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Thank you for standing by, and welcome to the Evolution Mining March 2022 Quarter Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Jake Klein, Executive Chairman. Please go ahead.
Thanks, Harmony. Good morning, everyone. Welcome to the call, and thank you for joining us. We do appreciate it. Bob Fulker, our Chief Operating Officer, is taking a well-earned break from today's call. So I'm joined by our Finance Director and CFO; Lawrie Conway and our VP Discovery and Business Development, Glen Masterman.
At a macro level, this quarter inflation in the U.S. rose to 8.5%, its highest level in 41 years, while unemployment rates in the U.S. and Australia are at historic at lows. Russia's invasion of Ukraine is now entering its third month with the conflict showing no signs of reducing and COVID continues to wreak havoc on people's health, workforce availability and supply chains.
Closer to home, in February and March, the Australian East Coast was battered by heavy rainfall and flooding that tragically killed 21 people and required thousands of people to evacuate their homes. Against this backdrop, gold has been fulfilling its traditional role as the best hedge against inflation and geopolitical uncertainty. Regrettably for the world, I expect these issues to continue.
Turning to Evolution's quarterly reports and our performance and starting on Slide 3 of the presentation, there are many highlights in today's report, but 3 are clear standouts for me. Firstly, our portfolio has been transformed into one, which is amongst the highest quality, lowest cost cash-generative, growth-oriented portfolios in the gold sector. 148,000 ounces of gold produced and an all-in sustaining cost of AUD 990 an ounce or USD 717 an ounce is a 27% reduction quarter-on-quarter and makes us very close to being the lowest cost gold producer of scale on the planet. Operating mine cash flow increased 33% to $269 million. Net mine cash flow increased 135% to $124 million, with the bulk of the $144 million of capital being spent on our most important organic growth opportunities at Cowal and Red Lake. We paid our 18th consecutive dividend of $55 million, bringing total dividends paid to shareholders to $1 billion.
Secondly, the impact of 100% ownership of Ernest Henry and the transformation at Red Lake. In the last quarterly report conference call 3 months ago, I said that I was confident that by securing 100% of Ernest Henry, we had concluded what is likely to prove to be 1 of the most transformative deals in Evolution's short history. Today's quarterly report is proof of this. The numbers speak for themselves. Copper production more than tripled to over 13,000 tonnes, resulting in an all-in sustaining cost of negative $2,000 an ounce and the mine generated $185 million in operating cash flow.
Gold sales were higher than production at 39,000 ounces due to an additional 20,000 ounces of gold that was sold due to the cancellation of the previous economic interest. Excluding the impact of those sales, operating cash flow for the quarter would have been $137 million and all-in sustaining cost would have been negative $4,200 per ounce. The transformation at Red Lake gained very important traction this quarter with a 67% increase in production to 33,000 ounces. We expect to improve this to over 40,000 ounces in the June quarter. This is testament to the significant efforts of our people at Red Lake and the operations team under Bob's leadership. We still have lots of work to do, but we are making tangible progress in creating value at this operation.
Thirdly, I was proud of the resilience our team has demonstrated. As mentioned a few moments ago, COVID and rain events caused problems across the country during the quarter, and we were also affected. Over 25% of our workforce at Cowal tested positive for COVID during the quarter, which amounted to 199 people. Fortunately, everyone is recovering. This, of course, excludes the impact of those needing to isolate as a result of being deemed close contacts.
Despite this, not only were we able to deliver a robust quarter at Cowal, but the team was able to plan and execute a very logistically challenging 7-day mill shutdown, which required a multitude of contractors around 300 people to assemble on site. With very strict protocols in place, not 1 person involved in the shutdown tested positive.
The unprecedented East Coast rainfall in the quarter impacted both Cowal and Mt Rawdon. Cowal managed through it, but at Mt Rawdon, it did result in some instability in the north wall of the open pit. Although this is being managed, it has had and continues to have an impact on our ability to access higher grade ore from the open pit and also required the crusher to be shut down for 9 days.
As you all know, the underperformance at Red Lake in the first 6 months of the year left us with very little runway on our original guidance and taking these new factors into account, we have reduced our FY '22 production guidance by 20,000 ounces or 3% from the lower end to around 650,000 ounces. We are expecting a strong fourth quarter with an increase in production of around 22%. There is no change to our sector-leading all-in sustaining cost guidance of $1,135 to $1,195 an ounce, so we will continue to produce high-margin ounces.
