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Edited Transcript of NCM.AX earnings conference call or presentation 13-Feb-19 10:00pm GMT

Half Year 2019 Newcrest Mining Ltd Earnings Call

MELBOURNE , VICTORIA Jun 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Newcrest Mining Ltd earnings conference call or presentation Wednesday, February 13, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Maitland

Newcrest Mining Limited - Head of IR

* Gerard Michael Bond

Newcrest Mining Limited - Finance Director, CFO & Executive Director

* Sandeep Biswas

Newcrest Mining Limited - MD, CEO & Director

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Kaan Peker

CLSA Limited, Research Division - Research Analyst

* Matthew Frydman

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Peter O'Connor

Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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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 Newcrest Mining Half Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 14th of February 2019.

I'd now like to hand the conference over to your first speaker today, Chris Maitland, Head of Investor Relations and Media. Thank you, and please go ahead, Chris.

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Chris Maitland, Newcrest Mining Limited - Head of IR [2]

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Thank you. Good morning, and welcome to everyone. With me today as well is our Managing Director and CEO, Sandeep Biswas; and our Finance Director and CFO, Gerard Bond.

First, please note the company's disclaimers on the first slide of our presentation. This relates to forward-looking statements, the use of non-IFRS financial information in the presentation and reliance on third-party information. As you may already be aware, Newcrest is a U.S. dollar reporting entity, and all dollar references made in this presentation refer to U.S. dollars unless otherwise specified.

I'll now hand the call over to Sandeep.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [3]

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Thanks, Chris, and good morning, everyone. Thanks for joining the call. Today, Gerard and I will take you through our financial results for the last 6 months.

So specifically, I'll focus on the progress we've made in regards to safety, then I'll touch on our strong set of numbers for the half year, followed by a review of our operational and financial performance. Gerard will then discuss our financial results in more detail. Following Gerard, I'll remind everyone about our disciplined and consistent approach to growth. And finally, I'll summarize what we believe are the reasons why investors choose to invest in Newcrest and highlight the differences that help us make us unique within the gold industry.

So firstly, a few comments on safety. We had an excellent half in terms of safety. One measurable outcome of this is the continued improvement in our group TRIFR measure, down to 2.3 per million manhours for the half. This is 12% lower than the corresponding period last year. As this graph clearly shows, we've come a long way, but we're determined not to sit still. We're continuing our relentless focus on our safety transformation program, which comprises NewSafe, Critical Control Management and Process Safety. The transformation is in full swing and is already demonstrating positive outcomes.

And the Lihir Mine team, for example, is celebrating the achievement of 5 years without a lost-time injury. The reason we do all this work around safety is to ensure everyone working at Newcrest goes home safely. We've had around 3.5 years without a fatality, and this remains our overarching goal to be a company free of fatalities and life-changing injuries.

Let's now turn to our operational and financial highlights for the half year. We produced 1.2 million ounces of gold at an all-in sustaining cost of $747 per ounce. We remain on track to achieve our production guidance for FY '19, noting that we expect the second half production performance to be stronger than the first half due to fewer planned shutdowns.

We also expect our capital [expendage] to be around the lower end of the guidance range. We've more than doubled statutory and underlying profit for the half to $237 million with no significant items for the period. Our operations generated $176 million of free cash flow with this free cash flow applied to the payment of dividends and reduction of our net debt to $959 million.

I'm particularly proud that we've generated $3.5 billion of cash since 2014. And in line with our dividend policy, today we've announced a fully franked interim dividend of $0.075 per share.

Now turning to the performance of our operations.

I'll quickly touch on the key takeaways for the group and then go through each of our operations over the last 6 months.

The group performed strongly this half. Compared to the corresponding half last year, we increased gold production and reduced all-in sustaining cost per ounce. Our profit and free cash flow was higher than for the same half last year despite lower gold and copper prices during the period. And this half saw our lowest ever all-in sustaining cost on a per ounce basis. Much of this performance was driven by Cadia.

