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Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining June 2018 Quarter Results Teleconference. [Operator Instructions]Please note that this conference is being recorded today, Thursday, July 19, 2018.I would now like to hand the conference over to your host today, Mr. Jake Klein, Executive Chairman. Thank you, sir. Please go ahead.
Thanks, Eddie. Good morning, everyone. Thank you all for joining us. We really do appreciate it. This call may test us a little bit because it's only Bob Fulker, our COO, and me in Sydney; Glen Masterman, our VP, Discovery; and Lawrie Conway, our CFO, have dialed in remotely. It is really a pleasure to be able to deliver another great quarter to cap off an outstanding year for Evolution. Whilst we recognize there is no place for complacency, there's always more to do in the area of safety, I'm pleased to report that our total recordable injury frequency declined by 31% over the 12 months to June 30. This quarter again demonstrates the quality of our portfolio. 202,000 low-cost ounces produced record operating cash flow of $222 million and net mine cash flow of $136 million. This has a result that, in only 3 months, we increased our cash balance by $115 million for the current balance of $323 million. This -- as evidenced by this result, gold mining really can be a very good high-margin cash-generating business. At the same time, we are spending on our future with the important H cutback and Float Tails Leach project at Cowal progressing on time and budget. And increased expenditure in the Discovery areas, producing very encouraging results at Cowal, Mungari and Cracow. And I'm really pleased that we now have an average mine life based only on reserves which we calculate on a very conservative gold price of AUD 1,350 an ounce of over 9 years. Yesterday, we announced that we had signed an agreement with Norton Gold Fields to terminate their rights to mine and process ore from the Castle Hill deposit, which is a deposit located approximately 25 kilometers from the Mungari processing plant. The agreement also terminates a number of other residual rights over a number of tenements in the area. We see this is an important part of Mungari's long-term future as it provides us not only with the good baseload feed for processing, but developing the Castle Hill deposit will also deliver operating synergies for several smaller nearby deposits, and thereby, reduce the cost to develop and mine these deposits. I'll just spend a few minutes now reflecting on the 12 months to June 30 because we are exceptionally proud to have made our cost and production guidance for the seventh consecutive year. We produced over 800,000 ounces at an all-in sustaining cost of less than AUD 800, or in U.S. dollar terms, USD 618 an ounce. This undoubtedly makes us one of the lowest-cost gold producers in the world. But to me, even more impressive is the cash flow we have generated. In the 12 months to June 30, we generated over $800 million in operating cash flow and $540 million in net mine cash flow. Group cash flow for the year before only dividends and debt repayments was $396 million. This has seen our cash balance grow to $323 million and our net debt has now fallen to only $72 million. Remember, it was only 3 years ago that we borrowed $400 million to acquire Cowal. And then 2 years ago, another $475 million to acquire the economic interest in Ernest Henry, at $875 million. The ability of our asset portfolio to generate strong free cash flow is truly exceptional. With that, I will hand over to Bob.
Thanks, Jake, and good morning, everyone. This morning, I will overview the production and safety performance for the June quarter and a quick summary of the full 2018 financial year. The quarterly results demonstrate our continued improvement in safety and social responsibility areas, with no recordable injuries in the month of June. The 12 months TRIF of 5.5, as Jake mentioned, was a 31% year-on-year reduction. This was combined with a 0 severity [ph] rate and an improvement of our overall safety culture. One of the very pleasing results is a 45% reduction in vehicle incidents over the last 12 months. The year also delivered an excellent set of health statistics with over 1,700 people being involved in Health & Wellbeing programs. And during the year, we also collaborated with our community stakeholders for the delivery of 7 shared value environmental enhancement projects.Moving on to the operational update. The 2018 financial year was an excellent year with production -- with a -- from a production perspective: 801,000 ounces, towards the top end of our guidance; and for the quarter, 202,000 ounces was a great result. This was only outweighed by the fact that 4 of our 6 operations were either at or exceeded the top end of our guidance. If we turn to Page 5 for Cowal and Mungari results, Cowal had a good quarter producing circa 63,800 ounces at an all-in sustaining cost of $976 per ounce. Plant throughput rate of 1.9 million tonnes was only 4,000 tonnes lower than the previous record in the March quarter. Mine operating cash flow was close to $55 million for the quarter, pre-capital investment, and the total of our gold produced at Cowal for the year was 258,000 ounces. At Cowal -- at year-end, Cowal had a TRIF of 3.3, and this is an excellent result especially when you see they started at 7.7. On an operating front, Stage H