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Edited Transcript of NCM.AX earnings conference call or presentation 16-Aug-19 12:00am GMT

Full Year 2019 Newcrest Mining Ltd Earnings Call

MELBOURNE , VICTORIA Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Newcrest Mining Ltd earnings conference call or presentation Friday, August 16, 2019 at 12:00:00am 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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* Ben Crowley

Macquarie Research - Gold Analyst

* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* David Radcliffe

Global Mining Research Pty Limited - Research Analyst

* Mathew Hodge

Morningstar Inc., Research Division - Sector Head and Senior Analyst, Basic Materials

* Matthew Frydman

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Paul Hissey

RBC Capital Markets, LLC, Research Division - Analyst

* Sophie Spartalis

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

* Steuart McIntyre

Blue Ocean Equities Pty Ltd, Research Division - Senior Resource 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 2019 Full Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, 16th of August 2019. I would now like to hand the conference over to your speaker today, Chris Maitland, Head of Investor Relations and Media. Thank you. Please go ahead, Chris.

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

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

Please note the company's disclaimers on the first 2 slides of our presentation. These relate to forward-looking statements, use of non-IFRS financial information, reliance on third-party information, ore reserves and mineral resources reporting requirements, a competent person's statement and Red Chris foreign estimates. As you may already be aware, Newcrest is a U.S. dollar reporting entity, and all dollar references made in this presentation refer to the 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. Today, Gerard and I will take you through our financial results for 2019, but first and most importantly, I will spend a moment talking about the progress we've made on safety and sustainability this year.

Newcrest has again improved the safety performance. The 2019 financial year was another year free of fatalities or life-altering injuries. It was also a year in which our injury rates were reduced by 3%, down to 2.3 per million hours worked. This is the lowest rate of injuries that the Newcrest workforce has experienced in a very long time. And pleasingly, it is the third consecutive year of improvement in our TRIFR. All but one of our operations delivered reductions in injury rates.

At Newcrest, we're proud of our history of safety improvement, but I want to be clear that we remain relentlessly focused on our safety transformation program because we believe it works to keep our people safe. We've had almost 4 years without a fatality, and this remains our overarching goal, a company free of fatalities and life-altering injuries.

Like our commitment to safety, sustainability is core to the long-term success of Newcrest. The business priority of it is straightforward. Sustainability drives good operational outcomes. Today, we announced the following sustainability commitments: our greenhouse emissions intensity target, pricing carbon emissions into our capital investment decisions, a catchment-based approach to water management and a commitment to no net loss of biodiversity values for new projects. Our aim is to drive innovation in how we operate to improve energy efficiency, water management and our impact on the environment. And through the application of the task force on climate-related financial disclosure framework or TCFD, we commit to transparently disclosing our progress against these aims.

This year, our public reporting will include the emissions intensity target we've announced today, our shadow carbon price and our approach to climate change governance. In following years, we'll start to assess climate change scenarios on our portfolio of assets to test our resilience.

So moving now on to our key achievements for the year. Our key achievement for the year was another year free of fatalities or life-altering injuries together with the reduction in the injury rates I mentioned earlier. Good financial outcomes are only good if they're delivered safely, so I'm pleased to say this was a very good year.

Operationally, Newcrest increased gold production by 6% and copper production by 36%, producing 2.5 million ounces of gold and 106,000 tonnes of copper. This was powered by record gold production from Cadia. We met our group production and cost guidance for the year. And while on costs, our all-in sustaining costs was a record low of $738 per ounce. This low-cost position allowed Newcrest to generate $804 million of free cash flow in a year when the average realized gold price was $1,269 per ounce. Pleasingly, all operations were free cash flow positive.

Our strong financial performance enabled the Board to determine a fully franked final dividend of $0.145 per share. This means the total dividend in respect to 2019 was $0.22 per share, which is a 19% increase from last year.

Finally, in FY '19, we further progressed our growth options. Today, we announced the completion of our 70% acquisition of the Red Chris mine in British Columbia, Canada. In March this year, we entered into an agreement with Greatland Gold for the Havieron tenement near Telfer. And in our recent June quarterly exploration report, you would have seen the promising drilling results there. I'll talk in detail about both of these growth projects shortly.

Turning to the performance of each of our operations. Cadia had an outstanding year, setting several operational records and exceeding its production guidance. Cadia achieved record tonnes mined and milled, which resulted in gold production of 913,000 ounces and copper production of 91,000 tonnes. This production was delivered by Cadia at a record-low all-in sustaining cost of $132 per ounce. And during the year, we commenced early works on the next panel cave, PC2-3, the first of many panel caves in the pipeline at the site, which has decades of production ahead of it.

Lihir successfully achieved its targets at annual sustainable mill throughput rate of 15 million tonnes per annum in the June quarter. Although production in the year was slightly impacted by unplanned shutdowns and processing of ore with a higher clay content, Lihir generated free cash flow in excess of $300 million. This is the fourth consecutive year that Lihir has generated more than $300 million of free cash flow. As a result, Lihir has generated almost $1.3 billion of free cash flow over the last 4 financial years.

Telfer achieved the top end of its production guidance producing 452,000 ounces of gold and 15,000 tonnes of copper. This was a 6% increase in gold production year-on-year, which was primarily driven by a strong improvement in recovery rates, thanks to the technical capabilities and operating discipline of the processing team at Telfer. We continue to work on ways to optimize Telfer's operation in order to maximize free cash flow. In the last quarter of the year, we commenced diverting more low-grade ore to dump leach. This enables a reduction in the tonnes being processed through the mill, which, in turn, has resulted in 1 of the 2 mills at site being taken off at 60% of the time, saving the energy and consumable costs.

