Evolution Mining Limited (OTCPK:CAHPF) Q1 2021 Earnings Conference Call October 27, 2020 7:00 PM ET
Bryan O’Hara – General Manager Investor Relations
Jake Klein – Executive Chairman
Bob Fulker – Chief Operating Officer
Glen Masterman – Vice President of Discovery and Business Development
Lawrie Conway – Chief Financial Officer
Conference Call Participants
Nick Herbert – Credit Suisse
Reg Spencer – Canaccord Genuity, Inc.
Luke Smith – AustralianSuper Pty Ltd.
Matthew Frydman – Goldman Sachs
David Radclyffe – Global Mining Research
Sophie Spartalis – Bank of America Merrill Lynch
Ladies and gentlemen, thank you for standing by, and welcome to the Evolution Mining September 2020 Quarterly Results Call.
At this time, all participants are just in a listen-only mode. Following the presentation, there will be a Q&A session today. [Operator Instructions] And just please be advised that today’s conference is being recorded. But I will now hand the conference over to your first speaker for today, Mr. Bryan O’Hara, General Manager of Investor Relations. Thank you and please go ahead.
Thanks, Miles. Good morning and welcome to the Evolution Mining’s September 2020 quarterly conference call. This morning on the call, we have: Jake Klein, Executive Chairman; Lawrie Conway, CFO and Finance Director; Glen Masterman, VP Discovery and Business Development; who are all with me here in the Group Office in Sydney. We also have Bob Fulker, our COO, who is dialing in from Brisbane.
During the September quarter, global macro factors remain supportive of the strong gold price. A new record that’s set in both U.S. dollar and Aussie dollar terms, with quarterly averages of US$1,909 per ounce and A$2,668 per ounce respectively.
While there is likely to be some volatility in the gold price with the upcoming U.S. election, the longer-term outlook remains constructive. We continue with negative real interest rates and record money printing from governments around the globe.
Last Friday, we were pleased to release our 2020 injury report and sustainability report. We’re looking forward to engaging with our stakeholders in the coming weeks to discuss the great progress we’re making in our sustainability performance as outlined in the report, including a healthier and safer and more diverse workforce; an increased focus on climate-related risks in the key areas of energy efficiency, water security, and extreme weather and health events; and the ongoing contributions we’re making as a trusted partner to provide community benefits beyond the life of our mines.
Thank you and I’ll hand you over to Jake.
Thanks, Bryan. Good morning, everyone, and thank you for taking the time to join us on the call today. We hope you are doing well and are healthy, and navigating through this COVID pandemic successfully.
I’m really pleased with our performance this quarter. We had a strong start to this financial year, with the results and progress across our whole business ahead of where we planned. Operationally, our focus continues to be on capturing and banking high margins, safely and reliably converting quality low-cost ounces in the ground into cash in the bank. This quarter we are able to capture an all-in cost margin of $871 for every ounce we produced, which is sector-leading.
At the same time, we are investing in our growth and have an exciting pipeline ahead of us. Over the next 2 years, we expect to be able to deliver a 17% increase in production and a 9% reduction in costs on our already low FY 2021 cost base.
At Cowal, we are making good progress to grow our production base to 350,000 ounces of low-cost gold from this outstanding asset. In September quarter, a very important milestone was achieved with submission of the Significant State Development Application and the Modification 16 Development Application to the New South Wales Department of Planning, Industry and Environment.
Support from the local communities and stakeholders for this project has to date been very positive. Reflecting the confidence we have in this underground mine, the Board last week approved the development of 2,300 meters of additional decline, which will be used initially for exploration drilling. But it’s also been designed so that it can form part of an operating underground mine in the future.
We continue to be encouraged by the size and scale of the underground orebody, which was estimated at 2.9 million ounces in the last release, which had 30 April 2020 drilling [kudle] [ph].
This quarter, drilling has again extended the resource envelope and it remains open along strike and at depth. We expect this drilling to support an increase in resources and reserves when we release it in the March 2021 quarter.
