Australia | Oct 17 2018
Evolution Mining beat expectations for production in the September quarter with better grades and all mines positive on cash flow.
-Strong potential to beat FY19 guidance
-Plans underway to lift production at Cowal
-Grade increases at five out of the six operating mines
By Eva Brocklehurst
Evolution Mining ((EVN)) beat production forecasts in the September quarter, delivering the consistent operating performance brokers have come to expect.
Production was over 200,000 ounces in the September quarter at all-in sustaining costs (AISC) of $885/oz. Quarterly production is 27% of FY19 guidance of 720-770,000 ounces at the mid point and ahead of the prior corresponding quarter. All mines were positive on cash flow and the company is expected to be net cash in 2018.
If the September quarter production rate can be maintained Citi suspects Evolution Mining will beat FY19 guidance. Setting the bar somewhat conservatively, given it is only the first quarter, the broker envisages the company will hit the upper range for gold and beat on costs.
Ord Minnett observes Evolution Mining has been conservative with full year guidance and this has been misunderstood as a cost issue. The broker calculates the cost margin over the past three months was 47% versus 49% in the June quarter, highlighting that the operating and balance sheet leverage implied by the sell-off in the stock simply does not exist.
The broker expects a 50% operating earnings margin (EBITDA) in the current year, just short of the 52% achieved in the prior year.
Catalysts At Cowal
Exploration results, particularly at Cowal, were encouraging for UBS, as a number of very high-grade intercepts have just been released to the market.
The broker believes, for an investor looking for gold price exposure and wishing to minimise operating risk, Evolution Mining is a relatively low-risk option. Yet, as the stock is trading around a fair value calculation, a Neutral rating is maintained.
Plans to lift production at Cowal are underway and the float tails leach project should be commissioned in the December quarter, bringing the most immediate benefit, UBS points out. This should increase gold recoveries by 4-6%.
There is potential for an upgrade to guidance at Cowal after the approval to ramp up to 9.8mtpa. The plant is able to operate at 8mtpa currently but the previous licence was constrained to 7.5mtpa each calendar year.
Credit Suisse notes Cowal could potentially be delivering 1mtpa of underground ore at 5g/t from FY23, displacing lower grades from the open pit. Despite a heavy program of capital investment Cowal continues to contribute cash. The main initiatives to enhance value include the increased throughput and the stage H cutback that secures the least a 15-year mine life.
Citi expects Cowal to drive the share price over the next 12 months as the epithermal system is proving to be of higher grade than previously envisaged.
Grade has increased quarter on quarter at five out of the six operating mines and the broker highlights Mount Carlton, where there has been a move to mine the eastern side of the main pit. Mount Carlton gold grades rose 35% quarter on quarter and milled grades were 10% above target.
At Ernest Henry, output suggests a 1.12% copper grade, on Ord Minnett's numbers, which is 6% above the reserve grade. High availability of ore supported elevated mill throughput at the mine.
Meanwhile, exploration at Mungari is being rewarded with encouraging intersections at Scottish Archer and Castle Hill. While grades increased 23%, Morgan Stanley cautions that grades are likely to fall towards reserve in FY19.
Higher grade ore was identified the base of the pit at Mount Rawdon, which had not previously been assumed. Cutback activity over the next two quarters will mean Mount Rawdon production declines, albeit stays on track for guidance.
FNArena's database shows four Buy ratings and four Hold for Evolution Mining. The consensus target is $3, signalling -0.6% downside to the last share price. Targets range from $2.65 (Credit Suisse) to $3.35 (Citi).
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