We also continue to test the next generation of caving capabilities at Telfer with our Undercutless Caving project. By developing new and innovative ways of constructing drawbells, we will be -- we believe we'll be able to eliminate the development of undercut levels from the block caving process. And if successful, we believe this undercutless approach could reduce the capital cost and construction time of a macro block by 30%. This is a significant saving that has the potential to make ore bodies, which today are not commercial, even by traditional block caving methods, attractive to mine in the future.

Gosowong produced 190,000 ounces of gold in FY '19 and generated $29 million of free cash flow. As previously announced and as required by the revised Gosowong Contract of Work, Newcrest has commenced the sales process to divest at least 26% of our interest by the end of June 2020.

The recent appreciation of the gold price is welcome, but we're well aware that the gold price fluctuates and altering long-term plans based on short-term movements can lead to poor decisions being made. At Newcrest, we remain focused on staying low cost and safely maximizing free cash flow generation, so the benefits of higher prices can flow to our shareholders.

Our Edge program, which I've spoken about before, provides the operating discipline to safely improve our operational and financial performance to maximize cash flow. This program has helped us achieve the lowest all-in sustaining cost of our peers and will ensure that we don't chase ounces for ounces' sake.

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

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

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Thanks, Sandeep, and good morning, everyone. Let's begin with profit where statutory profit equaled underlying profit at USD 561 million. As shown on the slide, underlying profit was $102 million higher than last year, and the main drivers of this increase were high gold and copper sales volumes in Cadia, lower operating costs and a lower depreciation expense.

From a revenue perspective, you can see we experienced lower gold and copper prices than the prior year with the average gold price being around $1,270 per ounce. However, this was more than offset by the higher sales volumes.

A weakening of operating currencies, mainly the Australian dollar, assisted both operating cost and depreciation. The Australian dollar averaged $0.715 for the year. The gold price in Australian dollar exchange rate today are far more favorable to Newcrest than what was experienced in the [2019] year.

Corporate and other costs appear to be high in FY '19, but the main driver of this variance is that the prior year had $120 million of insurance receipts reported in other income. Adjusted for insurance proceeds, the remaining $10 million increase related to high levels of exploration, growth and innovation activities. The only other movement of significance is a higher level of income tax expense, which broadly follows a higher level of profitability. Our effective tax rate was just under 33%, and the main reason why this is higher than the 30% corporate tax rate is nondeductible international exploration expenditure.

Turning now to free cash flow. Newcrest generated an impressive $804 million in free cash flow for the year. This is $203 million or 34% higher than FY '18. Newcrest's strong operating cash flows were powered by Cadia's record performance. The main drivers of the difference between EBITDA and operating cash flow is our net interest payments, which were lower year-on-year as our cash balance rose; and our tax payments, which are higher year-on-year following that increased level of profitability.

From this strong operating cash flow of almost $1.5 billion, you can see we continued to invest with total capital expenditure of around $530 million being in line with what we invested last year. As the slide shows, we invested $130 million in production stripping, which is 13% lower than last year mainly as a result of a lower level of prestripping at Lihir. We invested $248 million in sustaining capital, which was in line with last year. There was higher spend at Cadia offset by lower expenditure at Lihir and Telfer.

Major project or non-sustaining capital expenditure of $153 million was $12 million higher than the prior year. The main items here relate to the expansion at Cadia, Lihir projects focused on enabling mining of the Kapit ore body and the Wafi-Golpu project. Exploration spend of $78 million was $6 million higher than last year, reflecting an increase in greenfield exploration in North America and a decrease in spend in West Africa.

Finally, our other investing cash flows of $75 million were much lower than last year, and this is due to last year being -- when we invested around $250 million to buy our stake in Lundin Gold.

As this next slide shows, Newcrest has demonstrated a consistent history of generating strong operating cash flow, which allows us to both invest in the business and still deliver strong free cash flow. And I'll draw your attention to the realized gold price over this period represented by the line on the graph. Gold prices today are much higher.

Our consistent approach to investing in our operations and growth pipeline over this period is being made prudently with long-term value generation and risk management in mind. The level of CapEx has not been impacted by short-term gold price fluctuations and nor will be at higher prices. We know that many of our shareholders invest in us to act as a hedge against market uncertainty. And our low-cost production means that we're profitable and cash generative when prices are low, and we can provide greater returns when prices are high.

This is now the 11th consecutive half year in which Newcrest has delivered positive free cash flow, and this is real free cash flow after all growth investment and taxes. And this free cash flow has been applied mainly to debt reduction and increasing dividends to shareholders. In total, Newcrest has generated $4.2 billion of free cash flow over the last 5.5 years, which is a great reflection of the efforts of our people, the quality of our assets and the benefits of our Edge program, which looks to safely maximize cash.

This strong free cash flow and debt reduction has placed us well within our financial policy metrics. Our leverage ratio was 0.2x at year-end, which is comfortably below our target of less than 2x. And gearing ratio was low to just under 5% by the end of June 2019. And considering that at 30 June 2014 gearing was 34% and leverage was 2.7x, you can see just how far we've come.

Our strong cash position has increased our liquidity coverage to $3.6 billion, being $1.6 billion in cash and $2 billion in committed undrawn bank facilities. Finally, we continue to retain our investment-grade credit rating, which ensures we have good access to all capital markets.

As Sandeep announced, we have completed the acquisition of Red Chris, which will be funded entirely from our cash holdings. And this is what a strong balance sheet is about: funding your own growth.