On Slide 4, we have set out the results from Ernest Henry. Being a copper gold mine, it is challenging to compare it to other gold mines. The best measure is cash flow. And on this measure, I am confident that there will be very few gold mines in Australia that generated $175 million in net mine cash flow this quarter. We have chosen to treat the copper as a by-product credit, which delivers the exceptionally low cost of negative $2,000 an ounce. Another lens to look at this through is on a gold equivalent basis. Through this lens, production for the March quarter would have equated to 95,000 ounces of gold or 380,000 ounces on an annualized basis at a low all-in sustaining cost of AUD 1,150 an ounce.
The charts on Slide 5 tell the story of the transformation that is occurring at Red Lake. I am particularly pleased that we gained momentum through the quarter with March being the strongest month and in many areas, breaking all-time records at the operation. Having consistently delivered above 1,200 meters of development for the last 6 months, the Red Lake transformation plan now has a goal to consistently and safely mine 3,000 ore tonnes per day. This is was achieved in March with 106,000 tonnes mined, surprising the previous monthly record in the history of the mine by more than 20,000 tonnes. Pleasingly, this mining rate is being sustained in April. Ongoing improvements in mining practices continue to drive reductions in stope dilution that improved mine grades by 17% this quarter.
Both the Red Lake and Campbell Mills are operating at record throughputs. The CYD decline, which will provide an important new source of higher-grade ore gathered momentum and is on track to deliver the first production ore in the September quarter only 6 months away. We expect to improve production to over 40,000 ounces in the June quarter, with a focus on sustaining this level consistently over the next few quarters. Whilst being a few quarters behind our original schedule, we do remain confident of the potential for Red Lake to be transformed into a 350,000 ounce a year low-cost operation.
Turning to Slide 6. The Cowal underground project continues to be on budget and schedule for critical-part activity. Major procurement milestones have progressed during the quarter and the award of the primary mining and drilling contract is imminent. This will complete the award of all material contracts. First production ore from the project remains on schedule for the June 2023 quarter when the PAC funds is commissioned.
Slide 7 shows the significant impact the Kundana and East Kundana acquisition has made on the future of Mungari. The integration is progressing well with the objective to create what we are describing as 1 Mungari, standardized systems and processes and sharing of equipment and workforce across what was previously 3 separately run operations. One example of the operational synergies that are being captured is in the underground maintenance and training teams with 3 separate units are being combined with significant savings and efficiencies. Recruitment of vacant roles is also progressing well with vacant roles reducing during the quarter despite the tight West Australian labor markets.
Turning to Slide 8. Earlier this month, I was fortunate to be on site when Mt Rawdon hosted a delegation from the Queensland government, led by the Minister of Resources, the Honorable Scott Stewart. The visit included an update on the 2 gigawatt pumped hydro power project and the significant contribution it can make to delivering Queensland's renewable energy targets. As a potential pumped hydro facility in Mt Rawdon is blessed by history, topography and location. It has a huge head start in that about $1 billion has already been spent, mining $200 million, which has been processed for gold production over the expected 25-year period of its life. That $1 billion has created a big hole, which can be used as the lower reservoir of the pumped hydro scheme.
In addition, the topography of the surrounding region also delivers Mt Rawdon a great natural site for the upper reservoir. In terms of location, fortunately, Mt Rawdon sits only 25 kilometers from major power lines connecting Queensland Southern and Central grids. And on top of that, the timing of the mines closure aligns with Queensland decarbonization strategy with the state due to close the 700-megawatt Callide B coal-fired power station in 2028. I -- the study work remains ongoing and is due for completion in June 2023.
With that, I'll hand over to Glenn to provide an update on our exploration and discovery activity.
Thank you, Jake, and good morning. This morning, I'll update on exploration progress achieved across the discovery portfolio in the March quarter, which is set out on Slide 9. Key takeaways I'd like to draw to your attention firstly, the positive drilling results returned on the Cue joint venture, which have expanded the mineralization footprint at West Island and confirm the presence of very good grades at this emerging discovery. Secondly, at Mungari and Red Lake, drilling results continue to reinforce our views on underground upside potential, particularly at Kundana, where we are delineating new areas of high-grade mineralization very close to existing development.
Turning now to highlights in this morning's report. Commencing with our Cue joint venture in WA, we completed our first full quarter of managing and operating drilling activities after taking over from our partner, Musgrave Minerals, at the beginning of January. We recently switched analytical laboratories, which has reduced assay turnaround times from well over 12 weeks to a more manageable 5 weeks. Faster analytical turnaround times give us the confidence to accelerate diamond drilling with a second core rig expected to arrive on the project during the June quarter. This will increase to 3, the total number of rigs on the JV ground in which we are earning a 75% interest.
Encouraging results from the Diamond program in the quarter are highlighted on Page 11 of the report. Pleasingly, we identified additional mineralized loads along the West Island trend, which has also extended 500 meters in recent aircore drilling to 2.1 kilometers long. The June quarter program will focus on drilling extensions of known structures to understand potential scale of the mineral system and to test other target styles that may be important for hosting high-grade gold.