Red Lake continues to exceed our most optimistic expectations and our confidence is growing about the potential upsides for this asset. At 11 million ounces of resource, it is already a very significant mineral inventory and the 6 drill rigs operating underground is a reflection of our view on the upside of growing its resource and reserve base.
Accessing the 4.3 million ounce resource at 10.5 grams per tonne in the Upper Campbell area is a clear and present opportunity, and work has been accelerated to complete a study that will allow us to develop a decline to access to this high-grade area.
Ernest Henry continues to be a very powerful cash generator, this quarter contributing an outstanding $83.2 million. There are very few gold mines in the world that generate that scale of cash flow.
We are very confident that the drilling program currently being undertaken will extend the mine life of this important asset. Team at Mungari has done a fantastic job of transforming the operation. In many ways, it is the same journey that Red Lake is at the start of. They now consistently meet or exceed plan, and this quarter generated a third consecutive quarter of record mine cash flow of just under $45 million, an outstanding achievement by outside team. With this confidence in the operation, we have commenced studies on assessing processing options for the Castle Hill area, which we expect to be able to share with you in the June 2021 quarter. Mt Rawdon delivered large drill plan are set Mt Carlton drilling at Crush Creek is providing important optionality for the future of this operation.
Evolution is very well positioned to prosper through the cycle. During good times like we are currently experiencing, we are banking sector leading returns, rewarding our shareholders of dividends and investing in our future growth. This is a great position to be combined this with a fantastic team of people who are passionate about both our values and creating value. I am confident that Evolution is in very good shape.
With that, I’ll hand over to Bob to provide more detail on our operational performance.
Thanks, Jake, and good morning everyone. If I start with our safety performance, the September quarter, we’ve seen a slight increase in our [lagging measure true] [ph]. Pleasingly though, Mt Rawdon has gone 9 months without a Recordable Injury. This is the longest run under Evolution ownership, just like to say well done to both Jamie Coad and all the team at Mt Rawdon. We continue to actively monitor the impacts of COVID at all our sites and the people in our business remained unaffected. In the September quarter, we delivered 170,000 ounces at $1,198 all-in sustaining costs and just over $183 million of net mine cash flow, a great result from ore site teams to deliver strong quarter.
If we turn to Page 6 for the Cowal earnings and results. Cowal delivered just shy of 52,000 ounces at an all-in sustaining cost of $1,026 an ounce generating an operating mine cash flow of $72.5 million and a net mine cash flow of $30.2 million, while still investing over $42 million on the underground study works Stage H stripping in the IWL Cowal facility. As noted by Jake, the underground state significant development application has been submitted and the feasibility study is progressing well.
The board recently approved development of the Galway decline to further improve the [orebody nudge] [ph] with additional exploration drilling. A key focus of the feasibility study is to optimize the mine plan and find opportunities to bring grade and gold production forward to further improve project economics. This work is well underway, with completion expected in the June quarter. Post the quarter end, Cowal’s new IWL Stage 1 was commissioned and deposition commenced on the 14th of October, a huge milestone for the operation in the future.
Ernest Henry once again made a significant contribution to the group producing 24,500 ounces at an all-in sustaining cost of negative $515 an ounce was generating the record net mine cash flow of $83.2 million.
If we turn to Page 7 for the Red Lake results. Red Lake produced 26,500 ounces at an all-in sustaining cost of A$2,074 per ounce with the net mine cash flow of A$4.7 million. The underground development advance has been improving month on month. However, the quarter total development has impacted by the forest fires. The good news is that the surface ore stockpile ready for processing increased to 15,000 tonnes by the end of the quarter enabling consistent steady mill feed.
Lateral mine development in Q1 averaged 893 meters per month, 11% down on our original goal of 16,000 meters per month. The forest fire is attributed to a loss of 21 underground ships, or 11% of the available time in the quarter. Additionally, a past of 1,200 meters per month was hampered by availability issues with underground equipment.
