Jacob Klein - Executive Chairman & CEO Lawrence Conway - Finance Director, CFO & Director Robert Fulker - COO

Michael Slifirski - Crédit Suisse Sophie Spartalis - Bank of America Merrill Lynch Daniel Morgan - UBS Investment Bank Paul Hissey - RBC Capital Markets

Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining 2018 Full Year Financial Results Teleconference. [Operator Instructions]. Please note that this conference is being recorded today, Friday, August 17, 2018. I would now like to hand the conference over to your host today, Mr. Jake Klein, Executive Chairman. Thank you, sir. Please go ahead.

Thanks, Eddie. Good morning, everyone. Thanks for joining us. I really appreciate you taking the time. I'll make some brief introductory comments and then hand over to our CFO and Finance Director, Lawrie Conway, who'll provide additional context and detail. Bob Fulker, our COO, is also here and will participate in the Q&A. During the call, we'll be referencing the presentation released on the ASX this morning, titled 2018 Full Year Financial Results. For those wanting a deeper dive, there are 91 pages of detail in the Appendix 4E and annual financial report, which I know our finance team, who's spent many long hours putting it together, would appreciate you reading. Turning to the presentation into Slide 3. I want to start by saying how proud I am of our financial performance in FY '18. The only strategic pillar on that page that is subjective is building a reputation for reliability and transparency. I will leave it to you to judge this, but I hope that you recognize that we try our best to be transparent and tell it like it is. On every other pillar of our strategy, as you will hear in a moment from Lawrie, we have shut the lights out. A very pleasing aspect for me to see is our strategy really delivering the results we anticipated. How better can I summarize our strategy than by saying, "Look at our FY '18 if you want to understand it. We produced less gold, invested more in our future, generated more cash and rewarded our shareholders with higher dividends." As reflected in our FY '18 results and FY '19 guidance, we've established a portfolio that will enable us to fair better than almost any other gold company through cyclical downturn and will generate great returns in a good time, as we demonstrated in FY '18. Before handing over to Lawrie, I also want to highlight our improvement and continued focus on safety, which is summarized on Slide 4. I know I speak on behalf of our board and leadership team when I say that none of these fantastic financial results we are talking about today are worth anything if any of our people are hurt delivering them. It's an area where we can never do enough and one I assure you we will remain focused on. With that, I'll hand over to Lawrie.