As this slide shows, Cadia performed outstandingly, achieving records in both gold and copper production. This performance is driven by the highest-ever annualized throughput rate in the half of 29 million tonnes per annum and higher head grades from PC2. This increased throughput and grade resulted in lower unit operating costs, which together with a weaker Australian dollar and higher copper volumes, powered Cadia to achieve a record low all-in sustaining cost of $131 per ounce for the half year. This is a margin of almost $1,100 an ounce or AUD 1,516 per ounce in Aussie dollar terms. In the period, Cadia also commenced the early works program for the development of PC2-3, the next macro block, which will be one of many in the future of Cadia.

At Lihir, we improved on gold produced against the corresponding half last year. This was driven by an increase in head grade, partially offset by reduced throughput. Lihir's mill throughput rate was negatively impacted by the processing of argillic ore from the open pit. This ore is high in grade but is slower through the crushing and conveying systems due to the clay consistency of the ore.

We do expect Lihir will reach its 15 million tonnes per annum sustainable annualized mill throughput target by the end of June 2019. Lihir's all-in sustaining cost per ounce for the half improved compared to the corresponding period, reflecting lower sustaining capital and production stripping expenditure and higher gold grades in the current period. But its AISC was higher than the immediately preceding half year primarily due to lower production volumes. As in previous years, we expect to see an improved production performance from Lihir in the second half of this financial year due to fewer planned shutdowns. And all other things being equal, this has a positive impact on unit cost.

Telfer produced 215,000 ounces of gold in the half, which was fractionally lower than the corresponding prior period. Lower mill throughput was offset by higher gold head grade and recovery. We continue to work hard to improve Telfer's operating performance, prospects and financial performance. We commissioned a trial ore sorting facility on mill scats, which is generating encouraging results, and we continue to test this technology, and are looking at the possibility of installing this technology on the front end of the milling circuit. The work the team has done on improved recoveries has been first rate, and we continue to explore the potential for a lower-cost block cave that could help make Telfer's vast resources more economically attractive.

Gosowong's half year gold production was lower than the prior period, primarily reflecting substantially lower head grades. The impact of these lower grades was only partially offset by increased mill throughput rates compared to the corresponding half last year.

Later in the presentation today, we'll be summarizing what makes Newcrest unique in the gold industry. I'd like to highlight one of these now. As the graph shows, we are the lowest-cost major gold producer in our peer group. Gold production volume in of itself is not our objective nor a proxy for value creation. At Newcrest, we're about safely generating the most cash from our asset base and sensibly growing the business profitably with a focus on creating value for our shareholders. Being low cost with strong free cash flow and a strong balance sheet positions the company to weather the market cycles and also sensibly grow the business.

I'll now pass over to Gerard, who'll outline Newcrest financial results for the half.

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [4]

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Thank you, Sandeep, and good morning, everyone. This slide shows our achievements for the half year, which include being on track to achieve production and cost guidance for the full year and expecting to be around the bottom end of CapEx guidance for the year.

We achieved a record-low all-in sustaining cost of $747 per ounce. We generated $176 million of free cash flow. There have now been 10 consecutive halves of positive free cash flow generated by Newcrest. And to be clear, this is not adjusted free cash flow or free cash flow before tax. This is all operating cash flow, including tax payments, less all investing cash flow, including all investments in growth. The net of this is free cash flow, which we apply to pay dividends, reduce debt and/or buy shares to satisfy employee share scheme obligations.

We've reduced our net debt by a further $81 million in the 6 months, and this strong financial performance has resulted in Newcrest being well within all 4 of its target financial metrics. I'll touch on this in more detail shortly.

Finally, in regard to Newcrest performance, balance sheet strength and outlook, the Board has determined to pay an interim dividend of $0.075 per share, in line with our dividend policy. This is the same interim dividend amount as last year and represents around a 33% payout of free cash flow.

