Regis Resources Ltd

ASX:RRL

Earnings Call Transcript 2018-Q3

[Mark John Clark, Executive Chairman & CEO]

Thank you very much. Good morning, and welcome to Regis' Investor Conference Call to cover the company's March 2018 quarterly report and exploration update.I'm joined on this call by Kim Massey, CFO; Paul Thomas, COO; and Myles Ertzen, Executive General Manager of Growth, who will all be available to answer questions after the formal part of this call.Please note that all references to dollars in this presentation are Australian dollars.I'll start the presentation with an overview of operating results for the Duketon Gold Project for Q3. Q3 gold production was 85,331 ounces of gold, which was down only 7% from the all-time record of over 92,000 ounces in Q2. Production was at a run rate in the middle of our guidance range. Year-to-date production is at now over 269,000 ounces, which has allowed us to refine our full year guidance to the top-end of the guidance range with full year guidance now 355,000 to 360,000 ounces.Q3 throughput and recovery were consistent with Q2. As flagged last quarter, Q3 grade was down to 1.15 grams per tonne, down 6% from Q2 and this was the result of the Gloster satellite pit having mined through the supergene zone and now in the life-of-mine fresh rock grade. We were also hampered by 22 rain days, which impacted our capacity to haul a high-grade satellite ore across the projects.Q3 stripping ratio was up from 3.3 in Q2 to 4.6 in Q3, and this was the result of commencement of pre-strip mining at the high-grade Tooheys Well satellite pit in the quarter.Q3 cash cost was $752 per ounce, and all-in sustaining cost was $906 per ounce. The all-in sustaining cost was 6% higher than the record Q2, but both cash cost and all-in sustaining cost were below -- well below the bottom of FY '18 guidance.Our Q3 operating cash flow was $71 million. So we're continuing the strong operating cash flow, which is underpinning our cash build and the strong dividend that we paid in the quarter.The charts on this slide are for the combined Duketon Projects, including the takeaways of steady state of the operations over the last 2 years. You can see the overall Duketon stripping ratio is high this quarter as we start the pre-strip of the next of our satellite projects, Tooheys Well, which is less than 3 kilometers south of the Garden Well processing plant. It's worth noting that Tooheys Well is also a high-grade project at 1.61 grams per tonne reserve grade and in FY '19, this will further offset the lower remaining life-of-mine grade at the Gloster satellite pit.Now looking at the quarter on a more detailed basis. Firstly, the Duketon North operations produced 22,724 ounces of gold at an all-in sustaining cost of $879 per ounce. As flagged last quarter, we did expect lower production from DNO in this quarter and next. As I've already mentioned, this is the result of the Gloster pit having now moved through the higher-grade supergene zone into fresh rock, with the remaining reserve grade is around 1 gram per tonne, which is what it was for Q3 at about 0.95 grams per tonne.The strip ratio increased in Q3 also, as we were scheduled to mine a higher strip part of the oxide pits at Moolart Well. Pre-strip mining will commence at a number of other satellite pits commencing in Q4, and we'll be moving an excavator from Gloster across through the first of those satellite pits. And as a result, we'll continue to manage the stripping ratio at round about this level.Q3 all-in sustaining costs of $879 per ounce were reflective of the lower grade and higher strip during the quarter, but still very competitive and within the first quarter all of the Australian industry.Now looking at the Duketon Southern operations where we produced 62,607 ounces of gold at an all-in sustaining cost of $916 per ounce, which was in line with Q2 in spite of 25 days of haulage of higher-grade Erlistoun ore lost to rain during the quarter. We do expect as a result of that higher production in Q4 as high grade from the Erlistoun starter pits is mined and processed. All-in sustaining cost of $916 per ounce was 3% lower than Q2. And the stripping ratio, once you take out the 924,000 BCMs of startup pre-strip at Tooheys Well, which has been included in growth capital, the stripping ratio net of that at 4.2 is steady with the Q2's stripping ratio as Erlistoun is now in a -- in the steady ore zones.Turning now to our operating cash flow. As I mentioned, the Duketon Project generated an operating cash flow for the quarter of $71 million, which is almost right on the average for the last 4 quarters. It is lower than the all-time record cash flow of $83.8 million in Q2, which was also contributed to further reversal of the high working capital investment in gold in circuit in Q1.The March quarter saw Regis achieved a delivered gold price of $1,688 per ounce compared to $1,655 per ounce in Q2.Cash and bullion holdings at the end of the quarter were $168 million, which represented an effective cash build of $38 million for the quarter after allowing for $40 million paid for the dividend and $1.3 million of land acquisitions. This was a strong cash build, only $6 million less than the $44 million in the previous record-breaking quarter.Turning now to a review of exploration at Duketon during the quarter. It was another really big effort from our