Thank you, Jake, and good morning, everyone. I echo Jake's comments that the results we have achieved for the last financial year are extremely pleasing. They truly reflect the hard work we have done over the last few years to materially improve the financial returns from the business. The highlights on Slide 5 captures well the financial outcomes for the year. Key financial metrics improved by a range of 4% to 83%. We achieved a 43% increase in profit before tax at $339 million; while our after-profit tax, both statutory and underlying, was up by 21%. Underlying profit was a record $250.8 million. The lower percentage increase is due to the high availability of unrestricted tax losses utilized in FY '17. From a cash flow perspective, the operation has generated record operating and net mine cash flows of $812 million and $540 million, respectively, an increase of 15% to 17%. We maintained the focus on strong cash generation and building strength in the balance sheet with group cash flow of $396 million. Again, tax was the main difference between FY '18 and '17, with the company making initial tax payments during the year. Importantly, the cash generated is at high margins, with our EBITDA margin at 53% and our all-in cost margin at AUD612 per ounce. Our earnings per share increased by 17% to $0.156 per share. Gearing is now very low at 2.7%, and we remain on track to be net cash during the second half of the financial year. The reward to shareholders from this performance is a 33% increase in dividend to $0.04 per share, fully franked. Turning to Slide 6 to briefly look at the movements in the underlying profit. The record profit of $250.8 million was driven by a full year contribution from Ernest Henry, the divestment of Edna May, lower depreciation expense and lower finance cost. The higher profit generated from the divestment of Edna May reflects the fact that the asset made loss in FY '17 and demonstrates the benefit of our strategy to prioritize profitability over production. Full year contribution from Ernest Henry increased profit by $71 million. But more significantly, we now see what a full year's contribution from this asset is, with an EBITDA of $231 million. The lower grade at Mungari reduced production and ultimately sales volume, which lowered sales revenue by $37.4 million. The lower depreciation and amortization expense is mostly driven by the extension to mine life at our assets, which also reduced the fair value amortization at Cowal and Mungari. A flow-in effect of deleveraging and renegotiating our debt facilities is that our finance cost reduced by $12 million compared to last year. The higher profits generated drove tax expense higher as did the fact that we had more tax losses available for utilization in FY '17. Further details of the profit taxation are provided in the appendix of the presentation on Slide 16 to 18. We're moving to Slide 7, EBITDA margins. Our EBITDA margin increased by 8% during the year at 53% despite the achieved gold price being flat. There was a benefit from a full year contribution from the higher margin Ernest Henry asset, and the achieved copper price was 17% higher. At an asset level, EBITDA margins remained very healthy, ranging from 35% to 66%, representing a diversified portfolio. Significantly, the longer-life assets generate the highest margins and the contribution across the portfolio improved during the year, where by now we have 92% of our EBITDA generated by assets with greater than 6-year mine life. This compares to only 76% last year. Turning to Slide 8, cash flow and capital. One of the primary focus areas of the business has been to own assets which generate sufficient cash flow, enabling investment in areas to sustain or grow production and/or mine life. All assets in our portfolio have been net cash positive for the last 5 years or since being under Evolution's ownership. The chart on the top right shows that we've been successfully increasing our mine cash flow while at the same time investing for future production. We achieved a record net mine cash flow of $540 million after investing $272 million across the assets. We've been increasing our investment in recent years. However, the change in the portfolio in the last few years has not been as capital-intensive, as evidenced by our net mine cash flow moving up 290% since FY '15 while our capital investment is only up 60%. The critical part of our capital investing is that we must make a decent return and quickly pay back the investment. The chart on the bottom right shows the average annual returns that each asset has delivered over their mine life and how much of the investment capital they have repaid. Pleasingly, the range of returns are between 13% to 24%, with our long life assets generating the higher returns. Mt Carlton alone has averaged 34% per annum for the last three years and has fully repaid all capital with 6 to 8 years of mine life remaining. Cracow has also repaid all of its invested capital. The shaded areas on the bar represent how much of the total invested capital has been repaid. Given all assets are expected to fund their own investment, the repayment should continue to increase even though their rate of return may decrease for a period as we invest heavily for the future. For example, at Cowal, right now, we're investing in Stage H and the Float Tails Leach project. Looking at Slide 9 and our investment in discovery. We've continued to invest in extending mine life and growing resource base in the last year, successfully replenishing depletion of resources and reserves. We invested over $20 million in the last year and now have a group average mine life in excess of 9 years. Over the last three years, we've increased our reserves per share by 39%. During FY '19, we will invest between $10 million and $20 million in resource definition. In the coming year, we will increase our discovery investment by approximately 50% to $40 million to $55 million. The main areas of investment this year will be at Cowal with an allocation of $15 million to $20 million directed mainly at the GRE46 area, and the same amount of money has been allocated to Mungari. Cracow has been allocated a total of $4 million to $10 million across resource definition and discovery to guard the reserve rates - base. We remain confident we'll be able to achieve further growth at this asset during this year. Now to Slide 10, which outlines the group cash flow. Only a couple of things to highlight here, the first one being that we generated record group cash flow of $396 million, which is up 4% despite the gold price being flat. And FY '18 included initial tax payments of $48.4 million. Excluding the tax payment, on a like-for-like basis, cash flow was up over 16%. On a unit cash flow basis, we increased 9% to $494 per ounce at similar achieved gold prices. The high cash margin equivalent to 26% of revenue means we comfortably service our debt and improve flexibility on the balance sheet. Turning to Slide 11. As I mentioned, the flexibility in the balance sheet is improved on the back of excellent cash generated in the business. We reduced net bank debt by $325 million to $72 million, resulting in a very low gearing of 2.7%. Gearing reduced by 83% during the year. This is in line with our willingness to gear up for acquisitions on the basis that we have a pathway to rapidly deleverage back to acceptable levels. Our debt facilities were renegotiated in the second half of FY '18, which resulted in lower fees and interest margins to generate approximately $6 million in savings. These facilities provide balance sheet support for the next three years. Underpinning this is our hedge book of 250,000 ounces at an average price of AUD1,711 per ounce for delivery through to June 2020. This includes 150,000 ounces for delivery during FY '19 at AUD1,694 per ounce. Moving to Slide 12. We're pleased to have declared a fully franked final dividend of $0.04 per share. This is an increase by 1/3 over the final dividend for FY '17 and a 14% over our interim dividend. The dividend is based on a payout of 50% of net earnings, which is as per our policy announced last year. The full year dividend of $0.075 per share is equal to 8.25% of revenue, which is materially higher than our previous policy. In total, we have now returned just under $300 million via 11 consecutive dividends. Moving forward. On Slide 13, we have our FY '19 guidance. Our group guidance of 720,000 to 770,000 ounces at AUD850 to AUD900 per ounce was announced with our June quarter results. This slide provides the detailed guidance by site and includes our capital guidance. Sustaining capital will be in the range of $105 million to $135 million, while major capital will be in the range of $150 million to $180 million, with most of this capital being invested at Cowal in Stage H and completion of the Float Tails Leach project. The drivers for the production and unit cost guidance for FY '19 are mainly a change in the production mix in the portfolio and lower grades at most assets. Cowal is being impacted by lower grade, pit congestion and use of a secondary ramp, increasing the cycle times. Mungari's higher production is coming from higher grades with the completion of the Stage 3 open pit cutback in FY '18, leading to lower costs. Mt Carlton is also being impacted by lower gold grade. This, as well as lower byproduct credits and longer haul cycles, is impacting on unit cost. Mt Rawdon's production and costs are impacted by additional geotechnical remediation work in the pit during the first half of the year. This work will require processing of lower-grade stockpiled material during that period. Ernest Henry's production is impacted by lower gold and copper grades, offset by sustaining the higher processing rates achieved during FY '18. Included in the appendix to the presentation are further details of the major project capital and guidance for discovery investment and noncash items. In conclusion, Slide 14 highlights the excellent financial performance for the year. The work we have done in the last few years is paying off through superior financial returns. We've established a track record of the low cost produced in both operating cost and total cost terms, and this will continue in FY '19. This low cost position is flowing through to higher operating and all-in cost margins. We're converting these margins into record cash generation and reducing our gearing, which has allowed us to increase returns to our shareholders via higher dividends. Thank you for your time this morning. And with that, I ask Eddie to open the line for questions.