This half, we achieved an underlying profit of $237 million, more than doubling the profit compared to the same time last year. With no significant items, Newcrest's statutory profit equaled the underlying profit for the half. This is a clean result, which is matched by a clean balance sheet.

Revenue increased by $13 million against the prior corresponding half, driven by higher copper prices and -- I'm sorry, driven by higher gold and copper sales volumes being sufficient to offset the impact of lower realized gold and copper prices.

During the half, Newcrest retrospectively adopted AASB 15, which is the new revenue recognition standard. What this standard does is to apply the cost associated with the sale of concentrate as a reduction in revenue. It had the effect, as you can see on the graph, of negatively impacting the reporting -- reported revenue for the half by $66 million, but it positively impacts operating cost by the same amount. So there's no net impact on profit.

On to operating costs. They were well managed in the period in an environment where others are experiencing cost increase. Our operating costs also benefited from the weakening Australian dollar against the U.S. dollar.

The period saw a $42 million reduction in depreciation expense, which reflects the lower asset base at Telfer following the impairment recognized last year, also favorable exchange rate movements and lower production at Gosowong.

The improvement in corporate and other largely reflects the impact of foreign exchange gain in the current period, and this primarily relates to the restatement of U.S. dollar-denominated cash and concentrate receivables held by the group's Australian subsidiaries.

Net finance costs were lower due to the accumulation of cash since the end of the prior period. And finally, income tax expense is higher in the period in line with higher profit at an effective tax rate on underlying profit of 32%. The effective tax rate was marginally higher than the Australian company tax rate of 30% primarily driven by nondeductible exploration expenditure.

On to cash flow. Newcrest generated $176 million of free cash flow for the half, and that's 31% higher than the corresponding prior half. Cash flow from operating activities increased by $11 million over the corresponding period due to higher gold and copper sales volumes, particularly from Cadia. This benefit from higher sales is partially offset by higher income tax payments on this higher level of profitability and lower gold and copper prices compared to the prior period.

Investing cash flow was $31 million mainly due to lower stripping and sustaining CapEx at Lihir. And it's important to point out again that the positive free cash flow this half marks 10 consecutive halves of positive free cash flow generation, cumulatively delivering $3.5 billion of free cash flow over the 5-year period.

As Sandeep highlighted, our expectation remains that the second half will be stronger in a production sense than the first. And our expectation, like in prior years, is that the second half free cash flow to be higher than the first half.

Five years of positive strong free cash flow has resulted in us being comfortably positioned within our financial policy metrics. Our leverage ratio has reduced to 0.6x. Our gearing ratio has decreased to 11.5%. Five years ago, the leverage ratio was 2.7x and gearing was 34%. So you can see the balance sheet is substantially stronger today.

Our cash build increased our liquidity coverage to $3 billion, $2 billion of which consists of committed undrawn bank facilities. Finally, we continue to retain our investment grade credit rating. Indeed, during the half, S&P and Moody's increased our credit rating to BBB and BAA2, so we are even stronger in investment grade band than before.

I'll now hand back to Sandeep, who will talk about our approach to growth.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [5]

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Thanks, Gerard. So this time last year, I discussed the Newcrest 5 pillars and their associated aspirations, the way in which we'll take Newcrest forward. As stated in our growth pillar, our aspiration is to have exposure to 5 Tier 1 orebodies by the end of calendar year 2020. And at our Investor Day on October 28, we highlighted our desire to have exposure to a further 2 to 4 Tier 2 assets over time.

We consider Cadia, Lihir, Wafi-Golpu and our interest in Fruta del Norte as Tier 1 exposures. We also have an equity interest in SolGold, and though we don't currently consider it a Tier 1 exposure, we certainly hope that it will be one day.