At Mungari, drilling results outlined on Page 14 extended the structure that hosts the Christmas hanging wall load at Kundana. This mineralization is located 35 meters from the main Christmas ore body, which we are currently mining. The results signify that the important ore-bearing structure remains open along strike and down depth. The next round of drilling will target the high-grade port load within the structure with the aim of potentially expanding the high-grade mineral resource. An exciting implication of the recent Christmas results is the realization of untested potential in the hanging wall of the Strezlecki load where this structural position is modeled to continue.
At Red Lake, drilling returned high-grade results on extension of the R Zone at Lower Campbell, as summarized on Pages 12 and 13 of this morning's report. The results confirm grade continuity at the local scale and highlight an opportunity for significant resource potential between these deep intercepts at the bottom at the bottom of the lower Campbell mineral resource. Future drilling will be planned as short step-outs from adjacent development to extend the mineral resource into the 500-meter gap identified on the R Zone corridor. I look forward to sharing the results of the June quarter drilling programs at our next opportunity in July. With that, I'll hand over to Lawrie.
Thank you, Glen. Good morning, everyone. This morning, I'm pleased to update on our financial performance for the March quarter, as shown on Slide 10 of the presentation and outlined on Pages 9 and 10 of the report. We had a very strong quarter of cash generation with operating cash flow up 1/3 to $269 million, and we delivered $125 million of net mine cash flow. This was an increase of 135% from the December [ quarter]. We invested $144 million in capital, comprising $33 million in sustaining and $111 million on major projects. Our group capital guidance remains unchanged at $150 million to $175 million for sustaining capital and $440 million to $505 million for major projects. Group cash flow for the quarter was just under $22 million.
Jake mentioned our excellent all-in sustaining cost performance for the quarter and the $990 per ounce equates to a margin of around 60%. We remain on track to deliver our group all-in sustaining costs within the guidance range of $1,135 to $1,195 per ounce. We did see some higher costs come through in the quarter, and these were in line with what we outlined at our half year results. As I mentioned at the half year results, though, the improvement in metal prices and revenue are more than offsetting these cost pressures. Our achieved gold price was up 3.6% in the quarter. The achieved copper price was down slightly by 1.5%, but our copper volume more than tripled.
The focus remains on managing the cost pressures across all of our [Audio Gap] the balance sheet continued to strengthen even after the increased debt associated with the Ernest Henry acquisition. Our gearing is sitting at around 23% and is expected to trend down below 20% in the coming months. This is in line with our first target level that we set post any acquisition. We ended the quarter with a cash balance of $538 million and have around $900 million of liquidity.
Turning to Slide 11 and a summary of the quarter. Delivering an all-in sustaining cost below $1,000 per ounce is certainly sector-leading, and we will finish the year within our group cost guidance range. The margins we are generating is able to fund our growth plans and still return funds to our shareholders. The immediate exceptional contribution from Ernest Henry is evident in terms of additional copper exposure reducing our group all-in sustaining costs and materially increasing the cash flow. The existing mine life, plus the expected extensions will see this cornerstone asset generate significant benefits for many years to come. The ability of the team at Red Lake to achieve improvements in all areas of the operation gives us confidence that the transformation is now progressing well, and we expect the momentum to increase again in the June quarter. The other assets are performing well and throughout the business, we have demonstrated resilience against the extreme rainfall events and the impacts of COVID, especially the isolation requirements for positive cases and close contacts. We are in a very good position to close out the financial year.
Thank you for your time this morning, and Harmony, please open the line for questions.
[Operator Instructions] Your first question comes from Matt Greene from Credit Suisse.
Jake and team. My first question is just on Red Lake. Great to see you things heading in the right direction there. My question is just around the milling. Can you please provide some context as to how running the Campbell mill beyond the 2,000 tonnes per day went. Are you getting a sense of what the optimal milling capacity could be? And just to confirm, the exception to run beyond that level, I think I recall you mentioned it was about -- it was only for 6 to 8 weeks. Is that the case? Or have you been able to extend this?
Yes. So the last question first. It's a 12-week trial that we've -- you can restart if it's intermittent. So we are confident that we can run it until the end of June and into early July at these higher rates of 2,000 tonnes per day. But we are -- we're pushing it to the boundaries. I think it was only running at about 1,700 or 1,800 tonnes a day when we acquired the operation. These are -- the milling throughput, which it achieved in the first quarter are historic highs as the other mining rates. So we're starting to get the productivity through that we need to convert this into a medium-grade, higher-tonnage operation.