cutback, the Float Tails Leach project are both progressing well and within project specifications. At Mungari, we delivered 30,000-plus ounces for the quarter at an all-in sustaining cost of $1,230 per ounce. The mine operating cash flow for the quarter was circa $12 million pre-capital. Although still some way to improve, the TRIF reduced by 36% this year at Mungari, to 8.5. Outstanding result. Highlights for the quarter were the improved recoveries from the gravity circuit. These were offset slightly by lower recoveries in the plant due to our leach tank maintenance program that we completed. The quarter has seen improvements in the ore availability from Frog's Leg and the completion of the White Foil Stage 3 cutback. This resulted in an increase in ore availability in the coming months.If we turn to Page 6 for Mt Carlton and Mt Rawdon. Mt Carlton produced 26,700 ounces at an all-in sustaining cost of $712 per ounce. Both the mine and plant performed well. The all-in sustaining cost was negatively affected by the commencement of Stage 5 TSF lift and the purchase of an excavator. The mine operating cash flow was about $45 million pre-capital, and this was positively impacted by additional concentrate shipments in the June quarter that were produced in the March quarter. On a positive note, Mt Carlton TRIF was 3.9 at year-end, down from 8.2 at the start of the year, and we have progressed the extension of -- extension feasibility study during the quarter with the trade-off studies continuing to investigate the options of an optimized underground operation. This will be completed during the second half of 2018.Mt Rawdon finished the year with a very strong quarter at 31,000 ounces and an all-in sustaining cost of $934 an ounce, with the mine operating cash flow of $27 million pre-capital. TRIF was down to 5.1, 23% down year-on-year. Mining activity concentrated at ore sources at the bottom of the pit, in the bottom ventures, and ore mined is 1.1 million tonnes at 1.15 grams per tonne, a good result. In the coming months, ore will be sourced from stockpiles as mining activities continue to be focused on the southern wall cutback and the western wall geotechnical controls.If we turn to Page 7 for Cracow and Ernest Henry. Cracow had a strong quarter producing 26,000 ounces at an all-in sustaining cost of $1,232 per ounce. Mine operating cash flow, $23 million, pre-capital. On a safety front, Cracow performed poorly from a TRIF perspective, and this is a focus for the coming months and the coming year. All-in sustaining costs were impacted by the capital spend on the airstrip refurbishment and some mobile fleet replacement. Ernest Henry produced 24,000 ounces at a negative all-in sustaining cost of $823 an ounce. Mine cash flow continued to be very strong at $59 million for the quarter, and mine and mill production were in line with plans, but the financials were above our expectations.In summary, a good year and a good quarter. The group produced 202,000 ounces at an all-in sustaining cost of $847 an ounce for the quarter and 801,000 ounces for the year at $797 all-in sustaining cost, below the bottom end of our guidance.Thanks, and I'll hand it over to Glen.
Thank you, Bob, and good morning, everyone. We finished the financial year in strong fashion with another set of very pleasing drilling results from Cowal. 6,500 meters were completed at the Galway Regal E46 complex in the quarter, testing along strike of and below the previously announced 600,000-ounce underground resource. Drilling was aimed to complete coverage across the 600-meter long zone that had not been previously tested. Examples of several high grades are illustrated in Figures 2 and 3 on Pages 11 and 12 of this morning's report. Of note is the interval in hole 330, which averaged 10 grams per tonne over true thickness of 7.5 meters. The results reinforced our belief that further drilling has the potential to significantly grow mineral resources at GRE46, which has been defined for at least 2 kilometers and remains opens along strike and at depth. We completed additional drilling at E41 West, with results extending the zone further south by up to 250 meters. The new results will be incorporated in an update of the mineral resource at E41, which we aim to complete in the December 2018 half year.At Mungari, Discovery drilling continued in the Ora Banda camp, testing 2 promising targets approximately 50 kilometers north of the processing facilities. Results from Perimeter and Scottish Archer are shown on Pages 13 and 14, with the numbers confirming we're in the early stages of delineating 2 new mineral systems, we believe, have the potential to develop in the mineral resources. Step-out drilling is underway on both targets to fully assess their site potential.At Cracow, extensional drilling from underground appears to be delineating a south load extension of the Killarney chute. Worthy of mention is the result from hole 65 shown on Page 15, which returned nearly 16 grams per tonne over true thickness interval of 8-plus meters. Drilling around this intercept is providing strong support for the potential to extend the resource in this part of the mine. Meanwhile, underground development is being progressed to establish optimal drilling positions along the Imperial, Coronation, Empire corridor that will enable testing of large untested areas, along with prospective structural trends.With that, I would like to hand over to Lawrie.
