C1 cash costs dropped 26 per cent in the second half of 2014 at Evolution Mining’s Edna May operation in WA, part of a company-wide cost-cutting drive.

By Mark Scott

IN a surprising result for a period that saw gold prices plummet to four-and-a-half year lows, mid-tier producer Evolution Mining delivered a record net profit in the second half of 2014.

The result was driven by a massive cost-cutting push across the company’s five Queensland and WA gold mines as well as record production rates, reaching 220,444 gold equivalent ounces.

Evolution’s profit soared to $43.1 million, a 22 per cent compared to the same period in 2013, based on revenue of $325 million and an all-in sustaining cash cost of $1035 per ounce.

Last November the global gold price crashed to its lowest point since early 2010 – US$1142/oz – as the US Federal Reserve began to wind back its economic stimulus program and the US dollar strengthened.

In Australian dollar terms, Evolution’s average realised gold price dropped to $1429/oz for the six months to 31 December 2014, with the spot price dropping below $1400/oz.

While most gold mining bosses would be kept up at night by such a steep decline in commodity prices, Evolution executive chairman Jake Klein said the conditions provided both an opportunity and a wake-up call to the industry.

“Necessity is the mother of all invention,” he said.

“A lower gold price and costs that were too high and investor dissatisfaction prompted us to take active and significant action, which has been good.

“It’s been a lot of hard work and effort; people have relatively short memories in that it was only a few months ago that the gold price had a one and a three in front of it.

“The gold industry has had a tough time in the last 24 months, but certainly Evolution has emerged a lot stronger and in better shape.”


The Cracow project’s shift to an owner-miner model is estimated to have saved Evolution Mining more than $18 million last financial year.

Cutting costs

Evolution’s C1 cash costs dropped from $766/oz in the December 2013 half to a record low of just $710/oz in the second half of last year.

The overall decline was largely a result by massive cost-cutting drives at the Edna May mine in WA’s Wheatbelt, which recorded a 26 per cent drop in C1 cash costs, and at the Pajingo operation near Townsville, here C1 cash costs dropped 22 per cent.

Both operations had a general manager put into place to bring about change, hunting for efficiencies and driving new business strategies.

“At Pajingo we changed the operating strategy to not just going for ounces, but to go for higher margin ounces, and not worry about the scale or production but worry about the profitability of production,” Mr Klein said.

“At Edna May it’s been about reliability, it’s been about availability, it’s been about hunting down every dollar that could be saved on the procurement side, and building a winning team.”

Evolution introduced a group procurement function to engage suppliers and contractors, which Mr Klein said had offered material savings on big contracts like diesel and drill and blast.

Further pushing the company’s costs down was the move to an owner-miner model at its Cracow and Mt Rawdon mines in Queensland across the past 18 months.

The transition at Cracow, which took place at the beginning of the 2013-2014 financial year, saw costs drops $190/oz for the financial year.

Given the success at both operations, Mr Klein said Evolution would move towards an owner-miner model at Mt Carlton.

All up, according to Mr Klein, the company has taken more than $40 million per year out of its cost base – and with gold prices climbing in early 2015, the pay-off is set to be massive.

“You only have to multiply our production by an extra $150 [per ounce] and you would get the impact which it will have, which is $30 million for the half,” he said.

“The challenge for us, and all gold industry participants, is to ensure that we bank that increase in the gold price and don’t let our costs drift upwards.”


The Pajingo mine also witnessed a massive drop in costs.

Rebuilding confidence

Whether the gold price will remain strong or slip back down to the low point seen late last year remains in the air.

After rallying to US$1300/oz in January, the global spot price began to decline again, dropping to US$1170/oz in early March.

Mr Klein said the global price was unlikely to undergo major gains, but the future looked positive for Australian gold producers, thanks to a weaker Australian dollar and better cost conditions in the industry.

“It’s difficult in US dollar terms to see a near-term cap lifts for the gold price; we seem to be in a deflationary environment, the US dollar is strong and the US economy seems to be getting stronger,” he said.

“In Australian dollar terms I’m much more positive – the dollar looks like it has further to go on the downside and it will be very beneficial to us.

“On the cost side, what is bad for the iron ore and coal sector is really good for us; as the heat has come out of those commodities, really gold has been a massive beneficiary.

“Costs in Australia are normalising again after going through a period where they were unsustainably high.”

Despite his confidence and the strong 2014 results, Mr Klein remained wary of Evolution resting on its laurels.

“That’s the trap; it’s what got investors frustrated over the last few years,” he said.

“While we’re winning back their confidence, we need to recognise that confidence is fragile and we have to continue to make ground.

“We’re still in a market where good news is graciously received; bad news is absolutely punished by the market.”

Part of that attempt to regain confidence lies in banking every dollar earned above the company’s expectations; its business plan is set at $1400/oz, and anything above and beyond that is set to go towards reducing debt, investing in exploration or looking at new potential transactions.

Evolution is already reaping benefits of its cost-cutting drive and the elevated gold price.

“The six months under review we didn’t often have discussions about debt payments; we are now having those discussions and talking about repayments, which is very positive,” Mr Klein said.

“We are looking very actively at deals which will improve the quality of our portfolio – the operations have put us in a very good position to be able to be active, they are the enabler for us to be able to do deals.”

Evolution’s push for a leaner, more cost-effective business has been attempted across the gold industry in a bid to remain globally competitive, and Mr Klein said Australia was beginning to reclaim its competitive position.

“Over the last decade we’ve largely become uncompetitive on a relative basis; as costs have gone up, as the Aussie dollar did appreciate, and we went from a lowest-quartile producer in the early 2000s to highest quartile last year,” he said.

“It’s regaining its position, rather than regained its position. Reputation takes a long time to build up but is lost quickly; to really get investor interest again in the space we need a more sustained period of delivery.

“We need to make sure that we continue to maintain the rage and not slip back into the habits which resulted in the Australian gold sector losing its competitive edge.”