[Operator Instructions]. Our first question comes from the line of Michael Slifirski from Credit Suisse.

Look, I've got a couple of simple ones, and I hate to be nitpicky on the small operations but just wanted to understand. First of all, with Cracow, the all-in sustaining cost guidance there, if we add to that the major capital and a little bit of exploration, we end up with an all-in cost of about $100 higher now than what you used for your long-term gold price assumption. So just strategically, where does Cracow now fit? Is there anything sort of abnormal in that major capital number that sets you up that should see that fall? I'm just interested in your sort of thinking around that operation, please.

Morning, Michael. Thank you. Yes, look, Cracow, for us, it still remains a critical asset for us in that we've been able to replace reserves in the last couple of years and maintain that mine life. We've identified areas in which we believe we can extend further this year by increasing the resource base and replacing depletion, which is requiring us to invest in capital. But the other part of what's driving that sustaining capital is that for a mine life that's now where it's at, we've got to replace some of the equipment because 2 years ago, we didn't see that, that life was there and therefore, we didn't replace the equipment. So in the short term, yes, we're investing some more, but in the long term, we'll see the benefit of that.

Okay. Moving on to Rawdon, that's the one that sort of surprised me also, and then I thought with the completion of the cutback that we'd see better costs come out of it. With the $25 million to $30 million on major capital, is that on - largely on remediation? Or is there something else that's driving that large number?