Thank you, Glen, and good morning, everyone. This morning, I'll overview the financial performance for the June quarter and FY '18. We will be releasing our full year financial results next month. At which time, we'll fully review the performance for the year. A summary of the financials is provided on Pages 8 and 9 of the quarterly report. The outstanding results for the year seem to center around [ 800 ] have produced over 800,000 ounces at less than $800 per ounce all-in sustaining cost, generating over $800 million of operating cash flow and an unaudited EBITDA of around $800 million. The AISC for the June quarter was $78 per ounce higher in the March quarter due to a combination of change in production mix, noncash inventory charges and higher sustaining capital, offset by higher gold and copper production and a higher achieved copper price. The impact on copper production mix is that half the extra production in June quarter came from Cracow, which has an AISC above the group average. This increased our group AISC for the quarter by approximately $20 per ounce. Noncash inventory items related predominantly to Mt Rawdon and Mt Carlton. And Mt Rawdon, which is currently mining at rates higher than what we are milling; however, the tonnes mined above mill tonnes in the June quarter was a lot lower than what we did in the March quarter. This change, plus a lower stockpile valuation, added $55 per ounce to the group's AISC in the June quarter. While at Mt Carlton, we had a concentrate shipment which slipped into the June quarter. The shipment was credited to inventory after realizing the value in March and expensed on shipment in April. The noncash impact on group all-in sustaining cost was approximately $35 per ounce in the June quarter. So these 2 sites, the AISC for the June half year was $613 and $752 per ounce, both lower than the June quarter AISC, reflecting the timing impact of inventory movements and valuations. Higher sustaining capital, which is normal at the end of the financial year, added $57 per ounce to the group AISC in the June quarter. As mentioned earlier, higher gold and copper production and a higher achieved copper price offset the majority of the impact of these items. Operating cash flow in the June quarter was a record $222 million, driven by higher sales volume and a higher achieved copper price, while the achieved gold price was flat. Full year operating mine cash flow was a record $812 million, with an unaudited EBITDA margin of 53%, excluding Edna May. Capital investment for the quarter was $86 million. The higher capital investment predominantly related to the Stage H waste stripping and the Float Tails Leach project at Cowal as well as year-end sustaining capital across all the sites. Sustaining and major project capital for the year all are within the original market guidance. All operations were cash flow positive for the quarter and the year after meeting their capital investment commitments. Net mine cash flow for the quarter was $136 million, with the benefit of a diverse portfolio again being demonstrated with considerable increases in cash flow at Mt Rawdon and Mt Carlton, offsetting the impact on getting major capital investment at Cowal. Ernest Henry had another consistent quarter and delivered nearly $220 million of net cash flow for the year. Group cash flow was up 11% over the March quarter at $115 million and was $396 million for the year. Cash on hand at the end of the year was $323 million, reducing net bank debt by 62% during the quarter for just under $72 million. With regards to the full year financials, we continue to actively manage our capital management position and have now completed an independent taxation valuation of the Cowal open pit and Mungari open pit and underground. This will generate additional tax depreciation over the life of the mine at these operations, and we expect to record a reduction in income tax expense for the year in the order of $20 million to $25 million, of which $5 million to $10 million will be excluded from underlying profit for the year. Full details will be provided with our financial results next month. With that, I'll now hand you back to Jake.
Thanks, Lawrie. Looking forward to the next 12 months, we expect production of low-cost, high-margin ounces to continue, and we are forecasting 720,000 to 770,000 ounces of production at an AISC range of between $850 and $900 an ounce. This compares to our original guidance for the FY '18 current year -- or last year of 750,000 to 805,000 ounces at a cost of between $820 and $870 an ounce. Bear in mind that production guidance did include 20,000 ounces from Edna May. This last year, we worked hard to deliver our seventh consecutive year of meeting guidance and achieved a significant beat on the cost side. We're looking forward to the challenge of trying to do the same again this year. Our business strategy and approach remains the same as it has been since we set out on the journey of building this business 7 years ago. We want to build a gold company that prospers not only when the gold price is going up, but that prospers through the cycle, a consistent and focused strategy that has been rigorously implemented and which we are not going to deviate from. Today, we are highly profitable, cash-generating, dividend-paying, globally relevant, low-cost, mid-tier gold company. Eddie, with that, can you please now open the lines for questions?
[Operator Instructions] Michael Slifirski of Credit Suisse.
I've got 3 questions, I think. First of all, can you add some context around the production outperformance in '18 versus the opportunity for that in '19? Is there anything specific across the outperformance across the 4 operations, which I realized you can't forecast for that to continue, but was there anything around those that FY '18 outperformance that you wouldn't anticipate in '19?
Thanks, Michael, and good morning. I mean, I supposed the thing around our production guidance for next year is that it is related to grade. It's not really related to costs. And I suppose across the portfolio you see we're forecasting a 5% to 7% reduction in grade, which is more in line with the reserve grades. So 2018 financial year benefited, at Mt Carlton for example, from a significant outperformance is within an area of the pit which had these bonanza grades. And as you can see, we processed about 5.6 grams per tonne when the reserved grade is about 4.7 grams a tonne. So are there specific things we can point to that could potentially lead to outperformance? Not ones that we prepared to highlight right at the moment. Cowal has been an ore body that's outperformed generally, but we're forecasting a reduction in grade over there in line with the reserve grade next year. So it's really grade-related. And I suppose, I would say to observers that it shouldn't be unanticipated given that really 2018 was a bonanza year in many ways. We're really just going back to in-line performance. And AUD 850 to AUD 900 an ounce would still make as an extraordinarily low-cost producer.
