Australia | Sep 03 2020
This story features EVOLUTION MINING LIMITED. For more info SHARE ANALYSIS: EVN
Evolution Mining has confirmed its reputation as a consistent performer in the gold sector, although most brokers assess this is reflected in the price.
-Focus on maximising cash margins
-Pay-out policy unchanged, no change to reserve gold price
-Long-term plan for Red Lake well ahead of expectations
By Eva Brocklehurst
Evolution Mining ((EVN)) has used its strategy briefing to highlight the sustainability of its mines and a focus on maximising cash margins. The company has emphasised it has the lowest reserve price calculation among peers, at A$1450/oz, and remains disciplined on acquisitions.
Evolution Mining believes value-accretive acquisitions must either come from a forced sale or more gold potential than originally factored into the deal, and Morgan Stanley cites Red Lake (Canada) as the prime example.
The consistency in Evolution Mining's message and application does not mean there is no risk or the potential for assets to vary against what is planned but, as Credit Suisse points out, this is a risk inherent with all miners.
Regardless, the broker welcomes the company's more conservative profile which should prove more sustainable, and there are several options under a range of gold price scenarios. Commitment to shareholder returns is unchanged, with a pay-out policy of 50% of free cash flow. Evolution Mining is willing to take gearing to 35% for acquisitions but will only operate in tier-1 mining jurisdictions, basically North America and Australia.
No significant cost inflation is projected over three years and there is no planned change to the reserve gold price. However potential future price adjustment may occur to facilitate a Mt Rawdon stage 5 cutback (Queensland).
Ord Minnett expects the company's drilling programs and project studies across the main operations of Red Lake, Cowal (NSW), Ernest Henry (Queensland) and Mungari (Western Australia) should unlock significant value, although a lot of this is already factored into forecasts.
The broker models a mine life to FY33 for Ernest Henry noting an ore reserve update is due in the March quarter. Ernest Henry and Cowal comprise more than two thirds of the broker's valuation for the stock, although probably have less leverage to higher gold prices. Hence, the scrutiny of other assets.
The main revelation for brokers was the growth aspirations for Red Lake, set at 300-500,000ozpa. This long-term plan is well above Morgan Stanley's peak production estimate of 255,000ozpa from FY25 until the end of life in FY38.
In fact, Macquarie finds the prospect of an open pit compelling, although awaits more clarity on the cost and approval process before including it in forecasts. Still, the broker assumes a higher conversion to reserves, which extends assumed mine life and leads to an upgrade to Neutral from Underperform.
Citi notes an option for pushing underground tonnage higher via a decline. The prior owner received a permit for a decline which the company suspects may add 1mtpa. However the broker flags this means more mill capacity would be required, as the two small existing mills have always been an issue.
The company emphasised the delineation of further high-grade gold and the shifting of the bottleneck to the mill from the mine. Again, Citi points out open cut mines that require shifting of infrastructure and townships remain challenging and this is probably why, for now, the company's plan is still 200,000ozpa at costs below US$1000/oz.
Ord Minnett assesses it is probably too early to model the options and scenarios for potential ore bodies and retains questions around the legacy infrastructure and technical considerations.
At Cowal, Evolution Mining intends to submit permit application to access the resource under stage H via a ramp and new pits. Adding these pits to Citi's model extends the oxide streams and adds $0.10 to the valuation.
Sustainable production at Cowal is envisaged as upwards of 330,000 ounces from FY24, with a peak around 400,000 ounces in FY31. To reach this, the company is investigating the highest grade possible underground for the first 2-3 years of life.
First ore is anticipated in 12-18 months. While the mill is at 9.0mtpa it is permitted to increase to 9.8mtpa, although to reach this quickly would require a large capital expense, Morgan Stanley points out.
Meanwhile, at Mungari a processing rate of 2.0mtpa is considered sustainable. The improved visibility means Evolution is targeting 110-120,000 ounces for 10 years. This reflects upside to Morgan Stanley's 7-year mine life estimate which also has production falling towards 65,000 ozpa. The broker believes the finalisation of plans for the Castle Hill area would greatly increase the visibility on the production outlook.
FNArena's database has three Hold ratings and four Sell for Evolution Mining with a consensus target of $5.00 that signals -11.9% downside to the last share price.
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