Given the recent consolidation activity in our sector, I'd like to underline today that our disciplined approach to growth and profitable growth has not changed. First and foremost, value creation for our shareholders will always underpin our approach to growth. In order of preference: we seek to achieve growth through progressing the organic growth options already in our portfolio, of which we have many; greenfield exploration, which has been central to the heritage of the company; early entry partnerships with explorers, with our level of activity in this space having been much elevated over the past 2-or-so years; and finally, acquisition, when we see the opportunity to create value through application of our strong and unique technical capabilities.

We have a healthy pipeline of material organic growth options, including the expansion of the Cadia processing plant and the development project, Wafi-Golpu. In August last year, we announced the findings of our Cadia expansion pre-feasibility study. The study defined the pathway that results in a highly efficient allocation of capital and an attractive IRR. It identified a low-cost plant and underground materials handling expansion CapEx of approximately $58 million, enabling an increase in plant capacity to 33 million tonnes. This project has now been gated to feasibility, which is expected to be completed before the end of this calendar year.

As I've already touched on today, we're expecting to reach the 15 million tonnes per annum sustainable throughput target at Lihir by the end of June 2019. Considering that in FY '14, Lihir was processing just 10 million tonnes per annum, achieving our target would constitute a vast improvement in just 5 years.

The Wafi-Golpu project is a really exciting growth opportunity for Newcrest. First production is expected just under 5 years from the moment the PNG government grants the special mining lease. During the half, the Wafi-Golpu joint venture signed a memorandum of understanding with the government of PNG. The signing of the MOU gives us the confidence to commence a substantial work program.

This will include, amongst other things, the establishment of underground access for further drilling of the Golpu deposit, which is currently open at depth. This project has the potential to become a Tier 1 operation with a multidecade mine life, low-cost production, producing an average of approximately 266,000 ounces a year of gold and 161,000 tonnes of copper. I said that's 266,000 ounces of gold, not tonnes. I wish it was tonnes.

At the 2019 -- at the 2018 Investor Day, we revealed our new approach to exploring for gold in Australia, what we call our undercover strategy. Many people believe that the strategy is a very mature exploration location with limited potential for major discoveries. To date, the majority of gold discoveries in Australia have been found in less than 30% of Australia's landmass. That 30% is termed exposed, in which gold deposits are detectable using traditional exploration techniques.

The remaining 70% is undercover. These are areas which have no surface expression, which makes traditional approaches unreliable. Through the application of integrating vast datasets and data science, we've developed new techniques, which give us the ability to look below perspective area, undercover.

We're also looking to the development of machine learning technology to take this science to the next level. There've been major discoveries in undercover areas, such as Olympic Dam, Carrapateena and Prominent Hill. We're combining our proven ability to mine at depth with this new approach to search deeper. With drill rigs up at Mount Isa in Queensland and the Tanami in the Northern Territory. We're also exploring in our Cadia district with drill rigs right now drilling kilometer holes with this philosophy in mind. We believe that by looking deeper, combined with bulk underground mining capability, changes the maturity clock in the exploration space for Australia to something potentially more attractive.

We continue to pursue new discoveries through partnering with junior explorers. Junior explorers provide tenements, on-the-ground knowledge and the optionality to cover more prospective provinces. Juniors are attracted to working with Newcrest because we're prepared not only to finance further drilling, but we also provide access to our very experienced exploration team, who assists our partners with their drilling strategies. This will ensure they're able to accelerate and maximize their potential exploration results. Since 2016, we've entered into more than 20 of these agreements of various forms with junior explorers and currently active in 17 of these.

Our final pathway to achieve profitable growth is through M&A. To be clear, we're not interested in doing M&A just for the sake of getting bigger. For us, M&A needs to be squarely focused on delivering value to our shareholders. We don't need to do M&A. We're in the enviable position of earning 2 of the world's premier long-life gold assets in Cadia and Lihir, and we have a third, being Golpu, in our development pipeline and exposure to a fourth via indirect interest in Fruta del Norte.

Newcrest, as I mentioned earlier, is one of the lowest-cost major gold producers and has a strong balance sheet, allowing us to weather market and investment cycles. Our position in M&A has always been and remains that it is an option available to us. We will look at opportunities, but firmly through a value lens. And an M&A makes sense where we're able to bring to bear one of our key technical capabilities that ensures any transaction can deliver real value for our shareholders.

