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Edited Transcript of EVN.AX earnings conference call or presentation 13-Feb-19 12:00am GMT

Half Year 2019 Evolution Mining Ltd Earnings Call

Western Australia Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Evolution Mining Ltd earnings conference call or presentation Wednesday, February 13, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jacob Klein

Evolution Mining Limited - Executive Chairman

* Lawrence John Conway

Evolution Mining Limited - Finance Director, CFO & Director

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Jill M. Buckle

BM Alliance Coal Operations Pty Ltd - Alternate Director

* Paul Hissey

RBC Capital Markets, LLC, Research Division - Analyst

* Darren Gray

* Paul Garvey

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Evolution Mining 2019 Half Year Results Teleconference. (Operator Instructions) Please note that today's conference is being recorded, 13th February, 2019.

I would now like to hand the conference over to your host today, Mr. Jacob Klein, Executive Chairman, Thank you, sir. Go ahead.

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Jacob Klein, Evolution Mining Limited - Executive Chairman [2]

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Thanks, Sean. Good morning, everyone. I know it's a busy morning so we'll keep it short and sharp. Today, we'll be talking to the financial results presentation that we released on the ASX platform earlier this morning. I'm going to make some brief introductory comments before handing over to our Finance Director and CFO, Lawrie Conway, who'll take you through the details of the results.

At Evolution, we continue to demonstrate that gold mining can be highly profitable cash-generative, dividend-paying business. Whilst we recognize that operationally this was a weaker half and we need to ensure we remain cost and margin-focused, this morning, we have declared our 12th consecutive dividend of AUD 0.035 per share. This one is, again, fully franked, it means that through dividends, we have paid over AUD 350 million to shareholders. At the same time, over the past 3.5 years, we have repaid over AUD 700 million in debt and built our cash balance to over AUD 300 million. As we are demonstrating, gold mining can be a very cash-generative business, at the same time, we've also been able to increase our portfolio mine life based only on reserves, which have calculated to AUD 1,350 an ounce to approximately 10 years.

Our business is in great shape and with a stronger second half planned and the gold price currently AUD 150 above the price we achieved in the first half, we anticipate the second half results to be materially better than the first half.

I'll now turn to Slide 4. Whilst the numbers and cash generation at Evolution tell a great story, over the past couple of weeks, I think there's been an even better demonstration of what makes Evolution a special company. As you are all aware, far North Queensland has experienced unprecedented rainfall. Our team at Mt Carlton responded outstandingly, both in keeping our people safe and securing the site infrastructure and equipment, allowing the operation to safely start up yesterday, after only losing about a week of production. I was very proud that not only was our team focused on securing the site, but last weekend, around 20 Evolution employees from across our company volunteered to help those colleagues whose properties had been damaged in the storms. Glencore have done a similarly admirable job at managing Ernest Henry through the rain event and has also had minimal interruptions. We do not expect these weather events to have an impact on our production or cost guidance.

With that, I'll hand it over to Lawrie.

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Lawrence John Conway, Evolution Mining Limited - Finance Director, CFO & Director [3]

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Thank you, Jake, and good morning, everyone. The highlights on Slide 5 shows the key financial metrics for the half year. While our profit before and after tax has decreased by AUD 30 million to AUD 43 million or around 25% compared to the prior period, there are 2 key things which I want to highlight. Firstly, the reduction in profit has been driven by items which are noncash-related, and secondly, we are still generating significant levels of operating cash with further upside available given the current spot price of gold around the AUD 1,850 per ounce mark. I'll go through the drivers to the change in profit and cost in the next couple of slides, but the operating cash flow level of just under AUD 400 million is a testament to the cash-generative portfolio of assets we have established over the last few years. This cash is being generated at high margins with our EBITDA margin at 48%. We continue to reduce our gearing, which is now negligible at 1.4%, which means we are heading to net cash in the next couple of months. The reward for shareholders from this performance is an interim dividend of AUD 0.035 per share fully franked. This is in line with the last interim dividend and is based on our dividend policy of 50% of net earnings for a year. I will note that it is higher than the half year profit, but our policy is based on a full year. And in assessing the interim dividend, we do look at projections for the full year.

