnover rate than we have on the East Coast. So short answer to that is it's still a difficult market, but the site is actually doing quite well compared to where it was 12 months ago.
Your next question comes from Andrew Bowler with Macquarie.
I think most of the operational questions have been asked. I'll ask an exploration one. Just on Bert at Ernest Henry, I mean, a while ago, it was sort of touted as a potential ore source that could sort of top up the Ernest Henry mill. Just after a bit more detailed update on how that's going, obviously some pretty solid results out for that particular orebody today.
Thanks, Andrew, and welcome back. I'll pass that one over to Glen.
Thanks, Lawrie. Andrew, so your question was referring to Ernie Junior and/or Bert?
[ It was more... ]
Okay. So...
Yes, more Bert sort of potential timeline to sort of top the mill up, I mean, running it as an independent ore source compared to the main sub-level [ curve ]. Just referring back to the Strategy Day last year.
Yes, look, just to pick up on that. So the focus of the underground drilling where we've had a couple of rigs sort of plugging away in the first half, one of them has really been looking at sort of delineating further extensions to Bert so that to sort of understand how big this could be in terms of volume plus copper and gold grade. We've also had a surface drilling program just delineating what we already know so some infill drilling just to define that resource better. So that's essentially where we are. I mean, the concept as expressed during the investor visit last year is still in play. So we have a concept study that's sort of running in parallel with the feasibility study for the deeper orebody extension.The idea is that we will complete another resource update at Ernest Henry and including full Bert towards the middle of the year. And that will be sort of the basis from which those studies will sort of expand and determine what really is the option. I think, firstly, we just need to know exactly what it is we're dealing with. As I've previously described, it sits just 60 meters to 70 meters into the north wall of the pit there at Ernest Henry. It's fairly shallow. So there are certainly options to look at extracting it independently from the shaft. And we're still in the process of studying that.
Your next question is a follow-up from Jon Bishop with Jarden Group Australia.
I think it'd be rude if I didn't have a stab at a really weak accounting question. But can I please ask how often you're testing your book value for Red Lake? And I guess what I'm driving at without you obviously flagging it, are we at risk of a write-down on that asset transaction cost at all?
Jon, I would have been disappointed if we didn't get an accounting question. Look, in terms of book value, all assets are tested at every reporting period. When we looked at it at the full -year accounts and as we come into the half year, it has sufficient headroom. So there's nothing that we are flagging or expecting in terms of the book value or carrying value of the asset.
Perfect. And just -- probably just to take you guys question a little bit further on your North American for -- I think, did you say it's Timmins is the name of the asset? Is that correct?
Yes.
Just [indiscernible].
Jon, it's October, near Timmins in Ontario.
Near Timmins. Beg your pardon. Can I just understand what the broad strategy thinking is there by the Board? Is it a standalone greenfield opportunity that you're looking to and is that still part of what the board sees as Evolution's DNA? I guess I'm sort of looking at the business, it's quite mature now in terms of a number of operating assets. The low-hanging fruit tends to be resources or new discoveries in and around existing operations. Are you still hopeful of making a standalone there? Or is this something that could be leveraging off Red Lake or have I got my geography completely wrong?
I'm going to hand to Glen that he is in Canada. But the thing I'd say there, Jon, is the strategy is also about looking out beyond year 6 and 7 as some of these other assets tail away is where are those opportunities for production to come into the portfolio. Glen, do you want to just talk specifically on October?
Yes. Sure, Lawrie. So look, the thinking there, Jon, is exactly to Lawrie's point, it's looking at that sort of plus 6 to 7 years out. We're still -- and we're very sort of focused on the strategy in terms of the types of mineral systems that we'll go and explore for. We're not looking across the smorgasbord of various different gold deposits. So we are looking at our Archaean greenstone systems.We do believe that there are opportunities, particularly in the Abitibi in Canada. This one is sort of presented as essentially a walk of ground on a really well-endowed structure, which is the Larder Lake-Cadillac, has 100 plus million ounces of historic production and resources and reserves along it. It sits between the Cote Lake's deposit, which is iron, gold, and Sumitomo's construction project in Ontario. And then on the other side of it, we have the Borden operation, which is one of Newmont's mines there. So we think it's a very good geological address. It's been underexplored and this is part of our strategy for looking at sort of that longer-term 7 to 10-year timeline on a standalone greenfield asset.
Great. And if I could just sneak one final one in just around the Ernest Henry piece, whilst I've got you Glen. I mean, dare to dream, obviously subject to resource numbers, middle of this year. Is the optimization work looking around just location of infrastructure or should the market start to, I guess, anticipate the potential of expanding production output out of Ernest Henry, should Bert hang together in particular?
Look, I think, Jon, at this point in time, it's premature to sort of start to talk about what an incremental production opportunity might look like coming out of Bert. So we've still got to kind of work that one through. Obviously, we're most advanced with the feasibility study underway now looking at the mine extension. But as I mentioned earlier, we have expanded that scope of the study to take into account some of the growth that we've seen at Ernie Junior.What's particularly exciting about that is that in some of the drilling results that we've got out there this morning, you can see that there is the gap that was previously or previously existed between Ernie and the main orebody. It looks like it's going to sort of close out and be continuously mineralized between both of those targets. So what that does is it gives us the opportunity to establish more metal per vertical meter that will be accessed by that development that will be designed in the feasibility study. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks.
Thank you, Mel, and thank you, everyone, for your time today. Appreciate you making the effort to join the call. And as I said at the outset of the call, the quarter was mixed and our focus is on improving the areas under our control and focusing on margin and deleveraging the balance sheet. I know the focus will be on the areas that we do have to improve and we accept that.However, I do hope that the positives don't get missed, which is that we have seen momentum in cash generation starting to build this quarter and expect it to build further into the second half of the financial year. We've seen Northparkes integrate into the business well at the start and we need to keep that going. And we look forward to updating you next month on our half-year financial results and the MROR. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.