Evolution Mining’s Come-Back Potential Divides

This story features EVOLUTION MINING LIMITED. For more info SHARE ANALYSIS: EVN

A beaten-down share price usually excites investors, but Evolution Mining post disappointing FY22 is keeping the analyst community divided.

-Evolution Mining reported FY22 underlying net profit of $274.7m, down -22%
-Shares were punished post-result (now down -50%-plus since April)
-Labour costs remain a key source of pressure
-Gearing levels relatively high at 27%

By Nicki Bourlioufas

Evolution Mining ((EVN)) might be a good buy according to some brokers after its shares dropped on a big fall in underlying profit and mounting cost pressures, though revenue was boosted by higher gold and copper prices and greater volumes from the newly purchased Ernest Henry mine.

The gold and copper miner’s statutory net profit dropped -6% to $323.3m, down from $345.3m in FY2021. Underlying net profit plunged -22% to $274.7m. Total revenue rose 11% to $2.06bn boosted by higher metals prices.

Operating mine cash flow fell -5% to $893.3m and Evolution reported a 4.9% jump in operating costs as inflationary pressures built. The miner declared a fully franked final dividend of 3cps, the 19th consecutive dividend payment made to shareholders since 2013, totalling $1.05bn, the company reported.

Evolution’s Executive Chairman Jake Klein said the company achieved full ownership of the Ernest Henry copper-gold operation which was successfully integrated into Evolution’s mine portfolio. In addition to this, he said the company progressed on its transformation of the Red Lake mine and the execution of the Cowal Underground project, laying the foundations for a successful FY23 and beyond.

The miner expects gold and copper output to increase by 12.5% to a combined 720,000 ounces (oz) in FY23 at $1,240/oz.

Evolution could be a buy, some say

While Evolution faces several risks ahead, the dip in in its share prices represents an opportunity to buy, according to some brokers.

Evolution’s share price, like its peers, has been under pressure since April, after gold peaked above US$2,000/oz. Since then, gold has dropped back to around US$1750/oz, with the stronger US dollar hurting the precious metal. Rising interest rates and inflation too have contributed to gold's drop, which fell as low as US$1,700.20/oz on July 20, its lowest finish since March 30, 2021.

While Morgans thinks the worst is behind the company, “these headwinds could remain for some time weighing on our conviction”.

Even so, Evolution appears oversold with several areas likely to improve in FY23, including 10% growth in gold production and 37% growth in copper, Morgans says.

The broker doesn't see Evolution’s balance sheet, including relatively high debt levels, as a problem and says the miner can easily fund growth at Cowal underground and Red Lake mines in FY23. Morgans has maintained its Add rating and has a $3.00 price target on Evolution, upgraded from $2.95.

Canaccord Genuity also has a Buy call on Evolution, and it too views the company’s gearing as sustainable.

“We view gearing at 27% as high but manageable and within the company's tolerance levels of up to 35%”.

Nor does Canaccord think higher inflation is a big risk. While skilled mining labour markets remain tight, and Evolution expects labour costs to rise by 5% to 6% in FY23, other transitory inflationary pressures such as diesel and power cost pressures “seem to be abating.”

Labour (50%), diesel (5%) and power (8%) costs comprise around 63% of the company’s cost base. The miner too says efficiencies at all operations will help to mitigate price increases in the next financial year. Canaccord has a target price on the stock of $2.70.

UBS is equally optimistic. While the company’s net debt ended FY22 high at $1.3bn, UBS expects it to peak at 33% by the end of FY23. Evolution has options should cash flow get tight, with $100m of discretionary spending which could be halted, if necessary. UBS has maintained its Neutral rating on Evolution with a $2.80 price target.

However, Barrenjoey sees risks ahead, both industry-wide and stock specific.

With production guidance and costs having been significantly revised, Barrenjoey still thinks the Red Lake turnaround carries greater execution risk relative to peers, on top of other risks. A rapid lift in real interest rates would cause a decline in the gold price. Cost inflation too has been accelerating in the mining industry. Barrenjoey has maintained its $2.90 target price with an Underweight rating.

Morgan Stanley is another sceptic with a $2.35 target price on the stock. Falling gold prices below its base case expectations and cost pressures, leading to higher operating costs, continue to be seen as key risks ahead.

Macquarie sits on Neutral with a $2.69 target. This broker notes Evolution’s reported current payables on the balance sheet of $407m jumped $216m in FY22, weighing on Evolution’s profit.

According to FNArena’s database, the consensus target price for Evolution is $2.80, suggesting circa 13.4% upside to the last share price.

Barrenjoey and Canaccord Genuity are not included in the consensus calculation derived from targets set by seven stockbrokers monitored daily through FNArena's Australian Broker Call Report. These seven are Citi, Credit Suisse, Macquarie, Morgans, Morgan Stanley, Ord Minnett and UBS.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms