Evolution Mining Limited (OTCPK:CAHPF) Q4 2022 Earnings Conference Call August 17, 2022 9:00 PM ET
Company Participants
Martin Cummings – General Manager of IR
Jake Klein – Executive Director
Lawrie Conway – Finance Director & CFO
Conference Call Participants
Matt Greene – Credit Suisse
Levi Spry – UBS
Al Harvey – JPMorgan
Mitch Ryan – Jefferies
Alex Barkley – RBC Capital Markets
Daniel Morgan – Barrenjoey
Peter O’Connor – Shaw and Partners
Matthew Frydman – MST Financial
Operator
Thank you for standing by and welcome to the Evolution Mining Financial Year 2022 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 now like to hand the conference over to Mr. Martin Cummings, General Manager, Investor Relations. Please go ahead.
Martin Cummings
Thank you, Nirav. Good morning, and welcome to the Evolution Mining FY22 financial results conference call. Joining me on the call this morning, are Executive Chair, Jake Klein, and Finance Director and CFO, Lawrie Conway. We’ll be talking to the presentation released to the ASX platform this morning. As you can see, the results we’ve released today are in line with what we’ve released recently in our business update late June and our June quarterly report released in late July.
We now look forward to hosting investors and analysts at Red Lake next month, where attendees will see and the extensive infrastructure in place. The improvements we’ve made to date and the opportunity we have at the operation. We’re pleased with the strong interest shown but if anyone is interested to join the group, please let me know.
With that, I’ll hand over to Jake.
Jake Klein
Thanks, Martin. Good morning, everyone. Thanks for joining us, again. It does feel a little like Deja vu. This is the third time in six weeks we are speaking to you. I’ll make a few opening comments before handing over to Lawrie Conway, our CFO and Finance Director, who will take you through the FY22 full year financial results in detail.
Since we formed Evolution in 2011, which is now almost 11 years ago, our strategy has remained the same. Build a great team, focus exclusively on the Tier 1 jurisdictions of Australia and Canada, have a small concentrated portfolio of high-quality operations in well-endowed geologically prospective gold districts and continually seek opportunities to improve the quality of our portfolio of assets. In that context, these last 12 months have both been extremely challenging but truly transformational for Evolution as we have achieved a genuine step change in the quality of our portfolio.
With significant external and internal challenges, we do acknowledge that we have fallen short on operational delivery over these past 12 months. Encouragingly, whilst early days, we have started the year well with our portfolio performing to plan, and we are determined to sustain this throughout this year.
Now I’m going to turn to Slide three. Our approach to sustainability is that it is integrated into everything we do. This is seen through a human-centric lens, which incorporates health and safety, both physical and psychological. The environment and the community, including our First Nations partners. We acknowledge that we, as a company, like the rest of the industry have work to do in ensuring the psychological safety for all of our people. In essence, wise, this means a workplace where people believe they can speak up and that is inclusive and diverse.
We’re at a minimum, it is free of any form of billing, prejudice or sexual harassment. We are absolutely committed to doing this. We have demonstrated resilience and strong risk management through the COVID pandemic. Protocols were developed to minimize the risk to our people and the communities that also allowed safe production during this challenging time. Notwithstanding this, we, like every other business, understandably experienced high levels of absenteeism that adversely impacted our performance during the year.
Our commitment and focus to a net zero target by 2050 resulted in a 7% improvement in our carbon emission intensity per tonne mined. This is encouraging progress on this important journey. With the shifting ESG landscape and in the mine for renewables, we are also looking at our mine life cycle differently. In this regard, we are fortunate to have a truly unique opportunity at Mt. Rawdon create a multi-generational infrastructure asset.
Our plan, which is advancing rapidly is to convert the open pit into a 1 to 2 gigawatt pump hydro battery at the conclusion of mining. We are working with Einstein Capital, Australia, who originated the concept some three years ago and will be co-owners of the project with each party having a 50% share.
We have now reached a stage where we are engaging potential offtake parties. Encouragingly, there has been very strong interest with a number of parties in the data room. We are growing increasingly confident of the potential to demonstrate this as both a model mine closure as well as creating significant value for Evolution shareholders. The value of this type of renewable storage has been demonstrated recently with the takeover bid for GenX Power, which value the Company at an enterprise value of around $500 million.
Turning to Slide 4. It has been a very busy year and we have ended the year with our portfolio transformed and very well positioned for the future. We acquired the balance of Ernest Henry from Glencore. We consolidated the Mungari district through the acquisition of the Kundana and east Kundana joint venture from Northern Star, and we sold Mt Carlton to Navarre Minerals. We have a portfolio that is in the lowest cost quartile and was able to generate an EBITDA margin of 44% for every ounce we produced.
We like our increased exposure to copper, which helped us generate almost $900 million in operating cash flow. We are well positioned for growth with good progress being made on the Red Lake transformation with all physical metrics having improved to the level we need them at full delivery for our FY23 guidance. And the Cowal Underground project remains on schedule and budget.
These two projects alone will increase our production by 25% over the next two years. And importantly, this growth is coming from operations that have 15- to 20-year mine lives ahead of them. We also have a number of organic growth studies underway. None of these projects have been committed to, and we will be disciplined in our capital allocation, but they also do give us good options for future growth. As you will hear from Lawrie, our balance sheet is strong, and we were particularly pleased that our investment-grade rating was recently reaffirmed by the rating agency in their annual review.
Turning to Slide five, titled Delivering Value. I think we can all easily agree that the value of a gold company is largely determined by its mineral inventory, its resources and reserves, both the quality and the quantity. Discovering more high-margin ounces that are ultimately able to be safely mined, processed and converted into cash in the bank is the true test of value creation. This has been a core pillar of our strategy. The most important call on any acquisition or exploration program is the geological call on the discovery potential.
We are very pleased that three weeks ago, we were an updated mineral resource estimate for Ernest Henry that captured 119 new drill holes resulted in a 28% increase in the contained copper to 1.13 million tonnes, a 24% increase in contained gold to just over 2 million ounces. If you think about Ernest Henry in terms of gold equivalents equates to a total resource of about 7.5 million ounces, making it a very large mineral system. Whilst these additions have not been included in the charts on this slide, it continues our track record of being able to add ounces of resources to our inventory at a sector-leading very low cost of $35 to $40 an ounce. The reserve additions delivered at $50 to $55 an ounce.
In summary, these last 12 months have been challenging, but they’ve also demonstrated that our people are up for the challenge. They have shown incredible commitments, strength and dedication to navigate these difficult circumstances, and I really believe this is what makes Evolution a unique and special Company and provides us a great platform for the future.
Thank you, and I’ll hand over to Lawrie.
Lawrie Conway
Thank you, Jake, and good morning, everyone. I’m very pleased to report the financial results for FY22. On Slide six, we have a summary of the financial results. I will go through a number of these in detail in the coming slides. Our underlying profit was $275 million, while our statutory profit was $354 million. As per the half year accounts, the difference to FY21 relates to the portfolio mix and the stages of the mine plans at each of the operations. As noted by Jake, the improvement in the portfolio achieved by the end of FY22 gives us confidence moving forward on the financial performance. I’ll go through the drivers to the change in profit on the next slide.
From a cash generation perspective, we delivered around $900 million of operating cash flow, and this was with only 6 months of full ownership at Ernest Henry. Our EBITDA margin is strong at 44%. We invested over $600 million in capital projects and pleasingly, these projects remain on budget and schedule as part of our planned 25% increase in production over the next two years at a very low all-in sustaining cost around $1,240 per ounce. We declared our 19th consecutive dividend of $0.03 per share fully franked will be paid next month.
Slide seven shows the movement in net profit between the periods. The main drivers for the change in profit year-on-year have been the acquisition and divestment assets, higher achieved gold and copper prices offsetting lower production and higher operating costs at existing assets due to increased activities and slightly higher input costs.
The increased revenue was predominantly from the extra corporate Ernest Henry, which added over $250 million. Metal prices outside of this added a net $68 million. The acquisitions of Kundana and Ernest Henry added around $250 million to our operating cost base, while increased activities at Cowal and Red Lake added $65 million to the cost base. For Cowal, the Stage H costs did not have an impact on our cash flow as these costs were previously capitalized to the project.
We did see input costs increase over the year due to COVID supply chain issues, geopolitical tensions and general global inflationary pressures. Overall, the impact on our cost base was just under 5%. I’ll go through our cost drivers shortly.
The increased depreciation and amortization costs were linked to the acquisitions and details of our D&A profile by operation for FY23 is included in the appendix of this presentation. Two items of note, which relates to statutory profit and not underlying profit, our acquisition costs, including stamp duty, and a gain on the remeasurement of the existing interest in Ernest Henry at the time of full acquisition. The stamp duties will be payable in the first half of FY23, while the gain on remeasurement is a non-cash item.
Moving to Slide 8 on our costs and the drivers. There’s been no material change to our cost structure with employee and contractor labor costs, making up half of our cost base and our top 7 cost types comprised 93% of our total costs. As outlined in our business update in June, we expect our labor costs will move by 5% to 6% in FY23. For our employee labor, we continue to bias towards at-risk variable component.
