Evolution Mining Limited. (OTCPK:CAHPF) Q3 2022 Earnings Conference Call April 20, 2022 9:00 PM ET
Company Participants
Jake Klein – Executive Chairman
Lawrie Conway – Chief Financial Officer & Finance Director
Glen Masterman – Vice President, Discovery & Business Development
John Penhall – General Manager Cowal Operations
Conference Call Participants
Matt Greene – Credit Suisse
Mitch Ryan – Jefferies
David Radclyffe – Global Mining Research
Al Harvey – JPMorgan
Daniel Morgan – Barrenjoey
Alex Barkley – RBC
Andrew Bowler – Macquarie
Matthew Collings – Morgans
Kate McCutcheon – Citi
Stuart McKinnon – The West Australian
Michael Bennett – AFR
Operator
Thank you for standing by and welcome to the Evolution Mining March 2022 Quarter Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would like to now hand the conference over to Jake Klein, Executive Chairman. Please go ahead.
Jake Klein
Thanks Omni. Good morning. Welcome to the call and thank you for joining us. We do appreciate it. Bob Fulker, our Chief Operating Officer is taking a well-in break from today’s call, so I’m joined by our Finance Director and CFO, Lawrie Conway and our VP Discovery and Business Development Glen Masterman.
At a macro level, this quarter inflation in the U.S. rose to 8.5% its highest level in 41 years, while unemployment rates in the U.S. and Australia are at historic lows. Russia’s invasion of Ukraine is now entering its third month, with the conflict showing no signs of reducing, and COVID continues to wreak havoc on people’s health, workforce availability and supply chains.
Closer to home in February and March, the Australian East Coast was battered by heavy rainfall and flooding that tragically killed 21 people and required thousands of people to evacuate their homes. Against this backdrop, gold has been fulfilling its traditional role as the best hedge against inflation and geopolitical uncertainty. Regrettably for the world, I expect these issues to continue.
Turning to Evolution’s quarterly reports and our performance and starting on slide three of the presentation. There are many highlights in today’s report, but three are clear standouts for me. Firstly, our portfolio has been transformed into one which is amongst the highest quality, lowest cost cash generative, growth oriented portfolios in the gold sector. 148,000 ounces of gold produced an all in sustaining cost of A$990 an ounce was US$770 an ounce is a 27% reduction quarter-in-quarter and makes us very close to being the lowest cost gold producer of scale on the planet.
Operating mine cash flow increased 33% to $269 million. Net mine cash flow increased 135% to $124 million, but the bulk of the $144 million of capital being spent on our most important organic growth opportunities at Cowal and Red Lake. We paid our 18th consecutive dividend of $55 million bringing total dividends paid to shareholders to $1 billion.
Secondly, the impact of 100% ownership of Ernest Henry and the transformation at Red Lake. In the last quarterly report conference call three months ago, I said that I was confident that by securing 100% of Ernest Henry, we had concluded what is likely to prove to be one of the most transformative deals in Evolution’s short history. Today’s quarterly report is proof of this. The numbers speak for themselves.
Copper production more than tripled to over 13,000 tonnes resulting in an all in sustaining cost of negative $2,000 an ounce and the mine generated $185 million in operating cash flow. Gold sales were higher than production at 39,000 ounces due to an additional 20,000 ounces of gold that was sold to the to — due to the cancellation of the previous economic interest.
Excluding the impact of those sales, operating cash flow for the quarter would have been $137 million and all-in sustaining costs would have been negative $4,200 per ounce. The transformation at Red Lake gained very important traction this quarter with a 67% increase in production to 33,000 ounces. We expect to improve this to over 40,000 ounces in the June quarter. It is testament to the significant efforts of our people at Red Lake and the operations team under Bob’s leadership. We still have lots of work to do, but we are making tangible progress in creating value in this operation.
Thirdly, I was proud of the resilience our teams demonstrated. As mentioned a few moments ago, COVID and rain events caused problems across the country during the quarter and we were also affected. Over 25% of our workforce at Calow tested positive for COVID during the quarter, which amounted to 199 people. Fortunately, everyone is recovering. This of course excludes the impact of those named needing to isolate as a result of being deemed close contacts. Despite this, not only were we able to deliver a robust quarter at Calow, but the team was able to plan and execute a very logistically challenging seven day Mills shutdown, which required a multitude of contractors around 300 people to assemble on sites. With very strict protocols in place not one person involved in the shutdown tested positive.
The unprecedented East Coast rainfall in the quarter impacted both Calow and mount Rawdon. Cowal managed through it but at Mount Rawdon it did result in some instability in the north wall of the open pit. Although this is being managed, it has had and continues to have an impact on our ability to access higher grade oil from the open pit and also required the crusher to be shut down for nine days.
As you all know, the underperformance of Red Lake in the first six months of the year left us with very little runway on our original guidance and taking these new factors into accounts, we have reduced our FY 22 Production guidance by 20,000 ounces, or 3% from the lower end to around 650,000 ounces. We’re expecting a strong fourth quarter with an increase in production of around 22%. There is no change to our sector leading all-in sustaining cost guns of $1,135 to $1,195 an ounce, so we will continue to produce high margin ounces.