A further 16 pieces of equipment were decommissioned during the quarter, and still more to come. This is enabling more maintenance time on priority equipment to improve the availability risk. It remains an exciting time at Red Lake, at the same time remain on track to deliver our goal of greater than 200,000 ounces below US$1,000 all-in sustaining costs. And a study team going into the future and – sorry, and the study into the future potential has commenced. This study is to define our vision.
If we turn to Red Lake to a premier Canadian gold mine at a production rate between 300,000 and 500,000 ounces per year. This will likely involve construction of new projects in plan, alternative access to underground deposits for a specific decline and other options to further increase their production profile while improving our margins. The initial study on the decline is expected to be completed in the March quarter, we studied on the long-term processing options to be completed in the June quarter.
Mungari delivered another strong quarter with 35,000 ounces produced at an all-in sustaining cost of 1,115 ounce with another record net mine cash flow of $44.9 million. The Boomer grade control drilling began during the quarter, and I’m pleased to announce development commenced last month along strike of the Boomer high grade vein post-drilling.
Cutters Ridge mining has been done well, with a transition starting to occur from oxide material. The plan continues to run consistently a 2 million tonnes per annum, 25% above its nameplate capacity of 1.6 million tonnes per annum.
On Page 8, Mt Rawdon produced 20,000 ounces at an all-in sustaining cost of $1,536 ounce and a net mine cash flow of $16.8 million was realized. September was impacted by mining induced flow and – was impacted by mining induced work flow that prevented ramp access to hard drive material for about 3 weeks. This material has already started to prevent the mill during the December quarter.
Mt Carlton delivered 11,500 ounces at an all-in sustaining cost of $2,674 an ounce and an operating mine cash flow of $4.5 million. A geological model performance had improved since recalibration, and this is resulting in more predictable grade performance.
In summary our operations have made a strong stance in new financial year, and we continue to focus on safe and reliable delivery. Despite the minor setbacks in the safety performance at a couple of our assets, I’m encouraged by the efforts and focus at Cowal and Mt Rawdon to keep our people safe. And we continue to look at ways we can improve our safety performance across our other operations.
Thank you for your time and I’ll hand over to Glen.
Thank you, Bob, and good morning. Following on from our announcement in mid-August to the 11 million ounce Red Lake resource, we’ve continued drilling with 6 underground rigs at Cochenour, Lower Red Lake and on the hanging-wall cradle. Resource definition drilling at Cochenour is delivering to expectations and is on track to convert resources to reserves that will continue building mining inventory in these areas of the mine.
Several impressive results including 3.4 meters grading 297 grams per tonne, and 11 meters grading 11.4 grams per tonne, which is shown on Page 11 of this morning’s report, illustrate there will be some very healthy grades when we mined these areas at Cochenour. Across the property at Lower Red Lake drilling at Twin Otter return results better than we’re expecting. Examples include 12 meters at 10 grams per tonne, 4.3 meters at 26.8 grams per tonne, and 3 meters at 52.9 grams per tonne with details also on Page 11 of this morning’s report.
Drilling commenced at the hanging-wall cradle target we discussed during our Investor Day in early September. The hanging-wall cradle is perspective for high grade targets along a trend of highly prospective geology that largely escaped the attention of previous exploration. I look forward to reporting on this program over the coming quarters as results come to hand.
Turning now to Cowal where we recently wrapped up our first phase of underground drilling at GRE46. Highlight the results for the quarter I reported on Page 12 of the report this morning. Full results of the underground program will be incorporated in a mineral resource update that will inform the current feasibility study and will be included in our annual Mineral Resource and Ore Reserve Statement due to released in February 2021. Infill results are expected to return a higher proportion of indicated resource than previously reported.
And we believe step-out drilling should extend resources down plunge of Dalwhinnie and adapt that Regal. Diamond drilling is continuing with a single surface rig to step-out on the Dalwhinnie domain, extending mineralization where it remains open down plunge to the south. Underground drilling will resume in the June quarter from holsters on the new positions in the Galway decline, that open air angle of attack on deposition to the ore body for reserve conversion and expansion.