While we saw an acceleration in prices for input costs during the second half of FY22, pleasingly, we have seen oil, energy and steel prices reduced since our update in June. However, our FY23 guidance included assumptions around input costs, and these were set at the levels in place in June. This gives us comfort at this stage when looking at our operating costs for FY23. Despite the prices lowering in these recent weeks, our team remained focused on efficiencies to mitigate these cost increases at all operations with further potential at Mungari via integration opportunities and improvements in the cost profile at Red Lake are also receiving appropriate attention.
The chart on the bottom right shows how sensitivities are to the main cost and cash flow drivers. We proactively manage these to ensure our low-cost position and strong balance sheet are maintained.
Turning to Slide 10 and our cash margin. We saw significant cash generation during the year at just under $900 million of EBITDA and operating cash flow. This correlated to an EBITDA margin of 44% or the equivalent of $1,393 per ounce sold. We maintained our discipline on capital allocation to ensure we are investing in the right projects to improve the financial performance of the business and to enable we can continue to return to the shareholder. The immediate benefit of the acquisition of 100% of Ernest Henry is visible here with $465 million in EBITDA including $290 million in the second half, which was $115 million higher than the first half.
Cowal continued to be a consistent contributor to $286 million. We saw the benefits of the high-grade Stage H ore come through in the second half of the year, although it was partially offset by the impacts of weather and COVID. The contribution from Cowal should build as the benefits of Stage H and the underground mine are realized. While not where we want to see Red Lake’s cash generation, the operational improvements in the second half, which generated $35 million more operating cash flow than the first half was a positive change. This is expected to improve again in FY23.
Moving to Slide 10, which looks at our dividends and debt. We’ve declared a final dividend of $0.03 per share fully franked. This will be paid on the 30th of September, and brings our total return to shareholders to over $1 billion. There has been no change to our dividend policy. Key components of our policy are the performance during the year, and the outlook for the business. We take into consideration the cash received from divestments. This year we received around $56 million from the divestment of Mount Carlton, and the divert settlement from Krakow.
In terms of the balance sheet, it is in a good position with our investment-grade rating being reaffirmed earlier this month as part of the annual review process. This demonstrates the resilience of the balance sheet and the supports our dividend. We have $930 million in liquidity and is able to support our growth projects. It is important to note that we only have two major projects in the execution phase. These are the Cowal underground mine and the Upper Campbell mine at Red Lake. Both projects, as I mentioned earlier, are on budget and schedule.
This is planned to be our peak year in terms of capital for the next two years. We have 5 major studies in progress at the moment, but none of these have any commitments to development which provides further flexibility to the balance sheet. We are comfortable with our gearing at 27% is within our limits and is on track to reduce as the growth projects transition into production.
Lastly, on Slide 11. In summary, we finished FY22 with a much improved portfolio of assets. The operational performance at the end of FY22 has laid the foundation for a more consistent delivery in FY23. These assets will further enhance our high-margin portfolio when the growth projects move into production. They will be the catalyst for our production growth of 25% in the next two years. We continue to deliver returns to our shareholders even during a capital-intensive period and this is on the back of the relentless work we have done over the past few years to strengthen the balance sheet.
Finally, the ability to deliver the business outcomes over the past year takes a significant effort from our entire workforce despite a difficult operating environment with COVID restrictions and weather impacts. Their commitment is to be commended. The number of acquisitions this year has truly complicated the accounting issues and we’ve had many people working endlessly over the past six weeks to consolidate and present the results today. I want to take the time to acknowledge and thank the team for their work.
Thank you for your time this morning, and I’ll ask Nirav to open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Matt Greene from Credit Suisse. Please go ahead.
Matt Greene
Hi, good morning. Lawrie I’ve got a few financial questions to start with. Just on the stamp duty paid in the December half. I just want to confirm this is around $97 million?
Lawrie Conway
Yes, Matt. So it’s about $21 million for the Kundana acquisition and around $77 million for the Ernest Henry acquisition.
Matt Greene
Great. And just on the interest rate. So 57% fixed at 3%. I was just wondering if you could comment on the floating component. Where is that rate currently? And how often is that adjusted?
Lawrie Conway
So the term loans adjust as the cash rates move. So they’re on a floating arrangement. So they’ve been moving as the Australian rates have changed in the last few months and that’s sort of where that sit in line with current cash rates.
Matt Greene
Okay, thanks. And sorry to ask another question on the QP pricing at Ernest Henry, but Lawrie, you mentioned in the June quarter that your pricing period was around four months. But just looking at when your footnotes, you said that this period can range from 1 to 4 months. So just trying to get my head around this. Is this timing range determined by Glencore? And I guess if so, can you just provide some color as to what the mechanisms are that driver one month versus a four-month settlement?