Turning to Slide 6 to briefly look at the movements in the underlying profit. Our profit was AUD 92 million, which is down by about AUD 32 million. As I mentioned earlier, the decrease in profit was due to the impact of noncash items, which as shown on this slide, equated to AUD 32 million. The main items in the noncash area included utilization of ore stockpiles at Mt Rawdon during the period at AUD 11.5 million, higher depreciation, amortization expense of AUD 10 million driven by lower reserve ounces at Mt Rawdon, offset partially by lower depreciation at Cracow and Mt Carlton, and lower capitalization of mine costs of AUD 10.5 million in the current period predominantly by the completion of the White Foil cutback at Mungari. The cash items reduced profits by AUD 11.3 million, with the higher achieved gold price offset by lower silver and copper revenue and higher operating costs. I'll touch on the operating cost drivers in the next slide. The production and cost guidance for the full year is unchanged, which indicates a better performance in the second half of the year. If the current spot gold price is sustained, then we are well-positioned to achieve a materially better profit in the second half of the financial year.

Turning to Slide 7 and the operating costs. Mine operating costs increased from AUD 331 million to AUD 377 million. The December 2017 operating costs exclude Edna May costs to enable a like-for-like comparison. In terms of mine cash cost, the increase was AUD 25 million or around 7.5%, caused by both a mix of consumption and price changes. Year-to-date, our operating costs have essentially been tracking to plan. Our labor cost increased by AUD 5 million due to an average 3% rate increase and the filling of vacant and new roles.

Power cost at all locations were higher due to new contracts commencing in January 2018, locking in prices for a 3-year period. The group average increase was around 40%, with the biggest increase being at Cowal, where rates were up almost 80%. Diesel costs were slightly higher due to a higher oil price. The current price is below what we incurred in both December 2018 and 2017 periods. Importantly, our cost guidance for the year remains unchanged and we have many actions in place across the business to sustain or lower our unit costs over the longer term. Some of these will result in near-term benefits such as the Float Tails Leach plant at Cowal and accessing Stage 4 ore at Mt Rawdon in the coming months.

Moving to Slide 8. During the first half of the year, we did see our EBITDA margin slip slightly to 48% against a 3% rise in the gold price. This was due to the increase in operating costs but overall, our EBITDA margin is very healthy. At a site level, we are seeing rates of between 30% and 65%, which is very pleasing. But we remain disciplined to hold or increase these margins excluding the impact of a higher gold price. On an operating cash flow per ounce basis, we are delivering more than AUD 1,000 per ounce, which is more than sufficient to fund our strategy. Importantly, the improvement in our EBITDA and operating cash flow per ounce margins has outstripped the increase in the gold price. Since FY '14, our margins are up 45% and AUD 435 per ounce, respectively, against a gold price increase of only 18% or AUD 253 per ounce. The improvement in the quality of the portfolio is clearly demonstrated on the slide, in that the assets are generating a lot of cash and doing it at high margins. Overlying this with a spot gold price, which is AUD 155 per ounce higher than the achieved price in the first half of the year, these margins and cash generation levels are expected to increase further going forward.

Looking at Slide 9 and our investment in discovery. We have said that sustained investment is required to fill the pipeline for mine life extensions and growing our resource base. We have increased our reserve life to around 10 years. In the first half of the year, we invested AUD 30 million with over 160 kilometers of drilling. The investment was directed to Cowal and Mungari as well as resource definition drilling at Cracow. We are seeing continued success at Scottish Archer at Mungari and GRE46 in Dalwhinnie at Cowal, where the mining contract has been awarded and the decline will commence shortly. In the greenfields' area, we're ramping up our activity at Drummond and Connors Arc in Queensland as part of building out our pipeline of projects.

Now to Slide 10, which outlines the group cash flow. Overall, the group cash flow of AUD 111 million before dividends and servicing of debt is very healthy and provides multiple options to best direct the funds in executing our strategy. We invested an additional AUD 32 million in capital across -- capital projects across the business with a total investment of over AUD 150 million in the period, with the majority of the funds being directed to Cowal. We paid an additional AUD 29 million in tax payments following the utilization of the remaining unrestricted tax losses in the December 2017 period and commenced installment payments for the 2019 tax year in the current period. It should be noted that of this available cash flow, we paid out an additional AUD 17 million in dividend payments compared to the prior period.

Turning to Slide 11. The flexibility of the balance sheet improved again during the period with a net bank debt reduced to just over AUD 40 million and gearing now at 1.4%. As outlined last September at our Investor Day, we have no intentions of building a large net cash balance. In the absence of internal or external investment opportunities, we will look to increase returns to our shareholders. During the period, we took advantage of the elevated Australian dollar gold price to hedge a further 300,000 ounces of production at an average price of AUD 1,871 per ounce for quarterly deliveries between July 2020 and June 2023. As at December 2018, we have 475,000 ounces hedged at an average price of AUD 1,816 per ounce, with the profile shown on the bottom right-hand chart. The additional hedging provides support to the balance sheet during a period of major capital investment while leaving the majority of our production unhedged.