On slide four, we have set out the results from Ernest Henry. Being a copper gold mine it is challenging to compare it to other gold mines. The best measure is cash flow. And on this measure, I am confident that they will be very few gold mines in Australia that generated $175 million in net mine cash flow this quarter. We have chosen to treat the copper as a by-product credit which delivers exceptionally low cost of negative $2,000 an ounce. Another lens to look at this through is on a gold equivalents basis. Through this lens, production for the March quarter would have equated to 95,000 ounces of gold, or 380,000 ounces on an annualized basis at a low all-in sustaining cost of A$11150 an ounce.
The charts on slide five tell the story of the transformation that is occurring at Red Lake. I am particularly pleased that we gained momentum through the quarter with March being the strongest month and in many areas breaking all-time records at the operation. Having consistently delivered about 1200 meters of development for the last six months, the Red Lake transformation plan now has a goal to consistently and safely mine 3000 ore times per day. This was achieved in March with 106,000 tonnes mined surpassing the previous monthly record in the history of the mine by more than 20,000 tonnes.
Pleasingly this mining rate is being sustained in April. On-going improvements to mining practices continue to drive reductions in stope dilution that improve mine grades by 17% this quarter. Both the Red Lake and Campbell mills are operating at record throughputs. The CYD decline which will provide an important new source of higher grade all gathered momentum and is on track to deliver the first production ore in the September quarter, only six months away. We expect improved production to over 40,000 ounces in the June quarter with the focus on sustaining this level consistently over the next few quarters. Whilst being a few quarters behind our original schedule, we do remain confident of the potential for Red Lake to be transformed into 350,000 ounces a year low cost operation.
Turning to slide six, the Cowal underground project continues to be on budget and schedule for critical path activity. Major procurement milestones have progressed during the quarter and the award of the primary mining and drilling contract is imminence. This will complete the award of all material contracts. First production ore from the project remains on schedule for the June 2023 quarter when the pace funds is commissioned.
Slide seven shows the significant impact of the Kundana and East Kundana acquisition has made on the future of Mungari. The integration is progressing well with the objective to create what we are describing as one Mungari standardized systems and processes and sharing of equipment and workforce costs what was previously three separately run operations.
One example of the operational synergies that are being captured as in underground maintenance and training teams with three separate units are being combined with significant savings and efficiencies. Recruitment of vacant roles is also progressing well with vacant roles reducing during the quarter despite the tight Western Australian Labor markets.
Turning to slide eight. Earlier this month, I was fortunate to be on site when Mount Rawdon hosted a delegation from the Queensland government led by the Minister of Resources, the honourable Scott Stewart. The visit included an update on the two gigawatt pumped hydro power project and the significant contribution it can make to delivering Queensland’s renewable energy targets. As a potential pumped hydro facility Mount Rawdon is blessed by history, topography and location.
It has a huge head start in about in that about a billion dollars has already been spent mining 200 million which has been processed for gold production over the expected 25 year period of its life. That billion dollars has created a big hole which can be used as the lower reservoir of the pumped hydro scheme. In addition, the topography of the surrounding region also delivers Mount Rawdon a great natural sight for the upper reservoir.
In terms of location, fortunately, Mount Rawdon it’s only 25 kilometers from major power lines connecting Queensland southern and central grids. And on top of that, the timing of the mines closure lines with Queensland decarbonisation strategy, with the state due to close the 700 megawatt Callide B coal-fired power station in 2028. The study work remains on-going and is due for completion in June 2023.
With that, I’ll hand over to Glen to provide an update on our exploration and discovery activity.
Glen Masterman
Thank you, Jake and good morning. This morning I’ll update on exploration progress achieved across the discovery portfolio in the March quarter, which is set out on slide nine. Key takeaways I’d like to draw to your attention are firstly, the positive drilling results returned on the key joint venture, which have expanded the mineralization footprint at West Island and confirm the presence of very good grades at this emerging discovery.
Secondly, at Mungari and Red Lake, drilling results continue to reinforce our views on underground upside potential, particularly at Kundana where we are delineating new areas of high grade mineralization very close to existing development.
Turning now to highlights in this morning’s report. Commencing with our Cue joint venture in WA, we completed our first full quarter of managing and operating drilling activities after taking over from our partner masquerade minerals at the beginning of January. We recently switched analytical laboratories, which has reduced assay turnaround times from well over 12 weeks to a more manageable five weeks. Faster analytical turnaround times give us the confidence to accelerate diamond drilling, with a second core rig expected to arrive on the project during the June quarter. This will increase to three the total number of rigs on the JV ground in which we are earning 75% interest.
Encouraging results from the diamond program in the quarter are highlighted on page 11 of the report. Pleasingly we identified additional mineralized loads along the west Island trend, which has also extended 500 meters in recent aircore drilling to 2.1 kilometers long. The June quarter program will focus on drilling extensions of non-structures to understand potential scale of the mineral system and to test other targets styles that may be important to hosting high grade gold.