I'll get Bob to talk about what we're doing at that site and talking about the cost, Michael. But the $25 million to $30 million is finishing the cutback at Rawdon. So with the change in the resource model that we did with the MROR update earlier this year, it means there is some more capital ways that we've got to do before we finish that, which is in the first part of the year, which is impacting, therefore, on that cost base.

And expecting the ore movement as well, Michael. So the first half of the year has slightly lower ore movement, and we're supplementing that from the stockpiles. So that's coming into the cost as well. The rehabilitation of that west wall has commenced, and it will be done in this half as well. So all those costs are coming in this sort of half of the year.

Right. How significant is that remediation in terms of cost driver?

It's not material. But what it's really doing is, it says, particularly the September quarter, we processed stockpile material only.

Yes.

Yes, okay. And then look, a pretty unkind question and I apologize in advance. But you sort of set yourself up by providing 3-year guidance, and I know you've got to do it again shortly. But last time, you did it. I guess what interests me is that you're going to deliver this year the cost that you projected. You've improved the portfolio, but the production that you have delivered is about 100,000 ounces than what you thought you would when you gave that prior guidance on a weaker portfolio. So just interested in your comments around that. I know that Mungari has under-delivered compared to expectation. I know that Edna May is not there. But is there anything else sort of structural within the broader gold business that it's made - that's made it hard for you to achieve what you previously thought was achievable?

No. Look, I'd say yes, when we look at that guidance to now, Michael, there would be - it's movements in where the production is coming from. So what we're going through at Mt Rawdon right now, we would have - back then, have actually expected the cutback to have been finished by FY '18. Therefore, we would have seen higher production in FY '19. Mt Carlton, for example, we were - and you'd recall we were talking about a planned upgrade from 847,000 to 920,000 tonnes per annum. The study work has actually shown that the 847,000. The current configuration is the right configuration, but we're offsetting that - some of that by getting gravity. Mungari, as you mentioned, is lower than what we would have liked. Cowal is actually a bit higher from my recollection, and Cracow should have been getting closer to the end of the mine life than what it currently is. So it's the mix of all of that, and then you've got Ernest Henry coming in offsetting the production from Edna May. So that's really what's happened from September 16 through - until now, which then obviously where that production is coming from, impacts on our all-in sustaining cost.

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

Just two questions from me. Firstly, the Mungari exploration increased to $15 million to $20 million. Can you maybe just talk through that in a little bit more detail, please?

Yes. Sophie, it's Bob speaking. So what we've done, we're concentrating on trying to get some extensions in Frog's Leg. So we've got exploration going down-dip and along-strike. We're also working on stuff up around the Ora Banda camp, specifically to try and target the higher grade zones up around that area to get the ore mix right going forward. So what we concentrated on last year was getting the life at Mungari. Outwards then, we've managed that especially with the Castle Hill addition. Now we're concentrating on getting the grade up to a higher grade from an underground source to supplement that open-pit grade.

And Sophie, it's Jake. As we articulated at the site visits, the exploration at Mungari is to take it back to 150,000 ounces a year. We need a high-grade source of ore for that. And our principal focus over the next 12 months will be to try and identify that high-grade source of ore. And as Bob said, we're investing in that Frog's Leg deep target, which requires a bit of underground development and a drill cutting there, which should be drilled by the end of this year. And I think those prospects at Perimeter and Scottish Archer are showing some interesting signs that there is potential high-grade material out there.

Okay. And then just so in terms of number of drill rigs you've got out at site, maybe splitting into the underground and the regional targets?

I don't know. I'm sorry. We'll have to get Glen to come back to you on that.

That's okay. And then, Jake, maybe another question for yourself. It seems as though the call today, you've focused very much on showcasing how you deliver from previous M&A. You'll likely move to a net cash position by 2019. If you have a look at sort of your previous track record, you're adding an asset every 2 years. It is more FY '15, FY '17. As we move into FY '19, can we maybe just go through your thoughts around the portfolio? We've gone through, mine by mine, the performance over the last couple of years, but maybe how you can see the portfolio shaping up over the next three years ahead of the 3-year guidance outlook that you're going to provide.