Moving to Slide 12. We're pleased to have declared our final -- our fully franked interim dividend of AUD 0.035 per share. This in line with our 2018 interim dividend and will be paid on the 29th of March. The interim dividend will be our 12th consecutive dividend delivering over AUD 350 million to shareholders. The dividend is based on a payout of 50% of net earnings for the full year. For the interim dividend, we have considered the planned full year performance including the current high spot gold price. To further reinforce my earlier point on how we use our balance sheet, over the previous few years, the focus has been on deleveraging from acquisition debt whereas now we are increasing our return to shareholders. In the last 2 years, we have paid nearly AUD 240 million in dividends and only AUD 135 million of debt, as compared to the previous 3 years, where we repaid AUD 774 million of debt and only AUD 106 million of dividends.

Turning to Slide 13. A critical component of the business strategy is that investments are repaid and that high rates of returns are generated. This chart shows the returns that each of our assets have generated under our ownership. The range of returns of between 13% to 25% with our long life assets generating the higher returns. While the returns may drop during periods of heavy investment for future mine life, the expectation is that the assets self-fund these investments. For a couple of our assets, Mt Carlton and Cracow, a pleasing aspect is that they have already repaid all of their invested capital.

Turning to Slide 14. In conclusion, the financial position of the business is excellent and one which is fully able to support the company strategy. This has been from the continued focus to improve the quality of the portfolio to generate superior returns for our shareholders. We are doing that through sustaining a sector-leading, low-cost position, where our longer life assets deliver higher margins and rates of returns. We have highly cash-generative assets, and we'll benefit further from the current gold price. We ensure the balance sheet has the financial capacity to be able to act when investment opportunities, internal or external, arise, while at the same time, being able to reward our shareholders through consistent dividends and capital growth. Thank you for your time this morning.

And with that, Sean, I'll now ask you to open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take the first question from Paul Garvey from The Australian.

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Paul Garvey, [2]

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A couple of things from me. I was just looking at the way the margins have come down and so on in this results, a lot of the analyst talk at the moment is around whether gold stocks are fully valued now. Notwithstanding what you said about the guidance for the second half, are we pretty close to seeing the best that you guys have to offer? Where is sort of the upside from here? And how do you get people excited about the investment proposition at these kind of levels with the things appearing to come pretty close to peaking?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [3]

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Paul, thanks for the question. We don't think this is as good as it gets. We think there's good upside in our portfolio. We think the exploration results we're generating at Cowal provide real momentum to discovering significantly more ounces over there and changing, recalibrating that asset. It currently is a long life, 240,000 ounce a year asset. But aspirationally and we're still drilling very hard over there and we've committed to this decline, we think longer-term, and this is not yet a commitment, but longer term, we aspire to producing over 300,000 ounces at that operation at very low cost. 48% margins across our portfolio are sustainable, as indicated by our guidance -- our 3-year guidance, which we released on the Investor Day last year. So we are still one of the lowest-cost gold producers in the world. We think quality of portfolio and focus on profitability and margin is critically important. And at this point in time, we're one of the highest margin gold producers in the world and see that to be sustainable going forward.

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Paul Garvey, [4]

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And just on the current highs in the gold price there, how do you weigh up the alternatives of staying the existing course operationally or -- versus using the current pricing environment to tweak mine plans, bringing in lower-grade material that otherwise miss out that kind of thing. How do you strike that balance?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [5]

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We're very focused on remaining with our mine plans, and we calculate our reserves at AUD 1,350 an ounce, which should be amongst most conservative in the sector. So in terms of when prices are higher, we need to deliver that margin and that profit to shareholders and capture that in the bank. So we won't change our mine plans based on the gold price.

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Paul Garvey, [6]

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Is there any push from investors to say that? Because other companies have certainly gone down that path, haven't they?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [7]

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We haven't heard anything from investors that they want us to adjust our approach.

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Operator [8]

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(Operator Instructions) Your next question comes from the line of Daniel Morgan from UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [9]

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Just wondering if there's anything to say yet on the Mungari exploration effort with Frog's Leg. Is it just still a little bit too early and we expect that in the next quarter? So that would be my first question.

