Evolution Mining Ltd

ASX:EVN

Q4-2025 Earnings Call

[Operator]

Thank you for standing by, and welcome to the Evolution Mining June 2025 Quarter Results. [Operator Instructions]

I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead.

[Lawrie Conway, executive]

Thank you, Mel, and good morning, everyone. I'm joined today on the call by Matt O'Neill, our Chief Operating Officer; Glen Masterman, our VP, Discovery; and Peter Rocio O'Connor, our GM, Investor Relations.

Today, we released our June quarterly report and an exploration update, which will be the reference point for the call. Glen will take you through the great exploration results we've seen at Mungari and Northparkes, which is providing us with confidence about further resource growth at both operations a little bit later.

The June quarter has been another busy and successful quarter at Evolution. It rounded out what has been an excellent year for us. Upfront, I want to thank all of our employees and contractors who have enabled us to safely deliver on our plan in a much more consistent and reliable way.

The 3 charts on the first page of the report and the sustainability chart on Page 2 perfectly depict the year's performance, including the consistency quarter-on-quarter. With our TRIF improving 35% over the prior year and reaching its lowest point at just under 5%, it does mean that we have delivered our plan with a strong focus on safety. We have met our original group guidance, generating record cash flow, which has hit the bank account to further improve the balance sheet flexibility.

We produced 182,000 ounces of gold and 19,000 tonnes of copper at an all-in sustaining cost of $1,562 per ounce. For the year, we produced 751,000 ounces of gold, 76,000 tonnes of copper at an all-in sustaining cost of $15.72 per ounce for continuing operations. It is to be noted that the all-in sustaining cost included an additional $40 to $45 per ounce for royalties that were due to the higher-than-planned gold price. However, we will take the net additional revenue of $950 per ounce any day. You'll see the word record multiple times in the report. This is because we have broken many, be they safety, operational and financial.

Our group cash flow for the quarter was $308 million at a margin of over $1,700 per ounce. For the year, we generated just shy of $800 million of cash at an achieved gold price that is $800 per ounce below the current spot. The group cash flow was underpinned by the $2.3 billion of operating cash flow generated during the year.

I want to call out Cowal in terms of the operational cash flow. Ten years ago, tomorrow, we received New South Wales government consent to acquire Cowal and a week later, we took ownership. We paid just over $700 million to acquire the operation. This investment and all subsequent investment has been repaid. Last year, several people said that the best days of Cowal may be behind it. While in FY '25, it delivered $855 million in operating cash flow, more than we paid for the asset and $600 million of net mine cash flow. Having approved the OPC project in April with a 35% to 70% rate of return, it is abundantly clear that Cowal has many more decades of significant contribution to Evolution.

We ended the year with $760 million in the bank. To evidence our continued discipline to capital management, we repaid all of our FY '26 debt commitments of $145 million on top of the $75 million FY '25 commitments. We also paid our 24th consecutive dividend during the quarter. This financial performance resulted in our gearing improving to 15%, and we are now back in the normal operating gearing range. We should remember that our gearing was 25% at the start of the year which means we have improved by 10 percentage points or a 40% reduction. We successfully renewed our $525 million revolver facility through until August 2028 and this facility remains undrawn.

A couple of highlights during the quarter included the early commencement of commissioning of the plant expansion at Mungari, the approval of the Cowal OPC project and the appointment of [ Fran Summerhayes ] as our CFO. I'm looking forward to Fran joining us in September.

Turning to our FY '26 group guidance. We have released our key group metrics today and will provide full details with our financial results next month. In short, the way I would describe the FY '26 group guidance is a rent and repeat of what we did in FY '25 to safely deliver high-margin significant cash flow. Our group production is guided at 710,000 to 780,000 ounces of gold and 70,000 to 80,000 tonnes of copper, which is the same as last year. The difference will be in where the production comes from this year.

In Mungari, we'll be ramping up to the 200,000 ounce rate, while Cowal will be completing the mining of the ore in Stage H, Northparkes completed mining of E31 open pits in FY '25, and Ernest Henry will see planned lower grades. We have continued our focus on costs and expect to see about a 4% inflation impact, which equates to between $105 and $125 per ounce.

Cowal and Northparkes will be utilizing a larger proportion of stockpile ore during FY '26 that was predominantly built up during FY '25. Due to the completion of Stage 8 and the E31 pits. This will result in a higher noncash cost component of the all-in sustaining cost in the order of $75 to $90 per ounce. These 2 items are the drivers to the movement from the FY '25 all-in sustaining cost to FY '26, which is guided at $17.20 to $18.80 per ounce.