At Mungari, drilling results outlined on page 14 extended the structure that hosts the Christmas hanging wall load at Kundana. This mineralisation is located 35 metres from the main Christmas ore body which we’re currently mining. The results signify that the important ore bearing structure remains open along [Indiscernible]. The next round of drilling will target the high grade quartz load within the structure with the aim of potentially expanding the high grade mineral resource.
An exciting implication of the recent Christmas results is the realization of untested potential and the hanging wall of the stress load where this structural position is modeled to continue. At Red Lake, drilling retained high grade results own extension of the ozone at lower Campbell, as summarized on pages 12 and 13 of this morning’s report. The results confirm great continuity at the local scale and highlight an opportunity for significant resource potential between these deep intercepts at the bottom of the lower Campbell mineral resource. Future drilling will be planned at short step outs from adjacent development to extend the mineral resource into the 500 meter gap identified on the ozone corridor. I look forward to sharing the results of the June quarter drilling programs at our next opportunity in July.
With that, I’ll hand over to Lawrie.
Lawrie Conway
Thank you, Glen. Good morning, everyone. This morning, I’m pleased to update on our financial performance for the March quarter as shown on slide 10 of the presentation and outlined on pages 9 and 10 of the report. We’re in a very strong quarter of cash generation with operating cash flow up one third to $269 million and we delivered a $125 million of net mined cash flow. This was an increase of 135% from December. We invested $144 million in capital comprising $33 million in sustaining and 111 million on major projects.
At Group Capital guidance remains unchanged at $150 to $175 million for sustaining capital, and $440 million to $505 million for major projects. Group cash flow for the quarter was just under $22 million. Jake mentioned are excellent all-in sustaining cost performance for the quarter, and the $990 per ounce equates to a margin of around 60%. We remain on track to deliver our group all-in sustaining costs within the guidance range of $1135 to $1195 per ounce. We did see some higher costs come through in the quarter and these were in line with what we outlined with our half year results.
As I mentioned that the half year results though, the improvement in metal prices and revenue are more than offsetting these cost pressures. Now achieved gold price was up 3.6% in the quarter. The achieved copper price was down slightly by 1.5% but our copper volume more than tripled. The focus remains on managing the cost pressures across all of it.
The balance sheet continued to strengthen even after the increased debt associated with the Ernest Henry acquisition. Our gearing is sitting at around 23% and is expected to trend down below 20% in the coming months. This is in line with our first target level that we set post any acquisition. We ended the quarter with a cash balance of $538 million and have around $900 million of liquidity.
Turning to slide 11, and a summary of the quarter, delivering an all-in sustaining cost below $1,000 per ounce is certainly sector leading and we will finish the year within our group cost guidance range. The margins we are generating is able to fund our growth plans and still return funds to our shareholders. The immediate exceptional contribution from Ernest Henry is evident in terms of additional copper exposure, reducing our group all-in sustaining costs, and materially increasing the cash flow. The existing mine life plus the expected extensions, we’ll see this cornerstone asset generates significant benefits for many years to come. The ability of the team at Red Lake to achieve improvements in all areas of the operation gives us confidence that the transformation is now progressing well and we expect the momentum to increase again in the June quarter.
The other assets are performing well. And throughout the business, we have demonstrated resilience against the extreme rainfall events, and the impacts of COVID especially the isolation requirements for positive cases and close contacts. We are in a very good position to close out the financial year.
Thank you for your time this morning. And Harmony, please open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Matt Greene from Credit Suisse. Please go ahead.
Matt Greene
Hey, good morning, Jake and the team. My first question is just on Red Lake — do you think heading in the right direction? My question is around the milling. Can you please provide some context as to how running the Campbell mill beyond the 2000 tonnes per day? Are you getting a sense of what the optimal milling capacity could be? And just to confirm the exception to run beyond that level. I think, I recall you mentioning about it was only for six to eight weeks. Is that the case? Or have you been able to extend it?
Jake Klein
Yes, so the last question first. It’s a 12-week trial that we’ve you can restart, if it’s intermittent. So we are confident that we can run it till the end of June and into early July at these higher rates of 2000 tonnes, but we are we’re pushing it to the boundaries. I think it was only running at about 17 tonnes or 1800 tonnes a day when we acquired the operation. These are the milling throughput, which it achieved in the first quarter are historic, historic highs as the other mining roads. So we’re starting to get the productivity through that we need to convert this into a medium grade higher tonnage operation.
Matt Greene
That’s great. Thanks, Jake. And then, development rates are being sustained above the 1200 minutes a month. And if you’re able to get 3000 tonnes a day on a sustained basis, what’s your thinking around the Bateman mill versus Red Lake mill. I mean it’s a new mill, are there potential for cost savings there or scale. If you were to go down that medium grade path, it’s a transition to Bateman. And what’s your thinking around running all three mill?
Jake Klein
Yes, so we’re assessing that, Matt now. It is a thing and 11 kilometer distance from the Campbell and Red Lake Mills. We’re also doing the, we have the opportunity to do the bulk trial at McKinley deposit, which is near the Bateman mill. But we’re working out the milling strategy, obviously, the upper Campbell area, which will come on track in the first half of next year from the CYD decline gives us higher grade and potentially completely independent access to ore [ph] bodies. So, up until now, we’ve been focusing on keeping the two mills filled, because this is the first quarter, which the Red Lake mill and the Campbell mill have run combined throughout the quarter. So up until now, issues being on mining rates, we’re getting that right; we need to start getting consistency and reliability. We feel we’re getting there, you can see the trends. But obviously we’ve had a tough 12 mind set at Red Lake pre this quarter.