This strong balance sheet and profit performance allowed the Board to determine a final dividend of USD 0.145 per share. This takes the total dividends in respect of FY '19 to $0.22 per share, which is a 19% increase in total dividends year-on-year. We remain very focused on returns to shareholders and have a strong dividend policy that puts shareholders first. It targets a total annual dividend of at least 10% to 30% of free cash flow with the dividend being no less than USD 0.15 per share. This graph shows that we've continued to increase our dividends to shareholders since recommencing dividend payments in FY '16.

With that, I'll now hand back to Sandeep.

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

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Thank you, Gerard. Today, we announced changes to our senior leadership team. This is an opportunity for some renewal of Newcrest leadership while also maintaining an appropriate level of senior personnel continuity. Craig Jones will be our Chief Operating Officer for PNG and accountable for Lihir, Wafi-Golpu and all external relations in PNG. Phil Stephenson will be Chief Operating Officer for Australia, Indonesia and Americas and accountable for Cadia, Telfer, Gosowong and Red Chris. Bob Thiele, our current Head of Group Technical services and a deeply experienced mining professional, will become our acting Chief Technical & Projects Officer as we undertake consideration of both internal and external candidates for this critical role.

Craig Jetson has decided to pursue opportunities outside of Newcrest. He will remain with Newcrest until the end of the 2019 calendar year to support the transition. And due to the reduced -- reduction of the scope of the Chief Development Officer, Mike Nossal has decided not to continue in this role in the longer term. Mike will preside over an orderly transition of his current Chief Development Officer responsibilities and will leave Newcrest in the first quarter of calendar 2020. Gerard Bond, Ian Kemish and Francesca Lee will remain in their current roles. I want to take this opportunity to record my great appreciation to Craig and Mike for their strong contributions to the success of the business in their time with Newcrest.

By aligning responsibilities and clarifying accountabilities, we can increase the speed at which new ideas and processes can be implemented. This is a key part of our Edge philosophy. Our aim is to reduce duplication, waste and complexity, so we can unlock more value for our business and shareholders.

We continued to maintain our disciplined approach to growth during FY '19. As announced last year, we aspire to have exposure to 5 Tier 1 ore bodies either as operations, development projects or equity investments by the end of calendar 2020. In order of preference, we seek to achieve growth through organic growth, greenfield exploration, early-entry partnerships with explorers and acquisitions or mergers but only when we can see the opportunity to create value through application of one or more of our unique technical capabilities.

During the year, we continue to advance our organic growth opportunities. We've advanced the Cadia expansion feasibility study, which is expected to be completed during the December quarter. We proved the gating to execution of the Cadia molybdenum plant, which will provide another by-product revenue stream with production expected in calendar year 2021.

At Lihir, we achieved our target of a 15 million tonnes per annum sustainable mill throughput rate during the June quarter. And we'll now be targeting sustaining throughput at or around these levels as we shift our focus to improving recovery rates.

Golpu remains a great -- growth option for us that we will look to advance once the PNG government is ready to recommence discussions on the core documents and necessary to obtain the mining lease.

Newcrest has a proud heritage of finding and developing world-class ore bodies. It's fair to say that these discoveries have played a large part in building this company to wherever it is today. We continue to invest in our exploration team. And over the coming slides, we'll talk about some of the exciting new opportunities in front of us.

Newcrest strives to be seen as a partner of choice for exploration companies by leveraging our technical strengths such as block caving, our proven exploration expertise and by deploying some of the latest exploration technology that's available.

One of the partnerships I'd like to highlight is our farm-in agreement with Greatland Gold. During the year, we gained an interest in their promising prospect at Havieron, which, subject to further drilling and study, could become a satellite mine for our Telfer operation. I encourage you to look at their quarterly exploration report to see the positive results from this growth prospect.

Today, we announced the completion of the acquisition of 70% of the Red Chris mine in Canada. Our plan is to improve the current operating performance and, subject to drilling and further study, transform Red Chris into a Tier 1 operation by leveraging our unique block caving capabilities. The Red Chris acquisition is a measured entry into North America and supports our strategic goals, providing immediate asset and geographic diversification, a large mineral endowment, significant upside opportunity and utilizes our balance sheet strength and liquidity.

We plan to apply a 2-stage transformation to the Red Chris operation. Stage 1 will be to apply a Newcrest Edge transformation approach. This stage is about safely increasing the efficiency of the current equipment with minimal capital outlay. Stage 2 will involve applying Newcrest leading technologies, including block caving, coarse ore flotation, mass sensing and sorting, and deep underground brownfield and greenfield exploration techniques.

Now that we've completed the transaction, our forward work plan will involve resource and exploration drilling throughout FY '20, open pit and process plant optimization, and studies in the viability of implementing coarse ore flotation and the block caving design study. There's a lot of work to be done, and we look forward to updating you on the progress.

Today, there've only been 89 deep drill holes completed at Red Chris. These drill holes are spaced so far apart that we could easily fit Cadia's Panel Cave 1 and Panel Cave 2 in between them. At Cadia, we've drilled thousands of drill holes to properly define the ore body. We look forward to commencing the drilling campaign to fully discover the potential of Red Chris. This is an ore body which is open at depth and in all directions.

Now to summarize. In times of uncertainty, the gold industry has historically provided a safe haven for investors. We believe that Newcrest seeks competitive advantages that set us apart in this industry. Yes, unique long reserve life position. Our long-life assets mean we can continue to produce for decades to come, and we're not under pressure to replace mines in a high gold price environment when prices for gold assets are elevated.