I note that a number of analysts are quoting a 15% increase in our all-in sustaining cost. However, our all-in sustaining cost is reported on a by-product basis. These 2 changes I just spoke about are the main drivers to the FY '26 all-in sustaining cost change, of which the cash component is increasing due to inflation by 4%. This equates to $85 million to $95 million cash impact on our operating spend of around $2.1 billion. It is not a 15% change.

The movement in our operating cost equates to $130 to $140 per ounce change in the gold price. And remember that the spot price is $800 per ounce higher than what we achieved last year. Therefore, we could make up the operating cost increase in the first quarter of FY '26 if the gold price holds at the current levels for this quarter.

Our FY '26 all-in sustaining cost guidance will still see us as one of the lowest cost producers in the sector. Our group capital investment is guided at $780 million to $980 million, which at the midpoint will be around $200 million lower than our FY '25 investment. As we head into FY '26 with a continued focus on safe, consistent and reliable delivery, achieving our plan will result in another year of significant with material upside at the spot gold price.

With that, I'll now hand over to Matt to take you through the operational performance.

[Matthew O'Neill, executive]

Thank you, Lawrie. As noted, the final quarter of financial year '25 capped off a great year for our operations, with all sites safely delivering to plan. Over the 2025 financial year, as noted earlier, we set a number of new records for safety, production and financial outcomes. As I talked to at the last quarterly update, the consistency and predictability we are seeing in the operations now is built on the back of teamwork and collaboration, not just at the operations, but more broadly across the wider Evolution team. and is a credit to everyone involved.

Our goal remains the same. We say, we do, we deliver, and I'm very pleased to say that I think the Evolution team has done that this year. We placed a strong focus on safety and sustainability over the course of the year. And pleasingly, this effort has shown in the results we have achieved with the headline number being the 35% improvement in our TRIF. And pleasingly, all of our operations contributed to this. The rigorous and disciplined approach to safety from everyone is evident across both the leading and lagging indicators. The TRIF noted before is our key lagging indicator. And one of the key leading indicators that we use is outstanding material risk actions, and I'm happy to be able to say that this set at 0 outstanding actions as of the end of the financial year.

We also achieved a number of operational milestones during the quarter. Most pleasingly, in the year where we saw a rising gold price, we achieved our full year guidance for production, ensuring we bank the benefits of the high gold price as evidenced in the financial results. Mungari 4.2 commissioning continued with ramp-up to full production well advanced, and we commenced the OPC project at Cowal post Board approval in the March quarter.

There are a few items that are worth calling out in our group production numbers for the June quarter, and these are: the mill shutdown at Cowal, which saw the reduced output from the operation over that quarter; the commissioning of the new mill at Mungari, which as you can see in the quarterly numbers for that operation is starting to show the benefit; the continued consistent performance at Red Lake, which this year had its best year under Evolution ownership and set a number of records, including net mine cash flow ore mined and processed and gold produced. Also worthy of a call out is the continued cash generation from Mt Rawdon, which continues to contribute to the group.

Moving into the financial year '26, we're in a good position to repeat financial year '25. And the operational focus remains the same, continued safe delivery to plan. We have exciting long-life operations, each with opportunities to grow or extend as evidenced by the exploration announcements Glen will talk to next. and also the project pipeline noted in our quarterly announcement. We will continue to do the work required to ensure we achieve the full potential of each of our operations.

I'll now hand over to Glen to walk through the exploration updates.

[Glenton Masterman, analyst]

Thank you, Matt, and good morning, everyone. I'd like to turn your attention to our exploration announcement, which was released this morning in addition to the June quarterly report. Firstly, I want to take you back to August 2023 when we first introduced the Genesis discovery at our Mungari site visit during diggers and dealers that year. A few of you will remember the revealing of the gold-rich stockworks land along the wall of the ore drive, which signified the very top of the newly discovered Genesis pain.

Since then, our drilling has also discovered the Solomon vein shown in Figure 1 of this morning's release, which is parallel to and in the hang wall of the Genesis orebody. Together, we had reported a mineral resource of over 300,000 ounces of gold at an average grade of 10 grams per tonne contained in both vein [indiscernible]. The resource and growth potential are situated entirely on our 100% owned tenements at Mungari. We remain very excited about the potential to extend these vein systems along strike and at depth.as we're convinced we have unearthed the new mineralized corridor, which we expect should continue along strike towards the historically mined Barkers ore body shown in Figure 1.