At Mungari drilling south along strike of the main Boomer resource was completed during the quarter. Follow-up drilling will be designed after we receive and evaluate the full results from the program. A second round of drilling is designed north of Boomer to follow up on previously reported encouraging new surface narrow-vein intercepts.
Drilling at Crush Creek continued during the quarter and returned promising results from the BV7 and Delta targets shown on figures 4 and 5 of this morning’s report. We are becoming increasingly confident that drilling across Creek will confirm potential to extend mine-life at the nearby Mt Carlton operation. Further drilling is planned through to the start of the wet season in January, with the aim of further expanding the potential resource footprint.
Lastly, drilling programs continued at our Western Australian Greenfields projects near the town of Cue, 600 kilometers northeast of Perth. At the Cue joint venture, our partner Musgrave Minerals is managing the ongoing aircore drilling program on Lake Austin. We expect to be able to report full results from the program at the end of the December 2020 quarter.
80 kilometers away at our Murchison Joint Venture, we are awaiting full results from the recently completed aircore program, which will inform the next phase of work.
That catches our main exploration activities across the portfolio for the September quarter. With that, I’ll hand over to Lawrie.
Thank you, Glen, and good morning, everyone. It’s a pleasure to update on the financial performance for the September quarter. The summary is outlined on Pages 8 and 9 of the report.
Evolution continues to be in a great place financially with around $119 million of group cash flow generated, before debt, dividends and any business development activities. This equates to $690 per ounce sold being banked, and was on the back of about $272 million of operating mine cash flow and $183 million of net mine cash flow.
All operations were net mine cash flow positive for the quarter. Sustaining and major capital investment for the group was below plan and remains on track for full year guidance of $113 million to $138 million and $260 million to $290 million respectively.
The recently approved Galway exploration decline, which will see between $28 million and $30 million of investment is included in our original discovery group guidance of $75 million to $100 million.
Our group AISC and AIC were $1,198 and $1,663 per ounce respectively, with operations on track to deliver within guidance.
Focus on margins is evidenced for our group EBITDA cash margin remaining very healthy at 53%, while our AISC margin is a strong $871 per ounce.
After paying $154 million in dividends, the [essential] [ph] debt repayment of $20 million and receiving over $50 million, mainly from initial proceeds related to the Cracow divestment, our net bank debt reduced to around $180 million.
We finished the quarter with just under $370 million in the bank. Our gearing is approximately 7% and we remain on track to be net cash by the end of the financial year. Thank you for your time this morning and, Miles, please open the line for questions.
Thank you, ladies and gentlemen. We will now begin that Q&A session. [Operator Instructions] Okay, our first question on the queue is from Nick Herbert from Credit Suisse. Please ask your question, Nick.
Thank you. Good morning, gents. A few from me, please, I want to start with Ernest Henry. Are you able to give a bit more detail on the exploration, going on those lower levels? What that’s revealing? How much of that will be included in the February reserve resource update? And also, when we could expect any sort of formal updates on mine plan there? That’s number one. Thanks.
Yeah, good morning, Nick. Thanks for the question. Look, the program is progressing. It’s an 1,800 meter drilling program. We’re on to the fourth drilling platform and we’re confident that that will ensure that the resource is extended and the mine-life is extended.
Results of the program will be delivered when Glencore release the updated MRR, which I think is scheduled for February next year. And that will form the change to the mine plan. But, we’ve high degree of confidence that the program is progressing to plan.
Okay, great, thank you. And then just on your production guidance for the group for this year, if you could just provide your, I guess, general phasing in terms of how you’re seeing the contribution, so first half, this second half?
And then, just any, I guess, thoughts around where the key variables are on that fully production number are whether that’s potential for Red Lade to sort of improve back-end of the year or just more broadly how you’re thinking about that?