Second is our low-cost production because having a lot of gold won't create value unless you can achieve strong margins from its extraction. We remain the lowest major gold producer at the lowest cost with our all-in sustaining costs position in the first quartile.

We do what we say. We again achieved guidance in FY '19. We have a multitude of growth options. We have strong technical and exploration capabilities. And finally, we focused on remaining financially robust. Combined, these elements make Newcrest a unique offering in the gold industry.

With that, I will open up the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Michael Slifirski from Crédit Suisse.

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

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Sandeep, 3 or 4 quick ones for me if I may, please. First of all, with respect to PNG and the political climate there, the change in PM, the pain that perhaps the oil and gas industry might be looking at, is there any sort of read-through from that with respect to the conditions that Lihir currently operates under or with respect to the delays at Golpu? Can you sort of just add a little bit of color as to how -- what's your read of the situation is and any implications that are there or not there?

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

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Look, I think any potential implications are more related to the timing of Wafi-Golpu than anything to do with Lihir. Lihir is an established mining operation, a major contributor to PNG, and we've received many reassuring -- reassurances around Lihir. Around Wafi-Golpu, as you know, we did sign an MOU with the previous government. There's now been a legal challenge by the governor of -- government of Morobe province with the state government in relation to a judicial inquiry into the MOU. So we're stalled until -- in fact, we're prevented to progress negotiations until that stay -- order of stay is lifted. And when the government is willing to enable to continue to negotiate, we'll do so.

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

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Okay. Then specifically with Golpu, that dispute, that's a government dispute. It's around allocation of royalties, not royalty rate?

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

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That's our understanding.

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

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With respect to the people changes, Craig I guess did an amazing job at Lihir. People stuffed around there for 20 years, also some really clever people but achieved nothing. He came in, turned it around. It's performing well. Red Chris looks like an opportunity for a turnaround guy to come in. With Craig's departure, who's going to execute -- lead that turnaround?

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

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So Mark Adams, our GM from Telfer -- prior GM from Telfer, he's on the ground leading that turnaround under the guidance of Phil Stephenson. And Brett Mcfadgen has been promoted to General Manager of Telfer. With the Newcrest machine of our Edge methodology and what we've learned over the last 5 years pursuing this, we're confident that we can add a lot of value to the current operation at Red Chris. And with Mark's decades of experience in aboveground, underground mining and any other sort of mining, he's a great pair of hands to take on that challenge.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [8]

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Yes, absolutely. With respect to the comment around the application or potential application of ore sorting at Red Chris, does that imply that you actually made some demonstrable progress? And if so, when does it actually get implemented at either Telfer or Cadia?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [9]

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Look, we still -- so the test work is continuous at Red Chris, but there's 2 aspects to it. Is that technology applicable to the ores aboveground? Or is it more applicable to the stuff from underground? So we're going to do that evaluation. So that'll be part of the review of the flow sheet both currently and what we expected to be under the block cave because the 2 mineralogies are quite different, what's in the open pit now versus what's underground.

At Cadia, we continue to do the belt sensing. This is a nuclear device to see if we can differentiate waste from gold and copper. Copper is relatively easy. We're trying to tune it for gold and see what opportunities there might be as the grade lowers over the next few years at Cadia to start weight rejection on that belt. So that's kind of a monitoring and calibration exercise.

And at Telfer, we've done the ore sorting test, and now we're into some screening tests to work out which is the most cost-efficient way of improving the feed grade. At the moment, as I outlined, we've decided to move some of the lower grade stuff to the dump leach and process less ore but higher grade through the Telfer mill circuit and save the power and associated costs from that.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [10]

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And then finally, with respect to New South Wales drought, Cadia water supply, what are you seeing currently in terms of your water on site and water rights in terms of guaranteed operating period?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [11]

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Look, we're very well placed for the next 12 months at least, and we continue to work on sourcing more water options where we can but also working hard on our water recovery particularly now that we're -- a bunch of our tunnel lifts now goes into the open pit. That gives us unique opportunities to perhaps enhance our water recovery from the pit and then, yes, recycle that through without losing as much to evaporation.

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Operator [12]

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And our 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 [13]

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Just wondering if you can touch on a little bit more about Cadia progression this year. We've known that the SAG mill has had some issues for some time. It looks like -- has there been a failure that you're now rectifying now? Is that event now occurring and that's impacting the production for this year? That's the first part of my question. And then just if you could give more color on how grade progresses through this year and into next if at all.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [14]

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Look, in terms of the SAG mill, since we had the failure a couple of years ago, it's under an intensive preventative maintenance regime including inspections where we take the mill off-line to deliberately inspect the coils and rotors and what have you. And as part of that process, during this quarter, we have been doing some preventative maintenance work on the mill, which will have had a minor impact on the year. I think the biggest impact this year and going forward in terms of ounces will be related to the forecast grade decline. And all that information is contained in our briefing pack.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [15]

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And just staying on Cadia for a moment. The moly plant that you're moving through to development, just wondering if you can talk through at a high level the economics of this plant.