exploration team, where will drilled in excess of 61,000 meters and turned out some great results that I'll talk to you now.We drilled over 23,000 meters of RC and diamond at the Rosemont and Garden Well underground targeting projects, and I'll talk to that in more detail shortly.At Baneygo, at one of our satellite projects, we completed over 7,300 meters of infill and extensional drilling, where we're looking to extend reserves at depth and along strike, and turned out some really strong results outside of reserves that I'll talk to you in a moment as well.At Moolart Well, we're now working in a concerted way to expand our reserve shells and look beyond our current reserves. To that end, we drilled over 10,600 meters of air core and RC during the quarter, designed to extend those reserve pits at depth. And you can refer the quarterly report for detail of that drilling, but suffice to say that really encouraging results that point towards extensions there.In terms of regional work, as I've said a number of times in the past, we're turning over a lot of regional targets within -- to the 20 or 30 kilometers of our milling facilities. In the current quarter, we turned out some interesting results at 2 prospects. Firstly, Little Well, which is about 5 kilometers north-northwest of Rosemont. First pass air core drilling there over a 3-kilometer lag anomaly turned out 8 meters at 1.23 grams per tonne and 4 meters at 8.3 grams per tonne.At Ventnor, which is 10 kilometers south of Moolart Well, first pass air core drilling there on a 5-kilometer lag anomaly turned out 3 meters at 5.92 grams per tonne and 5 meters at 1.72 grams per tonne. So we'll certainly be following up those results and drilling the extremities of those lag anomalies in Q4.Also looking at 3 of the projects, I mentioned above in more detail. Firstly, starting with Rosemont Underground. The Rosemont project has at least 2 plunging high-grade zones extending well below the final depths of our open pits. The deposit has a strike length of over 4 kilometers, which has been barely explored below open-pitable depth.As investors following Regis would know, we focused on 2 areas of underground potential in the last 18 months to 2 years in these areas immediately below the mining and south open pits. A concerted program of over 58,000 meters of RC and diamond drilling over the last 21 months has culminated in the Maiden Resource estimate for these 2 initial and discrete areas at Rosemont Main and Rosemont South.The geology at Rosemont has gold hosted in steeply dipping, quartz-dolerite unit intruding into a surrounding mafic's package. The quartz-dolerite unit varies in width up to 80 meters. And as you can see from these 2 cross-sections, we have numerous high grade -- have returned numerous high-grade intercepts. The other encouraging thing is that we've not seen the quartz-dolerite unit pinching out at the depth extremities of our current drilling.Over the last 2 years, we've been drilling these 2 discrete areas and this drilling has culminated in March 2018 with a Maiden Inferred Mineral Resource, which at a 2 gram lower cutoff is 1.4 million tonnes at 5.1 grams per tonne for 230,000 ounces, and pleasingly, in particular, the grade at Rosemont Main, which is the stronger grade area and an area that's very much limited by the extremities of drilling that we've got there, but certainly the grades of both projects are encouraging for underground mining proposition. We're currently completing a scoping study that will roll straight out into a full mining study and we expect to be in a position to make a board development decision by the end of the June quarter. And basically, the aim is to establish a viable underground mine on these 2 starting positions and then to grow the scale of mining inventory and operations from within that platform.I think this slide with a blown-up view of the long section for Rosemont Main shows clearly an example of the extensional resource opportunity at Rosemont. In this area, the deepest extremity of the resource is also the area with the highest gram meter grade intensity. The only current limitation to the extension of the resource in this area is simply data density. As I mentioned earlier, the resource between these 2 areas covers less than 1.3 kilometers of the more than 4 kilometers of strike and drilling is down to a maximum depth of 150 meters below current open-pit designs.In some target areas, particularly like this Rosemont Main area, higher-density drilling is required in order to extend resource estimates, and that infill and extensional drilling will continue parallel with and past the development decision.In other target areas, preferred drill collar locations are problematic around open-pit operations and infrastructure. And some of these drilling would be best done from within an underground mine development. So well, that's challenging, it can quickly become an opportunity as can be seen on the next slide with a conceptual mine development long section.Clearly, there's significant opportunity to conduct exploration and resource drilling from a potential underground development between the 2 zones of the current resource. Obviously, it'll be easier to hit targets from surface -- from within the workings then from surface or from within the open pit and will be much cheaper and quicker to do so.So I reiterate that the aim