We're motivated by cash and shareholder returns, not ounces. Our technical capabilities, some which are listed on this slide here, enable us to mine and process virtually all gold and copper orebodies. Some of the skills that set us apart from the pack are in block caving and pressure oxidation of refractory ores. A unique mix of capabilities, we believe, gives us the ability to maximize the potential of not only our existing assets, but any new assets that come into our position.

So in closing, we believe that Newcrest has 6 competitive advantages in the gold industry: our unique long reserve life position; our low-cost to production; we aim to do what we say; we have organic growth options; the strength of our technical and exploration teams; and finally, we're focused on remaining financially robust. Combined, these elements make Newcrest a unique offering in the gold industry.

With that, I'll pass to Chris, who'll ask the questions that have been submitted online before opening the phone to further questions.

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Chris Maitland, Newcrest Mining Limited - Head of IR [6]

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Thank you, Sandeep. We haven't received any questions so far online, so I'll open up to the telephone lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Michael Slifirski from Credit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [2]

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Two quick ones from me, please. First of all, with respect to Cadia, you talked about the block caving opportunity or potential opportunity for some time now. The ore sorting, which clearly looks very, very exciting if it can be applied at a commercial scale. With respect to the book value of Cadia, does that assume any of those developments to support book value? Or conversely, if they don't progress, how sustainable is the value of -- the book value of Telfer, given that it continues to consume cash?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [3]

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Yes, I'm assuming all those questions are on Telfer. You did put Cadia in there. But I'm assuming you're just focusing on Telfer?

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [4]

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Sorry, yes. I'm getting a bit old inside. Yes, Telfer. I'm sorry.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [5]

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But at least you're always first in line, Michael. We appreciate that. The -- so in terms of the book value, it's not -- so these ore sortings and block caves are not factored into the book value. So I think that's the answer to your last question. The ore sorting, as you know, we've only tried it on the mill scats, but the work that we're doing on the ore also shows that you get similar type of upgrades. So that is potentially very exciting. And then the block cave, we're not only looking at lower cost, this is where we're also trialing the under-catalyst block cave, which also could be a technology which we're trialing at Telfer, but ultimately is something that we could use at Cadia in the future, given it has a series of block caves. And that -- if you take out one of the levels, you can imagine what the cost savings are from being able to do that successfully.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [6]

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Very exciting. Second question with respect to -- is more an industry question, but tailings dams getting a lot of publicity after the second tragedy. Brazilians suggesting that they might outlaw upstream tailings dams. That's what you use at Cadia. Interested in how you position yourself, how the regulator responds to all the commentary that's out there, whether that potentially defers in the recommissioning of your tailings dam. And I guess, whether -- given that you're now all underground, whether you'd generate sufficient rock if you were forced to convert to a downstream tailings method.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [7]

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Look, there's a lot of complexity in that question, Michael, and then this is something that is clearly on our mind and the whole industry. So one of the things that -- before I come back to address those questions is, the industry has to respond to this or answer it through the ICMM, MCA and the World Gold Council. We have to give confidence that in our industry we can manage tailings facilities. Look, I -- Brazil may go to banning upstream lifts -- I mean, Chile, at the moment, only does downstream lifts because of the seismic nature of the deposit. This is one of the reasons we've gone to deep-sea tailings at Wafi-Golpu, by the way, when we did the risk assessment, terrestrial dams didn't stake up. I think we operate on the ANCOLD guidelines here, and I think we've been able to demonstrate that we do operate them well. The issue with Cadia, if I can touch on that, is looking more and more like a foundational issue in that location only, which was just not picked up in the drilling write-back when the dam foundations were examined. So we're obviously learning from that, and we're going through all our tailings dams, and we're checking the foundations by drilling, if necessary -- not necessarily just believing it's all in place and using the latest technologies and knowledge. Now whether the regulators move to do something like what Brazil is contemplating, I don't know. I think it's up on -- up to us as an industry to demonstrate that whether it's upstream, downstream, centerline or DSTP, whatever it is, that we're able to manage them more successfully than industry. I think that's the key question and the key challenge here.

