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Date : 22/12/2020

Evolution Mining Limited

ASX :

EVN

Market Cap : $8.8 Billion

Dividend Per Share : $0.09

Dividend Yield : 3.10 %

Buy

52 Week Range : $3.29 - $6.59

Share Price : $5.04

Guidance forecast continues to remain positive and we issue a "Buy" recommendation in light of a pull back in stock price.

Company Analysis

Evolution Mining Limited (ASX: EVN) is a gold mining company focusing on mining and exploration operations in Australia. It owns and operates five gold and silver mines in Queensland and Western Australia. The company has recently acquired a new gold mine in Ontario, Canada. During September, when we first reviewed EVN, we were under the notion that the stock is overvalued, and we recommended our members not to enter into new positions. Come late December, the stock has pulled back about 10.5% – a substantial amount for a large cap gold mining company.


Source: Tradingview.com

While the financial statements reported by EVN have remained the same since our coverage in September, we do however have a couple of major announcements since then:

  • The quarterly performance results
  • Acquisition of Crush Creek

Cowal Project

The Cowal Project that is located in New South Wales and is 100% owned by EVN produced 51,774 oz of gold during the first quarter of FY2021. The AISC was $1026/oz. Compared to the previous quarter, we have seen a slight drop off in production and an increase in AISC.

As a result, the cash flows generated decreased to A$72.5 million from a high of $117.4 million that was seen in the last quarter of FY2020. Net mine cash flow stood at $30.2 million – a close to 50% drop off. The major project investments consisted of the continuation of Stage H stripping, construction of the Integrated Waste Landform tailing facility and the underground Feasibility Study.

The total ore processed was 2.1Mt. Plant utilisation is expected to increase as plant upgrades have been completed and a shutdown strategy has been adopted by the firm. Gold recovered has seen a slight increase and it stands at 83.9%. This was mainly due to the leaching and elution circuits.


Source: EVN

Ernest Henry Project

The Ernest Henry Project is located in Queensland and EVN owns 100% interest in the project that produces gold and 30% interest in the project that produces copper. 24,569 oz of gold and 5,040 tonnes of copper was delivered in the Q1 FY2021 at an AISC of -$515/oz. The performance has decreased compared to the previous quarter when the delivery was 28,183 oz of gold and 5,835 tonnes of copper at an AISC of -$617/oz.

The operating mine cash flow during the quarter was $87.9 million – out of which $69 million is attributed towards gold and the rest is generated from copper sales. Operating costs stood at $30.8 million. After sustaining capital of $4.6 million, EVN has generated a net mine cash flow of $83.2 million.

The total ore mined stood at 1,659kt at an average grade of 0.59g/t gold and 1.1% copper. The underground lateral development was 2,777m. Gold recovery was 76.5% and copper recovery stood at 94%. The operating cash costs (C1) was -$989/oz. The sale of copper during the quarter was 5,040t at an average copper price of $9720/t.


Source: EVN

Mungari Project

The Mungari Project of Western Australia has seen another good performance during the quarter. It produced 35,370 oz of gold at an AISC of $1115/oz – only a slight decrease in production and a marginal increase in cost compared to Q4 of FY2020.

The operating cash flow from the mine was $61.2 million and the net mine cash flow was $44.9 million – both showing significant increases from Q4 when the cash flow was $53.1 million, and the net cash flow was $44.9 million. The sustaining and major capital investments during the period was $16.3 million.

The reason for this high margin in cash was due to the higher-grade underground ore that was produced by the project. The underground production was in line with the operating plan with 101kt of ore mined at 3.93g/t gold.


Source: EVN

Mt. Rawdon Project

Mt. Rawdon is a 100% owned project that is located in Queensland. The project saw a significant performance dip during the quarter – both in terms of increased AISC and decreased production. 20,040 oz of gold was produced during the 3 months at an AISC of $1536/oz.

Mine operating cash flows was $24.6 million – a 31.7% drop off from Q4 FY2020. As a result, the net mine cash flow decreased to $16.1 million – a 50% dip in cash generated in the previous quarter. The major capital investments stood at 7.8 million for Q1 of FY2021.