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

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Look, I mean as you know, it all swings on the moly price. But on our projections that we've made, all these projects have to be well north of 15% IRR, and we expect this one to be in the region of 20% based on our moly price assumptions.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [17]

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And the project team that's been working on Golpu given that Golpu's sort of in a standstill position at the moment and they're being redeployed, can we view that as being redeployed to expediting Red Chris?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [18]

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I think we'll -- out of the 2 block caves, the first one is actually going to be the new panel at Cadia, so we have redeployed some people to Cadia. And as we learn more about the ore body at Red Chris, we'll start to work on the block caving team that will do the study for that. But the priority at Red Chris literally as of Monday is to get our geos on the ground, get the drill rigs up there in the next couple of weeks and start drilling the main zone where we expect the first cave to be but also doing some extensional exploration out in the gully area.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [19]

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And just the last follow-up question from me on that. When you've given your guidance on exploration, apologies if this is in all the notes and everything that you put out. But your numbers or exploration numbers, do they include Red Chris exploration spend? Or is that something that's not in the numbers?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [20]

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Yes. So our broader guidance does not yet include Red Chris. That guidance -- the broader guidance around Red Chris will be issued in the September quarterly, but we know we're going to do $20 million worth of drilling, 100% basis. So the -- our 70% of that $20 million is contained in the exploration line in the exploration guidance, and that's footnoted for clarity.

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Operator [21]

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And 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 [22]

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Sandeep, couple of questions from me. Firstly, on Cadia and following up on Dan's question on the SAG mill maintenance. Can you give us a little bit more detail on the timing of that maintenance during this year? And then given that you've called it out specifically in the commentary, should we expect that the impact will be larger than the impact of the plant shutdowns that were conducted during the March quarter of FY '19? And then I suppose, thinking forward, is this the baseline that we should be expecting for our annual plant maintenance at Cadia?

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

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Look, in terms of the inspections on the SAG mill motor and if we find something, we do preventive maintenance and we do some repair work. There is one scheduled for this quarter. And typically, we have a look at this every 6 months or so, but that doesn't mean we necessarily do work on it every 6 months. Wherever possible, we plan the inspections within the existing shutdowns. As you know, we have regular shutdowns of our mills for relines and [what have you] and we typically schedule it within that period. It's only if there's any extra work to do that would it take any longer.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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Sure. And then I guess thinking forward, as you say, it's obviously ongoing preventative maintenance. But is this the expectation that you'll have an annual shut in March plus ad hoc preventative maintenance work going forward?

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

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Well, every 6 months, as I say, we'll do an inspection. And if necessary, we'll do some work on it. But it's wired up like a heart patient. We know how it responds far more than perhaps before the failure. We know the potential mechanisms, and we look for that on a very regular basis.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Secondly on the Red Chris integration plan, you did mention that Mark Adams is taking the role of GM. Wondering if you can expand further on how the operation is being managed at a site level, specifically wondering if the existing site management teams and technical teams are being retained. And then on the concept studies that you're conducting, again, you touched on this. But are these being conducted internally? Are they using external technical specialists? Are they using existing Newcrest technical personnel or existing Red Chris personnel? Just wondering what the approach is in conducting these concept studies?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [27]

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Yes. Well, I'm talking about the -- given it's day 1, but I -- the approach is Mark and a selection of Newcrest people who will join the management team are on their way to Red Chris right now, and they -- so we'll be an integrated team. There will be Red Chris people and Newcrest on the new management team, and then there's a integration program, which they'll be implementing. Part of which is the improvement of the operations from their current levels.

In relation to the block cave, look, we use various consultants from time to time. But initially, this will be all done by our own people who are specialists in block caving. But as I outlined earlier, we've done a lot of thinking around with the existing drill results that we have that have been done by Red Chris, but really, we need more data. So there's -- quite an intensive drill program will be the first order of business. We have one of our geos on site right now and mobilizing other personnel and drill rigs as we speak to begin that campaign.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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Sure. I guess given that you've provided a bit of a tentative outline for those concept studies, you're obviously comfortable with the level of geological knowledge you've got at the moment to conduct at least the sort of scoping study level on the block cave and the other caves.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [29]

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At a certain level but as you know, the more data you gather, the more confidence you can have around that study. Ultimately, it's about the resource.

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

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Understand. Maybe finally just one for Gerard. On tax payments, cash tax seems to be predominantly December half weighted. Is there something we should expect going forward? Or is there any sort of catch-up payments we might be expecting in the first half of FY '20? And then on working cap, obviously, a bit of a drawdown during the second half of '19. Should we expect this to reverse or hold, I guess, during the first half of '20?

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [31]

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Yes. On tax, I mean the place where we're paying the most tax follows the profitability, and that's at Cadia so therefore, Australia. And our biggest settling payment occurs in December of each year. So yes, there will be a larger cash outflow associated with Australian tax payments, which are being the primary driver of the increase year-on-year.

Working capital varies half-on-half for various reasons, predominantly activity related and sales timings and the like. And you'll see from our cash flow waterfall that, that was in the presentation, that it -- most of our cash flow is -- typically are weighted in the inflows, are weighted in the back half of the year. As it relates to working capital's contribution to that specifically, you'll see year-on-year, it's de minimis. There's virtually no change in working capital this year in a cash flow sense. But yes, you're right. There are movements in a half-on-half basis.

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Operator [32]

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And our next question comes from the line of David Radcliffe from the Global Mining Research.

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David Radcliffe, Global Mining Research Pty Limited - Research Analyst [33]

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First question just comes in relation to the comment there, where you're talking about reduced scope in the role of the Chief Development Officer. Could you just maybe explain that? And is there any read-through here to your focus on M&A?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [34]

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No, the word -- so part of the structure, you will see there's a Chief Technical & Projects Officer role. So this is about combining all of Newcrest technical horsepower into one unit where you'll find projects, you'll find our mining team, our technology and innovation team, our digital team, our processing team. So it's pulling all that together into a -- which is currently more fragmented, into a powerful technical and projects right from technology and innovation through to execution. And the M&A role becomes -- the business development role becomes purely M&A and exploration.