That's great. And then development rates are being sustained above the 1,200 [ milled ] per month. And if you were able to get 3,000 tonnes a day on a sustained basis, what's your thinking around the Bateman mill versus the Red Lake mill. I mean it's a new mill, are there potential for cost savings there or scale if you were to go down that medium-grade path if it transition to Bateman? And what's your thinking around running all 3 mills?
Yes. So we're assessing that, Matt, now. It is, I think, an 11-kilometer distance from the Campbell and Red Lake mills. We're also doing the -- we have the opportunity to the bulk trial at the McFinley deposit, which is near the Bateman mill. But we're working out the milling strategy. Obviously, the Upper Campbell area, which will come on track in the first half of next year from the CYD decline gives us higher grade and potentially a completely independent access to ore bodies. So up until now, we've been focusing on keeping the 2 mills filled because this is the first quarter, which the Red Lake mill and the Campbell mill have run combined throughout the quarter. .
So up until now, our issue has been on mining rates. We're getting that rates. We need to start getting consistency and reliability. We feel we're getting there. You can see the trends -- but obviously, we've had a tough 12 months at Red Lake pre this quarter.
Yes. That's great, Jake. And then just on Cowal, challenging quarter there with the rain and COVID. You mentioned the 25% of confirmed cases. If we were to take the close contact that had to isolate, what sort of levels of absenteeism do you experience that time on site?
I think I saw that the highest level of absenteeism on 1 day was about 80 people, 75 to 80 people. It's now down to about 35. So it's reducing. But 80 out of about 400 people is a lot of people off site. That's 400 of total workforce. So if you took that shift and those who are on break, it would be less than the 400.
Yes. Got it. Okay. And then do you expect things to ease with the recent -- these recent changes on closed contact by the government?
John Panel, the General Manager of Cowal is sitting in the room here, he's nodding his head, but with none of our pandemic experts. So we're hopeful. Yes, Cowal has dealt with the brunt of it, and they've dealt with it very, very well. I mean getting 300 people on to site for a shutdown was a pretty remarkable achievement without getting infections.
Yes. I appreciate it. Okay. And look, if I could just squeeze one last one on Mt Rawdon there. Perhaps a longer-dated question here, but A lot of the gold mine is wanting to become net zero on emissions. What's your thinking on this pumped hydro project? Could this be a project that you participate in the future and look to maybe I guess, generate credits to offset carbon elsewhere in the portfolio? And then just on the scale, how did you arrive at the 2 gigawatts for 10 hours?
So I think the scale has been determined really by the reservoir capacity on the pit. It is a multibillion dollar project and we are not power operators, and we don't intend to become them. But yes, there is the opportunity, which I've described. Can we have some ownership of the project, it would be small and a disproportionate amount of carbon credits to me would be a structuring outcome that would be fantastic for Evolution.
It's -- we haven't yet been able to test it. The first priority is to make sure that this project is feasible and economic. The pre-feasibility study says that it is the meetings with the Queensland government suggests that it fits and aligns exceptionally well within their requirements. The more I read about pumped hydro and deep battery storage, the more compelling Mt Rawdon becomes. But fundamentally, Matt, Evolution's priority is twofold. One is to do the right thing by the community and the remediation of the mine. The second thing is to maximize the value of the project and the pumped hydro has the potential to be a very significant and valuable project for Evolution shareholders.
Your next question comes from Mitch Ryan from Jefferies.
First question, this one is probably Lawrie's wheelhouse. On Page 10 of your quarterly working capital build of roughly $67 million during the quarter. It seems high relative to previous quarters. I'm guessing it's got something to do with the Ernest Henry acquisition, but just wondering if you could please provide some color on that quantum of movement?
Yes, Mitch, it's exactly that. I mean what happened in the March quarter as we closed out the joint venture. So we get the gold sales. So that was a positive working capital movement, but we then moved to 100% of the concentrate, which works on either a 3- or 4-month quotational period. So in this very first quarter of owning a 100%, our working capital will increase, and it increased by over $40 million on the receivables side. And that was the major impact on our movement in working capital in the quarter.
Okay. And my second question, understandably, you've softened the guidance for FY '22, given the events during the quarter. Just wondering if there are any drivers for that change that are likely to flow into FY '23. And that a potential risk of impacting sort of the guidance that's out there for FY '23 currently?
I mean I think, Mitch, the real risk is on Red Lake. We had guidance out there for 200,000 ounces for next year. We are relooking at that. We're likely to need to downgrade that in due course as the final budgets and loans come in place. But it is 40,000 ounces is the mixed hurdle and then 50,000 ounces at quarter from there.
