Evolution Upside Hinges On Exploration

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

Having sold Edna May, Evolution Mining has improved its debt position and portfolio quality, narrowing its focus to strong producing mines.

-Promising exploration results at Cowal
-Exploration upside considered key to improving valuation
-To pay for upside the market likely requires more results, and investment
 

By Eva Brocklehurst

Record cash flow and production prevailed in the September quarter for Evolution Mining ((EVN)) as both Cowal (NSW) and Mount Carlton (QLD) outperformed on grades. Exploration results from Cowal signal a new discovery and longer life. Edna May was divested, improving the quality of the portfolio, and allowing the company to repay a further $40m in debt.

Record gold production of 220,000 ounces at an all-in sustainable cost of $786/oz was 6% higher and -6% lower than Macquarie's respective forecasts. The main beat in terms of production outcomes was a strong performance from Cowal as well as higher-than-expected copper production at Ernest Henry (QLD). Mount Carlton also assisted, with high-grade production from the V2 bonanza zone.

Gearing is now below 14% and, as a consistent producer, Ord Minnett expects the company to be net cash by the end of 2018. Evolution Mining has, in its short history, operated both open pit and underground mines and built a pre-development asset at Mount Carlton, while adding value via acquisitions. For Ord Minnett, the missing piece is the organic reserve growth and options on assets.

Production Sustainable?

The main question for Credit Suisse is whether the September quarter performance is sustainable. Management is confident that depletion across all assets can be offset from Cracow (QLD), Mungari (WA) and Mt Rawdon (QLD).

Several brokers find the outlook for Cowal even more positive after the quarterly report, with exploration outside the immediate mine plan only just commencing but already yielding results. This reinforces Ord Minnett's view that these tenements could host economic ounces outside of the E42 pit shell – priority targets that have not been progressed for over a decade because of a lack of funding.

Macquarie is impressed with the 139m intersection returning 17g/t and also flags the fact this, as well as other encouraging results, sits outside the current 400,000 ozs E42W resource envelope.

Cash flow continues to be a defining quality of the company and, should the current trajectory be maintained, Canaccord Genuity looks forward to a net cash position in the first half of 2018. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Hold rating on valuation, believing the outlook is priced in.

Exploration Upside?

UBS notes, despite the company's stable operations and execution on acquisitions, exploration success is not uppermost in client assessments. The broker suggests a lack of historical exploration success explains the difference between the value of Evolution Mining and Northern Star ((NST)).

Yet, the lower gearing and balance sheet strength now mean interest is mounting regarding the potential from exploration. While there is success at Cowal and Mungari, the broker notes for FY18 the budget is down by -30%. Most of this reduction is coming from expenditure on resource definition. Even so, the "discovery" component is still falling by -14%, to $25m.

UBS questions the low expenditure and, while not simply advocating an increase in spending, cannot help but compare Evolution Mining's $53m per production ounce exploration expenditure with Northern Star's equivalent $118m. The broker would not be surprised if the budget lifts when success demands it, but in order to get the market to pay more for this upside believes it will take time, results and probably more investment.

There are four Buy ratings, three Hold and one Sell (Morgan Stanley, yet to comment on the quarterly) on FNArena's database. The consensus target is $2.44, suggesting 3.7% upside to the last share price. Targets range from $2.10 (Morgan Stanley) to $2.80 (Macquarie).

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
 

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