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David Radcliffe, Global Mining Research Pty Limited - Research Analyst [35]

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Then maybe just another one if you don't mind on Red Chris. I mean at the time of the acquisition, one of the areas you said that it was a key opportunity was obviously the refocus is on more of a -- being more of a gold project and especially the recoveries, and the target there is to get them closer to Cadia. How should we think about that in relation to the difference between the Stage 1 and the Stage 2 transitions that you've outlined here? Can you achieve much there with just Stage 1 by applying Edge?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [36]

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Look, I think we can, and we'll have a much better idea obviously by the time we put our guidance out in the September quarter. Our people are just on their way. But if you look at all the drill results that do exist, you'll see that as you go further underground, so this is more about Stage 2, the gold actually increases compared to the copper deep down in the cave and the mineralogy changes. So there's 2 ways to look at Red Chris. One is the current ore body and what can we do on recoveries and throughputs there. And the other piece is, when you go deep underground, what are the different technologies that are applicable to that type of ore that we can start building into the flowsheet and our thinking. So that's kind of how we're thinking about it.

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Operator [37]

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And your next question comes from the line of Steuart McIntyre from Blue Ocean Equities.

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Steuart McIntyre, Blue Ocean Equities Pty Ltd, Research Division - Senior Resource Analyst [38]

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Listen, my questions relate to the sort of bigger picture stuff over the next couple of years and I guess the direction of the company. You put out guidance for FY '20 for Cadia of 800,000 ounces this year, but obviously, based on your expansion studies, you put out some profiles that are showing the ounces from Cadia you're going to pretty much half over the next 3 years or so of about 400,000 ounces. And you think that, that would coincide with quite a big increase in the unit cost there just by the fact that the production halved. But that's obviously not necessarily an issue. But the question that I have is, as the Newcrest share price continues to go up and up and up, does your position with respect to potential acquisitions to replace that declining profile change? Is there a point at which you think, you know what, our paper is pretty reasonably valued here. We might reassess our -- how we look at M&A because you guys have been pretty committed to the sort of early-stage low-cost M&A. Can you talk a little bit about all that, please?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [39]

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Yes. So if I start with Cadia, just because the ounces decrease over time, I wouldn't necessarily read into the fact that the cost starts spiraling because, as I've said many times before, you have to look at the copper grade as well. The copper grade does not drop anywhere near the rate of the gold. So those copper credits that help with the unit cost actually increase if we -- once we deliver what the ultimate size of Cadia will be. So that ameliorate any sort of cost impacts, although you will see a headline reduction in ounces as the grade decreases, which has been well known for some time.

But in terms of saying, well, do we want to replace those ounces and what have you, well, we've heard what we're doing at Red Chris, what we're doing at Havieron. But the temptation, as I outlined in the presentation, is to resist the temptation to just fill ounces for ounces' sake. Any deal that we may or may not do or any investment that we make of any sort are under very strict guidelines on rates of return and what value that brings to shareholders. We're just not going to chase ounces. And that's why we're looking at things like the organic development of Golpu, the Cadia expansion study, looking what can we do at Lihir beyond what we've already achieved once we stabilize where we are, what will the next step be. And that's, frankly, where you make the highest returns. But having said all of that, if there's something that comes up that meets our criteria, like the investment we just made today in Red Chris, we'll look at it. And we have the firepower and the technical capability to act if we think it makes sense for the company and our shareholders.

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Steuart McIntyre, Blue Ocean Equities Pty Ltd, Research Division - Senior Resource Analyst [40]

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Sure, sure. Look, just to come back to that point on the cost at Cadia over the next couple of years, if the reduction in ounces from about 800,000 ounces to 400,000 ounces is predominantly driven by grade, even -- I mean you've got the copper profiles in there as well, which are pretty steady over that same period, I still would have thought the costs would have gone -- are going to go up pretty materially if it's -- if the production halved. But putting that aside, I mean some of these other projects that you've got coming onstream on the M&A stuff, it's obviously longer dated, and it's going to be quite a while before that comes into your production profile. And as you probably know that most of the market values gold companies on a combination of NPV and next year's cash flow. So all things being equal, 3 years from now, your cash flow is probably going to be quite a bit lower is, I guess, where I'm going. And I'm not suggesting that you do ounces for ounces' sake at all. Just saying that your paper is -- your paper is pretty valuable at the moment. And so the question remains does that change how you look at things. It sounds like if the right opportunity presents itself, you'll assess it. But look, I think you've answered the question.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [41]

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Yes. Again, just on Cadia, look at gold equivalent ounces, and you'll see that there's a slightly different picture than what you might do by just halving the gold production. I'd take your point, but our discipline in how we go about running our business and how we spend our money is one of the reasons that certainly I get told that our shareholders support us.