And then I guess on that, then, can you provide a bit of clarity on Red Lake with regards to that 40,000 ounces. My -- the way I would think about it is that that's the new base once you've achieved that in the fourth quarter, is that the right way to be thinking about it? Or is it running hard in the fourth quarter and may come down in 1Q FY '23?
No. When we had this debate around reducing guidance in the range we've made a conscious effort to try not to push the sites in the fourth quarter and fall off the edge of a cliff in the first quarter next year. So we are very driven by the fact that we've recognized our missteps at Red Lake we need to build confidence and we need to get credibility, and we are going to be trying to build a base and then step up from those bases.
Your next question comes from David Radclyffe from Global Mining Research.
So just a follow-up, I guess, on Red Lake, a couple there. So firstly, you've got that chart showing the improved haulage from Cochenour, which looks like it was around half [indiscernible] for the quarter. Is it showing that Cochenour was a key bottleneck? And going forward, we should expect sort of similar volumes out of Cochenour?
Yes, David, I don't know whether you've looked at the history of Red Lake, but that high-speed tram, there was nothing high speed about it and it cost a huge amount of money, originally. It had kind of built-for-purpose electric low keys that it used. So we've changed those. We've changed it -- there's been some tremendous and successful change management there, and the team has done a great job there. And it's -- and they're now running it very consistently.
So Cochenour was never really able to provide a reliable base load and it is now starting to be able to do that. It is lower grade. So as we open up better and higher-grade sections in aviation, MMTP, you've seen we mine a couple of stopes there. And when the upper Campbell area comes in line from CYD decline, obviously, we're going to try and replace as much material if the mills are full with higher-grade material.
Okay. And then just a follow-up, given your previous comments there about the outlook for '23. Given it looks like the ore mining rates are coming up, but you've talked about better dilution control this quarter. So is really one of the key ones just getting that grade up towards reserve grade because we're still obviously running below that. I mean you do have new high-grade areas coming in, which is [indiscernible] I think you've said you've started stoping there. But is it really still grade that's the key drag into '23 and that's the way we think about it? Or is there further sort of potential -- the aspiration, I guess, for the ore throughput levels was maybe high as well?
No. Look, I think there's an element of bruising that we've experienced over the 12 months. But it really is about getting the grade consistent accessing these higher-grade areas, getting reliability and predictability and confidence. Now the mills are running at maximum throughput, there's a 15,000 tonne stockpile on surface at the moment. Remember, 3 or 6 months ago, Red Lake, there were skeptics as to whether it would be an operation that would survive. We were always confident -- but this quarter, you're starting to see the development rates consistently starting to see the mining rate, the processing rates. It's about building confidence and getting credibility.
Your next question comes from Al Harvey from JPMorgan.
Jake, Glen and Lawrie, maybe one on Mungari. Just wanted to get an update to confirm the Mungari mill expansion still on track for FY '22. And you did kind of run through some of those synergies that you're seeing across the role in EKJV projects. Wondering if you could outline any more of those and how we should think about cost savings at the Mungari asset?
Yes. So we're trying -- we're integrating we're essentially 3 separate operations into one. We think there are synergies and opportunities over there. As you know, there's a tightness in the labor market. I mentioned that our vacancy rates have actually gone down this quarter, but we did have high level of vacancies at the start of the quarter. But yes, there's plenty of opportunity. Glen visited Mungari a couple of weeks ago, came back very excited about the geology and the study is on track for completion at the end of this year, this calendar year.
And maybe just a follow-up on Mt Rawdon. Have you got any expectations around how long it might take to stabilize that pit wall? And maybe just following on from that, how do we think about rehab costs in the context of the pumped hydro project? Does that shift that down the track further? Or do we still need to take some costs out there for the rehab?
I think that on the access to the ore this quarter, we've made some conservative assumptions that we believe, and that's part of the reason why we downgraded guidance. We're expecting that it's deferred production rather than lost production, but we need to do the geotechnical work on [Audio Gap] with regard to the rehab, it's kind of a bit of a binary outcome, either we're going to have to rehab it or we're going to go down the pumped hydro scheme. So what I'd encourage people to start thinking about the option value of a pumped hydro scheme being viable at that operation.
And I'll just sneak one last one in there. Just on the Ernest Henry costs. Obviously, taking out that lag effect -- negative $4,200 an ounce, pretty impressive. Can we expect that -- those actual numbers to flow into subsequent quarters now? Or are you expecting any other kind of accounting lag impacts going forward?
I'm going to pass that question on to Lawrie, but thank you for asking the first question on Ernest Henry on this call so far. This is an asset that delivered us 17% of the purchase price in the first quarter that we owned it. Lawrie, over to you.