Matt Greene
Yes, that’s great, Jake. And then just on Cowal changing quarter there with the rain and COVID mentioned the 25% of confirmed cases, if we were to take the close contacts that had to isolate what sort of levels of entities and to the experience of time on site?
Jake Klein
I think I saw that the highest level of absenteeism on one day was about 80 people, 75 to 80 people, it’s now down to about 35. So it’s reducing, but 80 out of about 400 people is a lot of people off site. That’s 400 of total workforce. So if you took that that shift and those who are on break, it would be less than the 400.
Matt Greene
Yes, got it. Okay. And then do you expect things to ease with the recent, these recent changes on close contacts by the government.
Jake Klein
On John Penhall, the general manager of Cowal is sitting in the room. Yes, he’s nodding his head. But what none of us are pandemic experts. So we’re hopeful. Yes, Cowal has dealt with the brunt of it. And they’ve dealt with it very, very well. I mean, getting 300 people onto site for a shutdown was a pretty remarkable achievement without getting infections.
Matt Greene
Yes, I appreciate it. Okay. And look, if I could just squeeze one last one on Mount Rawdon there, perhaps a longer dated question here. A lot of a lot of gold miners wanting to become net zero on emissions. What’s your thinking on this pump hydro project, could this be a project that you participate in the future and look to maybe, I guess, generate credits to offset carbon elsewhere in the portfolio? And they’re just on the scale, how did you arrive at the 2 gigawatts for 10 hours?
Jake Klein
So I think the scale has been determined really by the reservoir capacity on the pit. It is a multibillion dollar project and we are not power operators and we don’t intend to become them. But yes, there is, the opportunity which I’ve described, can we have some ownership of the projects, it would be small, and a disproportionate amount of carbon credits to me would be a structuring outcome that would be fantastic for Evolution. It’s, we haven’t yet been able to test it. The first priority is to make sure that this project is feasible and economic. The prefeasibility study says that it is, the meetings with the Queensland Government suggests that it fits and aligns exceptionally well within their requirements. The more I read about pumped hydro and deep battery storage, the more compelling Mount Rawdon becomes. But fundamentally Matt Evolution’s priority is twofold; one is to do the right thing by the community and the remediation of the mind. The second thing is to maximize the value of the project and the pumped hydro has the potential to be a very significant and valuable project for Evolution shareholders.
Matt Greene
That’s great. Appreciate your time. Thanks Jade.
Operator
Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.
Mitch Ryan
Good morning, Jake and team. First question. This one’s probably Lawrie we’ll have some on page 10 of your quarterly working capital build of roughly $67 million during the quarter. That seems high relative to previous quarters. I’m guessing it’s got something to do with the Ernest Henry Acquisition but just wondering if you could please provide some color on that quantum of movement.
Lawrie Conway
Yes, Mitch it’s exactly that I mean what happened in the March quarter is we closed out the joint venture. So we get the gold sales. So that was a positive working capital movement. But we then moved to 100% of the concentrate, which works on either a three or four month, quotation or period. So in this very first quarter of owning 100%, our working capital will increase, and it increased by over $40 million on the receivable side. And that was the major impact on our movement in working capital in the quarter.
Mitch Ryan
Thank you. And my second question. And understandably, you’ve softened the guidance for FY 22, given the events during the quarter. Just wondering if there any drivers for that change that are likely to flow into FY 23 and ended up potential risk of impacting sort of the guidance out there for FY 23 currently?
Lawrie Conway
I think Mitch the real risk is on Red Lake. We had guidance out there for 200,000 ounces for next year. We are really looking at that. We are likely to need to downgrade that in due course, as the final budgets and loans come in place. But it is, at 40,000 ounces is the next hurdle and then 50,000 ounces that caught up from there.
Mitch Ryan
And then I guess on that, then can you provide a bit of clarity on Red Lake with regards to that 40,000 ounces? My the way I would think about it is that that’s the new base once you’ve achieved that in the fourth quarter, is that the right way to be thinking about it? Or is it a running hard in the fourth quarter and may come down in 1Q FY 23?
Jake Klein
No, what we saw, when we had this debate around reducing guidance in the range, we’ve made a conscious effort to try not to push the sights in the fourth quarter and fall off the edge of the cliff in the first quarter next year. So we are very driven by the fact that we’ve recognized our missteps at Red Lake. We need to build confidence and we need to get credibility. And we are going to be trying to build a base and then step up from those bases.
Mitch Ryan
Thank you. That’s it for me.
Operator
Thank you. Your next question comes from David Radclyffe from Global Mining Research. Please go ahead.
David Radclyffe
Hi, good morning, Jake and team. So just a follow up, I guess on Red Lake. Couple there. So firstly, you’ve got that chart showing the improved haulage from Cochenour, which looks like it was after the team [ph] for the quarter is showing that Cochenour was a key bottleneck. And going forward, we should expect sort of similar volumes out of Cochenour?