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Operator [8]

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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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Sandeep, I was just looking at the reserve statement that you've released today as well, and it appears you've taken Namosi out due to economic and technical issues. Just wondering if you could expand on this and whether strategically you might look to divest at all.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [10]

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You see, the reason we took the Namosi reserve and put it to resource is -- what's clear to us is the original prefeasibility study based on a very large throughput mine isn't economic. It's -- I mean, the CapEx is too high, although the operating costs are quite low posted. So what -- well the reason we've put to resource is we're now looking at applying some of this technology I talked about earlier, maybe smaller tonnages with ore sorting technology, with coarse floatation, maybe looking at tailings here in a different way, all designed to bring down the capital cost and lower the footprint on the environment. So while that work goes on, we'll push it to resource, and if that work shows that it's economic, we'll probably push it back into reserve once we have that confidence that, that's a mine we can make money from.

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Operator [11]

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Your next question comes from the line of Sophie Spartalis from BAML.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [12]

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Just a follow-on from Michael's question on Telfer. Obviously, it has been a challenging asset for some time. How long do we use or how long do you give the asset in terms of that tenor? And I know that you mentioned that you're looking at a number of different initiatives, but when do you say enough is enough, given that it is no doubt going to be a cash drain going forward?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [13]

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Well it hasn't really been a cash drain in the past. I know the last half, we had a negative $45-or-so million, but we're doing a lot of stripping during the period and various other things. So certainly, we don't really want to talk about cash losses from Telfer, and the management team had been totally focused on making sure that stays a positive number. But there's still several million ounces of resource. So if we can crack that, the technology that I just talked about, that does potentially give Telfer a very different future and also converts some of those resources into reserve. The other thing that is increasingly obvious is that the whole Paterson region has opened up to exciting new potential discoveries and what have you. Now Telfer's unique infrastructure where you've got 2 sizable mill trains, gas pipelines with source of energy is also a very key asset, which could be used in the future for bringing ore to it, not necessarily from the Telfer mine itself. So for a whole range of reasons, we don't want it to be a cash drain, and we're determined that it's not. But it's in option value and technology development value is where we see the true benefits. And it's an Aussie dollar gold exposure as well, and that the Aussie dollar seems to be headed in the right direction, at least from this perspective.

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [14]

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Yes, and if I could just extend that, Sophie. In the period in the half, and it's -- for all the other reasons that Sandeep said, that can realize further value in the future. In the period and in the half, the Aussie dollar gold -- realized gold price is AUD 1,694. The swap today is AUD 1,840. So we actually have that Aussie gold price exposure that should, all other things being equal, benefit Telfer in the second half, even before the other improvements and auction bays come into play.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [15]

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And then just in terms of a follow-up in regards to M&A. Really appreciate your additional comments there. You talked about how you want to sensibly grow the business. You've put a number of assets already in the portfolio there where you don't have 100% shareholding. See, just maybe update us on the appetite to move those shareholdings to 100% basis? Are your partners willing sellers? I.e., are the Lundin family open to selling it, just a matter of price? Can you just maybe give us -- because obviously, Ecuador, you maybe, you had have favorable tax rulings there, so it seems to be an even better place to do business. Can you just maybe give us an update on where those discussions have -- are at?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [16]

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Okay. I appreciate it, Sophie. I can't talk in detail on any of it, and it's very sensitive to our partners if we're to talk about it. But the way we think about these assets is, a, first of all, it gives us that exposure, then if there's opportunities in the future to increase our exposure, as long as it's good for our shareholder value and that, then we'll take those opportunities as and when they come. But at the moment, we're happy to be their supportive shareholders and -- as we go into the future.