This new search space spans a large volume of prospective geology which had never been effectively tested by previous drilling. We will continue to aggressively explore this area to expand the mineral resource into the untested gap towards markers with the aim of extending high-grade production well into the future. Positive results were also received underneath the Arctic pit, North of Millennium, also shown in Figure 1. The results are significant because we believe we have picked up the very well indebted stretch-like line of load under the pit with lots of room to grow it.

At Northparkes, we have been exploring along the stock margin contact represented by the pink unit in Figure 2. This contact is important because it is a localized in placement of copper-rich porphyries which are preserved at depths very close to surface. Our geological model is predicting the potential for the discovery of additional porphyry targets to be preserved at similar depths to major Tom and E51 in the vastly drilled areas highlighted by the red shapes in Figure 2. The Major Tom and E51 results confirm continuity of grade and volume geometries of copper mineralization at both prospects drilling programs have been extended into the September quarter to ensure the full extent of mineralization will be delineated at both targets before we commence resource modeling and optimization studies.

Elsewhere across the portfolio, Drilling has recommenced at the [ Concare ] North project near Ernest Henry in Queensland. Work is progressing on the recently acquired [ Corella ] project also adjacent to Ernest Henry. We are aiming to develop open pit copper gold drill targets on both projects within haulage distance from Ernest Henry with potential to utilize latent capacity in the processing -- Drilling also commenced in the June quarter on our slate Bay target near Red Lake. Slate Bay is hosted in rocks of similar age to Kinross great Bar deposit which were typically never previously considered to be prospective for gold until the discovery operate there. We have developed a sizable and strong [indiscernible] in this very underexplored rock package only 15 kilometers north of Red Lake.

Key points I want you to take away from the results released this morning are: firstly, that the high grades in drilling at Mungari increase our confidence of being able to sustain for longer the high-grade underground production at current rates or better. And secondly, we have confirmed the geological model at Northparkes that will lead to a potential pipeline of new copper-rich near-surface open pit targets with the ability to offer future operational flexibility and incremental production growth.

And with that, Mel, would you please open the line to questions?

[Operator]

[Operator Instructions] Your first question comes from Kate McCutcheon with Citi.

[Kate McCutcheon, analyst]

Good morning, Lawrie and Matt. Congrats on the strong safe results. I guess, across the portfolio, there's organic growth options across each of them. You've guided us to $750 million to $950 million CapEx spend over the next 5 years. And we've got 2. Can you talk through the staging of that CapEx, they start at a high level over that period, what that profile looks like and what projects come in and out or how the priority?

[Lawrie Conway, executive]

Looks like you want more than just the FY '26 guidance there, Kate. Look, I think our view there is the projects as they go through feasibility and then into execution, they're going to change. So that's why where we stand. Cowal is the main one. It's $430 million over the next 7 years. you'll see a fair portion of that come through over the next, I would say, 2 to 3 years as we do the bond at the north and then this other surface infrastructure and go to the south.

Then the next decision point comes into the Ernest Henry extension and then E22. As you know, we've got the hybrid study, which is -- and that will then be something the Board will consider in the first half of this year and similarly with the extension at Ernest Henry. I think the -- what the study team has been doing at Ernest Henry is working out -- it will now be more trucking -- it's down below the existing 1,200 level. So the capital pushes out a few years, but we need to get that final feasibility study.

So it's a long way of saying, at the moment, that $750 million to $950 million is going to be the average over the next 5 years. As these projects advance, we will be updating on that spend. But I would be taking that as sort of the average over the next 5 years.

[Kate McCutcheon, analyst]

And then at Cowal and Northparkes, that noncash component in all-in sustaining class I assume it's larger how that number? Is there anything you can say about that? Or can you talk to tons of stockpiles we should expect for the mills need at Northparkes and Cowal in terms of forecasting next year?

[Lawrie Conway, executive]

Yes. The short answer to that, Kate, is that it will be at Cowal. When you look at it, we got 1.5 million tonnes of ore at Northparkes from the E31 that will feed through over the course of the year, but the value of that are in terms of the overall production, considering you got 6.5 million tonnes, and most of it coming from the underground on a per ounce basis. I think the -- the only difference you have there is they produce less ounces than Cowal. So on a per ounce basis, it will be a relatively larger amount.