is really to establish a viable underground mine on these 2 starting positions and then to grow the scale of the operations from the sensible exploration from within the drive.So we're really pleased with how this underground position is shaping up at Rosemont and we're very optimistic that this work will ultimately see us commence an underground mining operation at Rosemont, from which we hope to quickly and cost effectively grow from within the drive once we're up and running.Just to round off the discussion on Rosemont Underground, I'll note that there was significant drilling completed in Q3, for which assays were not returned in time to be included in the Maiden Resource estimate. These results included 5.95 meters at 10.6 grams per tonne, 13 meters at 5.45 grams per tonne, 9 meters at 9.91 grams per tonne, 9 meters at 10.7 grams per tonne, 16 meters at 7 grams per tonne and 6 meters at 27.9 grams per tonne. So really quite exciting results during the quarter. And as I've said earlier, infill and extensional drilling is continuing at pace in Q4.As I mentioned last quarter, the ongoing success of our drilling of underground targets at Rosemont has given us the confidence to apply the strategy to the next logical target for underground resources at Duketon being the southern end of the Garden Well deposit. In this area, we've got very significant underground targets below the southern end of the pit. We're looking there at zones of continuous mineralization between 10 to -- 4 to 10 meters of true widths and at least 300 meters of strike and these areas of 10 -- 100 to 300 meters below surface dipping east and they're open to the south.The next slide shows some of the 2011 to 2013 Regis drilling in this area that originally spiked our enthusiasm for this opportunity. Some of these earlier results include 19.6 meters at 9.47 grams per tonne, 19 meters at 6.38 grams per tonne, 12 meters at 9.5 grams per tonne, 5 meters at 22 grams per tonne and 20 meters at 4.28 grams per tonne.As I've said last quarter, the reason we're drilling here is that the drill spacing currently at 40x40 meters is not suitable for underground resources. So the ongoing drill program is really designed to infill the high-grade zones, test for mineralization continuity and, ultimately, test for mineralization extensions to the south.The first 43 holes of this program into this target area were completed in Q3. That was out of 12,000 meters of drilling. Assays were still pending at the time of the quarterly report for 16 of the 43 holes. Really encouraging results from the Q3 drilling that we've got results back for so far, including 15 meters at 8.5 grams per tonne, 12 meters at 4.23 grams per tonne, 9 meters at 3.44 grams per tonne and 5 meters at 8.9 grams per tonne. Pleasingly, RC drilling in Q3 has confirmed the continuity of down-dip grade within the moderately south dipping high-grade shoot. As I've said, the program is continuing in Q4 and we'll also be doing step out and deep extensional RC and diamond drilling starting this quarter as well.So we're really positive about this opportunity and the early results of drilling so far given that economically, the best place to find additional mining inventory is immediately near or under our existing operations where we have the advantage of very significant installed processing capacity.The final Duketon exploration project that I'd like to talk about in more detail is the work that we're doing to expand the mining reserves around and below the Baneygo satellite pit. Baneygo is a 136,000-ounce reserve project, 7 kilometers south-southwest of Garden Well. It's scheduled to be -- to have commenced for the mining in FY '19. The drill program that we commenced in Q2 is designed to convert inferred resources in pit, below and along strike of the pits. In Q3, we drilled 86 holes throughout the 7,300 meters and turned out some really exciting results, all outside our current reserve shells, including 11 meters at 12.3 grams per tonne, 6 meters at 5.1 grams per tonne, 6 meters at 10 grams per tonne, 30 meters at 3.3 grams per tonne, 20 meters at 2.6 grams per tonne and 15 meters at 3.49 grams per tonne.Drilling is continuing in Q4 and a new program has been planned to assess the continuity of high-grade fresh rock intercepts below pit designs, looking for underground targets and networks going to commence in Q4 as well.So that's really an overview of our exploration effort at Duketon for the quarter. And I have to say, I'm really excited about the breadth of remarkably strong results across numerous projects. All of this work points to supporting our internal view that bold but targeted and scientific exploration on this 10 -- tenement package, we'll see the mine lives of the projects continue for many years to come. As I've said many times in the past, this is the great advantage of exploring the shadows of 10 million tonnes per annum of processing capacity.So turning now to our organic growth project at McPhillamys in New South Wales. This project is located in the Central West of New South Wales in the same region as Cadia, Cowal and Northparkes, a very well-established gold mining district. We've got a gold reserve there of just over 2 million ounces, making it one of Australia's larger undeveloped open pit opportunities. PFS that we completed last year shows a high quality and large-scale