Yes. There's nothing further that should impact on the costing structures from the old joint venture. So going forward, depending on gold and copper produced and sold the AISC will be normalized. And it would obviously will depend on the copper price that we achieved in the quarter. in terms of the byproduct credits we get. Jake sort of locked in his mind that will be $4,200 negative every quarter. We've just got to give him back to the accounting days of the mechanics of how you calculate it.
Your next question comes from Daniel Morgan from Barrenjoey.
Jake and Tim. First question is just on Cowal. Given the impacts of rainfall and COVID on the quarter, and it sounds like there's still impact this quarter. I'm just wondering if you could outline the latest thinking of grades from the open pit over the next 12 months?
I mean I think we think it's consistent, albeit John Penhall's right here, and I'm going to put him on the spot and our General Managers standing in for Bob, while Bob's on leave. So John, you're the best person to answer that question.
Yes. Thanks, Jake, and good morning, Daniel. Look, we're expecting to see the grade incrementally increase over the coming 12 months. And we see that looking back over the last 12 months as we've seen volumes come up a strip ratio fall well below 1, so it's going to be a volume piece here, but we're going to see increased volume and we're going to see increased grade, and that will translate through the mill. -- already seen the grade come up from circa 0.9 12 months ago up to around just less than 1% -- 1 gram per tonne, I should say, going through the [indiscernible].
And maybe an accounting question for Lawrie. Just D&A at Ernest Henry was about $4,000 an ounce. Just wondering might be some accounting finalization adjustments in there or something. Just what's the best guidance on where that should settle?
Yes, Dan, we've got -- there certainly would be some in the finalization of the -- the prepaid metal, which was always averaging $1,350, $1,400 an ounce and then now you're amortizing another $1 billion of asset acquisition. So that was the impact in this quarter. As we finished the life of mine plans in the June quarter, we'll update on what the D&A profile for this asset is going to be going forward. And I haven't got it in front of me, but we had it at the half year as to what it would be on an annual basis, but I'll get Martin to follow that 1 up with you.
Okay. And Red Lake, revisiting a little bit of some earlier questions. Just specifically on the mills where you've done this trial, could you further outline what you've learned about the mill that you didn't already know and what's potentially surprised you from running it at full tilt?
Yes, Dan, they can be pushed harder than they've previously been pushed and they can produce -- they have high throughput capacity than they previously had. So we're kind of pushing the boundaries now. But Bob is always keen to push the envelope. And I think we started off at 1,700, 1,800 tonnes. They're over 2,100 tonnes now at Campbell. The mills have never really been pushed to their maximum capacity.
Yes. The only thing I'd add to that, Daniel, is if you recall, when we first took ownership of the asset, the Campbell mill was one of the things that we had identified through our [ DDA ] that needed to get a little bit of love and attention and money on taking ownership because it was not a mill that was set up to go for the extended periods. We completed those works, and the pleasing thing we've seen in this trial is that those works that we've done have allowed us to run even above where the team thought they could on an unlimited or an unconstrained basis. And so therefore, they're getting a little bit more confident about the capital that may be required to have this sustain at these levels.
And then maybe just an update on the permitting process. [indiscernible] Temporary -- these concessions to run these mills flat out, which I presume is obviously they have to throttle back in the September quarter. What's the process to repermit them at a higher number once you know what that number is? .
That's in train, and we don't think it's a major impediment. It's more just processed than anything else. .
Yes. And if you'd recall, when we talked about the mill expansions in the second half of last calendar year, if we, if we were running at these rates, it's a local permitting approval as opposed to if you go above 50%, I think, then it's a federal. So these improvements that we're running at are local approvals. So it's not as complicated.
Your next question comes from Kate McCutcheon from Citi. Your next question comes from Alex Barkley from RBC.
Jake and Tim. Another one on Red Lake, with the mining rate going quite well, particularly in March, well above even the 850 kilotons you'd guided from existing mines in FY '22, '23. Just wondering why on an annualized basis, the gold and all-in sustaining costs would still fall short of your FY '22 guidance despite probably suggesting it was going to be a better second half. So just wondering what you had expected for the third quarter in that original guidance versus what was achieved? And was it just basically a case around grade not being where they want where you wanted them to be? .
I think the main issue is really the first 6 months of performance that we produced 38,000 ounces which left us, as I said, on our group guidance with no runway really and a disappointing performance has been well documented. So we're building from that base, the third quarter was pretty much in line. It's consistently now kind of delivering and we're getting more confidence, but a bit gun shy as to making bold predictions. We need to build confidence for the site team and we need to build confidence that these things are consistent and that 3,000 ore tonnes a day becomes a habit. And then we can start looking at optimizing and getting grade up. We're very comfortable with the models. The reconciliations are not giving us concern about the models. We do have some work to do to further improve mining dilution, but these are all within the range of what you describe as normal improvements.