Then if you look at Cowal, we'll be into the third quarter is when we start to move into ore -- sorry, in the stockpile ore only, and that becomes the majority of the feed for the -- basically almost the second half of the year. So that's why it will be the largest proportion of that in to at $70 to $80 an ounce will be at Cowal.

[Kate McCutcheon, analyst]

Okay. Got it. But I have to wait until the full year before I will get the numbers by that. Is that right? .

[Lawrie Conway, executive]

Absolutely, you will. So it's $75 to $90 an ounce. But yes. If you look at it, Kate produces over 300,000 ounces out of 750. So on a per ounce basis in the group impact, it will be the larger portion.

[Operator]

Your next question comes from Daniel Morgan with Barrenjoey.

[Daniel Morgan, analyst]

First question is just on Ernest Henry. I know the extension study is complete did not release to us. And there's a PFS [indiscernible] but for the end of this year. And Lawrie, you just also intimated that there might be a bit more trucking in the near term, which -- if I put all of that together, does that -- is the crusher chamber and associated infrastructure, is that going to be deeper in the mine and therefore, longer life proposition. Is that what we're looking at here?

[Lawrie Conway, executive]

Thanks, Dan. I'll hand this over to Matt, but just briefly, yes, we will be tracking below and therefore, we have to introduce trucks -- more trucks into Ernest Henry that will look at their capital in FY '26. And that is the reason why the study went for a bit longer is to look at how we can best optimize the orebody and the reason it finishes in the June quarter, but the next board meeting is later in this quarter, and therefore, the Board needs to see the outcomes before the market.

[Matthew O'Neill, executive]

Yes. And without going into all of the detail, thanks Lawrie. But the study, I suppose, high level, and Glen has talked about it as we've gone through, is that there's been more mineralization at Ernest Henry come in. And so that study has included some of that. and that has an impact on what we do there to make sure that we maximize it. So the trucking does buy us a little bit of time. It does obviously tend to lend itself towards what you indicated, where does the crusher go. And that's really the key point of what we're talking about.

But going through the economics, the trucking works quite efficiently because it's not trucking to surface, it's only tracking back to the crushing horizon. I think that's an important point to note of what we're talking about there. But you will see some of that come through and study when it gets released.

[Daniel Morgan, analyst]

And just at Mungari, is there a live update of how well the mill commissioning is going when can we -- when might you expect it to be running at the 4.2 million tonnes in the ramp-up?

[Matthew O'Neill, executive]

Yes, I'll cover that one. It's going pretty well. We had a really good start and sort of a honeymoon period for a commissioning of a mill. Last month, we had a really strong month in terms of throughput. So there's been no major concerns that have come up. I would expect us to start seeing everything come to fruition sometime in the next quarter. But we've been able to achieve throughput and we've been able to achieve recoveries is just sort of betting in some of the things that you find as you commission a plant like that. So no material items that are slowing us down at this stage, which is really good.

[Daniel Morgan, analyst]

And just last question is that Mt Rawdon -- and I appreciate a small asset in the portfolio now, but it looks like you're going to be doing some processing of stockpiles into FY '26. When do you expect last gold production to be? How material is this? And you have provided group guidance for FY '26. I presume it's either a minor contribution to it or it's excluded from cost calculations, et cetera. Can you just outline that?

[Lawrie Conway, executive]

Yes. Sure, Dan. So what we've seen with where the gold price is sitting there is economic, very low grade material on the ground there at Mt Rawdon, we were able to process that through the last part of FY '25, and we'll go through the first part. So it won't -- it will be very minimal contribution in terms of that $710 million to $780 million. And then in terms of the all-in sustaining costs, we've quoted, that is on the ounces and costs for the continuing operations, so excluding Mt Rawdon.

[Operator]

Your next question comes from Hugo Nicolaci with Goldman Sachs.

[Hugo Nicolaci, analyst]

Congrats on the full year results. First one on Northparkes, maybe for Glen, just noting the open pit there is stopped and you got the stockpile material to process this year. Could you just give us a little bit an update on how you're thinking about when the next open pit developed. Is that something for FY '27 or more FY '28 as you chose between sort of E51 and Major Tom or E27?