Yes, it's the same, Sophie. It's definitely not on a time-based measure, our M&A strategy. But we're very happy with the portfolio we've got now. I mean, we've positioned ourselves as one of the lowest cost gold producers in the world. We've increased our mine life to over - close to 10 years on a reserve basis. As you know, reserves were down at AUD1,350 an ounce, so very conservative there. And we're generating lots of cash. We've said that it's cyclical, the sector we operate in. And you're seeing that right now. The GDX and GDXJ indices are close to two year lows. And we've always said that we're open to countercyclical investment, those that improve the quality of our portfolio and that are accretive to our shareholders. We've also said that we want only 6 to 8 assets, and that's really the guidelines within which we think about opportunities. There's no real point in me speculating as to what the portfolio may look like. We're very happy with the current portfolio but are always open to countercyclical opportunities that are accretive to our shareholders.

And the only thing I would add there, Sophie, is that you missed in the trends. We normally do them as we release our results. So thankfully, Aaron and Jake haven't given us anything at the 11th hour this year.

Matthew Fredman [ph] from Goldman Sachs.

Just wanted to drill down a little bit into the Cowal capital items. You've indicated there other process plant projects of $14 million to $16 million. Can you give us a little bit more detail on what those consist of? And does any of that, I suppose, relate to Mod 14 and taking the pie to 9.8? Or are there other things going on there?

Yes, thanks. The other projects really, there is some study work in there around the planned upgrade. The other ones that are around some oxygen generation on-site and also around the Gillis motor drive, a major change out in the plant that we need to make at the end of FY '19, start of FY '20. They are the 3 main things that make up that amount of capital.

Sure. So that sort of that Feb project mainly relating to, I suppose, reliability and outcomes. Your giving yourself some critical spare there.

Well, the Gillis motor drive one is - the oxygen is for processing.

The oxygen is around cost and effectiveness of processing. The Gillis motor drive is around the age and the supportability of the actual technology and just making sure it remains a reliable, going forward, I guess, method.

Sure, I understand, okay. I appreciate that. And then just secondly, I suppose - obviously, you don't have any control over this, but the current copper price where it's sitting at the moment is - you've already started the year with a bit of a headwind there to the AISC guidance. Where do you guys see the opportunities across the group to be able to, I suppose, claw some of that back over the year?

Yes, Matthew, I mean, it's certainly - we've planned at AUD8,800. We're below that. I mean, what we're targeting is making sure that we invest our dollars appropriately, making sure that we deliver to our production plan or better. But at the same time, I think what we look at in the marketplace, we're fortunate enough, I think - I was looking at it. We've done about $100 million worth of supply contracts in the last 6 to 9 months, which have average savings of over 10%. So the pressures we're seeing out there aren't as hard as we would have seen. So we're trying to capture those. And then really, it's the work that Bob and the technical team are doing. It's about how do we apply more efficiencies, innovation and technology to the way that we deliver the answers.

Sure. Just as a follow-up, I suppose, is there any significant supply contracts that are coming up for renewal over the year that you guys are hoping to be able to apply the same potential for savings to?

Well, look, there's nothing major in that sense as we did last year. The payout contract for all of our sites, except Mt Carlton, is locked away for three years. Our fuel contract is in place for another - through the end of this year. And then when we're getting into the other items that's either around contract labor, which we've locked away at Cowal for a two year process and generated a lot of savings there. So there's - it's probably getting down into the consumables that we're really working through at the moment. And then as we get towards the end of FY '19, some of these other contracts, such as the explosives and fuel and that, will come back up.

