Evolution Mining Limited

Thank you for standing by and welcome to the Evolution Mining FY21 Half Year Results Financial Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Jake Klein, Executive Chair. Please go ahead.

Thanks Melanie. Good morning everyone. Thanks for joining us. We really do appreciate it. This morning on the call I'm joined by Laurie Conway, our Finance Director and CFO, Glen Masterman, VP Discovery and Business Development, both of whom will be talking to the presentation. Bob Fulker, our COO, is also available here to answer any questions. By any measure the releases we have made on the ASX today are outstanding. I have the privilege of introducing them to you, but before launching into details about the very measurable things like profit, cash flow, resources and reserves, I want you to know that the most valuable asset this company has by far is not measurable and is our people and our culture. We are fortunate to have a group of passionate, hardworking, talented people who together make Evolution a special company who have made these exceptional announcements today possible. Our culture revolves around the characteristics of humility, respect, belief and empowerment. Continuing to develop this culture is core to Evolution's ongoing future success. Turning to the announcements and starting on slide three of our presentation. At Evolution, we seek to differentiate ourselves by focusing on delivering the best long-term sustainable returns via both capital growth and dividends. Our strategy recognizes that we are investing our shareholders' capital, and for every dollar we spend, we need to achieve an appropriate risk-weighted return. If we cannot be confident of delivering this, we should not be making the investment. We predominantly focus on bottom line metrics rather than top line production growth because it is the bottom line where shareholder returns are created, not the top line. So it is with pride that today we report record statutory net and underlying profit for the six months ended 31 December 2020. These results have allowed us to declare a dividend of $0.07 per share fully franked, our 16th consecutive dividend. This brings our cumulative amount of cash return to shareholders via dividends to $851 million over the past eight years. Our strategy is centered around our ambition to be the premier global mid-tier gold miner. operating six to eight high-quality assets in Tier 1 jurisdictions. At the core of our DNA is a belief that quality and margin matters most. Not all resources and reserves are created equal, and that is behind our relentless pursuit of continually seeking to upgrade our portfolio of assets. In the past five years, we have acquired four assets and sold three. Focusing on quality also drives our decision to estimate our resources and reserves using a very conservative gold price of $1,450 per ounce for all reserves and $2,000 per ounce for mineral resources. Today's announcement of a 74% year-on-year increase in resources to 26.4 million ounces and a 49% year-on-year increase in all reserves to almost 10 million ounces is a reflection of the strategy of upgrading the quality of our portfolio. Importantly, the increases in our resources and reserves are coming from our highest quality assets. We are incredibly pleased to announce today the first York Reserve at Red Lake of almost 3 million ounces. There is a strong potential for further reserve growth and discovery and we continue to be excited about our future at Red Lake. Reflecting this, the Board has approved the development of a new decline into the upper Campbell area of the mine which will allow access to the 1.85 million ounces of reserves grading 7.4 grams per tonne. We anticipate the decline will allow in excess of 1 million tonnes of ore to be mined annually from these new mining fronts which are separate to and independent to the current lower levels of the mine which are constrained by the shaft infrastructure. At Cal, the mineral resource base is now 9.7 million ounces and reserves are 4.6 million ounces. The underground reserve has grown to an excess of 1 million ounces and there is good potential for more. For those of you who may recall our acquisition of Cal in 2015, we acquired the mine with 1.6 million ounces in reserves. and it was scheduled to stop mining in 2020 and process stockpiles until closing in 2024. With investment and exploration success to date, we have produced 1.7 million ounces of low-cost gold, and notwithstanding this depletion, today have a reserve base of 4.6 million ounces. Cow and Red Lake now have a reserve base that places each of them in the top five gold deposits in Australia and Canada respectively. At Ernest Henry, the drilling program completed in 2020 confirmed that the ore body extends below the 1200 level at similar copper and gold grades and remains open. A significantly increased budget for drilling is approved and scheduled for 2021. with the aim of allowing these levels to be included in future resources and reserves. Evolution has a 49% interest in all copper, gold and silver added to reserves below this level. This asset has and will continue to be a fantastic one for evolution. Since evolution was formed almost 10 years ago in 2011, We have grown our resource base by 283% to 26.4 million ounces and our reserve base by 186% to almost 10 million ounces after taking into account depletion of 6 million ounces. On slide 4, we highlight a number of achievements we have delivered in the important area of sustainability. We are fortunate that we continue to navigate through the COVID pandemic successfully. However, we remain very conscious of the impact that this is having and have sought to assist and support our host communities with over $2 million of support. With that, I will hand over to Laurie to take you through the financial results.