Yes, absolutely. Second question, the Cowal deep drilling. I'm really interested in that and the decline concept. So can you sort of map out what that all might look like in terms of approval for that decline, development time, when drilling might occur and when you might have a -- and I'm assuming it's a potential underground high-grade supplement to the mill. What's that time line might look like? And then with respect to permitting, as it doesn't presumably require the band wall to move, how do you think of that sort of the whole district opportunity?
Michael, you're stealing our thunder for the Investor Day in September. But I'll hand over to Glen to just give you a better focus or perspective on GRE46 because I think it is very significant. It's early-stage, but it a significant. And then Bob may want to comment on sort of the concept that he's thinking about.
Thanks, Jake. Michael, what's -- one of the things we're feeling genuinely very excited about is the open areas beyond the resource that we disclosed back in April for the underground. And what we continue to sort of understand is that these areas are open, and particularly to the south of the largest area of resource where it has not -- the area or along strike in that portion of the corridor has not been really previously tested. There's a large gap in the drilling. So the 2 -- there are 2 considerations underway. We're currently -- drilling from surface to case filling in that gap and completing the coverage. And what we're also understanding is that, to the second prong to this is it's going to take a lot drilling because we do -- we have evidence of sort of narrow widths and high grades, but then there's also parts of that resource where we had sort of wider widths at slightly lower grades. It's going to take quite a lot of drilling. The plan at the moment is to continue to step that drilling from surface, and we'll utilize directional drilling capability to minimize our cost and precisely drill the target we want to be testing. But at the same time, we're obviously contemplating how do we effectively convert this or upgrade the resource classification and eventually convert to reserve. And an underground exploration decline is part of that consideration.
And I guess, Michael, just to expand on what Glen said there, the underground exploration decline permit gets -- the actual work is going on now to lodge that and to get it underway. Our priority at the moment is Mod 14 and getting Mod 14 approved. So that's the high priority. But the best option and the best ability to get, as Glen said, the location for the best price is via that underground exploration decline. So that will give us a great platform to drill and to fill in those gaps to hopefully move something towards that resource and reserve in the future.
But specifically, are you thinking approvals for the decline soon, maybe 18 months to get down, then 12 or 18 months' drilling. Is it that the sort of time frame we should be thinking about?
That wouldn't be unreasonable, Michael.
Okay. And then finally, with respect to Mungari, the developments there, which look quite interesting between Castle Hill and the 2, a high-grade opportunity I suspect to replace Frog's Leg. When you look at Mungari now versus 12 months ago, I know reserves don't really give a true picture of the mine life but they give a pretty limited picture. When you look at it for getting reserves, resources, what -- we're watching now from the express -- exploration results in Castle Hill, what time frame can you project reasonably for life expectation of what you can see now?
I think, Michael, it is an important piece of the whole Mungari puzzle. And the opportunity for us at Mungari is to go from where we are at the moment, the 120,000 ounce a year production base. The prize would be to try and get it back to 140,000 to 150,000 ounces. Castle Hill doesn't deliver that for us. What it does do is it definitely extends the mine life and gives us a baseload feed. White Foil, I think, is -- the current cutback is -- and ore is scheduled to run around FY '20. So it would be available potentially after that. But we're kind of starting to see visibility of Mungari out to 2026, 2027 quite comfortably. The challenge is finding that high-grade replacement for Frog’s Leg. And yes, I suppose, I'll let Glen comment on it. We haven't yet found it. But when I see grades and widths, like we're seeing at Scottish Archer, it gives me some encouragement that we're drilling in an area that has the potential to host these things. Glen, do you want to add anything to that?
Sure, Jake. I'll just expand a little bit further on that. I think, Michael, we're focusing not just on the Ora Banda camp there, I'll speak to Perimeter and Scottish Archer in a moment. But we're also in the process of expanding the decline at Frog’s Leg in the mid-part of the ore body to, I guess, get a position in the hanging wall from which we can drill some of the deeper targets that we've identified at Frog’s Leg. We're hopeful that we'll be able to report on those results towards the end of the year, if not early next year and that's about the timing for that work. Now coming back to Ora Banda. The interesting development out there is that we've identified, particularly at Scottish Archer, a vein -- a high-grade vein on the contact of very similar geology to what we see at Frog's Leg, although obviously in a different geographic location. So that similar geology has got us very interested in that target. At the moment, we've got a handful of what we sort of consider some pretty reasonable hit. We're stepping out on this to understand the full-size potential. Switching across to Perimeter, that's a target that's starting to sort of develop in a really interesting way. It has what we think some structural similarities in Norton's enterprise mines. So that gives you a sort of sense of the scope of target that we would be hopeful of developing there. And then there are a number of -- in addition to what we're doing, we're again stepping out on it. There is also a number of other trends in similar orientations on our Ora Banda land position that we've lined up to sort of follow on from this as well. So it's a developing story that we're feeling pretty excited about.
Great. And just last one if I may, just on Mt Carlton, the mine extensions feasibility study. Is there a decision from that study as to whether it is another cutback or an underground mining option?
Thanks, Michael. We're focusing, at the moment, on completing this current CapEx with the underground options. So we're just trying to -- finalize the actual optimized underground before we make the final decision.