Okay. So when you say that the third quarter was pretty much in line, those grades were about what you had planned at the start of the year. .
So yes, the Cochenour material is lower grade and that's -- and we are getting some dilution from the ore pass at Cochenour, which is an ongoing issue as we're mining those areas. We've factored those all into the guidance and everything we have now -- but Cochenour is a bit lower grade because of the success we've had at the tramming and the haulage that materials being a base load and aviation and CP zones are only coming online now. So that's where you're going to see a bit of grade increase in the fourth quarter.
Yes. Okay, sure. And excuse me if I misheard your comments earlier on the call, but I think you said Red Lake was a few quarters behind the original schedule. Is that pertaining to that sub USD 1,000 per ounce guidance you have by FY '23 end? .
Red lake had 165,000 ounces of guidance this year. That's been the cause of our -- the root cause of our miss this year. We've overestimated our capacity to transform the operation. We rebased it. We think we're on track. We have not -- nothing in the -- in what we've seen at the operation gives us doubt that it can be achieved, but we are definitely 12 months behind where we expected to be on delivery.
Your next question comes from Andrew Bowler from Macquarie.
Just sort of noticed a 1 liner in the quarterly about development at Bateman. Is that largely to established drill positions? Or are you considering sort of heading in there in terms of getting some ore out as well?
It's established drill positions. And we do have the opportunity to take 100,000 tonnes as what's described as a bulk sample there, but that's not in the numbers that we're talking about today.
And just that sort of interim target of 3,000 tonnes per tonne. And obviously, heading beyond that. Is it sort of expected that, that will come from continuing improvements in mining practices? Or is the next big step coming from opening up those new areas from that big capital driver at the moment? .
Opening up the new areas. This is going to be a case of opening up multiple areas. We've talked about the fact that it was grossly underdeveloped and undercapitalized when we took it over. We knew that when we took it over. We bought it for USD 375 million a couple of years ago. We knew that was the case. We didn't know how much it had been undercapitalized. But getting that 1,200 meters a month was a key milestone. We've now shifted that to 3,000 tonnes of say 4 tonnes a day. that's now being achieved, and it's about building bases, debottlenecking the whole process, and the mine is definitely the process because we still have a mill sitting on site that is unused at this point in time being the Bateman mill.
Just heading back to Australia. I mean, Cowal, you're talking about stoping the underground there sort of roughly a year from now. Can we expect a reasonable volume of development ore from there over the next sort of year or so? And if so, can you give us a sort of rough guide on that? Or is it expected to be quite minor before that first stoping milestone.
John, do you want to take that one? Lucky you.
No worries. Andrew. Look, I think in the context of the underground as it develops, we're going to see that normal profile as we start to develop into the ore body over the coming next 12 months. We're pretty busy drilling at the moment, underground to get confidence in those first set of stoping. And I think as we follow the critical part, you're going to see come through in our quarterly results. I guess, an increasing amount of ounces come out of the underground, but mostly through development until we hit that first stoping. And like all mines, Andrew, it's going to have a bit of a ramp-up period post the mill coming on board. But you will start to see increasing levels of development ore. Again, it will be at a modest grade because, of course, with development, it will come through with that lower cutoff.
Your next question comes from Matthew Collings from Morgans.
It's just a very simple question on Mungari and just maybe it's an accounting treatment around the JV, but it looks like a disconnect between the tonnes and grade processed for the gold produced. Is the difference there just attributable evolution ounces versus a whole ore through the mill? Or am I looking at it the wrong way?
Yes, is the answer. So we're reporting 100% of the stats through the mill, and then we're taking our production number that's attributable to all of the 100% of the assets and 51% of the EKJV.
Your next question comes from Kate McCutcheon from Citi.
Jake and, can you hear me now? .
We can.
So just on Dan's question at Cowal, I thought at the September quarter result, you said we would see all these grades from Stage H, pick up to 1 grams per tonne in December and March. I would be running at 0.8. What's driven that? Are you still expecting it to pick up to that 1.1 million, 1.2 million in FY '23? .
So on that, Kate, the mining grade will always be the lower one because we are out of Stage H building that stockpile. So the lower grade goes on. So that's the average grade mined and the highest grade is going through the mill. So when we were talking about the lifting grade, we're seeing that in grade process. So we're moving away from the stockpile material to pure Stage H material. We saw that get up to just under a gram, in this quarter, and it will lift, as John said earlier, over the coming quarters as we get the higher volumes of ore out of the pit.
Yes, I understand. That makes sense. And a question for Lawrie. How much longer is cash tax going to sit at that lower rate? And then secondly, when are you expecting to pay stamp duty on the Ernest Henry deal?