Thank you, Jake, and good morning, everyone. It's a pleasure to present the financial results for the half year to December 2020. I echo Jake's comments that the results for the first half are outstanding, with several financial records achieved and more importantly we are banking cash and returning more than half of it to shareholders in a period of high metal prices. Even with the Australian spot gold price being $160 per ounce lower than what we achieved in the first half, our margins and cash generation position remain strong. On top of this, as you'll see in a couple of slides, our cost control efforts continue, with operating costs only increasing by 1% over the prior period. We will maintain our discipline and priority on margin. Turning to slide five, which summarises our financial performance. Our profit, both statutory and underlying, were records at $229 and $234 million, respectively. This equates to increases of 55% and 57% and an earnings per share of 13.4 cents. I'll cover off the drivers to the increased profit on the next slide. Our operating cash margin is very healthy and increased by 6% to 52%. Our investment in sustaining capital, major projects and discovery saw our all-in cost margin increase by 30% to $852 per ounce. The 30% increase is against an 8% lower sales and only a 14% increase in the gold price. This reinforces our focus on margin over ounces. At today's spot gold price this margin would be around $700 per ounce, although the nine year high copper price will buffer some of this impact if it is maintained for the remainder of the financial year. Group cash flow was down 10% but this was effectively due to negative $25 million working capital movement between the two periods. Moving to slide six where the drivers to the underlying profit are shown. The sale of Krakow and acquisition of Red Lake essentially netted off each other with a $4.5 million reduction to profit. Overall revenue was up 9% increasing profit by 21 million net of Red Lake and Krakow. Our focus on cost control remains effective with our operating costs essentially in line with the prior period. Non-cash items of inventory movement and DNA were favourable in the period. They were driven mainly by different stockpile utilisation in grades at cal between the two periods and lower depreciation rates as a result of increased mine lives linked to our MROR. On slide 7 which covers our cash margins and cash flows. Our EBITDA margin is sector leading at 52% which was an increase of 6% over the prior period. On a like for like basis where Red Lake was not in the portfolio in 2020, the 2021 margin would have been 56%. Red Lake has started well with a good base of 34% and we expect this to increase materially as the transformation programs are completed. Our long life assets have the highest margins at 60% to 73%. After investing $173 million across the business, our net mine cash flow margin is very strong at 36%. While at a group level, the cash is hitting the bank at a rate of 22% of total revenue or $625 for every ounce that we've sold. Even at spot gold prices, this margin would be still a very healthy 17%. Turning to slide eight and dividends. On the back of the cash flows generated in the first half and the outlook for the business, we've declared a fully franked interim dividend of $0.07 per share. This will deliver a return of around $120 million to shareholders and is equivalent to a payout rate of 55% of our first half cash flows or 12% of revenues. It represents a dividend yield of around 3.5%. We continue to manage and balance our dividend level and franking credit position to deliver fully franked dividends. We see no change to our policy or payout rates in the near term. Lastly, slide nine demonstrates that any changes we make to the portfolio are aimed at improving the quality. This is either through acquisition or divestment and underpins our strategy. Our track record is shown in recent transactions. A fundamental part of M&A is making a return on investment which means all assets repaying their capital and generating an adequate rate of return. Ernest Henry has repaid all of their investment while Cow will reach 100% in this quarter. They have repaid their investment in a short four to five and a half years. Meanwhile, Mangari's turnaround in the last couple of years has been exceptional. In fact, in the last 12 months alone, it has repaid 36% of its investment. I would suggest that this is the highest return in the Kalgoorlie region. These three assets have delivered an average of 15% to 25% return each and every year that we have owned them, with Ernest Henry to stand out at 25%. It's only early days for Red Lake in the portfolio, but with the transformation plan tracking ahead of schedule and the significant increases in reserves, we expect the rate of payback to improve in the coming years. We've also demonstrated that when we sell assets, not only do we improve the quality of the portfolio, but we sell well with royalty or contingent payment mechanisms. We have received just under $5 million from Penjingo and Edna May to date, and those structures are now delivering payments every six months. In conclusion, the results of the first half of the year sets us up very well to finish FY21 in an even stronger financial position.