project. It's a 100% Regis owned and we believe a great organic growth project for the company.Along with PFS and EIS work, which has been continuing, we've also completed an 8-hole diamond program in the December quarter, which we've designed to infill deeper parts of the reserve model and add drilling data beyond the current pit design. Significant results for the last 2 holes of that program that were returned during the quarter included a quite significant 248 meters at 1.76 grams per tonne from 231 meters and 105 meters at 1.16 grams per tonne from 486 meters. These results inside the reserve model are confirming the surrounding intercepts, and deeper results are confirming mineralization is extending beyond the current pit design and, obviously, those results will be included in the next round of resource updates.Moving now to our -- to an update on our work on the EIS and DFS from McPhillamys. As I mentioned last quarter, we did submit a draft preliminary environmental assessment to regulators in Q2. We're targeting now formal submission of the final document in Q4. The main matter that's been outstanding in terms of finalizing the PEA has been resolution of the final location of the TSF and issues have been associated with the interaction of regulations involving surface water harvesting, water access licensing and dam classification. Regis continued investigating these issues during Q3, and we've continued to advance towards resolving a final layout and, I think, we've made good progress on that front during the quarter. As I've said, that should allow us to submit the PEA this current quarter. And meanwhile, other work on the DFS is well advanced and finalization is expected to progress expeditiously once the final site layout is resolved. At that point, we'll also be able to update the development timetable and complete the DFS.So I think, we're making good progress on the various elements of the study areas. Most resolution of the site layout, in particular TSF location, has been somewhat frustrating and taking longer than we would have expected. We look forward to settling that and lodging the PEA in the June quarter and then completing the DFS as soon as possible so that we can make an investment decision on this project as quickly as we can.The other New South Wales project that we're really positive about is the Discovery Ridge deposit on the Blayney Gold tenure that we acquired early last year. This is a 100% owned project located 32 kilometers away from McPhillamys. Discovery Ridge has a quoted resource of 501,000 ounces. For the last couple of quarters, we've been undertaking a RC infill drilling program designed to flush out the known resource there. In the current quarter, we had significant results, including 147 meters at 1.26 grams per tonne and 117 meters at 2.48 grams per tonne, quite an exciting intercept. And results to date appear in line with historic results for both location and grade. And the 117 meters at 2.48 grams per tonne intersection extends into a deep area of the resource with very limited drilling density to date. So that's a quite encouraging in terms of expanding the metal content on an ultimate pit optimization.We do expect the Maiden Reserve to be completed in Q4. And what we're targeting ultimately is a substantial satellite project with minimal capital, higher grade and lower strip than the early years of McPhillamys. And we do expect like Gloster, that acquisition -- that ultimately this acquisition will deliver very significant value for Regis in the fullness of time.We'll be working to expedite the development of this deposit at the same or as close to the same time as startup of McPhillamys as we possibly can.So look, to recap the presentation, I'll summarize the key points as follows.Our Q3 gold production was 85,331 ounces at an all-in sustaining cost of $906 per ounce. Year-to-date production of over 269,000 ounces of gold at $873 per ounce, all-in sustaining cost, puts Regis on track to achieve the upper end of our guidance range to the point that we've now refined guidance for the full year to 355,000 to 360,000 ounces.Q3 and year-to-date all-in sustaining cost are both well below the bottom of our guidance range.Continued strong cash flow from operations during the quarter, $71 million of operating cash flow source finished with $168 million of cash and bullion holdings, which was an effective $38 million cash build after dividend and land payments. We paid an interim fully-franked dividend of $0.08 per share, which was an industry-leading payout ratio of 13% of revenue.Exploration results continued the pace during the quarter. The Maiden Resource was reported at Rosemont Underground at 230,000 ounces at over 5 grams per tonne, continued strong exploration results around Rosemont. Early -- very early encouraging results of Garden Well at the underground target there, expansionary results at Baneygo and very strong infill results that hopefully helped the optimization of Discovery Ridge. Meanwhile, we're working hard on the EIS and DFS at McPhillamys with a view to lodging the PEA there this quarter and then moving into the permitting and making an investment decision on that project.So on that note, thanks very much for listening. That concludes the formal part of the conference call, and we are happy to take any questions that you might have. Thanks very much.