This dip in performance was due operational difficulties as a rock fall in September resulted in loss of access to high grade material for about 3 weeks. The total material that was mined was therefore below the expected 2.5Mt market. However, the firm maintains that this will be recovered in Q2. 849kt of ore was processed at Mt Rawdon at an average grade of 0.83g/t gold. Plant recovery was 88.5% and plant utilisation was 94.9%.


Source: EVN

Mt Carlton Project

The Mt Carlton Project is also located in Queensland and Evolution Mining has 1005 ownership interest. The project produced 11,646oz of gold that consisted of 15,959 dry metric tonnes of gold in concentrate. We have seen an increase in AISC by 50% during the quarter as AISC was $2674/oz. This is compared to just $1325 during Q4 of FY2020.

Mine operating cash flow was $4.5 million – a drip from last quarter’s $11.47 million. The net mine cash flow was however, $4.3 million compared to Q4’s $3.4 million. This can be attributed to the low capital investment of just $200,000 during Q1 of FY2021.

Plant recovery averaged 81.8% and plant utilisation was 94.3% during Q1 FY2021. Mill throughput totalled at 234kt at 2.4g/t gold.


Source: EVN

Red Lake Project

The Red Lake Project is also 100% owned but is located in Ontario, Canada. This is a relatively new project for EVN that has started producing gold from Q4 of FY2020. EVN states that the project has been making good progress in delivering the planned operation production of above 200,000 oz per annum at an AISC of less than US$1000/oz. The Mineral Resources during the quarter were upgraded and it is now 11Moz. EVN is currently working to meet its long-term objective of 300k – 500k Oz of low-cost annual production.

Red Lake produced 26638 oz of gold at an AISC of $2074/oz. The comparison to the previous quarter can be seen in the chart below. The cash flow from mine operations was $21.6 million. With capital investments at $7.1 million, the net mine cash flow during Q1 of FY2021 stood at $4.7 million.

In August, the Red Lake community was impacted by a nearby forest fire resulting in an evacuation of the community and temporary suspension of operations. This resulted in 11% reduction of available operating time in the quarter. Underground mine development for the quarter was 2,678m. Work continues towards achieving the target of 1,200m per month. The underground mine produced ore feed of 117kt at an average grade of 6.42g/t gold. Ore processed was 120kt at an average grade of 6.35g/t gold and 93.6% recovery.
Source: EVN

Outlook

EVN’s projects have overall had a mixed bag during Q1 FY2021. Earlier this month, the firm acquired 100% in the Crush Creek project that is located close to the Mt Carlton Operation in QLD. EVN previously owned 70% of the project and the firm exercised an option to acquire the remaining 30% for $4.5 million in cash. Previous owner Basin Gold continues to retain a 10% interest in net profits on gold production in excess of 100k ounces.

The production, cost, and capital guidance for FY2021 can be seen in the below table and they remain the same since the firm first revealed these numbers at the beginning of FY2021.


Source: EVN

Investment in sustaining capital in FY2021 is forecast to be between $112.5 million-$137.5 million. Red Lake accounts for a significant amount of Group sustaining capital as the company invests in transforming the operation with key items including replacement of mobile fleet, shaft decommissioning, resource definition and major maintenance and upgrades.

Major capital in FY2021 is expected to range between $260 million –$290 million. A large proportion of the major capital is associated with expansion projects at Cowal as the operation invests in projects to augment production to over 300,000 ounces per annum.

Three-year outlook

Production is planned to increase to over 800,000 ounces during the three-year period to FY2023. Growth is expected to be driven by the initiation of the Cowal underground mine in late FY2022 and execution of the Red Lake transformation plan.

Investment in two significant projects at Cowal and Red Lake will materially increase production and transform the quality of the company’s asset portfolio. Major capital investment at Cowal is expected to increase production to above 300,000 ounces per annum. Red Lake will continue to invest in mine development aimed at augmenting annual production to over 200,000 ounces.

Dividend

The company has declared a final, fully franked FY2020 dividend of 9 cents per share, amounting to $153.4 million. This results in a record full-year dividend for FY20 of 16 cents per share, fully franked, which equates to a 68% increase over FY2019.

Recommendation

The firm has stood still on its FY2021 guidance and remains in a position to meet its forecasted numbers. Gold prices have dropped recently, however, they are tipped to surge as another stimulus is being readied by the US Federal Government. This surge will result in outperformance in cash flows due to high margins in the next couple of quarters. Hence, we recommend members to “Buy”.

 

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