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Jacob Klein, Evolution Mining Limited - Executive Chairman [10]

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Yes, the Banjo decline, which is drilling the Frog's Leg deep is occurring at the moment. No results in yet really to report, so I think the quarterly results will have some of those drill results in it.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [11]

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And then my next question is, I guess, more strategic, and we've had some huge mega -- major M&A in the space, which I guess as an expectation may lead to divestments. Just wondering if you can speak to any expectations on when you think that might occur. I mean, I imagine they will want to bed down the acquisitions first. When do you think that M&A activity might kick off? And what might you be interested in?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [12]

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Yes, I -- Daniel, I can't comment as to the speed at which they're going to divest these assets. They've certainly made it public. And in reading an interview that Mark Bristow gave yesterday, he certainly seems to be moving at rapid speed. So I'd say, in the next 12 months, that's likely to occur. We've said previously publicly that we're interested in those divestments, particularly or specifically in Australia and North America, including Canada. And we remain of the view that those could present opportunities for us. We've also always said, and just to repeat it, that we need acquisitions to improve the quality of the portfolio and be accretive to our shareholders. And that's still the lens we're going to look through -- look at these things through that.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [13]

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And then just a last follow-up, if I may. So if it's -- if for argument's sake, it's going to be 12 months before these divestments might be made and process is run, you're generating a lot of cash, which is clear, and you talked about a desire not to build cash on the balance sheet necessarily but to increase returns to shareholders. Is there a 12-month window where we're going to see good cash returns? Or might you hold a little bit back given that we -- there might be a lot of assets coming down the pipeline?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [14]

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I think that's something that we'll review when the final results are out and where we're at, at that point. I said within the next 12 months, it may be earlier. So I think it's really a watching brief on that.

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Operator [15]

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Your next question comes from the line of Jill M. Barry (sic) [Jill M. Buckle] from BMA (sic) [BM Alliance Coal Operations].

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Jill M. Buckle, BM Alliance Coal Operations Pty Ltd - Alternate Director [16]

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I just have a question -- we just have a question regarding the reserve life. Is it the norm to have the reserve life for the size of your company relative to other companies. I presume you've probably got your own plans down the line to further extend the reserve life. And is the reserve life at all impacted by the gold price, I mean, assuming that it had to go huge amounts higher, would that impact on the reserve life of the underlying mines that you actually currently own?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [17]

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Thanks, Jill. We calculate our reserves at a price of AUD 1,350 an ounce and that reflects the fact that we accept that we operate in a cyclical sector. When the gold price is AUD 1,850 as it is today, we need to be making super returns when the gold price is at our long-term price assumptions, which we base investment decisions on. We need to be making appropriate returns on our capital. And when the gold price is lower than that, we still need to be making money at any price above AUD 1,350 an ounce. So our approach is more to focus on getting those super returns when the price is high rather than extending our mine life during those periods.

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Operator [18]

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There are no further questions at this time. I will now hand back to the speakers -- oh, we do have one more question from Darren Gray from Sydney Morning Herald.

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Darren Gray, [19]

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You can hear me, can't you?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [20]

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Yes, I can. How are you, Darren?

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Darren Gray, [21]

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Right. Good. I would just like you to talk a little bit about the noncash-related items that affected the profit results for the half. Just any more detail that you can to explain things would help.

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Jacob Klein, Evolution Mining Limited - Executive Chairman [22]

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That sounds like a good one to hand over to our CFO, Lawrie Conway.

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Lawrence John Conway, Evolution Mining Limited - Finance Director, CFO & Director [23]

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Yes, Darren, I mean, what we're looking at is a comparative to the half year to December '17 versus December '18. And so essentially, when we look at it in this half year, particularly at Mt Rawdon, we were drawing down on stockpiles due to where we're mining in the pit. And we won't be able -- we're going back in to accessing the Stage 4 ore later this financial year. So essentially, in drawing down the stockpiles, which have already been mined there, they're not -- there's a noncash impact that we bring the balance sheet cost of that inventory into the P&L and that was about AUD 11.5 million. And then in terms of our depreciation, amortization, it's the same thing as we then issued in April 2018 our updated mineral resources and ore reserve statement. The reserves at Mt Rawdon reduced, which means then we have to increase our depreciation at Mt Rawdon. So we had AUD 20 million in round numbers at -- in the first half of 2018 versus 30-something-million-dollars at Mt Rawdon this year. And yes, we had lower depreciation at Cracow and Mt Carlton. So again, it's writing off the existing asset base over a period of time. And the last one was really as where Mungari was in its mine plan in 2018 December half -- sorry, the December 2017 half that we're mining a lot of capital waste to access the ore, whereas in the December 2018 half, they're actually mining that ore, so the costs are therefore treated as capital in the prior period but operating in this period. So it doesn't actually have a cash impact on our business because we were still mining in both of those periods.

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Darren Gray, [24]

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So is the time or the impact of those noncash items, would you consider it now to be in the rearview mirror? Or could you have a repeat of that in the half that's now underway?

