Large Potential At Cowal For Evolution Mining

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

Brokers observe Evolution Mining has compelling potential with the expansion of the Cowal gold mine.

-Improved scale could lower processing costs at Cowal substantially
-Capital management likely to be the driver of shareholder value
-Considered low-risk alternative to Newcrest for gold exposure
 

By Eva Brocklehurst

After recently visiting the Cowal gold mine in NSW, brokers were impressed with the potential of Evolution Mining's ((EVN)) flagship asset. Cowal is a long-life, high-margin asset where an expanded plant could unlock reserves and reduce processing costs.

Deutsche Bank calculates that with higher throughput and a reduced cut-off grade, Cowal could be operating at 300,000 ozs per annum by FY21 and sustain a life beyond the current reserves. Nevertheless, the broker considers this growth already largely captured in the valuation.

Evolution Mining acquired the Cowal asset in 2015 and, after years of limited capital and exploration, Credit Suisse observes the company has moved exceptionally fast to unlock the potential.

The site visit confirmed a well-run operation with a clear sight of mine life of 14 years and the broker expects near-term upside from productivity gains and cost reductions under the company's lean operating practices.

Macquarie also suggests that as with a number of other assets acquired around the same time as Cowal, it has become apparent that many historical exploration targets and geological models were not tested by previous owners.

Two major projects are now underway. The float tails leach project is on track to be commissioned in the December half and should improve recoveries by 4-6% at an incremental processing cost of $1.50-1.70/t. The project is also expected to provide the flexibility to co-treat high-grade oxide stockpiles, which are expected to double with the mining of Stage H.

Feasibility Study

A feasibility study is underway to assess the options to increase plant throughput up to 9.8mtpa. The company believes this could be achieved through the addition of a secondary crushing circuit for material that currently stymies SAG mill capacity.

Deutsche Bank notes the operation is currently permitted to 7.5mtpa and its recent performance suggests something closer to 8.0mtpa is achievable. Around 100 additional operators have been brought in to deal with the increased material movements.

The broker does point out a cut-back beyond Stage H would require the re-location of the primary crusher and therefore appears uneconomical at the present time.

Deutsche Bank suggests improved scale could lower processing costs by -10-15% on a unit basis. The company has proposed a 12-months turnaround for the expansion approval and, pending a favourable outcome from the feasibility study, expansion could be fully implemented by FY21. In turn, this would be well timed for Stage H ore.

Expansion is a likely outcome and Macquarie lifts production forecasts from 2021. While the broker expects improved recoveries and expansion, the stock appears fairly valued at current levels and a Neutral rating is maintained. While exploration appears promising, near-term success is expected to take some time to translate into additional production.

Macquarie observes both Cowal and Ernest Henry have transformed the company's portfolio. While opportunities for value adding acquisitions are limited at present capital management is expected to be the most likely driver of shareholder value.

Credit Suisse agrees scale and the balance sheet have been enhanced by both the Ernest Henry transaction and the divestment of Edna May. Consolidation of various assets has elevated the company to Australia's second largest gold producer with annual production in excess of 800,000 ozs.

Evolution Mining has also been entrenched as a low-cost operator and, as Credit Suisse notes, a low-risk alternative to Newcrest ((NCM)) for gold exposure.

FNArena's database shows two Buy ratings, five Hold and one Sell (Morgan Stanley). The consensus target is $2.84, signalling -5.8% downside to the last share price. Targets range from $2.40 (Deutsche Bank, Morgan Stanley) to $3.45 (Citi).

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