Your next question comes from the line of Jim Pollock.
It's Jim Pollock from Surbiton Associates. I've got a number of questions, but I'll restrict it just to 2 questions initially and give somebody else a go. Jake, you said that the mine lives were currently calculated on a gold price of AUD 1,350 an ounce. That seems extremely conservative. Some would say, I suppose, pessimistic. Why calculate it at such a low gold price?
Thanks, Jim, and good morning. Fundamentally, we wanted to mine profitable ounces, high-margin ounces, and we're really not interested in mining ounces for production. In fact, we are not production-focused. It's not a driver for us. We want to mine high-margin ounces, and the best way to do that is to calculate the ore reserves at a conservative gold price. $1,350, in our view, is the right number.
High-margin, though, also translates into high grading. Are you mining above the mine grade, the reserve grade?
No, we're not. Last year, we had the fortunate situation where a few of our deposit feeds have higher-than-expected grades, and that was largely at Mt Carlton where we had bonanza grades. Cowal has also outperformed in terms of its reconciliation, but no, we're not high-grading.
Okay. Look, my second question, but there are other questions I've got. Jake, you commented on gold mining in some cases being very profitable. What are your comments regarding the plan, I suppose, or at least hope of the Western Australian government to increase royalties from 2.5% to, what, 3.75%. How can you argue against that given your statement that gold mining can be a very profitable business?
I think what I said, Jim, was that we had a very profitable business. The Australian gold sector is in good shape at the moment, but we have a very high gold price at this stage and it is a high gold price. $1,650 is a high price. We need to recognize that this is a very cyclical business, and it was not long ago when the prices were materially lower than this, and that would compress the margin. We're probably one of the highest, if not the highest margin producers in Australia and in the world, frankly. And in the event that margins were compressed, then it becomes a much more marginal business. As I said, we want to build a business that prospers through the cycle. We need to make Australia an efficient and attractive mining destination. Raising imports and taxes and royalties is not conducive to that.
Sorry, Jim, if I can just add to that. I mean, we understand where the WA government is going on that. But I think something to take into consideration that Mungari for the year and the quarter was producing at around [ $1,556, $1,600 ] an ounce, which is giving a very skinny margin. And we're trying to invest heavily in Glen's Discovery area to try and extend mine life and increase the grade, as Jake said, to get production back to 130 to 140. And Mungari was our lowest cash producer for the year, at $23 million out of $540 million. So it's not as, though, yes, we are making high-margin. But in WA, our asset is not making a lot of money for us and generating a reserve.
Your next question comes from the line of Paul Hissey from RBC.
A couple of questions from me. Just on -- maybe Bob for you. On Mt Rawdon, I noticed from prior presentations that, basically, the capital mine -- waste mining at Rawdon was expected to be done by now. Is that the case?
No, we're still doing a cutback at Mt Rawdon on the southern wall at the moment. And we had that issue this year on the western wall, which will continue stripping waste into next year. So we still got a fair bit to do on this.
Okay. And then probably, just more generally. Forgive me if you've already stated this, Jake. But we've just got the headline on guidance for the year ahead, as opposed, I guess, the nuts and bolts. So is that likely to be forthcoming, along with that kind of CapEx outlook for the different assets with the financial result or that's a Strategy Day in September agenda item?
No. Paul, I think our intention is to deliver it when we release our financial results on the 20th of August. And [indiscernible]
[indiscernible] financial.
Yes, okay. Sure. Okay. And then, I guess, perhaps just one more question, perhaps a little bit higher level. If you're going to deliver on face value slightly lower production in fiscal '19 at a slightly higher price or cost. Does that, in theory, mean that -- and then you made comments, Jake, about grade reversion over time. Does that mean that FY '18, all else being equal, is likely to be trying to peak earnings or peak cash flow around for the business?
We hope not. Because I mean, again, our guidance was sort of $820 to $870 an ounce when we started the year. I mean, I guess, I'm kind of sensing that we're suffering from the fact that we've overdelivered this year, and we're kind of going back to what we would have -- would have been a very effective and successful results, $820 to $870 -- $850 to $900, not a big shift. A slight reduction in grade. Yes. I mean, I don't see it as peak production. You can see some of the exploration results we're getting. I would hope that we get some of these wins going forward as well. But we're certainly not prepared put them into our guidance and back that.
Sure. Yes, I guess the bigger question is if -- let's say, you -- under those metrics for the next year or 2, I'm trying to understand what might be able to drive the share price further from an investor's perspective if maybe the best you can deliver the same financial outcomes? And look, perhaps, it is the longer-dated optionality you through some of your exploration opportunities.
I think that's one of the opportunities. I think the other opportunity is that we are still generating material amounts of cash flow. Even at the $850 to $900 an ounce, our calculations are that we have an EBITDA margin above 50%. So I think it depends where investors want to position themselves. We're not prepared to kind of chase production for production's sake. So what we've been very conscious of is trying to almost move away from how many ounces we produce. It's more around how much cash we're generating, what returns are we going to get on our capital that we invest and making sure that we do keep that optionality on the Discovery piece well-funded. And certainly, I think Glen's made a lot of progress in that area. It is longer-dated, but the signs are promising.