I’ll hand over to Lawrie and let him answer that question. But just make an introductory comment that, yeah, our guidance is based on our budget. And as at the end of the first quarter, we were ahead of where we expect it to be on production and lower than we expected to be on cost.
Yeah, morning, Nick. I think in terms of the split, half on half, you’re only going to see about the second half being 5% to 8% higher than the first half. So there’s not a lot of movement. And then, if you look at around asset by asset basis, Cowal will trend up by over the course of the year, particularly the second half, as we get back and did some higher grade, and then, certainly access into [say taken] [ph] material as opposed to stockpile material.
We are trying to put some more oxides through in the first half just to be de-risked under the second half. Red Lake, you will see a heavily weighted second half of the year as we get more development through the first half of the year, and then allow us to process more material into the second half of the year.
So you’re probably going to see that being probably 30% higher in the second half versus first half. As opposed to Mungari, we would expect to see the first half being higher, second half dropping away as the grade will come off from the underground and more open pit to coming through there.
And at both Rawdon and Carlton, you’ll see they’re doing pretty well in 1 half – half 1, half 2. And the same Ernest Henry, you will probably see it slightly lower, maybe 5% lower in the second half than first, just to – in that grade and the [indiscernible] comes down a little bit.
So, yeah, it’s really – if you look at on an asset by asset, it’s going to be depending on where they are in their mine plan and sequencing. You’re not going to see a lot of difference in terms of [spot] [ph] cost, sustaining capital. It’s going to impact their AISC.
Great, Lawrie, that does sounds really helpful. Thanks for that. And then, could you just remind me, because what’s the copper price that you have assumed in the full year cost guidance?
We’ve assumed A$8,400 per tonne.
Okay, great. Thanks very much.
[Operator Instructions] But your next question in queue comes from Reg Spencer from Canaccord. Please ask your question, Reg.
Thanks. Good morning, guys. Just a question on sort of Cowal Underground, the second decline going in, clearly, if you proceed with the development there then that would double as a production decline as you said. Having those 2 declines there, could that be indicative of the potential to take underground ore production above the top-end of that 2 million tonnes per annum range that you guys have previously suggested?
Morning, Reg. We don’t want to get ahead of ourselves. No, it’s not anticipated that that will lead to higher than 2 million tonnes per annum production base at this stage. We’re still sticking with the 1.5 million to 2 million tonnes per annum.
Okay, fabulous. Thanks, guys.
Okay, our next question comes from Luke Smith from AustralianSuper. Please ask your question, Luke.
Thank you. Morning, everyone. Morning, Jake. I was just interested in your – and in the first minute of your presentation you spoke to the growth in ounces. And I just wanted to clarify, is the focus for evolution still very much on margin and free cash flow generation rather than production growth, because I think where I’m coming from where you’ll – probably most people on the call remember April 2013, when everyone was focused on growth, and all of a sudden [one got caught with its hands down] [ph]?
Thanks, Luke. Good morning. I did mention the increase in production and reduction in cost just after I mentioned that $871 of all-in cash margin. But let me just take a step back and explain our philosophy, because I think it is appropriate. And I think, it is where Evolution is positioning itself. We don’t want to be focused on the top-line of sales or production. If we could remove it from this quarterly report and our reports, we would happily do that. We are focused and want to remain focused on the bottom line. You asked that means cash flow per ounce that we produce cash flow per share, and resource and reserves per share, and those resources and reserves continue to be calculated and will continue to be calculated at very conservative prices of at the moment A$1,450 an ounce for reserves and A$2,000 an ounce for resource in the very – for the very reason to protect those margins.
And that’s, I think, hopefully something that investors have become used to hearing from Evolution, but there is absolutely no deviation, largely because the people in this room are old enough to remember 2013, and the decimation which occurred as a result of that, and really believe that margin and sustainability of that margin is much more important than top-line growth. Thanks for the question, Luke.