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Operator [42]

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And your next question comes from the line of Sophie Spartalis from Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [43]

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Just wanted to touch on Lihir and Telfer if I can. Just firstly the mill throughput at Lihir staying at 15 million tonnes or thereabout, can you maybe just talk through why now the more moderated approach at Lihir versus those previous targets of 15 million to 17 million and whether they are still in place but whether they're probably a little bit more longer term than what they were previously?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [44]

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Yes. I think what we're seeing is that Lihir's come up so quickly in terms of its rates, what we've got to go -- and I think I spoke about this last -- at the half year. What we need to do is really double down on the reliability and availability of the equipment. So we're not having such big differences in quarters in relation to throughput rates that we steady that out much more than it is now over a year, recognizing we do have some quarters with higher planned shutdowns and what have you and really to work on our recoveries to get them back up while producing at that rate, which is all enhanced by better reliability and availability. And as that works gets completed and executed, we'll be better placed to look at what the next step-up for Lihir may or may not be. That's the rationale behind it, Sophie.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [45]

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Okay, that's great. And then just also on Telfer, you talked about currently working on optimizing the operation there? You've obviously got Havieron there that you continue to call out. Can you maybe just talk through sort of the more medium-term plan over the next sort of 2 to 5 years in regards to where you can see Telfer going? You've obviously taken down 1 of the 2 mills. You've taken off 60% of the time. Does that ultimately go to one train? And then how Havieron sort of fits into that picture?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [46]

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Yes. Well, I think what you're finding -- because the changes that we made now is -- certainly optimizes the cash flow situation, so the lower grade stuff going to the dump leach and saving costs and lifting the grade in the current mill. But you're right. So it's really to work on our current ore bodies, and we continue to do extensional exploration at Telfer as well by the way. I mean we're not necessarily looking for the next big dome, but there's lots of interesting smaller deposits, which we think may be able to add to the current operation at Telfer. But the plan at Havieron is how do we really find out very quickly what the scope of what we have there. We've got 4 drill rigs there at the moment, and we'll put as many as we need to find out what we have there. And then it'll be about how quickly can we get in there provided that there's a feasible mine there and mine that stuff out and truck it to Telfer. I mean the beauty of having the Telfer infrastructure there is, subject to Havieron being feasible and us going to mine it, all you have to do is mine it, and then you just truck the ore to Telfer. The thing that's unusual about Havieron in relation to the Paterson is the grades that we're seeing. I mean we're not used to seeing these sort of grades in the region. So that's particularly interesting and if it all holds up, certainly gives us a much more economic -- potential economic outcome by trucking -- as you know, trucking high-grade stuff is a lot better than trucking low-grade stuff.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [47]

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Sure. And so just in terms of those drilling efforts in and around Telfer, would that also include potentially increasing your holdings on the Peterson (sic) [Paterson] range?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [48]

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Look, we're always on the lookout for exploration properties. But I think people are starting to twig that Telfer's infrastructure is very valuable from the viewpoint of early to market with mines. And we're having a lot of people knocking on our doors is what I'll say at this point.

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Operator [49]

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And your next question comes from the line of Ben Crowley from Macquarie.

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Ben Crowley, Macquarie Research - Gold Analyst [50]

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Yes. Just a sort of longer-term question, where you got a couple of big development projects on the horizon. But given that Wafi's delayed but hopefully we see some progress there and it move into development in the next little while, but then you've got Red Chris, which it sounds to me is potentially fast tracked or at least you have the motivation to try and fast track it. I'm just wondering how you look at the balance between those 2 projects both from a sort of timing perspective, CapEx perspective. And is there a scenario where you see yourself sort of building both at the same time?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [51]

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I have no qualms about building both at the same time. We have all the technical horsepower and the balance sheet to do that without a problem. We thought through all of that. I mean it's not just an off-the-cuff comment. We -- if that were the case, we're perfectly comfortable that we're capable of handling it.

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Operator [52]

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And your next question comes from the line of Mathew Hodge from Morningstar.

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Mathew Hodge, Morningstar Inc., Research Division - Sector Head and Senior Analyst, Basic Materials [53]

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I'm just curious about how I should be thinking about the potential upside from technology at Telfer. And then a kind of related question is do you see the key driver of value there being that kind of technology unlocking efficiencies. Or is it exploration or some kind of combination of the 2? Like how do you think about that, Sandeep?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [54]

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Well, I mean it's a very good question. So I mean there's a whole suite of stuff around exploration targeting and technology. And speaking about the Telfer region, I mean initial indications, which is quite exciting, is the Havieron deposit is structurally different to the domes you find at Telfer. And the question is does that make us think differently about some of the ground at Telfer. So yes, there's always a learning and innovation technology piece there.

As the grades at Telfer are quite low, implementing some form of arrangement that sees a rejection of the waste ore before the high-cost milling process is something that I think Telfer is quite amenable to. So we're certainly pushing along our studies and test work in that area. So essentially, you're treating the ore you want to treat and rejecting the stuff you don't want to treat before you start spending the high cost. So that's one area.

And the other one is the undercutless block cave trials that we're doing a Telfer. You'll recall a couple of years ago, we were looking at -- or a year ago at block caving some of the material underground at Telfer at the end of the sublevel cave. That didn't prove economic in terms of delivering the rates of return we're looking for. But if suddenly, you were able to cut the cost by 30% of the installation of the cave and speed that up, that may make a difference. I'm not saying it will. It may make a difference on how we view the possibility of doing a cave at Telfer and would certainly flow over to any caves that we would do, the multiple panels at Cadia, at Golpu and at Red Chris. So they're just 3 examples.

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Mathew Hodge, Morningstar Inc., Research Division - Sector Head and Senior Analyst, Basic Materials [55]

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And can you talk about the results of the testing of the ore sorter for example, like what you're seeing there?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [56]

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I mean the ore sorter proved quite successful, and I mean we were in a position of getting 80% of the material into about, from memory, 25% to 30% of the volume. So that was quite successful from a test work viewpoint. Then you've also got to look at what is the capital cost of such an installation and what's the return, but also, which we're in the process of trialing now is, is there a low-cost methodology such as screening technology that can be used to screen out the waste in -- maybe not as well sorted as an ore sorter but certainly more economical given the lower capital cost. So it's not just a question of technical success. You have to be pragmatic about which one gives you the better return. So we look at it with both lenses if you like.