[Glenton Masterman, analyst]

Sorry, got my mic on now. Yes. Look, I think that's probably a fair timing for the next open pit delivery, and that would be and the E28 Northeast pit. And what we're looking at trying to do with the exploration drilling and subsequent studies is to build this pipeline of open pit targets that we can for the most part, switch on and off when we need them to -- from a sort of flexibility operational standpoint. And if there's opportunities to introduce some production growth, we'll look at that as well.

[Hugo Nicolaci, analyst]

Great. And that's helpful color. And then maybe just one on cash flow given the focus there, some observations in terms of the quarter, looking like your corporate costs and D&A has stepped up significantly in the fourth quarter. I appreciate you're setting up a Brisbane office, you've got a number of studies running. How much of that step-up is sort of the underlying corporate versus the studies? And what do you think your corporate cost should be on an underlying basis going forward?

[Lawrie Conway, executive]

Yes. A couple of things in there driving that Hugo is there's some studies work and that we've done that are not being deemed as capital, so they fall into the corporate costs. And then as we get into June, you have a lot of true-ups across all of the departments. And so that's why that was higher in the quarter. And then in the D&A, you've got to take into consideration that we put out the MROR and therefore, you update your DNA for the whole 6 months based on the latest. And so with some of the changes in the MRR, the depreciation per ounce will look a lot higher than normal but the full year D&A gives a fair indication of what they are starting as the base going into '26.

[Hugo Nicolaci, analyst]

Got it. And then just if I can on the cash flow piece, it looks like your cash tax in the second half was a fair bit lower than what would have been implied by your first half reporting. Do you expect any catch-up there? And then also on working capital, the $100 million build in the quarter. What are the moving pieces in that? And do you expect that to unwind?

[Lawrie Conway, executive]

Yes. So tax quite simply is that we make our installment payments monthly. and then we make our final payments in the December quarter. So that's why you'll see the second half is generally lower than the first half because you have that final payment for the prior year tax returns in the December quarter. In terms of the working capital, I look at it from an annual basis to start to try and keep it simple. And what we really have is our working capital movement in the year is $25 million, $35 million either inflow or outflow.

But it's heavily impacted on concentrate sales at Ernest Henry and Northparkes nowadays. And when you see in the June quarter, we had a Northparkes shipment that fell from the last week of June into the first week of July. And therefore, the sales, as you'll see for Northparkes for the year were less than the production for the year, and therefore, our receivables were lower. And Ernest Henry, we received a settlement in June that was actually expected in July. So the combination of those reduced our receivables by about $40 million to $60 million, and that would have brought us back into the normal range just in that perspective.

But in addition to the receivables, the June quarter, you'll see that our -- we had a higher major capital spend in the quarter, and that was really related to projects finishing and new projects starting and we've got project client progress claims and deposit requests coming through in the back end of June resulting in higher payables. So you'll see that -- those 2 combined to drive the working capital movement in the June quarter. But as I've said, those concentrate sales are the ones that really drive it on the annual basis.

But as we look forward in the unwind, you'll see we received the payment for that Northparkes shipment in this quarter. and that for that will offset some of the payables that would go out. So you won't see the full $98 million in the September quarter. and concentrate shipments really and the timing of them are the ones that drive our working capital movements quarter-on-quarter.

[Operator]

Your next question comes from Paul Kaner with Ord Minnett.

[Paul Kaner, analyst]

Firstly, just on Cowal, I think there was an underground roof collapse there back in March. Just sort of want to know what the ground conditions are like there as you continue to ramp up the underground operations? And I guess any learnings or changes in procedures following that incident?

[Lawrie Conway, executive]

Thanks, Paul. Matt will take that.

[Matthew O'Neill, executive]

Yes. No problems. So yes, without going into a huge amount of detail on the incident, we're still -- it's under investigation at the moment, and then you'll have seen the department notices on that. The -- what we've done in the short term, we did take some actions to stop some of the areas until we finish our investigation around the geotech. Once we've completed that, we changed some standards on ground control in some of the drives depending on the orientation.

But at this stage, that's probably all I can really talk about there. It wasn't -- we haven't seen anything majorly different across the whole operation, if you I mean we did have that as an isolated event, but we have done -- taken steps to make sure we put probably more conservative back into some areas short term.

[Paul Kaner, analyst]

Yes. No, understood. And then just another 1 just there on the stockpile adjustments for 2016 at both Cowal and Northparkes, just double checking that, that $75 to $90 an ounce that's included in your all-in sustaining cost guidance for '26?

[Lawrie Conway, executive]

Yes, it is.

[Operator]

Your next question comes from Ben Lyons with Jarden.