Jake Klein
David, I don’t know whether you’ve looked at the history of Red Lake but that high speed tram there was nothing high speed about it. And it cost a huge amount of money. Originally, it had kind of built for purpose electric low keys that it used. So we’ve changed those. We’ve changed it. There’s been some tremendous and successful change management there. And the team has done a great job there. And it’s and they now are running it very consistently. So Cochenour was never really able to provide a reliable base load and it is now starting to be able to do that. It is lower grade. So as we open up better and higher grade sections in Aviation MMTP, you’ve seen with mine, a couple of stops there. And when the upper Campbell area comes in line from the CYD decline obviously, we’re going to try and replace as much material if the mills are full with higher grade material.
David Radclyffe
Okay, thank you. And then just the follow up and given your previous comments there about the outlook for 2023. Given it looks like the ore mining rates are coming up, but you’ve talked about that dilution control this quarter. So it’s really one of the keyboard next, just getting that right up towards reserve grade, because there’s still obviously running below that. I mean, you do have new high grade areas coming in such as aviator, and I think you’ve said you started stooping [ph] there. But is it really still great, that’s the key drag into 23? And that’s the way we think about it, or is there further sort of potential the aspiration, I guess, for the ore throughput levels was maybe higher as well?
Jake Klein
No, I think there’s an element of bruising that we’ve experienced over the 12-months. But it’s really is about getting the grade consistent accessing these higher grade areas, getting reliability and predictability and confidence. Now the mills are running at maximum throughput. There’s a 15,000 tonne stockpile on surface at the moment. Remember, three or six months ago, Red Lake there were skeptics as to whether it would be an operation that would survive. We were always confident. But this quarter, you’re starting to see the development rates consistently starting to see the mining rates, the processing rates, it’s about building confidence and getting credibility.
David Radclyffe
All right, thank you, Jake. I’ll pass it on.
Operator
Thank you. The next question comes from Al Harvey from JPMorgan. Please go ahead.
Al Harvey
Good day Jake, Glen and Lawrie. Thanks for the call. Just maybe one on Mungari. Just wanting to get an update to confirm the Mungari mill expansion still on track for FY 22. And you did kind cause run through some of those synergies that you’re seeing across the role in EKJV projects. I wonder if you could outline any more of those and how we should think about cost savings at the on-going asset?
Jake Klein
Yes, so we’re trying — we’re integrating what were essentially three separate operations into one. We think there are synergies and opportunities over there. As you know that, there’s a tightness in the labor market. I mentioned that our vacancy rates had actually gone down this quarter, but we did have high level of vacancies at the start of the quarter. But yes, there’s plenty of opportunity. Glenn visited Mungari a couple of weeks ago, came back very excited about the geology. And the study is on track for completion at the end of this year, this calendar year.
Al Harvey
Thanks, Jake. And maybe just to follow up on Mount Rawdon, have you got any expectations around how long it might take to stabilize that pit wall? And maybe just following on from that? How do we think about rehab costs in the context of the pumped hydro project? Does that shift that down the track further? Or should we still need to take some costs out there for the rehab?
Jake Klein
I think that is on the access to the ore this quarter, we’ve made some conservative assumptions that we believe and that’s part of the reason why we downgraded guidance. Yes, we’re expecting that it’s deferred production rather than loss production. But we need to do the geotechnical work on. With regard to the rehab, it’s kind of a bit of a binary outcome, either we’re going to have to rehab it, or we’re going to go down the pumped hydro scheme. So what I’d encourage people to do is to start thinking about the option value of a pumped hydro scheme being viable at that operation.
Al Harvey
Thanks, Jake. And I’ll just sneak one last one in there just on the Ernest Henry cost, obviously, taking out that lag effect 42 and negative $4200 an ounce. Pretty impressive. Can we expect that to those actual numbers to flow into subsequent quarters now? Or are we expecting any other kind of accounting lag impacts going forward?
Jake Klein
Al, I’m going to pass that question onto Lawrie, but thank you for asking the first question on Ernest Henry on this call so far. This is an asset that delivered us 17% of the purchase price in the first quarter that we owned it. Laurie, over to you.
Lawrie Conway
Yes Al, there’s nothing further that should impact on the costing structures from the oil joint venture. So going forward, depending on gold and copper produced and sold, the AISC will be will be normalized. And it would obviously will depend on the copper price that we achieved in the quarter. In terms of the by-product credits, we get Jake has sort of locked in his mind, that it will be 4200 negative every quarter. We’ve just got to give him back to the accounting days or the mechanics of how you calculate it.
Al Harvey
That’s great. Thanks, Laurie. Thanks, Jake. Thanks, Glen. I’ll pass it on.
Lawrie Conway
Thanks.
Operator
Thank you. Your next question comes from Daniel Morgan from Barrenjoey. Please go ahead.
Daniel Morgan
Hi, Jake and team. First question is just on Cowal. Given the impacts of rainfall and COVID on the quarter, and it sounds like there’s still impacts this quarter. I’m just wondering if you could outline the latest thinking of grades from the open pit over the next 12 months. Thank you.