Lawrie Conway
Yes. So Matt, it’s basically outlined in the offtake agreement. So Glencore have to nominate what the QP will be. It’s either a one-month number or a four-month number. And at this point, they’ve nominated four-months. So we’d expect that not to change, but it’s certainly at their discretion.
Matt Greene
Okay. Is that range set at shipments? Or is this sort of a quarterly or semiannual agreement?
Lawrie Conway
It’s set on an annual basis is my understanding. It may be same just have to double check. It’s not on a shipment-by-shipment basis though.
Matt Greene
Okay, thanks. That’s helpful. And just finally on an operational question related to Cowal. July and August been pretty wet have too much disruption. And unfortunately, it seems like we make another La Nina this spring. If this were to entry, are there any measures that you put in place to try and minimize the amount of disruption you’ll see that this time around?
Jake Klein
So Cowal had a good July. It’s operating well and wasn’t impacted by wet weather. Mt Rawdon is being impacted by wet weather and continues noting that it’s not a material part of our production at the moment. The El Nino, yes, we are monitoring and watching the bond. We are taking every step that we can to ensure that we are well prepared in the event that it event sites and feel that we have we are taking the right steps to address it.
Matt Greene
That’s great. Thanks, Jake, thanks Lawrie. That’s all for me.
Operator
Your next question comes from Levi Spry from UBS. Please go ahead.
Levi Spry
Good day, Jake and team. Thanks for the call. Just a very quick simple one for Lawrie. Red Lake and cash tax, when do you expect to pay cash tax over there? And can you just remind me how it all works with Battle North, the Bateman plant and their losses, how we can expect that to play out?
Lawrie Conway
Yes, I would like them to start paying cash tax a lot sooner than they currently planned, but that’s going to be dependent on formats. But in short, at the moment, we’ve got AUD 520 million of Red Lake losses that are being recognized on the balance sheet. And then we’ve got unrecognized losses of about another AUD 300 million. So tax effect on those at 25% is around AUD 130 million and AUD 60 million, respectively. So I think depending on, as I said, performance over the next two to three years, I’m not envisaging cash tax to be paid in Canada for a little while.
Jake Klein
I’ll put a slightly more positive spin on that differently. When and as Red Lake hits its straps, we have sufficient cash tax losses, part of which we acquired when we acquired Battle North that we’re not going to be paying cash tax for a long time.
Levi Spry
Thank you. Thanks guys.
Lawrie Conway
And just before we go back, mate, I did double check on the shipments. It is actually at the end of each month, sorry, for the concentrated Ernest Henry.
Operator
The next question is from Al Harvey from JPMorgan. Please go ahead.
Al Harvey
Good day, Jake and team. Just a couple on costs. So just wanting to know, you’ve noted that oil energy and steel pricing are down. Do you have a ballpark figure on what the dollar per ounce impact that could be? I noticed the sensitivities in the slides. But yes, if you could just talk us through that and also how you’re seeing the labor cost. You also noted there, I guess, that they’re still in line with your June view, but any extra detail there would be helpful?
Lawrie Conway
Yes. Look, on the first one, I mean, where we’re sitting now versus the business update in June oil is down around 15% and electricity is down around 14%. Sort of what we see is that oil price at $10 a barrel movement is giving us around a $7 an ounce impact on a full year basis. In terms of the energy, we’re in the market in the next couple of months to finalize the cost there. So we haven’t sort of landed on where that’s going to be in terms of the impact on FY23. But as I said, when we gave the update in the guidance in June, we had actually allowed for a higher energy cost than what they currently are.
And in terms of labor, we’re finishing our reviews right now, they take effect from July 1. And in the next 3 weeks, we settle that. And as I said on the presentation, we’re expecting them to be around 5% to 6%. I mean you’re seeing it’s more around the tightness in the market. We’re seeing a little bit of an increase in turnover at the moment, but it’s the availability of resources that we’re really trying to deal with.
Al Harvey
Yes, thanks, Lawrie. Maybe just on to Mungari. Can you kind of give us a bit of an update on the study there? Has there been any changes to the scope, now the Kundana has been on the books for the last year or so?
Lawrie Conway
No, I mean, look, our view still remains, although there was someone who presented diggers that said that gold’s going to $2,000, so when he was on site with some people, they were asking if the project could be brought forward. Our view is that the project remains in a study mode because we do see that the risk of cost escalation on construction projects and availability of quality resources, so there’s no movement. The study is on track. It’ll complete during this year, and then we’ll make that decision at that point whether it goes through the gate to the next phase.