[Ben Lyons, analyst]

Just one further one on the cash flow statement, please. Noting the early repayment of $145 million just given the very attractive structure and cost to offer a lot of your facilities. Just wondering what your intentions may be what you intend on making sure the early debt retirements or possibly just growing the cash balance going forward?

[Lawrie Conway, executive]

Sorry, Ben, it was just a little bit hard to get that last part of the question.

[Ben Lyons, analyst]

Just around whether you intend on making further early debt retirements or growing the cash balance.

[Lawrie Conway, executive]

Yes. Thanks, Ben. No, look, our view is that we'll continue to balance out between the capital investment, the debt repayments and dividends. We don't see a lot of value in building up a large cash balance. As I said, we're back at 15% gearing well into the range that we see as our normal operating. I would expect that we'll continue on reducing those debt term lines earlier.

[Operator]

Your next question comes from Al Harvey with JPMorgan.

[Alistair Harvey, analyst]

Just on FY '26 guidance. Wondering if you could just step us through the downside and upside scenarios that would take you the ends of the 710,000 to 780,000 ounce range. Is it primarily around the speed of the Mungari ramp-up or something else in the portfolio?

[Lawrie Conway, executive]

Al, I am going to not deflect that one to Matt because I think give you all the downsides and not the upsides. But look, I think we can talk about that in August when we go asset by asset. But our position is that we want to continue what we've done over the last 12 months and really the last 18 months, which is deliver consistently quarter in, quarter out. There are things that can be the downside, but our focus is on just delivery each quarter safely getting those ounces and copper tonnes out.

[Alistair Harvey, analyst]

Sure. And maybe are you able to share the FY '26 copper price and Australian dollar assumptions?

[Lawrie Conway, executive]

Yes, it's in the report. AUD 4,400 an ounce for the gold royalty price assumption and AUD 14,500 a tonne for our copper byproduct credit.

[Operator]

Your next question comes from Mitch Ryan with Jefferies.

[Mitch Ryan, analyst]

First question. Obviously, the 2 key studies completed during the quarter, still need to go to the Board. So I'm assuming that those -- the CapEx associated with those is excluded from the FY '26 guidance at this point in time. Is that correct?

[Lawrie Conway, executive]

In terms of studies and the like, they are included is the trucking requirements that we have for Ernest Henry. In terms of E22, nothing material in the guidance and in terms of -- but we're not expecting any execution in FY '26.

[Mitch Ryan, analyst]

Okay. Perfect. And then obviously, the OPC project commenced in the quarter. Have you commenced the bundle will move as part of that? And can you progress in the stage without the bundle or move? .

[Lawrie Conway, executive]

So the second part, yes, Stage I progresses without the need for the bundle to be a place. And in the first part, we were fortunate we had the Board out there in the last week of June as part of their annual visit. And a few days afterwards when the works on the bundle will commence. So they actually saw the contract of mobilizing the site while we were there in the last week of June.

[Mitch Ryan, analyst]

Okay. I guess we've sort of been given capital numbers, if I recall correctly, around it happening in the dry conditions being conditions. Have we got that sits inside that $430 million.

[Lawrie Conway, executive]

Yes. So the $430 million allows for the Northern Lake production but to be done as a wet move and the southern that's intended as a dry move, but that's a few years away. And based on where it is, we'd expect the water to have receded enough.

[Operator]

Your next question comes from Andrew Bowler with Macquarie.

[Andrew Bowler, analyst]

Apologies if you've already answered this. I got booted during Dan's questions. The first one for me, you provided some broad color from the major operations into next year. Just wondering if you can provide similar commentary on Red Lake. I mean I think comments in the past is that asset long-term potential of roughly 140,000 ounces per annum. Is that still where the thinking is? And is that the sort of run rate you expect to achieve in '26?

[Lawrie Conway, executive]

Thanks, Andrew. Sorry, that Dan kicked you off the line. In terms of Red Lake, I'll hand to Matt to talk about the operation and where it's going. I was there a couple of weeks ago and just seeing that they're definitely getting more resilience into the operation and being able to get more consistency. What we want and it hasn't changed for the last 18 months. We want 30,000 to 40,000 ounces quarter in quarter and safely delivered and generating positive cash. We saw that through last year. And Matt, do you just want to talk about then what that does going forward?