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Operator [17]

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Your next question comes from the line of Peter O'Connor from Shaw and Partners.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [18]

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A couple of questions from me. Firstly, a bigger-picture question on costs. You talked about your costs and how well they performed during the period, and you mentioned that the peer group was under pressure, I think, was the term. What are the headwinds out there? Are they broad-based? What particular areas of the cost line are they hitting? And why are you not getting the same effect firstly?

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [19]

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Yes. Thanks, Peter. We're pretty pleased with how our costs have held up in the period. I think -- in no particular order, I think we're procuring exceptionally smartly. We work well with suppliers, and we have a very good team that makes sure that we get good deals that are mutually beneficial for the long period. I think utilization of materials have also -- we've also have become very good at. The Aussie dollar, in an international sense, obviously helps us. But not -- even in an Aussie dollar context, labor is getting tighter in the west, and in some skills, is getting tighter in the east. And I think we've shared that view before, particularly with all the infrastructure work going on in the Eastern States. Lead times for Yellow Goods has increased. But in our industry, a lot of the inputs -- and generally, we've been able to see only single-digit inflation rate, with 1 or 2 exceptions where we don't have much purchasing power.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [20]

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Let's go to your tax rate. You talked about the higher tax rate because of nondeductible explorations. How should I think about that beyond the current half? Is that an ongoing issue? Going forward, given your spend, at your 6-digit spend, so it's a low 30s number. A more accurate number than 30?

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [21]

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I think so, Peter. I think if you look at our activity, we are doing more exploration overseas. That's when more drilling will occur, our activity map, which sits in our briefing book and other material, you can see that we're more active internationally. And to the extent that we are engaging in activity, until -- unless it converts into something that is income-earning, we don't get a deduction for it, so there. All other things being equal, they could be -- and depending on the rate of exploration spend, you could expect that, that small delta could continue.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [22]

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Sandeep, just back to the semantic of M&A. I love your comments about sensible growth of the company. That's fantastic. Thank you for that. You've got a portfolio set you've grown and in sensible development of the company, divestment's a part of it. You did mention the word divestment during your presentation, but I know you've done a lot of divesting. And then most notably, just recently with the asset in West Africa. Could you just talk through the portfolio of core/noncore (inaudible) ? What else is out there? What balance do you need to achieve in that portfolio? And given the gold price is at near highs, what should we expect about the divestment process from Newcrest?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [23]

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Well, okay. As you know, we are committed to divesting at least another 26% of Gosowong. As per the new COW that we've signed, and that could end up being larger. Don't know. Telfer, as I've said -- look, Telfer is available at a price, but right now, we don't really want to sell it because we think there's more upside if we bring the Newcrest kind of abilities to that. Look, other than that, we're pretty clean. There's Cadia and Lihir and Wafi-Golpu. I've commented on them mostly. So I think it's all about getting those assets to their full potential and looking for growth opportunities through the drill bit, through our partners and potentially M&A. That's with a very strong balance sheet. So we're a different company than we were 5 years ago, but we know how hard we worked to get here. So whatever decisions we make, we want to be prudent as we go forward.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [24]

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Just lastly from me, acquisitions. You've talked throughout your presentation about the capabilities of the company and what you would do if something came up and it was right. And you always talk about the technical capability. You haven't mentioned the financial capability. Is that an omission? Or is that because you don't have that capability for size, and it's really the technical that drives it or...

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [25]

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It's a given. So if you look at the M&A market out there, right, I mean, I wouldn't say there's a whole bunch of buckets out there, right? So if you're going to go and buy something, we know we've got the balance sheet to do it, and we assume that you know, as you've pointed out. So if you go and buy something, to really stack the odds in your favor and get the rates of returns our shareholders want, you've got to be able to bring something to it. I mean, there has to be either synergies or you have to be able to mine it better, process it better or look at deposits in a different way and unlock that value. Otherwise, you're going to get lower rates of return. That's how we think about it, and that's why I focus on technical. We have the balance sheet, and I think it's self-evident to everyone that we do have that.