Al Harvey
All right. Thanks, Lawrie.
Operator
Your next question is from Mitch Ryan from Jefferies. Please go ahead.
Mitch Ryan
Good morning, Jake and team. Thanks for taking my question. Just wanted to clarify, you’ve made a very clear one you’ve got liquidity to support current growth projects. Just wanted to clarify, does that include the likes of, I guess, the Kundana project, which remains in study mode and Ernest Henry expansion and also the capacity to pay back to pay the next — the final installment for Ernest Henry?
Lawrie Conway
Short answer there, Mitch, is yes. I mean, when we look at it, we finished the year, $574 million of cash. We’ve got the revolver available to us. We’ve got obviously good operating cash flows that will be generated through the course of this year. We’ve got — as we get to the end of FY23, as I said, this is sort of our peak year. Underground at Cowal comes on stream first — end of FY23. So as we go into FY24, we expect the cash flows from Cowal to increase. The improvements we’re targeting for Red Lake this year should deliver the Upper Campbell as well that their cash position changes into FY24. As we said, just to hold there, the growth project isn’t coming forward. So that’s been delayed into FY25.
And Ernest Henry, as that study finishes, we’ll look at what the capital requirements are and when they need to be staged and a lot of that capital predominantly will be around mine development spread out over a period of time, except for the materials handling, which we’ll assess when the study finishes. So the answer is we’ve been positioning the balance sheet, knowing these projects coming through, and we’ll allocate the capital as and when those projects justify. Jake?
Jake Klein
And just to add to that, I think that was the rationale behind going to the private placement markets. You look at the tenor of the debt that we’ve put in place and lock that in at 3% at investment-grade rating, that’s a very cheap cost of capital, very comfortably matched with the mine lives at Cowal and Red Lake and the rest of our portfolio. Ernest Henry getting mine life extensions with this drilling success that we’re having. So we now really are getting a portfolio of long-life assets, and the balance sheet is appropriately positioned for that. 3% debt in the private placement market is terrifically well done by Lawrie and his team.
Mitch Ryan
Guys, thank you. I appreciate the color. That’s it for me.
Operator
Next question is from Alex Barkley from RBC. Please go ahead.
Alex Barkley
Hi, Jake and Lawrie. I sort of going to ask a similar question on the lines of sort of gearing and ability to delay projects. I think you’ve given some good color there. Just for FY23, probably most of the spending at Red Lake and Cowal, which is underway, so a bit tougher to defer. Is this sort of a difficult point with regard to commodity prices, when you could see issues arise? And is there much flexibility remaining in the year, maybe some of that growth exploration spend?
Jake Klein
Yes. Senior notes on concerns around liquidity. But as Lawrie has outlined, our liquidity is strong. The only two major projects we’ve committed to are at Red Lake and Cowal. We have over $900 million of available liquidity. So I guess it may be helpful to provide a bit of context as to where that concern is.
Alex Barkley
I think as you’ve said, you can defer Mungari and Ernest Henry that’s okay. I was just wondering for out coming FY23, if you do see any issue with the gearing. But I mean, if not, that’s okay?
Jake Klein
No. The only things we’ve committed to are the Red Lake transformation and the Cowal underground project, the Cowal underground project is on track and on schedule, Red Lake is progressing to plan. All the other studies that are underway are discretionary and capital will be allocated.
With regards to their return and the balance sheet capacity. But as Lawrie said, all of those could be accommodated in our long-term forecasts, without taking a very aggressive view of the gold price. Our life of mine plans and budgets are being run $150 lower than the current spot price of gold. Lawrie, do you want to add to that?
Lawrie Conway
No, I think you’ve covered it, Jake. I mean we deliberately — and when we gave the business update on the 27th of June, and said that there are projects that right now don’t measure up in an inflationary environment, and we are going to delay those, we’ve got flexibility. And if we look at Mungari with the amount of ore sources we’ve got there, there is no pressure to bring that plant expansion forward or absolutely do it. I mean if you talk to the team on site, they’d love for that to come in place because they get cost efficiency, and it allows them to open up some other ore bodies, but that also then requires more capital.
What we’ve said is that Cowal underground and Upper Campbell in this year, our pivotal projects for us as an organization. We’ve committed the funds to those, and they’re on track. Everything else will go through the studies, but we’ve got capacity to pull those forward or push those back, not really based purely on where the balance sheet is, but also how those projects stack up economically.
Alex Barkley
That’s quite helpful. Thanks very much.
Operator
Your next question is from Daniel Morgan from Barrenjoey. Please go ahead.