[Operator]

[Operator Instructions] Our first question comes from Michael Slifirski from Crédit Suisse.

[Michael Slifirski, Managing Director]

A couple of questions from me, please. And first of all, with expect to McPhillamys, can you sketch out really a longer-term time frame? You've made it clear when you expect to submit the PEA and complete the DFS, but what's the -- what are the sort of critical time points beyond that, please?

[Mark John Clark, Executive Chairman & CEO]

Mike, I suppose, we have articulated that in the past with a target previously to be in production towards the back end of the December '19 quarter. So I think, everything really hauls on the same set of relativities, but where you know it's obviously, we're 3 to 6 months behind that. So I don't think anything has changed other than given the delays that we've had so far that the haul schedule sort of ratchets back by circa 3 to 6 months.

[Michael Slifirski, Managing Director]

Oh, that's great. That's terrific. Secondly with respect to the Rosemont Underground drilling and that initial resource, how sensitive is that resource, tonnes, grade, ounces to your cut-off grade assumption in that we know what your processing cost is, your admin cost, it's -- looks like a very, very shallow, pretty simple underground. So mining cost shouldn't be excessive, but the 2-gram cut off, I guess, implies about at least where gold is now $100 a tonne of value. So I'm just interested in how sensitive it is and what the longer-term play might be? Do you initially aim for that 5-gram material and then longer term, something larger and lower grade?

[Mark John Clark, Executive Chairman & CEO]

Well, look, I can -- obviously, I need to be careful what I say, Mike, around the scoping study, but look, I guess, what I can say is that it's shaping up that we should have a robust mine on these 2 positions covering all of the initial capital to be spent on the day the original decline and then the decline between the 2 positions. So if you sort of take that view, to say, I've got less, that's in itself a viable business than once that initial capital spend, and everything else that once we are down and that decline is only going to carry its incremental mining and milling cost. So I suppose, without sort of preempting where the studies will land, I think that sort of where we're looking at. As you said, I think, the observation that we would make is that this stuff is very close to the bottom of our open pit. So we're not talking about kilometers deep underground, we've got robust grades. We did look at a number of cut-off grades and arguably, you could push a lower and arguably, you might push it lower in the fullness of time. But -- for this first position to get it up and running, I think the study will probably show that 2 grams or somewhere in that range is the right number and then we'll just take it from there. You know what, what we're sort of targeting longer term at least 0.5 million tonnes per annum of displacement through the mill. And you don't have to be a great mathematician to say if you're putting in 0.5 million tonnes at 5 grams versus what we know as the background grade of the project -- the open pit project, well, then it's a significant advantage to us to do that.

[Michael Slifirski, Managing Director]

Yes, absolutely.