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Operator [26]

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(Operator Instructions) Your next question comes from the line of Kaan Peker from CLSA.

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Kaan Peker, CLSA Limited, Research Division - Research Analyst [27]

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Just 2 from me, please. Firstly, just on the tailings dam value study. When was that? I believe it was meant to be finalized at the end of CY '18. When will that be released? And can you give us a brief or some understanding why it's been delayed? And secondly, on PC2, I know you guys have mentioned that's fractured to service but not broken through. It seems like it's progressing a little slower than expected. Can you please give an update on this?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [28]

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So on the first one, so we expect the independent report in the next couple of months, but look, this is a world-class group of people, and they're going to the nth degree to arrive at the -- not only what the root cause is, which looks like it's a foundational issue in that area, but also what the trigger mechanisms are in this, and then more work and more drillings being asked for, and we've gone and done that work, given them the samples. So we expect in the next couple of months, but we have to respect their time line. And once that comes out -- and again, it is imminent. We'll obviously address the solution to the dam and also share the findings with the industry. I think there's going to be some real learnings that both help contribute to the industry push to improve our performance as an industry in the tailings management area. And to PC2, look, it is fractured. So as -- when you can break through the surface, it doesn't just happen one day that you -- suddenly a big crater appears. There's cracks up here, and you get some surface depressions and what have you. So that's why we say it hasn't actually broken through yet because you haven't got that full crater yet. And it's not delayed. It's a little bit slower than PC1, but PC1 was exceptional, and we reached surface there years before we expected it to. So I'd say PC2 is progressing very well and on plan in relation to, what? Of all things, but also the topic that you talk about. The important thing to note is once you've got that cracking at surface, the air gap risk depletes almost to 0, so a big part of the benefit of breakthrough is gained already. But we don't class it as full breakthrough, hence, the change in terminology.

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Operator [29]

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Your next question comes from the line of Matthew Frydman from Goldman Sachs.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [30]

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Just one from me on Wafi-Golpu. You've said previously, and also in the presentation today, that you're expecting the SML to be granted in June of this year. Can you just remind us again of the kind of things that you're hoping will accompany that SML in terms of the fiscal stability arrangements? Or any clarity around the potential buy-ins for the PNG government stake? And then secondly, also, maybe just remind us of what the first year of CapEx might look like for that project, assuming you and also, obviously, the JV partner there are hoping to break ground effectively since that SML has been granted.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [31]

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Yes. So look, all of those things you mentioned have to be in the special mining permit. So this is around royalty rates, tax rates, to this, going to be permitted under the current mining code. At that point, the wish of the government in terms of their shareholding will also crystallize. We have to have our agreements of -- with our landholder agreements in place. So there's whole bunch of things that accumulate in the granting of that mining lease, and all of that is all well progressed, and that MOU is a milestone in addressing some of the key terms, including fiscal stability terms. But it is an MOU, and the whole plan is to finalize that into a binding agreement, hopefully, by the end of June. As you know, these things can vary, but the parties are committed to getting to that day. And in relation to the first year of CapEx, so Gerard...

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [32]

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So if I -- we released our briefing book. You may be familiar with -- we released it to the market. So on Page 46, it's the same graph we've had now for a while, and it shows that in 100% terms, year 1 cash flows post commencement with the SML to be $133 million. So our shares of that is 50%. And just for completeness, a reminder that in guidance this year for FY '19, we're guiding to our spend being $40 million to $45 million on Golpu.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [33]

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Does that answer your questions?

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Yes, it does. Thanks for the clarity.

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Operator [35]

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There are no further phone questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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Chris Maitland, Newcrest Mining Limited - Head of IR [36]

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Thank you very much, everybody. I think with no questions online and no more on the phone, we'll wrap up today's conference. So thank you, everyone, for listening.