Daniel Morgan
Thank you, Jake and team. First question is this hydro project. Just wondering how I should think about it? How do you — how can you value it? And is this a project that ultimately you might sell because you are a mining company? Or is it something that you keep to offset emissions, not that you do have high emissions, but yes.
Jake Klein
Thanks, Dan. That’s a good question. So I guess the best analog is this GenX power, which is under a takeover offer which values them at around $500 million. So they have a pumped hydro project, which is under construction, the old Kidston mine. They have a couple of smaller solar projects, one of which has been built. But their pump hydro at Kidston probably not as well located as ours is between — ours is between 4 and 8 times the size of theirs potentially. So we’re going through — we’re at feasibility study stage. There’s a construction phase. Their company is being valued around $500 million. I don’t know, that’s probably the best analog, noting that it is ours is 4 to 8 times bigger. But a lot will depend on how we go with the offtake contracts now.
Certainly, we’ve had very good incoming inquiry and interest. We’ve had site visits. We’re advanced on the feasibility study. There are no fatal floors at this stage, and it all seems doable. The question is whether it’s 1 gigawatt or 2 gigawatts and how that all fits into the capital structure and the Queensland Group. But certainly, it’s getting interest from the Queensland government as well. I read yesterday that Queensland needs between 100 and 200 gigawatts of new renewable power if they had to meet their commitments, so it’s a very interesting project.
Certainly, it’s not one where Evolution intends to build and construct and become the operator of a hydro project. We will, at some point in time, monetize it either by an exit all by some sort of spinoff vehicle where Evolution shareholders can participate in that upside.
Daniel Morgan
And does that mean that you’re targeting sort of a free carry type arrangement on the capital spending?
Jake Klein
So we need to make a decision as to how far we advance the project. The options are to take it through to the end of the feasibility study, which we’re committed that will have then secured offtake contracts. Then there’s another phase of detailed design that will take it to the FID, which obviously provides additional value, but it’s going to compete for costs alongside other projects. And Lawrie has determined that most of our capital gets spent on gold and copper projects correctly. So there is a point in the next 12 to 24 months, we need to think about how to identify an alternative source of capital, an alternative capital structure for that, or to exit the project.
Daniel Morgan
Okay, thank you. Back to an accounting questions, which I’m sure everyone loves. Your DNA guidance is a little bit lower than I thought it would be given that you have acquired quite a bit of assets in the past 12 months. Just wondering, I mean, maybe this is a mechanic, but a mechanical thing, but what have you factored into life at Ernest Henry, for example, when you amortize the acquisition cost? Thank you.
Jake Klein
So Dan, we’re looking at the current life of mine, which would sort of take us to down below the 1,200 to the 775. And what we have to do is, so we’ve done the resource update recently. We’ve got to flow that through to the reserve update. And that’s what’s really — and the completion of the pre-feas. That then determines whether or not it will actually be extended out over a longer period.
Daniel Morgan
And can you just remind me about the catalyst coming at Ernest Henry, the timing and how we’re thinking about it in terms of when are we going to have a feasibility study? And how are you thinking about how far you take down the RL and how big you might make the infrastructure that you need to invest?
Lawrie Conway
Good question, Dan. So the study will complete end of this year in time for the MROR update in February, and that’s what will give us the guide. Right now, the main focus of the study team is really around the materials handling system that’s required. So the concept study assumed a trucking fleet. That was what we took on from Glencore, the pre-feas is now looking at what are the right materials handling systems to put in place, and that’s currently looking at conveying system below the 1,200.
And then if that does, we have to determine the sequencing of it, what the first step we’ll have to decide later this year is do we start some development below the existing infrastructure so that by the time we need to install the next level of infrastructure we’re there. And so what we would see is that’s something to consider pre-feas study. And what they’re looking at is down to the 775 while there’s drilling going on as well to see how far down this ore body could go and would take it into the feas study stage.
Jake Klein
Yes. I mean just to add to that, Dan, the challenge, which Glen is providing the projects team is that he can’t find the bottom of the ore body. He’s got 2 drill rigs operating from surface and the ore body seems to continue robustly at depth. We’ve got an intersection, which has been previously released, 300 meters below the 775 level, we’re now looking to try and get some holes in between those areas. But early indications are that we have not found the bottom of the orebody yet.
Daniel Morgan
Yes. So that creates, I guess, an interesting challenge on how you think about maximizing long-term value. Do you — extending the shaft, is that something that you would think about? Or is the location awkward because the ore body is dipping away, so it’s very much a conveyor?