Yeah, thanks, Jake. I’m not done by anyway hinting we’re just going to go through April 2013, again, but good to hear that that production growth is a result of your strategy focused on margin. Thank you.
Okay. Your next question comes from the line of Matthew Frydman from Goldman Sachs. Please ask your question, Matthew.
Sure. Thanks. Morning, Jake and team. Just one for me on Ernest Henry, again, rounding back to that discussion on the drilling program there and potential results extension. Can you talk through, I guess, your understanding of any mine planning constraints around extending the loss of that asset? I guess, in terms of, what do you think could easily be added incrementally to the loss of that asset? And what might require a bit of a raising in terms of infrastructure, whether that’s, additional underground crushing or moving of underground crushing, additional ore haulage capacity, et cetera, et cetera, effectively, what might be think can be added incrementally and what, I guess, requires a more detailed study.
And then secondly, maybe if you could give some color around Glencore is thinking on this drill program, is it to incrementally extend life? Or is it to say, into a more detailed study that might address some of those constraints in terms of their strategy for the asset and more broadly across their portfolio in the region? Thanks.
Thanks for the questions. Look, I think it’s a bit early to speculate on that we want to see all the results of the drilling program and then sit down with Glencore and define what it all means. I will reference the point that there already, I think, an additional 1.5 to 2 years of reserve life that has been added to below the 1,200 level already. That was in February last year. So there is – there are clearly going to be need to be discussions around how far it extends a debt, and then what it means for the infrastructure. But I think it’s premature to speculate on that until we have all the drill data, which will be early next year.
Okay. Thanks, Jake.
[Operator Instructions] But we do have a question from David Radclyffe from Global Mining Research. Please ask your question, David.
Hi, good morning, Jake and team. Just a question from me on Red Lake, can you maybe just talking a little bit more detail about where you actually pulled the ore from this quarter to deliver that sort of grade growth 6.4 grams, just trying to think about obviously going to be lifting throughput, but also maybe how that grade profile looks over the year?
Bob, can you take this question?
Yes. No problem. Thanks, David. The predominant ore from last quarter was from Lower Red Lake and Cochenour. We did have some coming from Upper Red Lake, but none coming from Campbell or the [Upper length of the orebody] [ph]. The profile of the year is pretty stable from a growth perspective. But the last quarter, the planning to build stockpiles I talked about, and then open up the Red Lake yield, because the Red Lake yield shutdown a month. So we’re only running the Campbell yield, up until probably that last 3 to 4 months of the year. And that’s where we’ll get a bit of a kick up in production as well.
Okay. Thank you.
Okay. We have a follow-up question from Matthew from Goldman Sachs. Please ask your question, Matthew.
Yeah, sure. Thanks, gents. Sorry for jumping with another one that probably a bit of extra time practicing your questions, because some maybe exactly on – I mean, I know, Bob touched on this, but during the call, but obviously a bit of disappointing quarter on cost base of that asset. Can you – I just talk a bit through, how that looks going forward? Are we expecting things to improve given a better understanding of the ore body and like it’s working our way further into the underground mine? And I guess when we start to, I guess, rethink the role of that asset in the portfolio at what point does that become a good question, given the soft cost performance? Thanks.
Yeah. Lawrie, please end-up to answer this question.
I wouldn’t say that, Matt. So I think the thing that we look at in this quarter versus Q4 last year, you saw a drop off in the grade in the order of about 24%, and that’s obviously had an effect on AISC. But at the same time with that drop off in grade was the drop off in copper, as well. So we end up with about, yeah, 190 less tonnes of copper. So that added $270 an ounce to the AISC. So yeah, in terms of quarter-on-quarter, that’s really what’s happened. And then, as the years been going to pan out, we will see the grade should lift each quarter through to the end of the year, we get an uplifting recovery through the course of the year as well.
And then obviously, we’ll get some additional byproducts caught up with that lift up in production and grade. And so that’s how we see the year panning out, as Bob mentioned on the call, production was in line with plan, and therefore, we’re expecting the cost to be high in this quarter. As to the question of where it fits in the portfolio, I think, the approach there is to finish off this drilling at Crush Creek to evaluate that, and then to make some assessments in the first half of next year.