[Matthew O'Neill, executive]

Yes. I think you covered it off in terms of -- the real key for Red Lake is about making money. And so that continues to be the focus rather than chasing a target is probably the message to keep giving the team at that operation. And they've been able to do that this year. So the 30 to 40 in each quarter, obviously, you do the math on that and you get your range, but that's still the thinking. It's still probably an exciting asset.

And I know Glen would be pretty keen in terms of geology and what we still see available there, for me, I still look at that as one of the exciting ones. We've got to earn the right and have consistent delivery and making some money to be able to go and chase that. So that's kind of the process for at least the next 12 or 18 months to be at Red Lake.

[Andrew Bowler, analyst]

And on to Mt Rawdon, I mean, last quarter, you commented that you were going to see stockpile production in the fourth quarter of FY '25, you're doing a final tails dam lift and it seems to be an implication that -- sorry, an inference that production will continue into '26. I assume that's the material and is that included in the overall group production number for FY '26?

[Lawrie Conway, executive]

Yes. Andrew, that was a question of Dan's. So Mt Rawdon, based on the metal prices, will continue to process some low grade material through the plant because it does make money as a quarter. We'll see that tail off through the next couple of quarters. The ounces are included in the 710,000 to 780,000. They're not material ounces in terms of a group perspective. It will be a lot less than what we did the 35,000 ounces last year. And in terms of our all-in sustaining cost, the ounces and costs of the other assets are the only ones that are included in terms of the AISC.

[Operator]

Your next question comes from Alex Barkley with RBC.

[Alexander Barkley, analyst]

Lawrie and team, just a quick follow-up question on Red Lake around the reserve rate to line. Are we able to give some breakdown of which mine areas that go at and why was -- why did the update is there now?

[Glenton Masterman, analyst]

Yes. So Alex, you're referring to the MRL reserve grade at Red Lake, just to...

[Alexander Barkley, analyst]

That's right. Apologies. I don't think we've got a call since then. So just interested on the guidance going forward.

[Glenton Masterman, analyst]

Yes. So there's a couple of things to on the reserve grade. And I think what we've done in the underground is really to sort of fully understand the full potential of the resource and how that's going to convert to a reserve. So a couple of the drivers there that have really sort of driven will affect impacted cutoff grades. So we've seen inflation come in.

But also as we've started to open up in the underground, we've seen that we've had swings and roundabouts, and we're not seeing the type of continuity that we had assumed in the drilling space at the time. So these have driven -- these have driven changes to both the resource and the reserve. And so what we've done on the reserve is to look at the resource to sort of maximize the full reserve potential.

Now in fact, what that enables us to do is then to expand that we're currently mining to. And as Lawrie mentioned earlier, in terms of what we've been doing in the last 18 months, it's really to start to look at how we -- how to generate cash flow and that is what that is switching us to is mining at a higher cutoff grade, mining it more selectively as we sort of progress at Red Lake.and mining to a grade that's in the plan is going to be higher than the reserve.

Now what enables us to do that in the plan is that we do have a resource that sits there at higher grade. We need to upgrade the drilling classification on that. So we've doubled the drilling budget in FY '26 to enable us to do that. That will convert to reserve and allow us to then sort of narrow that gap between what we see in the reserve grade, which is lower than what we had in the plan.

[Operator]

Your next question comes from Matthew Frydman with MST Financial.

[Matthew Frydman, analyst]

Sure. Lawrie and team, I might continue with Glen while he's got the mic. And can I ask on Mungari in the context of some of your commentary already this morning and also the recent MROR update. Obviously, you're finding more high-grade underground material from Genesis continuing to add tonnes to the reserve there. So I guess, looking forward and now that the mill project is largely completed, how do you think about the splits in terms of feed between underground, open pits from Castle Hill and other areas?

Does that change going forward now that you've got more confidence in the underground. I think previously, you said you expect it to be about an 80-20 split between open pit and underground. As I said, does that change now going forward? Is there any consideration in that of feeding 100% evolution owned dirt versus EKJV dirt into the mill. And I guess bigger picture is the near-term target still that sort of circa 200,000 ounces? Or as you suggest, Glen, does this discovery more kind of add to the runway or add to the length of time that you can operate at that level in the future? Does it sustain that production level for longer?

[Lawrie Conway, executive]

Yes, Matt, Glen will talk about the exploration potential. I think in terms of an operating standpoint, the 80-20 is still the expectations in the plan of the split between the open pit and the underground. Glen's role is to get the 20% to 30%, and therefore, we get more production out of Mungari. In terms of the joint venture, I mean, our EKJV, operates, it's operating well. We do the campaign processing of that material, that will continue as we go forward even under the expanded plant. Do you want to talk about that ground?