Jake Klein
I think probably the choice is more likely between a mechanized conveyor versus trucking and clearly mechanized conveyor which can be extended further at debt would be a better option. So that’s where we’re biasing towards now.
Daniel Morgan
Okay. Thank you very much.
Operator
Your next question is from Peter O’Connor from Shaw and Partners. Please go ahead.
Peter O’Connor
Three questions. Firstly, clarification one. So when you said the Ernest Henry generate PFS would be by end calendar ’22 ready for the MROR next year in February. When do we see any update on the Ernest Henry? Will you make an announcement in December at the end of this year or do we wait until next year go to see the details?
Lawrie Conway
Yes, Peter, it would be in February. So because what we’ll be doing is finishing the study, December, taking that through the internal gate and seeking Board approval to go through to the next phase of the study at the February meeting.
Peter O’Connor
Got it. And Jake back to Mt Rawdon, just thinking about these renewables potential to, I think what you’re saying about it’s not a core asset for you to monetize assets. In terms of ESG slide, which you talk to first and you talk to it with quite passion. How does a renewable energy source like this take some of those boxes on slide what it was three and four? And it is important to have it in the portfolio to get that benefit from your ESG credentials. Or how do you monetize the ESG side of it?
Jake Klein
Yes. I mean I think that the monetization of the — sorry, the ESG side of it, Rocky is we’re looking at sourcing renewable power. So one of the things we’re looking at, at Cowal at the moment, is securing a midterm renewable source of power. It looks like that’s potentially doable. And it’s — the pump hydro doesn’t itself sold the carbon credit issue that we need because carbon credits aren’t generated by the pumped hydro. So you’d have to put more renewable power around that. And then you’re starting to get into capital requirements, which are better suited to infrastructure funds.
So the main inbound kind of inquiries we have from major infrastructure funds, government funds, that’s where this asset will sit in once it’s operating. Don’t take that as a hesitation around our commitment to meeting our renewables target and I think that 7% improvement in efficiency or reduction in emissions on a per tonne mine basis is an indicator of how seriously we’re taking it.
Peter O’Connor
And to your opening remarks as well, you said when you gave your description about where the company has gone from in terms of strategy being consistent, use the term a small concentrated portfolio of assets et cetera. You previously actually put a number around that 6% to 8% that pivot to a more concentrated, is that a new change? Or is that just a reflection of where you’re up with sort of 4 key hubs now that you’ve divest it?
Jake Klein
No. I think 6% to 8% is quite small and concentrated. Is there any bankers out there, can you find us the next 2, please?
Peter O’Connor
Thanks, Jake, thanks, Lawrie.
Operator
The next question is from Matthew Frydman from MST Financial. Please go ahead.
Matthew Frydman
Sure, thanks. Good morning, Jake and team. Thanks for taking my question. I just wanted to ask the balance sheet question in a bit of a different way. And maybe just picking up on your comments just now around finding out a couple of assets. You made the comment in the presentation that you’re in currently at 27%, it’s within your internal limits. I think you’ve previously said that the target range is 25% to 35% to digest an acquisition or for internal growth, fund internal growth.
Clearly, the portfolio has changed a lot since you first outlined those ranges, I guess, in terms of life and the quality of the assets and also perhaps the cost structure of the asset. So how do you think about that currently? Is it still a fair range? Are you more focused on bringing the balance sheet back into a more normalized range, which I think you’ve previously said is around 10% or 15% gearing? Or are you happy to sustain it at these high levels by investing in the growth options that you’ve outlined that you haven’t committed to yet or even inorganically looking at current asset prices in terms of acquiring new assets?
Lawrie Conway
Yes, Matt, look, it hasn’t really changed. I mean, we’ve said for major acquisitions going up to 35%, as long as we see waste delever. I think is we saw the acquisition of Ernest Henry. It was one that we had to do when that opportunity came up that put some leverage onto the balance sheet. I think we did have an underperformance in FY22 that left the gearing level up a bit higher than we would have liked. And obviously, the movement in copper price in Q4 had another slight impact on it. But what we look at is that these projects that we’re in the final stages of construction at both Red Lake and Cowal, they then transition into cash generation.
And that’s really the way we’re looking at it. I mean, ideally acquiring Ernest Henry and doing those major construction projects would probably not go inside, but you can’t really perfectly align each of those. And that’s why we’ve said we’re always comfortable with that. As long as we go, we’re not rushing to get back to 10%. But we’re making sure that we keep our balance sheet well and truly under control.