So the tax was lower in this quarter because based on our tax returns. So the FY '21 tax had to be finalized and paid in December, at the time that we submit the return. Therefore, there's a higher amount that goes in the December quarter and the March quarter is lower. We then will see maybe a slightly higher tax cash in the June quarter. But again, we're going to manage that based on where we see the FY '22 year finishing and what franking credit balance we want to end up with.
And then the second one, the Ernest Henry will either be in June or potentially in the September quarter. We're finalizing the valuation that has to go in with the stamp duty lodgment. We're hoping it goes in the September quarter, but it could be in June.
Yes. And then finally, look, I know Bob is not here to answer this question, but what are you most excited about at Ernest Henry? Are there any near-term opportunities or levers to pull that you've identified in the first couple of months?
We're most excited about the cash that's generated, and I'm going to keep coming back to this because I wish someone would look at this. We've got 17% of the purchase price back in the first quarter. We like the mine life extensions down at depth. The pre-feasibility study suggests that it's going to have an extended mine life down there. So we're excited about the geology the operation and the cash generation.
Your next question comes from Stuart McKinnon from The West Australian.
Jake and team. Just 2 from me. Firstly, on Mungari, are you guys expecting COVID rates haven't quite peaked there yet. I see there's no major impacts to date, but you do mention that there's been a slight increase in cases in April. Are you expecting that increase to continue and possibly you're experiencing the same sort of levels of absenteeism as you did at Cowal? Or you're not expecting the same impact at Mungari?
Stuart, you'd have to think that it is likely to increase as travel increases and as exposure increases, what we'd hope is that we've learned from our experience at Cowal and at Red Lake, and that the protocols in place at Mungari are strong and have been built off what the other sites have learned and we'll be able to contain it in a way that is less disruptive.
Okay. And just another one for me on the gold price. You mentioned the macroeconomic environment being supportive of the gold price and certainly is still at that fairly historically elevated levels. But are you in any way surprised that the price hasn't sort of broken out above USD 2,000 an ounce? I mean it's hard to imagine a more supportive environment for the gold price. And while it is elevated, it's not really sort of breaking any records or anything like that. Are you surprised by that? Or -- what are your thoughts on the gold price going forward?
My thoughts are that it's going higher. The Federal Reserve, I think, has very, very challenging job of trying to bring inflation down from 8.5% last quarter without plunging the country into recession. That is -- has very rarely been done successfully. And therefore, I expect inflation to continue, and that is always good for the gold price. .
Your next question comes from Michael Bennet from AFR.
Just a quick follow-up to that on COVID, given the broader labor market tightness. How many cases have you had at Mungari in April? And are you getting a bit frustrated that WA is still taking a very different approach, given what we saw this week with the easing of restrictions in New South Wales and Victoria?
Yes. So we've had 10 cases at Mungari to date. So much fewer than at, for example, Cowal or what Cowal experienced. I did see in -- I think it was a [indiscernible] newspaper. The call from mining companies that later access overseas labor, immigration, should be eased, and we would be very supportive of that. In a tight labor market like we have at the moment, access to skills without creating rampant inflation and just not being able to fill roles is critical to the future of the mining industry, and frankly, the economy of the country.
And just 1 more on this issue. I mean in the last few days, we've seen in quarterly BHP, Whitehaven and others talk about these COVID impacts. I mean if you sort of sit back, how big of a deal is this production and guidance for the industry going forward? And are there any solutions because it doesn't seem like COVID is going away?
Well, I think there are solutions in that there are waves of the virus and they do recede, and the sites and operations get better at managing it. Omicron seems to be less -- it caused less damage or illness or death than previous strains. So I think we've got to learn to live with it. And that's what our sites are doing and our people are doing. But it does cause a huge distraction to our operations teams, and I see John is nodding his head on this one. In dealing with high levels of absenteeism, high levels of concern within the workforce and legitimate concern around health and it is a distraction that certainly is not what you describe as normal business.
There are no further questions at this time. I'll now hand back to Mr. Klein for closing remarks.
Thanks, Harmony. Thanks, everyone. Look, an interesting call and an interesting quarter. I'm going to go back to just leaving you with one final thought that we sold our gold at $2,464 an ounce. That leaves us with an average margin of around $1,474 an ounce, as Lawrie said, 60%. That's 150,000 ounces of production. Just to give you an equivalent basis, if we were able to keep the same mix of production on that quarter, and we increased AISC to $1,740 an ounce or $1,750 an ounce, which I think will be more in line with the industry standard in Australia. That's the equivalent of us producing 300,000 ounces of gold at that AISC. Our view is it's much better to produce less gold at higher margin and make lots of money. Thanks for your time.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.