Jake Klein
I mean, I think we think it’s consistent albeit, John Penhall is right here and I’m going to put him on the spot and our general managers standing on for standing in for Bob, while Bob’s on leave. So, John, you’re the best person to answer that question.
John Penhall
Thanks, Jake. And good morning, Daniel. We’re expecting to see that rate incrementally increase over the coming 12 months and we see that looking back over the last 12 months, as we’ve seen volumes come up a strip ratio for well below one. So it’s going to be a volume piece here, but we’re going to see increased volume, and we’re going to see increased grade and that will translate through the mill. We’re already seeing the grade come up from circa point 9, 12 months ago, up to around just less than 1% or one gram per tonne I should say, going through the — now.
Daniel Morgan
Thank you. And maybe an accounting question for Lawrie. Just the DNA at Ernest Henry was about $4,000 an ounce. Just wondering, might be some accounting finalization adjustments in there or something? Just what’s the best guidance on where that should settle? Thank you.
Jake Klein
Yes, Dan, we’ve got, there certainly would be some in the finalization of the prepaid metal, which was always averaging $1,350 $1,400 an ounce. And then now you’re amortizing another billion dollars of asset acquisition. So that was the impact in this quarter as we finished the life of mine plans in the June quarter, we’ll update on what the DNA profile for this asset is going to be going forward. And I haven’t got it in front of me, but we had it at the half year as to what it would be on an annual basis, but I’ll get Martin to follow that one up with you.
Daniel Morgan
Okay, thank you. And Red Lake, revisiting a little bit of some earlier questions just specifically on the mills where you’ve done this trial. Could you further out on what you’ve learned about the mill that you didn’t already know. And, what’s potentially surprised you from running out at full tilt?
Jake Klein
Yes, that they can be pushed harder than they’ve previously been pushed. And they can produce they have higher throughput capacity than they’ve previously had. So we’re kind of pushing the boundaries now. But Bob’s always keen to push the envelope. And I think we started off at 1700, 1800 tonnes, they are over 2100 tonnes now at Campbell. The mills have never really been pushed to their maximum capacity.
Lawrie Conway
Yes, the other thing I’d add to that Daniel is, if you recall, when we first took ownership of the asset, the Campbell mill was one of the things that we had identified throughout the day that needed to get a little bit of love and attention and money on taking ownership because it was not a mill that was set up to go for the extended periods, we completed those works. And the pleasing thing we’ve seen in this trial, is that those works that we’ve done have allowed us to run even above where the team thought they could on an unlimited or an unconstrained basis. And so therefore, they’re getting a little bit more confident about the capital that may be required to have this sustain at these levels.
Daniel Morgan
And then maybe just update on the permitting process for that, because this is a temporary dispensation to run these mills flat out, which I presume is obviously the after throttle back in September quarter. What’s the process to repayment them at a higher number once you know what that number is?
Jake Klein
That’s infrain and we don’t think it’s a major impediment. It’s more just process than anything else.
Lawrie Conway
And if you’d recall, when we talked about the mill expansions, in the second half of last calendar year, if we were running at these rates, it’s a local permitting approval as opposed to if you go above 50% I think then it’s a federal. So these improvements that we’re running at a local approvals, so it’s not as complicated.
Daniel Morgan
Thank you very much.
Operator
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead. Hi, Kate your line is now live. Thank you. Your next question comes from Alex Barkley from RBC. Please go ahead.
Alex Barkley
Yes, hi, Jake and team. Another one on Red Lake. With the mining rates going quite well, particularly in March well above even the 850 kilo tonnes you’d guided from existing mines in FY 22, 23. Just wondering why on an annualized basis, the gold and all-in sustaining costs would still fall short of your FY 22 guidance despite probably suggesting it was going to be a better second half. So just wondering what you had expected for the third quarter in that original guidance versus what was achieved. And was it just basically a case during grade not being where they wanted to where you wanted them to be? Thanks.
Jake Klein
I think the main, the main issue is really the first six months of performance that we produced 38,000 ounces, which left us as I said, on our group guidance with no runway really, and a disappointing performance. So it’s been well documented. So we building from that base, the third quarter was pretty much in line. It’s consistently now kind of delivering, and we getting more confidence, but yes, a bit gun shy as to making bold predictions. We need to build confidence for the site team, and we need to build confidence that these things are consistent, and that 3000 odd times a day becomes a habit. And that then we can start looking at optimizing and getting greater. We’re very comfortable with the models. The reconciliations are not giving us concern about the models. We do have some work to do to further improve mining dilution. But, these are all within the range of what you describe as normal improvements.
Alex Barkley
Okay, so when you say that the third quarter was pretty much in line, don’t grade for about what you had planned at the start of the year.
Jake Klein
So yes, the Cochenour material is low grade. And that’s and we are getting some dilution from the all parts at Cochenour which is an on-going issues, as we mining those areas. We factor those all into the guidance and everything we have now. But, we Cochenour is a bit low grade, because of the success we’ve had at the tramming and the haulage that materials, being a base load and aviation NIM and CP zones are only coming online now. So that’s where you’re going to see a bit of great increase in the fourth quarter.