Jake Klein
And it probably does make debt-funded acquisitions more difficult. So we’re not — and please don’t take my previous comment of saying we’re rushing out there to buy things. It needs a discipline around all of this capital allocation, M&A and everything to ensure that we keep the balance sheet strong. But I think the balance sheet is in very good shape. But at the sort of tenor of debt that we’ve got a 3% cost of funds, that seems a very efficient way of funding these projects.
Matthew Frydman
Thanks for that color.
Operator
Your next question is from Peter O’Connor from Shaw and Partners. Please go ahead.
Peter O’Connor
Lawrie its question for you, related to that question, longer time taken to get to this I’ve just forgotten what it was, that I didn’t noticed. Actually, no, I do. I just remember than. CapEx inflation, Lawrie. So you make to see observations about your cost profile post the balance date at June 30 now, it seems like fuel and still limit have come off. And I’d marry that comment to what David Lamont from BHP said on Tuesday. He talked about the vertical as the intense inflation period looks to have passed your comments kind of marry with that from an operating perspective. And wrapping this into your thoughts about these projects, can you do them should you do them, it’s CapEx inflation high. Is it feeling like we are seeing a peak of inflation, both OpEx and CapEx?
Lawrie Conway
Look, our view there is just looking from an operating cost perspective, we have seen it come off a little bit in the last 6 to 7 weeks. On the construction side, our view is depending on where those projects are. Hungary and the amount of projects in the gold fields and in iron ore and everything in WA says that we don’t think that we’re at a point where we’re coming off the peak. And as I mentioned on the on the call earlier, it is also around availability of resources and quality resources. And so in WA, I’d say there’s a bit of time to go. And I think that’s fair.
Then when we look at Ernest Henry, as we come through to the end of the pre-feas, it is going to look at that construction component, and we’ll get a bit of a sense of what this — the East Coast is looking like, but it definitely doesn’t seem like it’s where WA is at the moment.
Peter O’Connor
Thanks, Lawrie.
Operator
[Operator Instructions] Your next question is from Al Harvey from JPMorgan. Please go ahead.
Al Harvey
Yes, hi guys. Just a quick follow-up, just again on copper pricing. I know your guidance for the next two years around USD 4 a pound spots about 360. And I do note those sensitivities you provided in the slide pack. But what gives you that confidence over the next two years that, that price assumption you’ve used will stay at those more elevated levels?
Lawrie Conway
Yes. Look, I mean, our view when we set the guidance and we explained this in the business update in June, we had to take a point in time of where everything was. So if we were to adjust because of where the price is sitting today, I mean, it was down $1,000 in July. It was up $1,000 — about $600 a tonne in the first half of August.
We’ve had to take the forward curves at the point of locking our budget. We know what the sensitivity is. Because if we’re going to change that, are we going to change the oil price, are we going to change the steel prices like we have chosen the point in time. We know the sensitivity and we’re going to manage it that way. That’s how we’ve sort of set it.
If you take the talk in the market at the moment, whilst we’re — we’ve come off some highs from the three months ago where when we spoke at the quarterly, Copper was down over 30% in the three-month period. As of today, it’s down 16%. So it’s come back. And if you look at what the market outlook, everyone says there’s going to be a shortage of copper in the next two years, and that’s where we’ve taken that sort of long-term forward curve.
Jake Klein
Just going to add that I took some personal comfort from the fact that our view is obviously aligned with BHP and their bid for us.
Al Harvey
Yes, thanks guys. I guess another maybe follow-up is how often you review those forward curves and when that flows through to your view on guidance?
Lawrie Conway
We always keep our guidance up-to-date every quarter. If there’s a material change, we’ve obviously got a continuous disclosure requirement. We’d let that be known. But when we look at it, whilst on an all-in sustaining cost perspective, it has an impact on a cash flow perspective. If you look at where the gold price is today versus our achieved gold price for last year, the additional revenue we will get in FY23 exceeds the lower copper revenue we would get against the guidance because the — also, it’s fair to note that the price currently being achieved in August is actually in line with what we actually achieved for the whole of FY22.
We are conscious around the AISC, but we’re more conscious on the impact on our cash flow. And at the moment, if today’s price hold for the rest of the year, we get a higher cash flow than we actually would have achieved last year with more ounces and more copper tonnes and we actually would get a higher cash flow than what we guided at the June 27 update.
Operator
As there are no further questions at this time, I’ll now hand it back to Mr. Jake Klein for closing remarks.
Jake Klein
Thanks all. As I said at the start of the call, third time in six weeks, we’ve spoken to you, really appreciate you attending. If you haven’t booked your tickets to Red Lake, get on board, an opportunity to see a really genuine and great transformation that is occurring at that operation, we are — if that operation was in Australia, it would be the fourth largest gold field in the country, speaks in, cheers.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you.
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