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Operator [57]

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And 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 [58]

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Just while we're talking about ore sorting, Sandeep, can you tell us about, generically technology, what's the impediment? It sounds like obviously -- maybe the CapEx is especially high. It doesn't sound like it was a slam dunk for you guys to embrace that given you're now looking at maybe some screening sort of solutions as well. But generically speaking, what are the limitations on ore sorting? Why doesn't everyone use ore sorting everywhere?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [59]

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Well, the technology is just emerging. I mean you -- the sensors and scanning technology that you're getting is improving at a faster, faster rate as you look at the technology and the digital processing capabilities. But all the ores are different, right? I mean some ores lend themselves to ore sorting and some don't. And gold is particularly different -- difficult because of the sensing, I mean XRF, all that stuff works for copper and other materials, but gold is very different. So if you're going to just use x-rays, you got to make sure your gold follows the copper and what have you.

So -- and you -- but ultimately, it's an economic trade-off, and we got to make these decisions carefully. And if you look at Cadia, we're looking at a nuclear source. So it's not that one suits -- there is no panacea for ore sorting because it's ore dependent, so that's the first answer. And secondly, we'll have to look at which -- where does it make sense and where doesn't it. And that's just an economic evaluation. But the technology is, in my view, going to be used much broader and broader in the industry as we go forward and you get mines that have lower-grade ore coming into situations where the milling process is more expensive because of power costs and size of capital. So there is a market there. It's only just opening up, but it is ore dependent.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [60]

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And just on Telfer as well, for the avoidance of any doubt, absent any other technology, the current kind of life expectation of Telfer, correct me if I'm wrong, coincides with the end of your current hedging program. So as per your sort of plans and budgets, is that right, sort of 2023?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [61]

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Yes, thereabouts 2023, 2024. Yes.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [62]

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Yes. Okay. And then if I can swing on to Gosowong with a similar question, obviously, the -- it feels a bit like the decline is coming quickly now at Gosowong. And you probably disagree with that sentiment. But what's the remaining kind of mine life as per your plans look like there? And what are the opportunities to sort of keep that asset rolling along perhaps with a shorter sustained mine life?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [63]

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Look, Gosowong has had a 2-year mine life for all the time that I've been in Newcrest because it's just one of those ore bodies. But there's no question that this mine life is coming to an end. It's -- now my view is Gosowong will be there for much longer as a lower ounce mine, not the rates that we mined it in the past. So we continue to operate it. As you know, we're under an agreement to sell at least 26%, and we're in the process of doing that. And we'll see what comes out of that whole process.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [64]

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So there's a bit -- is there some more scope as part of that process? Maybe you'll end up selling the whole lot if the price is right, et cetera, et cetera. That's a bit more of a broader umbrella?

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [65]

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Yes. Look, I mean we will judge the bids on its merits, but certainly, that's something we'd be open to.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Yes. Okay. Then I had 2 quick questions for Gerard, which are probably reasonably mechanical. Just to be clear, Gerard, so the 800 or so, you're going to pay -- you're going to shell out for Red Chris, that will be factored into your free cash flow calculations as per a dividend estimate when we're looking forward into 2020, correct?

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [67]

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Cash flow and -- yes, remembering that the dividend policy has a minimum dividend payment of $0.15 a year.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [68]

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Yes. And it's over the full year, too, yes, yes. And then just quickly on tax or the question earlier. But just apologies for everyone else on the line, but can you just, for my benefit, explain in a little bit more detail the lag or the latency on that tax payment -- cash tax payment mechanism, please?

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [69]

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Yes. In Australia, you're depending on what your profitability was in 1 period. You look at installment notices that are based on the year just gone and then you have to pay, and depending on the rise and fall of your submitted tax returns, you will be basically increasing the rate of payments that you make on a quarterly basis or half yearly basis -- monthly basis, I should say, during the year. So as Cadia's profitability has lifted, those rates of payments have increased, and the settling payment occurs in the December period. And as Cadia's profitability has increased year-on-year, that settling payment at -- in December is higher year-on-year.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [70]

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Yes, and so there's sort of, what, a 3-, 4-month lag from when you submit your accounts effectively then to when you settle up that cash tax.

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Gerard Michael Bond, Newcrest Mining Limited - Finance Director, CFO & Executive Director [71]

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That final settlement payment is inclusive of your final submitted tax return.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [72]

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And just one last question on stripping at Lihir. The uptick this year, is that a function of better prices, gives you a little bit more cash flow, a bit more flexibility? Or is this an uptick in stripping, which has always been part of the mine plan? Perhaps just a little bit more granularity around the drivers at Lihir, please.

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Sandeep Biswas, Newcrest Mining Limited - MD, CEO & Director [73]

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Yes. It's always been part of the mine plan. As you know, sometime back, when we changed the whole methodology on how to get to the Kapit ore body, we outlined a sequence of pits as opposed to the plan from way back to build the dam in the ocean and go straight for Kapit. So it's all part of that mine plan we unveiled probably 3 to 4 years ago, and it's just part of that life of mine plan.

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Chris Maitland, Newcrest Mining Limited - Head of IR [74]

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Okay. Look, thank you, everybody. We've run a little bit overtime there, and we have other calls scheduled for the media. So look, I'll just wrap up the call today. And look, wish everybody having a safe day today. Thank you.