Sure, thanks. Thanks for that, gent. And maybe just quickly again, on Mungari, you talked about how that asset is really submitted so much more consistent performance. I guess, the next phase of investigation there is obviously looking at your milling options, particularly through Castle Hill. And I hate to be the one to ask the question, obviously, some of your big piece in the sector are looking at the potential synergies in that region that I can achieve in terms of mining and milling capacity.
So how do you think about potentially building another mill in that region to exploit a relatively, I guess, low grade deposit, whereas, potentially that set of assets or that deposit might have more value for others in the region that already have established milling capacity, I guess, and again, the role of Mungari in your portfolio in that context. Thanks.
Yeah. Thanks, Matt. That’s a good question, and one which we’re happy to take I’m glad someone’s rounded back to Mungari, because a cash generation of close to $45 million this last quarter is fantastic for the asset and I suspect very good for the region. So we are looking at optimizing Mungari is still further, we’re open to synergies where they exist. And Castle Hill, we mentioned previously that we’re investigating either a heap leach over there and tracking to Mungari. We’re investigating a standalone plants. We’re investigating and are very open to regional synergies if they make sense for all parties, not only exclusively without larger neighbor, but all neighbors around us.
Yeah, fantastic. That’s good to hear. Thanks very much for the details, Jake.
Okay. We do have one other question, I believe, from the line of Sophie Spartalis from Bank of America. Sophie, please ask your question.
Good morning, Jake and team. Just wanted to come back to Red Lake if I can, he talks around the potential for the decline there, and you’re working on that. Can you just talk through your intention there and potential timing in that Upper Campbell area? Thanks.
Yeah. Thanks, Sophie. Good morning. I’ll start off, and then if Bob wants to add something he can. But I mean, obviously, the resource estimates shaped view that Upper Campbell area at 4.3 million ounces and 10.5 gram is a real opportunity. There is an area, which is already permitted to commence a decline. So we’ve accelerated that study to assess, where and what that decline could do. We articulated the view that at the moment, Red Lake is mine constrained. And we want to ultimately shift it to a mill constrained operation in for studies are commencing around milling options.
So we expect to make a decision in the next 6 months, before the end of the March quarter, maybe sooner on where to put that decline, what it could do and how much order could access. Obviously, it will also be informed somewhat by our view on reserves. The last reserve estimate, which is – was calculated at Red Lake was around 1.3 million ounces, we’re expecting that to be significantly increased through this resort – new resorts estimate. So all of these pieces are coming together, and that sort of objective of 300,000 to 500,000 ounces is starting to get some flesh around it, and over the next 6 to 9 months, we’ll be articulating exactly how we intend to get it.
Bob, do you want to add anything to that?
I think you covered 90% of that, Jake. Sophie, it’s a great question. The – what I was getting in [best-buy that it] [ph] being the new riddle for Red Lake, I think is still valid. As Jake said, that at the level of Campbell with 4.3 million ounces, the location of the portal. The fairly short distance to HG Young, the potential of Upper Red Lake or the Red Lake orebody’s ore brings in what is the sort of best option for that decline and how do we actually get in there.
The real challenge is getting the orientation right to get the best outcome for all those as well as not detracting from what I call – I mean, I’d stress the potential of mining something from the surface that go from an open pit sort of style of mining potentially, because they all come into the mix.
We are doing all that work at the moment and we’re trying to figure out what’s the best solution within in that March quarter. We are pretty confident, I’m pretty confident that we will have an answer for that.
Okay, so just to be clear, so March quarter you deliver to the market your intentions around the decline. And then in terms of if that was to proceed, when we could see mining in the Upper Campbell area.