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Lawrence John Conway, Evolution Mining Limited - Finance Director, CFO & Director [25]

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No, as I -- yes, like for example, at Mt Rawdon with that depreciation, the second half of this year will be very similar to the second half of last year. So no, no impact there. The stockpiles at Mt Rawdon in the second half of this year, that's for 3 or 4 months of the second half, we will be accessing ore rather than drawing down the stockpiles, so that won't be an ongoing one. And the same thing at Mungari, in the second half of this year, they'll be mining ore. And in the second half of last year, they were mining less waste than they did in the first half. So it will be a minor impact but not as material as what we saw in the first half.

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Darren Gray, [26]

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Sure. So with -- one for Jake. With all the considerations you guys have talked about this morning, would you say that -- have you had a very good half or a good half or a bumpy half? What kind of language would you use to describe the half?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [27]

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I'd say we had a half that we anticipated. And we've always said that the second half would be better than the first half. We're on track to deliver that and very comfortable with the fact that at AUD 928 an ounce, we need a better half to meet the top end of our guidance, which is AUD 900 an ounce. But remain one of the lowest cost gold producers in the world and that's a position which we proudly hold and want to retain.

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Darren Gray, [28]

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And last question, then I'll let you go. Do you think the -- do you think that a stronger gold price is going to be sustained through the half? Is the market set up to do that?

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Jacob Klein, Evolution Mining Limited - Executive Chairman [29]

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I don't know. I don't -- oh, I guess, on a personal level, I would say that there are plenty of reasons to be positive with the gold price at the moment. From a business perspective at Evolution, we would say that at AUD 1,850 an ounce, that's a fantastic gold price. It's amongst -- well, it's near the high Aussie dollar gold price, and we need to be driving our business hard and remain disciplined. I think that, to me, is the biggest challenge for us going forward as a company that I want us to remain disciplined, I want us to remain margin and profit-focused in spite -- irrespective of what the gold price is.

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Operator [30]

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Your next question comes from the line of Paul Hissey from RBC.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Great chart on Slide 8 of the deck. Just showing your margin over time, moving from sort of 33% of your data to 53% in '18, it's no surprise the share price has been a great performer in that period of time. Obviously, the gold price has contributed but I would assume that the addition of Ernest Henry and your workaround cost has also pushed that margin higher. But clearly, the dip back to 48% this half is a break in that trend and absolutely, that is still a fantastic margin. Just wondering if you could -- I guess, I'm sure we can do the math, but very broadly break down the decompose, the reason for that rollover this period, despite the fact that the gold price has continued to trend higher. And then, I guess, you already answered the question when Paul queried you sort of right at the very start about longer-term margins, but do you see yourselves being able to get back to that kind of margin given, I think, Lawrie, you spoke at the Strategy Day about grades tending back towards reserve grades over time and obviously without the gold price moving any higher.

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Lawrence John Conway, Evolution Mining Limited - Finance Director, CFO & Director [32]

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Thanks, Paul. Look, the drop-in margin, if you look at it, gold price was up 3%, our operating cost were up 7.5%. So that, in rough numbers, will give you the movement between the 53% and the 48%. I think a couple of things to point out. First half, all-in sustaining cost of AUD 928 full year guidance being AUD 900 or below says that the second half of the year, you've got about a 50% -- sorry, AUD 50 an ounce or higher reduction over the first half of the year. And if we look at that between operating costs and capital, you'd say that you've got somewhere around 2% to 3% margin, operating margin improvement coming out in the second half of the year. So that's where we are if we delivered to our plan. That should push us back up over 50% and then you'd see what the gold price does in the second half of the year. I think the thing -- and on that -- on our operating costs slide, which talks about the programs we've got underway, looking at what we can do to improve our position, second half of the year, we see Float Tails Leach come on board and get up to full capacity, which gives you a 4% to 6% improvement in recoveries, which is a pure flow-through to our EBITDA. So if we finish the year as we're guiding and you look at our 3-year outlook, next year and the year after are pretty similar. So there's everything that gives us an indication that the margins should be getting back. Maybe not to 53% but not far off them, if everything goes to plan. So yes, I wouldn't say it's as good as it gets, but yes, as the grades have come off in the first half and we've had to process some lower-grade material at Mt Rawdon and the like, our margin has dipped and some of our operating costs have gone up and we're looking at ways to offset that.

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Operator [33]

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There are no further questions at this time. I will now hand back to the speakers.

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Jacob Klein, Evolution Mining Limited - Executive Chairman [34]

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Thanks, Sean. And thanks, everyone, for listening in. We're looking forward to reporting our first quarterly results in April. Thanks for joining us.

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Operator [35]

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That does conclude our conference for today. Thank you for your participation. You may all disconnect.