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Evolution Mining Parts With Edna May

Australia | Sep 19 2017

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

Confirming speculation, Evolution Mining has sold the Edna May gold mine, divesting its smallest and highest cost asset.

-Viewed positively because of an improvement in margins and reduction in costs
-Price realisation below value attributed while part of a larger portfolio
-Evolution Mining's next move considered likely to be an acquisition

 

By Eva Brocklehurst

Evolution Mining ((EVN)) has fulfilled expectations by announcing the sale of Edna May. Ramelius Resources ((RMS)) will purchase the Western Australian gold mine for $40m in cash and up to $50m in extra payments involving royalties and/or scrip.

Edna May was considered an obvious divestment and updated production guidance signals falling costs, providing a positive impetus. The mine is one of the company's smallest and highest cost. The consideration is below the estimates of several brokers but the sale is still viewed positively because of an improvement in margins and reduction in costs.

Canaccord Genuity previously estimated a value of $136m for the mine, modelled on a four-year life and the commencement of underground production in late FY18. Contingent consideration is the largest component of the deal value and, even assuming the full consideration of $90m is ultimately paid, this remains some 34% below the broker's estimated value for the asset.

The broker suspects this soft valuation may centre on doubts around whether underground production will deliver the expected improvement in operating margins or, maybe, Evolution Mining's view of the potential life is below broker model assumptions.

The sale, representing only 4% of Canaccord Genuity's estimated net asset valuation for the stock, has little impact on the investment view. The broker, not one of the eight monitored daily on the FNArena database, retains a Hold rating and reduces its target by 2% to $2.25.

Edna May Valuation

The structure of the transaction is a demonstration of the differential pricing that is applied to mature, challenging assets versus high-quality assets, in Credit Suisse's view. As with the company's divestment of Pajingo the structure is complex and conditional. Price realisation is well below the value that was attributed by the market while the assets were part of a larger portfolio.

Macquarie assumes Edna May has 273,000 ounces of mineable inventory left to produce, leaving 73,000 ounces above the 200,000 ounces royalty trigger point. Using this estimate, the broker believes Edna May can deliver an additional $24.3m to Evolution Mining, if the stage III pit is mined, or $7.3m if Ramelius does not mine stage III.

The broker calculates a discrepancy in perceived value between the discounted cash flow valuation of Edna May and the likely total payments for the mine. This drives a minor reduction to the target. On the upside, the drag from high costs has been removed.

The company has indicated a $30/oz reduction in all-in sustainable costs (AISC) for the rest of FY18 via this divestment, and an annualised saving of $40-50/oz thereafter. The revised FY18 guidance is 750-805,000 ounces at AISC of $820-$870/oz versus prior guidance of 820-880,000 ounces at AISC of $850-900/oz.

Next Move

Credit Suisse does not expect the company to announce an acquisition in the near-term, as quality assets are not readily available and/or are priced at significant premiums to value. The broker downgrades to Neutral from Outperform and reduces its target to $2.22, reflecting an 8c reduction, on accounting for the sale below prior valuation.

Never say never, is Citi's view of the potential for another acquisition. The broker points to a good track record of value adding via M&A, although acknowledges management has been clear in its view that gold mines are currently too expensive and organic growth is preferred. While the sale reduces FY18 revenue there is less of a fall in terms of earnings per share, because the mine is high cost. It was one of the foundation assets of Evolution Mining.

UBS agrees the transaction price is on the low side, especially in the light of heightened competition for gold assets, Edna May has been an underperformer and lacks the significance of the other mines in the company's portfolio. Around 47% of the reserve is underground and UBS believes only minor capital expenditure would be needed to completely mine the remainder. Beyond this, more investment and exploration success would be required.

Post the divestments, the company sector-leading position within Australian gold miners is reinforced, UBS asserts, underscoring a preference for the stock. The company now holds six assets, at the lower end of its target of 6-8. UBS accepts this is not a hard rule but suggests, therefore, the next move is likely to be an acquisition.

FNArena's database shows four Buy ratings and three Hold. The consensus target is $2.52, signalling 7.9% upside to the last share price. Targets range from $2.22 (Credit Suisse) to $2.80 (Macquarie).
 

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