[Mark John Clark, Executive Chairman & CEO]

I don't know if I answered your question, Mike. I don't know if I can within the realms of the scoping study, but I think the macro view, as I've said, is really around -- let's get this original resource to come through as the mine and if that can comfortably carry all of the initial capital, that needs to be spent to get down here, then every ounce that we find from there doesn't have to carry that. And therefore, do you stay at that point to each of those additional ounces ends up being higher-margin ounces or do you say we're prepared to lower the lower costs to bring the mine back to that sort of all-in cost that the initial mine has, which hopefully is very robust in its own right, even carrying all of that initial capital.

[Michael Slifirski, Managing Director]

Yes, it makes absolute sense. Certainly, the Moolart Well drilling, the depth extension, from what you're all seeing today, can you put some numbers around what you're thinking the opportunity might be?

[Mark John Clark, Executive Chairman & CEO]

Again, it's hard. But look, that's what that just needs to keep going. But one of the things that we will be looking at this year as well is what is the right goal for us to build the reserve at Moolart Well. As you know, we're very comfortable doing our sort of global reserves at AUD 1,400 per ounce, which is the right decision because we've always said that, that gives us a really robust margin on our business and using AUD 1,400 gold price on a pit shell tends -- for our business tends to give us around a $1,000 an ounce of total cost, which is to us is a really robust and enduring sort of margin. But obviously, there is a lot of metal at Moolart Well and other places that sits outside of the $1,400 shell, but within -- whether it's a $1,500, $1,600, $1,700 shell, there's a lot of metal there that we need to -- that -- in our view, that metal belongs to our shareholders and that's going to make a return. So given that we don't have an extensive mine life at Moolart Well, what is the right time of which, to say, we do the reserves at a higher gold price and we chase those cutbacks and we mine that gold as efficiently as we can. So that's partly extending the envelope if you like, Mike, and it's also partly about getting the best knowledge that we possibly can in the bigger shells to make sure that if and when we make that decision, which I'm sure we will, that we make sure that we've got robust information to make sure that we -- that we get the metal and the economics that we expect.

[Michael Slifirski, Managing Director]

Yes, it makes absolute sense. And finally, with respect to guidance and achievement today, I guess, what intrigues me is, I would have thought that predicting your dollar million costs for the year is probably more straightforward than predicting production. Your productions could end up at the top end of guidance, but your costs massively, well, bottom end. So I'm just trying to understand what changed in terms of performance through the year that's allowed costs to be so much better than what you foresaw?

[Mark John Clark, Executive Chairman & CEO]

I'll pass that over to Paul Thomas. He's the guru on that front.

[Paul Vincent Thomas, COO & Executive Director]

Thank you. Obviously, we had some fuel savings that we didn't -- and also the fuel price didn't jump as much as we've budgeted. Also, we managed to reduce some of the BSMs at Rosemont that produce the mix -- excess. Also we pulled the excavator a little bit earlier. So that's -- basically those 2 ones pushed the...

[Mark John Clark, Executive Chairman & CEO]

And the other thing probably, we did get a nice overcall at Gloster. We overperformed by tonnes and grade at Gloster and, obviously, as you know, we were mining through the oxide supergene zone for most of the year and that's the positive overcall. So obviously, if you're producing more ounces for the same dollar value cost, then you get that benefit as well. Across the haul, sweep at Duketon smack bang on reconciliation, but we've certainly had some wins along the way at various pits on the way through.

[Operator]

[Operator Instructions] Our next question comes from Cathy Moises from Patersons.

[Cathy Moises]

Mine's just a quick one. I think, Mike has covered off on pretty well everything else. Just the tax payable giving your strong profits for the first half, is there some more tax to be paid on there? So...

[Kim Massey, Company Secretary & CFO]

We've paid $9 million off this quarter and there'll be something similar in the next quarter that's just on the PAYG, the monthly payments we make. And then there's probably a true up when we lodge tax return in November of around $3 million.

[Operator]

[Operator Instructions] There looks to be no further question, gentlemen. I'll hand it back to you, if you have any closing comments.

[Mark John Clark, Executive Chairman & CEO]

No. Look, I think we've covered it pretty extensively, and the questions have probably covered some of the key topics. So on that note, we are happy to close the call.