Alex Barkley
Okay, sure. And, excuse me if I missed your comments earlier on the call, but I think you said Red Lake was a few quarters behind the original schedule is that pertaining to that sub U.S. 1000 per ounce guidance you have by FY 23 end?
Jake Klein
Look Red Lake had 165,000 ounces of guidance this year, that’s been the cause of our the root cause of our miss this year. We’ve overestimated our capacity to transform the operation. We rebased it we think we’re on track we have not nothing in the in what we’ve seen at the operation gives us doubt that it can be achieved. But we are definitely 12 months behind where we expect it to be on delivery.
Alex Barkley
Okay, all right. Thanks. Thanks very much guys.
Operator
Thank you. Your next question comes from Andrew Bowler from Macquarie. Please go ahead.
Andrew Bowler
Hey good day Jake. Just sort of noticed a one liner in the quarterly about development at Bateman is that largely to establish drill positions? Are you considering sort of heading in in terms of getting some more out as well?
Jake Klein
It’s to establish drill positions. And we do have we do have the opportunity to take 100,000 tonnes as what’s described as a bulk sample there. But that’s not in the numbers that were that we’re talking about today.
Andrew Bowler
No worries. And just that sort of interim target of 3000 tonnes are down and obviously, hitting beyond that is it sort of expected that that’ll come you know from continuing improvements in mining practices or as the next big step coming from opening up those new areas from that big capital drive at the moment.
Jake Klein
Opening up the new areas. This is going to be a case of opening up multiple areas. We’ve talked about the fact that was grossly underdeveloped and undercapitalized when we took it over. We knew that when we took it over, we bought it for US$375 million a couple of years ago. We knew that was the case. We didn’t know how much it had behind the capitalize but they’re getting that 1200 meters a month was a key milestone. We’ve now shifted that to 3000 tonnes of say four tonnes a day. That’s now being achieved and it’s that building bases, de-bottlenecking the whole process and the mine is definitely the process because we still have a mill sitting on site that is unused at this point in time being the Bateman mill.
Andrew Bowler
Thanks for that. Just heading back to Australia, I mean how you’re talking about starting the underground network roughly a year from now. Can we expect a reasonable volume of development ore from now as an extra year or so? And if so can you give us a sort of rough guide on that or is it expected to be quite minor before that, that first opening milestone?
Jake Klein
John, do you want to take that one?
John Penhall
Lucky, yes. No worries. Good morning, Andrew. Look, I think in the context of, of the underground as it develops, we’re going to see that normal profile as we start to develop into the ore body over the coming next 12 months. We’re pretty busy, busy drilling at the moment underground to get confidence in in those first set of stoping. But I think as we follow the critical path, you’re going to see come through in our quarterly results, I guess an increasing amount of ounces coming out of the underground, but mostly through development, until we hit that first stipend. And like all mines, Andrew it’s going to have a bit of a ramp up period that posts the mill coming on board. But you will start seeing increasing levels of development ore. Again, it will be at a modest rate, because of course, with development, it’ll come through with that lower cut off.
Andrew Bowler
No worries, that’s all for me. Thanks.
Operator
Thank you. Your next question comes from Matthew Collings from Morgans. Please go ahead.
Matthew Collings
Good morning, Jake. It’s just a very simple question on Mungari. And just maybe accounting treatment around the JV, but it looks like a disconnect between the tonnes and grade processed for the gold produced is the difference just attributable Evolution answers versus a hole through the mill. Am I looking at it the right way?
Jake Klein
Yes, is the answer. So we’re reporting 100% of the stats through the mill, and then we’re taking our production number that’s attributable, so all of the 100% of the assets and 51 of the EKJV.
Matthew Collings
No worries. Thank you very much.
Operator
Thank you. Your next question comes from Kate McCutcheon from Citi. Please go ahead.
Kate McCutcheon
Hi, Jake and Lawrie, can you hear me now?
Jake Klein
We can.
Kate McCutcheon
So just on Dan’s question at Calow, I thought at the September quarter result, you said we would see those grades from Stage H pick up some one grams per ton in December and March. And I’d be running at point eight. What’s driven that you still expecting it to pick up to that 1.1, 1.2 in FY 23?
Jake Klein
So on that Kate, the mining grade will always be the lower one because we are out of Stage H building that stockpile. So the lower grade goes on. So that’s the average grade mind. And the highest grade is going through the middle. So when we were talking about the lifting grade, we’re seeing that in grade process. So we’re moving away from the stockpile material to pure Stage H material. We saw that get up to just under a gram in this quarter. And it will lift as John said earlier over the over the coming quarters as we get the higher volumes of ore out of the pit.
Kate McCutcheon
Yes, understand that makes sense. And a question for Lawrie, how much longer is cash tax going to sit at that lower rate? And then secondly, when are you expecting to pay stamp duty on the Ernest Henry deal?