Matthew, just as an additional comment, in some ways, the strategic - or these headwinds that you referred, lower copper price, potential - low gold price at the moment, in many ways, are reflective of the strategy which we've put in place, where it's a portfolio that will undoubtedly prosper through the cycle. And hopefully, the cycle will present opportunities for us as well. We've got terrific organic growth opportunities as well. We talked about Cowal and the target there going to over 300,000 ounces per year sustainably. We talked about Mungari going back to 150,000 ounces a year. But this is a portfolio that will - is very well positioned for any headwinds in - on the revenue line.

Certainly, the margins attest to that.

Your next question comes from the line of Daniel Morgan from UBS.

Just a question about - obviously, you've generated a lot of cash in the past 12 months. And now you essentially don't have any debt. You're moving to a net cash position very shortly. I know M&A is always something you'll be looking at, but is there - what are you thinking about capital returns in the absence of M&A? Why can't - would you think about dividends? Would you think about buybacks? Or is it - how do you think about capital allocation?

Yes. Thanks, Daniel. The first thing that we had to do was, as I mentioned on the call, get our gearing levels back down to something manageable through the course of this year. We've done extremely well and actually got it probably what I'd say is too low. But what we also had to manage was we had no franking credits until the start of FY '18. We finished the year with a couple of million dollar franking credit balance. But as we pay our FY '18 tax return, that franking credit balance improves. So as we go through the course of this year, we will look at our dividend policy and if there's a way to return that. We do look at buybacks and other things like that, but given where we are right now, it's not something that we think is the right thing to do because realistically, we'd have to commit to $500 million to $800 million worth of buybacks over a few years to make it meaningful for our shareholders.

[Operator Instructions]. Your next question comes from the line of Paul Hissey from RBC.

Just a question from me. I guess, you spoke about the $1,350 gold price. Obviously, if the gold price rolls over, it suggests you still have plenty of margin left on your remaining reserves. But I'm just interested in - I guess, over, say a, 6- to 12-month view, what you might do tactically if we did see the gold price fall to those levels?

To AUD1350?

Well, just if the gold price falls another couple hundred bucks from where we are now, what changes would Bob go and make to the business on a 3-, 6-, 9-month view, yes, to - I guess to protect your margins or to protect your cash flow?

I mean, I'll let Bob answer that in a minute. But I'll just say that the one thing we wouldn't need to do is make short-term changes that impact the long-term future of the portfolio. So I think the risk with any significant downturn in the gold price is that companies are forced to make short-term decisions, which have long-term impacts. We've been there before in 2014, 2015, and we've purposely put the portfolio in a shape and position that we wouldn't need to do that and our balance sheets in that shed. But I suspect Bob has some things that he would be looking at in terms of adjusting for a situation like that.

Yes. Paul, the main things that I think we'd probably start looking at, as Jake said, wouldn't be around changes to mine plans and changes to the budget cycle. The cutoff grades and the block models are all pretty low, solid and stand-out price. What I would probably try and do is look at the cost impacts and the cost across the sites. But you wouldn't want to try and - or I wouldn't want to try and adversely affect the production by doing that. So really, by having that reserve base at AUD1,350 does make us pretty sound for the bottom of the cycle. And we've all been through them before. And if you can actually maintain your production and your stable projects and your stable operation through that downside, you really are placed to come out of the cycle a lot better than other people.

What we would be doing much more of is looking at opportunities that are accretive to our shareholders because I suspect other groups - other gold companies would be in a world of pain relative to us.

Yes, I suspect it might almost be this horrible outcome from that perspective.

Thank you very much. Thank you, sir. There are no further questions at this point. Please continue, sir.

Okay. We'll wrap up here. Look, thanks very much. Appreciate the - you listening in and the questions. And hopefully, it really is a very transparent and open result. I see a few of the notes that have been published reflect that, and that's really where we want to be. Just finally, Sophie, you asked the question about drill rigs. There are 4 drill rigs currently operating at Mungari. Fortunately, some of our site team are listening to the call and we're able to radio that in. We hope to see you all on the 4th of September at our Investor Day, where we'll talk more about the strategic future of the business. But I presume you take it from this that our business is in great shape, great result in FY '18 and positioned fantastically for the future. Thanks very much.

Thank you, sir. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect. Thank you.