Are Liquidity Concerns An issue For Evolution Mining?

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

New research by Jarden addresses recent market concerns around liquidity for Evolution Mining.

-ASX gold stocks lagging the rising Australian dollar gold price
-Jarden initiates coverage on Evolution Mining and addresses liquidity concerns
-Suspension of operations at Ernest Henry causing market angst 
-Leverage to the gold price muted for Evolution

By Mark Woodruff

As was the case for most ASX-listed Gold sector stocks, shares of Evolution Mining ((EVN)) bounced of trading lows in October last year.

The stock price hit a low of $1.80 before rising to $3.42 and then settled back to the current level around $2.97, which suggests there is around 2.1% upside to the average $3.03 target price in the FNArena database.

In late-January, Morgans set far and away the highest 12-month target ($3.75) of six brokers in the database, and more recently noted the increasing appeal of safe haven assets such as gold due to fears of a global banking contagion.

Despite a 10% rise in the Australian dollar gold price in the 12-months up to March 21, the broker noted Australian gold stocks had fallen by around -11%, when using the All ordinaries Gold index as a measure.

Unfortunately, company-specific factors such as operational performance and balance sheet considerations sometimes outweigh a good gold sector story.

Yesterday, Jarden initiated coverage on Evolution Mining with an Underweight rating and $2.79 target, as the broker holds a below-consensus view on FY25 production for Red Lake in Canada.

Despite a constructive view on the gold price and current liquidity concerns held by the wider market, this broker feels any marginal buyers of the company’s shares will be deterred by current elevated capex levels across the portfolio and risks to production guidance.

Also, Jarden suggests any leverage to the gold price is muted for Evolution due to elevated operating costs and the currently high-margin forecasts for its core assets.

In Ernest Henry, Cowal and potentially at Red Lake, Evolution boasts three core projects with operations extending out more than ten years, and operating costs that help generate high free cash flow margins.

Ernest Henry also produces enough copper to rank Evolution as the second largest pure copper producer on the ASX behind Sandfire Resources ((SFR)).

The Mungari gold operation near Kalgoorlie in Western Australia is a lower margin proposition, notes Jarden, with greater operational intensity due to multiple pits in overlapping and sequenced development.

Jarden points to the intangible ESG benefit sitting within the gold portfolio courtesy of the carbon-negative Mt Rawdon pumped-hydro concept, and is also excited by potential for a large open pit discovery/province via the Lake Austin joint venture with Musgrave Minerals ((MGV)).

However, recent events have given the market a reason to dwell upon liquidity concerns.

Balance sheet concerns 

The mine life and scalability attractions of the company’s three core projects have lately been soured by a heavy capex cycle, causing in particular a delay in cash flows for Red Lake, explains the broker. As a result, the market has become increasingly focused on debt levels.

This concern was first evident when Ord Minnett highlighted the balance sheet position in mid-March, following news operations at Ernest Henry would be suspended for six weeks due to weather events across northwest Queensland. The broker also adopted a more conservative stance on Mt Rawdon’s output for the same reason.

Morgan Stanley dispelled such liquidity concerns at the time, and pointed out Evolution could withstand gold prices as much as -US$300/oz lower for a period of three years.

While Jarden doesn’t see any material risk for the balance sheet, any need to substantially draw upon the company’s $525 revolving debt facility in the June quarter may fuel a bearish outlook, despite existing debt being both cheap and long dated.

As Mungari doesn’t fit the profile of the core portfolio, the broker suggests this asset could be first in line should the existing portfolio be rationalised.

In February, higher-than-expected expenses and a one-off currency adjustment caused a first half result miss versus consensus forecasts, while the 2cps interim dividend was below the 3.6cps expected.

Following these results, Canaccord Genuity retained its $3.20 target price and Buy rating. Along with Jarden, this broker is outside the FNArena database.

There are two Sells, two Holds and two Buys (or equivalent) by the six covering brokers in the database.

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