Yes. And look, and I don't intend to labor the point. But I guess with that in mind, in the year ahead, you may well produce less ounces but yet also produce less cash flow. And so you're not really able to fulfill that ambition. But look, I take your point. Perhaps, there is further upside throughout the quarter or the year which is underway.
We can invest -- sorry, Paul, which ambition were you talking about?
Well, you're not willing to pursue ounces for the sake of it, and that's fine, I totally accept that. But if your driver is margin, then I wonder if the potential to produce less ounces in the year ahead but be able to keep your cost lower, which would defend your margin, so we have an obvious -- I guess, we have that obvious trade-off. But yes, we're happy to let some ounces, we're happy to let the -- output fall a little bit, but we are defending our margin. Whereas the guidance we're looking at here, the ounces are falling but the margin may well sort of on a pro forma base, also deteriorate in the year ahead. So we're kind of catching -- we're catching the worst of both situations on paper.
Yes. I don't want it...
Paul, I cannot...
Yes, go ahead.
Yes, Paul. I think you've got to look at also over a longer period as well, Paul. I mean, yes, we will have a different production mix in FY '19 than FY '18, whereby Cowal is transitioning towards the end of Stage G, really getting ready for Stage H. So we're investing there, which also says we've got to invest in sustaining capital because the mine life is extended. We've got Cracow, which out of mine life. We've consistently generated $25 million to $40 million of free cash. But now it's at a point where we've got to actually invest in sustaining capital to justify that 4- or 5-year mine life. So the short term, yes, FY '19 maybe a lower year. But if you look at FY '20, '21, '22, which we'll outline on the Strategy Day, some of that capital investment we're making now gives us a lot of stronger cash generation into the future. And so keeping our mills filled in FY '19 and '20 across the group actually makes a lot better sense than producing less cost -- less ounces at some of our higher-cost assets to get an all-in sustaining cost that is lower. As Jake said on the call earlier, AUD 850 to AUD 900 an ounce to 720,000 to 770,000 ounces is actually still very profitable, a little bit less than this year. I mean, it's only really $50 to $70, at a maximum, $100 an ounce different next year versus FY '18.
Sure. No, look, and I'm not trying to split hairs here. I just think we're at an interesting inflection for the sector in general. And yes, look, maybe some of the nuts and bolts of the CapEx spend, et cetera, over the next few years will become a little bit more transparent to us over the next few months. I'll leave it there.
Your next question comes from the line of David Radcliffe from Global Mining Research.
I just wanted to come back to Mungari and sort of understand, I guess, a little bit what we should be thinking going forward because, I guess, despite you guys talking to the potential there, we've sort of heard a little bit of that before and we are sort of the year on. And I'm just trying to understand from the outside looking in, what those tangible changes have been over the last 12 months. And then, when we think about what your neighbors and your peers in the sector are doing, they're upping exploration spend, they're putting capital into tool drives. Are we at the stage here, especially with the balance sheet, looking like it could be ungeared fairly soon, you could justify more capital here at Mungari? I'm just trying to understand, really, is there a potential for a step-change here on the horizon at Mungari? And if not, what really does make it core for you guys?
Thanks, David. I'll answer it briefly and then hand over to Glen with respect to Discovery. But I guess, our sense is that we are spending the right amount of money at Mungari. We have a well-funded program. Glen joined us a couple of years ago. He's really set the science, in some ways, in motion. We have over 30 prospects to drill. My understanding of that district is that you're just going to keep turning over these prospects and make sure you're doing the right thing and the right level of work. But you got to keep spending and keep drilling and hopefully, eventually, you'll have success. Now you're right, we have not yet had that. But I think the signs are sufficiently encouraging that certainly as a board and as a company, we are prepared to continue and be committed to that. And it's an interesting, in our view, an interesting portfolio asset. We've obviously got this Castle Hill acquisition, which extends the mine life. But yes, getting to higher-margin ounces is a key driver for us over there. Glen, do you want to add something to that?
Yes. Sure, Jake. Well, I think, I'll just, David, reinforce what Jake said in terms of the exploration investment. We feel that it's right size at this point in time and this is just an example we -- in the FY '18 year, we invested $11 million to $12 million in Discovery and there's the incremental piece of resource definition drilling as well on top of that. So it's a fairly sizable program already. We've done well at -- on the sort of regional targets converting to the resources to reserves. And so that's sort of our lower-grade baseload production, which is really helped to extend the life of mine into the future. And the goal, as we've stated previously, has been to deliver the higher-grade mill feed that can sort of take it -- take our baseload production from 120,000 to north of 140,000 ounces. And so we've spent, I guess, the last 2 to 3 years exploring in the sort of south area, the tenement package, which is really some sort of Frog's Leg and White Foil over the south. What we're starting to understand is that we have opportunities for lower grade. That's not necessarily higher-grade in that part of the world. So those targets for us have sort of fallen down the priority list. We obviously, as we spoke earlier about the deep drilling under Frog’s Leg, so that'll -- we'll know more about that towards the end of the year. And then at the same time, we're trying to advance the opportunities in the Ora Banda camp where we see evidence of a similar geology to Frog's Leg. As I said, it's a very different location, but the geology is quite similar. And so we will keep those types of targets for us. We'll always at the list -- at the top of the list in terms of priority with the goal of being able to sort of supplement the low-grade resources from time to time with higher-grade discoveries. And then we'll carry over that strategy until we feel that we've exhausted our opportunities. And as Jake mentioned, we still got 30 targets on the list that we're working through.