Yeah, so, what I’m saying is we’re trying to figure out, which is the best area to go for first, whether it’s the Upper Campbell, whether it’s HG Young, whether it’s a combination of Upper Campbell and a bit of the Upper Red Lake, so some of those are things that we’re looking for. And it changes the orientation and the route the decline takes slightly, so that’s what we’re trying to figure out certain.
So far as to say, the way that I look at it, and this is not predicated on any study work, I mean, at Red Lake, but a decline at the end of 1,000 meter should give us circa 800,000 to 1 million tonnes from that decline. So that’s the sort of thing I’m looking for.
Okay, and just to confirm, there won’t be any need to move any infrastructure, you said here the challenge is the orientation. So is that challenge to ensure that you don’t need to move the infrastructure?
That’s what – yeah, so that’s what we’re looking at for them. There is no need to move any of the surface infrastructure for the decline. But what we’re trying to do is sort of – so that we don’t have to move the decline in the future as well.
Okay, now, that’s clear. Thanks, Bob and Jake. And then, just a second one on Mungari, I know we’ve talked about that already quite a bit. But just in terms of 1Q performance, it was relatively strong. And we talked around sort of 1 half, second half split. So you – in terms of just where it’s sitting versus the guidance, it’s sort of tracking to come above or at the upper end of the guidance, is that sort of the best way to think about Mungari like in terms of the sustainability of what we’ve seen so far in the year?
No, Sophie, as I said, the second half, their production will be long. I’m assuming when you’re talking guidance, production guidance, that will be lower as the grades will come off, the plant throughput won’t be dropping below that 2 million tonne per annum. And that’s going to be the driver that will bring it back into that guidance range.
Okay, clear. Thank you very much, Lawrie. Thanks. That’s all for me.
We’re only 1 quarter into a 4 quarter game. Thanks, Sophie.
Okay. We do have one other question on our line. It’s just a follow-up question from Nick Herbert from Credit Suisse. So please ask your question, Nick.
Okay. Thanks again. Jake, just you commented your focus on margin, which is always good to hear. Just sort of on that theme, I’m just interested in your thoughts on how you weigh up your competitiveness in the M&A landscape, again at this point in the cycle, given this conservative approach to reserve pricing, and gold price being perhaps more conservative than many of your peers out there?
And do you think that gives you sort of less opportunity to be competitive for sort of biddings and whether then, sort of conversely, that gives you a greater competitive advantage at a lower point in the cycle, which perhaps it’s positive for a longer term value opportunity, just give some thoughts on that, would be interested in that. Thanks.
Sure. Yeah, absolutely. I mean, I think the notion that we haven’t been active in the M&A space is not right. I mean, we’ve done 7 deals in the last 5 years. We’ve acquired 3 assets and – or 4 assets in our history. We sold 3.
Yeah, we’re all about value and margins, and improving the quality of our portfolio. So the challenge we have is that we’ve actually done a great job at improving the quality of our portfolio to the point where the threshold is higher now to get into the portfolio. That doesn’t mean that we’re not very active and looking for opportunities, but we are going to be disciplined. And we’re not going to chase growth in production and ounces. We’re going to chase things which are accretive to our shareholders and which improves the quality of our portfolio.
We think that’s just a very rational and logical way of running a business. Just because the gold price is higher or our share price is higher, doesn’t necessarily mean that we should be doing more. I think we got to wait for opportunities which are accretive. And I’m sure they will come. The current momentum on consolidation and growth and things, let’s see how long that lasts and how that goes through the cycle. But this is way more than a 20/20 game. It’s a 5-day test match.
Yeah, understood. Thanks, Jake.
[Operator Instructions] Okay. There appears to be no further questions at this stage. So I’ll hand back to your presenters for any closing remarks.
Yeah, thanks, everyone, appreciate it. And that was really good and engaged conversation. We enjoyed it. We look forward to updating you at our Virtual AGM on November 26. Stay safe and healthy, and look forward to speaking to you soon.
Ladies and gentlemen, that does conclude today’s conference call. Again, thank you all for participating today, that you may now all disconnect.