[Glenton Masterman, analyst]

Yes. And I think in terms of what we saw, Matt, you referenced the sort of the growth in the resource and the reserve in our MROR statement. A lot of that was driven in the open pits we have captured some of the resource growth that I spoke about in the underground this morning. That is included, but most of that growth was driven the open pits, and that was with the drill bit and metal prices has also helped increase there. I think from what we're seeing at the moment in the extension of these veins is and continuing to delineate and grow the resource is really, really important to us.

And as Lawrie alluded to, I think the first trick that we want to be able to succeed at is actually extending that 20% contribution for as long as we can into the future. And what we're doing with the results at the moment is confirming we can. So we want to be able to get that underground production to match the open pit production in terms of its ultimate mine life so that we always have that 80-20 contribution.

Now assuming we're good enough, and we make more discoveries in the underground, which we believe we will then there's the opportunity to think about how we all increase the underground production rate. And I think what the result both from Genesis and its extension towards Barkers and then at Arctic, which is further north of Millennium. We're starting to see that we have that opportunity to deliver on both fronts.

[Matthew Frydman, analyst]

Yes, understand. Glen, that's pretty clear. Can I ask just a quick one while we're on Mungari. The processing cost and all-in sustaining cost of $91 an ounce. I'm assuming that, that largely represents the capitalization of most of the processing costs, while obviously, the mill expansion is ramping up, and you've alluded to commercial production in the first half. So should we expect that processing costs as a function of all in sustaining cost will lift once you declare commercial production, but obviously offset by the growth CapEx rolling off? I hope that all made sense, but I'm just wondering what the $91 an ounce relates to?

[Lawrie Conway, executive]

Short answer there, Matt, is no. It isn't the capital for the plant is in the major capital section of the cost per ounce. The higher cost per ounce at Mungari is on 2 things. You're putting -- you are in a commissioning phase and you're putting through lower grade material through that phase. And then we also have toll treated some material that was of our old low-grade stockpile material that will come through into a processing cost as well. But what you'll see in FY '26 as we move to the 4.2 million tonne rate, the cost per ounce will reduce, particularly in the processing area. That's where we'll get the economies of scar.

[Matthew Frydman, analyst]

Yes. Okay. I understand, Lawrie. Perhaps I didn't express it clearly. But in the quarter, you declared that your processing cost per ounce at Mungari was $91 an ounce, which seems artificially low. So I'm just trying to understand what drove that, whether that was recognizing revenue.

[Lawrie Conway, executive]

In that regard, yes, some of those commissioning costs get backed out and capitalized. So though you meant the actual construction costs.

[Matthew Frydman, analyst]

So yes, that Yes. No. Sorry, I mean -- I meant the impact to all-in sustaining costs. So I assume partly that capitalization continues until you declare commercial production?

[Lawrie Conway, executive]

Correct.

[Matthew Frydman, analyst]

Okay. I understand. And then maybe just lastly, I suppose, on capital management and capital returns. Obviously, you've mentioned on the call that you're quite comfortable with the balance sheet flexibility. Obviously, the gearings come right back into the range. Just thinking about how that translates to capital returns at the end of the financial year. Obviously, you enjoy a tax shield benefit on some of those cash flows that you generate, particularly out of Northparkes. I guess wondering whether, in your view, the franking balance and generation support continuing to pay out 50% of cash flow as the policy sort of dictates? Or are there other options? Remind us of where buybacks sit in terms of the capital return framework. And is that something the Board might consider?

[Lawrie Conway, executive]

Yes. A short answer to that, Matt, is we -- each time we sit down with the board and look at our policy. We'll do that in August. I think the last couple of halves, we've made the call that our policy, we think, is working well, where 50% of our cash flows are going back to our shareholders, and we use the balance for the reinvestment in the business. reducing our gross debt levels. I don't think you're going to see much of a change.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks.

[Lawrie Conway, executive]

Thank you, Mel, and thank you, everyone, for taking the time to join us on the call today. We certainly had a great quarter to finish the successful year, which improved in not only the safety and the consistency but also in the exploration and projects areas and generating significant cash flow as we've seen today. We'll continue to apply that cost and capital discipline, and we'll see that flow through into FY '26 and look forward to updating you next month on our full year financial results. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.