Lawrie Conway
So the tax was lower in this quarter because based on our tax returns, so the FY 21 tax had to be finalized and paid in December, at the time that we submit the return therefore, there’s a higher amount that goes in the December quarter and the March quarter is lower. We then will see maybe a slightly higher tax cash in the June quarter. But again, we’re going to manage that based on where we see the FY 22 year finishing and what franking credit balance we want to end up with.
And in the second one, the Ernest Henry will either be in June or potentially in the September quarter. We’re finalizing the valuation that has to go in with the with the stamp duty lodgement. We’re hoping it goes into September quarter, but it could be in June.
Kate McCutcheon
Yes. Thank you. And then finally, look, I know Bob’s not here to answer this question, but what are you most excited about Ernest Henry, are there any near term opportunities or levers to pull that you’ve identified in the first couple of months?
Jake Klein
We’re most excited about the cash that’s generated and I’m going to keep coming back to this because I wish someone would look at this. We’ve got 17% of the purchase price back in the first quarter. We like the mine life extensions down at debt. The prefeasibility study suggests that it’s going to have an extended mine life down there. So we’re excited about the geology, the operation and the cash generation.
Kate McCutcheon
Yes, fair enough. Thank you.
Operator
Thank you. Your next question comes from Stuart McKinnon from the West Australian. Please go ahead.
Stuart McKinnon
Good day, Jake and team, just two from me. Firstly, on Mungari. Are you guys expecting COVID rates haven’t quite peaked there yet I say? I see there’s no major impacts to date. But you do mention that there’s been a slight increase in cases in April. Are you expecting though that increase to continue and possibly you experiencing the same sort of levels of absenteeism as you did [Indiscernible] or, or you’re not expecting the same impact at Mungari?
Jake Klein
You’d have to think that it is likely to increase as travel increases. And as exposure increases. What we’d hope is that we’ve learned from our experience at Cowal and at Red Lake, and that the protocols in place at Mungari are strong and have been built off what the other sites have learned. And we’ll be able to contain it in a way that is less disruptive.
Stuart McKinnon
Okay, thanks, Jake. And just another one from me on the gold price. You mentioned the macroeconomic environment being supportive of the gold price. And certainly it’s still fairly historically elevated levels. But are you in any way surprised that the price hasn’t sort of broken out above 2000 U.S. announced? I mean, it’s hard to imagine a more supportive environment for the gold price. And while it is elevated, it’s not it’s not really sort of breaking any records or anything like that. Are you surprised by that? Or what are your thoughts on the gold price going forward?
Jake Klein
My thoughts are that it’s going higher. The federal reserve I think, has a very, very challenging job of trying to bring inflation down from 8.5% last quarter without plunging the country into recession. That is, has very rarely been done successfully. And therefore I expect inflation to continue. And that is always good for the gold price.
Stuart McKinnon
Okay, thanks, Jake.
Operator
Thank you. Your next question comes from Michael Bennett from AFR. Please go ahead.
Michael Bennett
Hi, Jake. Just a quick follow up to that on COVID given the broader labor market, tightness. So how many cases have you had at Mungari in the – Icrow [ph] and are you’re getting a bit frustrated that WI is still taking a very different approach, given what we saw this week with the easing of restrictions in New South Wales and Victoria?
Jake Klein
Yes, so we’ve had 10 cases at Mungari to date, so much fewer than at for example, Calow or what Calow experienced. I did see in — I think it was in your newspaper the call from mining companies that labor access, overseas labor immigration should the eased and we would be very supportive of that. In a tight labor market, like we have at the moment, access to skills without creating rampant inflation and just not being able to fill roles is critical to the future of the mining industry, and frankly, the economy of the country.
Michael Bennett
And just one more on the [Indiscernible], I mean, in the last few days have seen in quarterly BHP what have and other talk about the COVID impacts. I mean, if you sort of sit back, how big of a deal is this for production and guidance for the industry going forward? And are there any solutions? Because it doesn’t seem like COVID is going away?
Jake Klein
Well, I think there are solutions in that they are waves of the virus and they do recede and the sites and then operations get better at managing it. Omicron seems to be less, cause less damage or illness or death then than previous strains. So I think we’ve got to learn to live with it. And that’s what our sides are doing and our people are doing. But it does cause a huge distraction to our operations teams. And I see John is nodding his head on this one in dealing with high levels of absenteeism, high levels of concern within the workforce and legitimate concern around health. And it is a distraction that certainly is not what you describe as normal business.
Michael Bennett
Allright, thanks Jake.
Operator
Thank you. There are no further questions at this time. I’ll now hand back to Mr. Klein for closing remarks.
Jake Klein
Thanks, Omni. Thanks, everyone. Look an interesting call and an interesting quarter. I’m going to get back to just leaving you with one final thought that we sold our gold at $2,464 an ounce, that leaves us as an average margin of around $1,474 an ounce or as Lawrie said, 60%. That’s 150,000 ounces of production. Just to give you an equivalence basis, if we were able to keep the same mix of production on that quarter, we and we increased AIC to $1740 an ounce or $750 an ounce, which I think will be more in line with the industry standard in Australia. That’s the equivalent of us producing 300,000 ounces of gold that AIC. Our view is it’s much better to produce less gold at higher margin and make lots of money. Thanks for your time.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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