David, I'll just also add one final comment to that. I mean, I think it's a benefit of having the portfolio. The question you asked is a very important one and critical, when does something not fit in the portfolio. And I think we've demonstrated that we are willing to exit assets. We've done that with Pajingo, we've done that with Edna May when we felt it doesn't fit in the portfolio. Mungari, we still do believe has that prospectivity to become a significant contributor. It did contribute $24 million of net mine cash flow this year with quite a substantial investment in exploration. But we've demonstrated that we're willing to make those decisions. At this stage, we think the right thing to do is to continue with our strategy at Mungari.
Your next question comes from the line of Ranjeetha Pakiam from Bloomberg News.
Just a very general question for me. Gold prices have dropped to their lowest in a year in U.S. dollars. How does it affect Evolution and what are your thoughts on prices going forward in general?
Thanks, Ranjeetha. Look, I think we're one of the best positioned companies to actually prosper through a decline in the gold price. We're one of the lowest-cost gold producers in the world, and that's been the whole strategy. We recognize we're in a cyclical industry, and we want to be able to prosper through the cycle not only when the gold price is going up. Now as an industry participant we all hope that the gold price does go up, but as it's demonstrating at the moment, that's not always the case. Our strategy has always been around ensuring that we have a portfolio of assets that are high-margin, low-cost assets that will allow us to prosper through that cycle, and I think these results really demonstrate that to a large extent.
Great. And any thoughts on gold prices going forward? I mean, do you think, with what's going on with trade issues and things like that, that still languishing at a 1-year low?
I don't have anything really of value to add that other market participants couldn't on that front. Yes, other than I'm in a camp that -- of course, I hope the gold price goes up. But we aren't going to build the business and plan the business around that.
Your next question comes from the line of Matthew Hocking from JPMorgan.
Just a quick question for me on the FY '19 guidance. And obviously, one of the key inputs for your business is the copper production and the price assumptions that have been used. Could you just provide some more details, firstly, on the price assumption using FY '19 guidance? I note that you realized AUD 8,900 a tonne in FY '18. And then just secondly on the copper output, I know you don't guide to copper production, but I do note that one of the assets that did outperform in FY '18 was Ernest Henry. And if I just look at the gold production, at least, it exceeded guidance, up 9% versus the midpoint. And I'd assume that, that same type of outperformance has been realized in the copper production as well. Is there -- can you give any indications as to what the copper production assumption is in FY '19? And also, is there any reason why these productivity gains at Ernest Henry shouldn't continue into FY '19?
Lawrie, do you want to answer that or you're happy for me to take it?
[indiscernible] For the FY'19 guidance, the copper price [indiscernible] was [ AUD 8,800 ] a tonne. The production, we would see lower copper obviously with some lower production both at Ernest Henry and Mt Carlton. We'll get the ranges in August, but it's possible to be about up to [ 2,000 tonnes ] less production in FY '19 than FY '18 in copper. Then we'll have -- we will put the copper guidance out in August. And in terms of the performance, Ernest Henry, when we did the budget for FY '18, was planned at about 6.5 million tonnes per annum, mining and processing. At the half year, and making the calendar year budget, that will be updated to 6.8 million tonnes, and we would expect given we've got their budgets for FY '19, they're going to be able to sustain that at 6.8 million tonnes in FY '19. But there is an expected lower grade.
Got it. Okay. So that 2,000 tonnes of lower copper production in the year is a function of grade not productivity.
Not productivity. And that is mix between Ernest Henry and Mt Carlton.
Matt, there's one additional comment I'll just make in that in FY '18, we are fortunate enough to produce the most amount of copper in the 2 quarters when the copper price is highest.
Your next question comes from the line of Darren Gray from Fairfax Media.
Look, a couple of questions for you Jake. Cutting straight to the chase, what's the secret? How do you keep beating your production and your cost guidance year-after-year. It's a very good record. How you do it?
Okay, Jake and Bob have accidentally disconnected. So we'll just wait for them to rejoin.[Technical Difficulty]
Okay, we've been rejoined by Jake and Bob. Please go ahead.
Sorry, we dropped off the cord.
No problem, Jake. Did you hear my question or do you want me to just repeat it?
I did not. I'm sorry. Yes.
All right. Okay, now. It was a simple one. It was along these lines, what's the secret? How do you keep beating your production and your cost guidance year-after-year? It's an impressive record. What's the secret?
We have a great team and we have great assets, and we have a strategy that is focused on quality of production rather than quantity. And we're focused very strongly on ensuring that we continue to seek to upgrade the quality of our portfolio. We've done that, and we will continue to do that. But the biggest contributor is that we have a wonderful team and group of people working for Evolution.
Terrific. And early in the call -- I've got a couple of more questions, they're pretty brief. Early in the call, you told us how pleased you were, and I think I've got the terms right. But you now had an average mine life of over 9 years. I'd just -- I'd like you to talk about that a little bit. What kind of a footing does that put the business on? And what kind of certainty does it give the business?
I think one of the keys, from an investor perspective, Darren, and from a corporate perspective is an ability to plan longer term and also to be able to sustain cash generation. The best way you can do that is to have long-life, low-cost assets. And that's really been part of this whole upgrading the quality of the portfolio strategy. So we exited Edna May and Pajingo, which we're smaller, shorter-life assets, and we've acquired Cowal and Ernest Henry in the last 3 years. So it's really been around ensuring that there's a continual focus on upgrading the quality of the portfolio, making sure that you have a longer runway to plan things, you give Glen and his team sufficient time to really extract the greatest potential out of these assets, because the best thing that we could do is discover more ounces and we need a well-funded, well-structured scientific approach to exploration, and having a longer mine life gives you that opportunity.
Terrific. And lastly for me, I noticed you made a remark during the call about 2018 being a bonanza year for the business. I'd love you to expand on that. And I realize I might be recapping some of the things you've already said, but I'd love you to explain why was the financing...
Our original cost guidance is $820 to $870 an ounce. To get -- and that would have been exceptional. To get below AUD 800 an ounce. I think that's USD 620 an ounce. If you compare ourselves to the global majors, we'd be hundreds of dollars below their average cost of production, that's a bonanza year for me. We've talked a lot about catalysts and things. Obviously, the Discovery success would be a major catalyst. But I'm not sure why in the gold industry cash flow and cash production isn't the greatest catalyst.
We have a follow-up question from Jim Pollock.
I think this is one more for Bob Fulker. What's the realistic throughput capacity for Ernest Henry per year?
Thanks, Jim. I think the plan that we've got is a sound plan. And the management and the relationship we have with them is really well-managed. And I think they actually are doing probably what they can from the ore body and the plant itself. But Lawrie, do you want to add anything else to that?
Lawrie may not be there anymore.
I mean, what I'd say is that it's mine-constrained, it's not plant-constrained, and that the asset is being very well-run by Glencore. They've done a terrific job and have exceeded our expectations at every juncture since we've owned this asset.
Right, good. Okay, that's clears the question up for me. Because just looking at it, I wondered whether it was mine-constrained or plant-constrained. But on an $8 million tonne a year throughput, in the last quarter, you're only running at sort of 80%, 85% capacity. With that presumably is because you don't have enough ore or Glencore does not have enough ore to keep the plant running at full bore?
I think, as Lawrie said, Jim, they've done better than they expected. They've increased throughput, they're doing a great job.
I couldn't get off mute. The phone was playing up. I mean, it is mine-restricted. And when we entered in the deal in 2016, it was at 6.4. They haven't used to get it to between 6.8 to 7 without major capital investment in the mining area. Going beyond $7 million could require investments in the mine. And that's not something they're contemplating at the moment. It used to be an 11 million tonne capacity plant. We're on back to 8 when the open pit closed and $7 million is what they intend at the moment to keep it running at that sort of the upper limit.
Good. Excellent. A question on Mt Carlton. It had a wonderful quarter in the June quarter, and I think I heard you say or someone say it would switch to relying more on stockpiled materials for -- from here on.
No, no, that's not right. No, Mt Carlton [indiscernible]. Mt Carlton's reserved grade is 4.7 grams per tonne. We've been mining about 5.5-plus grams and because we had some bonanza grade, 4.7 grams per tonne open pit in North Queensland, wonderful high-grade, low-cost deposit.
Particularly with coppers as a sweetener as well?
Yes.
I presume that would be, from here on, if you're relying on stockpiles...
We're not relying on stockpiles at Queensland.
All good, all good. Good. Okay. So we can expect another good quarter from Mt Carlton next quarter or the current quarter.
$850 to $900 an ounce is our FY '19 guidance from a group basis.
Okay. Look, just final question. Jake, going to Diggers in a few weeks' time. Would it be possible to have a chat with you?
Sure, sure.
Good. Okay, you'll be available over the 3 days.
I'm not sure at this stage, but we'll make a plan.
There are no further questions in the queue. Please continue. Thank you.
Thanks very much, everyone, for joining. I think we've broken another record, our longest call ever. But I appreciate the time and efforts you've made and we'll speak to you soon with the release of our financial results. Thanks, everyone.
Thank you, sir. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating, you may all disconnect. Thank you.