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Evolution Mining (ASX: EVN)

3Q24 Trading Update Analysis – 22nd April 2024

Evolution Mining (ASX: EVN) announced third-quarter results that beat market expectations. EVN’s operations optimisation has coincided well with rising gold prices on the back of higher inflation rhetoric and growing tensions in the Middle East. The company flagged higher production and lower ASIC guidance, which means higher profit margins and cash flows – shares surged over 7% on the day of the 3Q24 performance announcement.

In 3Q24, group cash flow was up 7.5% to $85 million. EVN realised an average gold price of $3,171/oz. Gold production was up 15% to 185,252 ounces of gold at a 9.6% lower All-in Sustaining Cost (AISC) of $1,464 per ounce (US$963/oz).

The new Northparkes asset generated $37 million in net cash flow in the first full quarter of ownership. Cash on hand and liquidity increased to $215 million and $740 million, respectively. This is after the payment of Northparkes acquisition stamp duty of $51 million and before the receipt of concentrate shipment proceeds. Deleveraging of the balance sheet has also continued with gearing falling to 28% from 30% at the end of December.

EVN’s revenue is significantly leveraged to spot metal prices (gold spot price of $3,715/oz), with over 95% of gold sales unhedged and no copper hedging. With gold prices hovering at all-time highs and copper prices rebounding to over $4.4 per pound, the highest in nearly two years, Evolution Mining is sitting in a very comfortable position to significantly boost its cash flow in 2H24.


Source: EVN

On the exploration and discovery front, there were new drilling results announced that have the potential to drive resource additions and potential reserve growth adjacent to existing infrastructure at Ernest Henry (Ernie Junior) and Mungari (Kundana underground) – providing attractive propositions for future production. The drilling results are to be incorporated in a mid-year (2024) Mineral Resource update that will inform the Feasibility Study and associated Ore Reserve update due for completion in the March 2025 quarter.

Markets are Rewarding EVN’s return to Smooth Operations

When we added EVN to the High Conviction Buys, the company had operational hiccups leading to costs blowing out of hand. Shares were oversold. But EVN still had incredible assets and a history of successful operations. The tide has turned in the subsequent quarters and the share price has followed.

All operations delivered materially to plan, including successful planned major shutdowns at Cowal and Ernest Henry. Wet weather at Cowal, Mungari and Mt Rawdon cut production by around 8,000 ounces, predominantly in March 2024, but this was well known.

Cowal

Gold production improved by 9%, and Cowal is on track to deliver at least 320,000 ounces of gold for the year. The underground mine reached commercial production, and the plant continued to ramp up. Operating mine cash flow improved by 9% to $150.7 million, and net mine cash flow of $56.8 million improved by 13%.

Gold production increased 9% to 78,109oz. AISC was $1,522/oz (Dec qtr: $1,226/oz) due to the need to utilise higher cost, lower grade stockpiled inventory as a result of weather impacts during the quarter, planned increased sustaining capital expenditure, and lower gold sales at quarter end.

Ernest Henry

There was consistent and reliable delivery of gold and copper production, and cash flow continued with operating mine cash flow of $103.9 million, exceeding $100 million for the third consecutive quarter. Ernest Henry achieved a major milestone during the quarter, having fully repaid all acquisition and subsequent investment capital. With an expected 17-year mine life remaining, this will be an extremely good operation for EVN.

Year to date gold production is on track to meet FY24 guidance. March quarter performance of 18,534oz was 9% lower as a result of reduced mill availability due to a 5 day planned maintenance shutdown and lower recovery on processing of ore from the coarse ore stockpile.

Copper production was 12,543t. AISC improved by 25% compared to the December quarter due to the higher copper price and the lower gold sold.

Northparkes

In the first full quarter of Evolution ownership, Northparkes delivered material net mine cash flow of $37.4 million. The integration of Northparkes is progressing. Operating mine cash flow of $59.3 million was achieved for the quarter.

Northparkes produced 8,402oz of gold and 7,366t of copper in the quarter and AISC improved by 23%, demonstrating the operation’s value as a high quality, low cost asset.

EVN said Northparkes expects to deliver increased production in the June quarter, notwithstanding planned maintenance on the hoisting shaft and concurrent surface works in April.

Mungari

Gold production increased 15% to 32,473oz as a result of higher mined and processed ore grade (up 41% at 2.92g/t) and improved mill recovery at 94.3% (up 2.6%) which partially mitigated the impact of a regional 4 day power outage and the wet weather in March.

Production was 1,400-1,500oz lower due to these events. Mined gold grade was higher from both open pit at 1.45g/t (Dec qtr: 1.36g/t) and underground at 4.17g/t (Dec qtr: 3.87g/t).

AISC improved in the March quarter to $2,479/oz (Dec qtr: $2,558/oz) due to the higher production being offset by the need to use higher cost stockpile material due to the wet weather. As the higher grade ore is produced in the June quarter, this will reduce the AISC.

The Mungari 4.2 expansion project is progressing well and remains on schedule and budget. Gold production is planned to increase in the June quarter in line with the sourcing of higher grade ore at the Kundana and Paradigm mining centres, plus an additional mill campaign of higher grade EKJV ore.

Red Lake

Red Lake started to demonstrate safe and consistent production during the March quarter. Gold production increased 26% quarter-on-quarter to 30,415oz at an AISC of $2,842/oz (Dec qtr: 24,095oz at $3,343/oz).

Earlier this year, EVN said that its focus at Red Lake is to bring consistency and reliable production, concentrating on cost control and cash generation. Production is expected to increase further in the June quarter to 40,000 to 45,000 ounces based on increased grade and tonnes from Balmer and Upper Campbell and consistent performance at Cochenour. The performance for the second half of the year of between 70,000 to 75,000 ounces is expected to be the base performance on an annualised basis leading into FY25.

Mt Rawdon

Gold production of 17,319oz was the highest quarterly rate since September quarter 2022. Net mine cash flow increased 45% to $17.6 million, benefiting from an 11% increase in production and higher realised gold price. AISC improved 15% to $2,063/oz (Dec qtr: 15,618oz at $2,423/oz). Gold grade mined at 0.75g/t was the highest since the September quarter 2022 and an 11% increase on the December quarter (Dec qtr: 0.64g/t).

EVN said mining operations will transition to day shift only during the June quarter and from the September 2024 quarter will move to processing of stockpiles for the remainder of FY25.

Evolution Maintained Guidance

There was no change to Group FY24 guidance. EVN said gold production would be at the lower end of the range, that is ~749,000 ounces and the higher end of the AISC range of ~$1,410/oz. Copper production is tracking at the high end of the range at ~65,000 tonnes. Group capital guidance is unchanged. A material increase in gold production was always planned for the June quarter from the continued ramp-up of the Cowal underground mine, planned higher production at Red Lake and scheduled higher proportion of underground production at Mungari.

Consensus has been slightly upgraded since our last coverage. The expectation is now for EVN’s revenue to hit $3.12 billion, a 36% growth over the previous year. NPAT is expected to be $484m. Based on current shares outstanding, it translates to an EPS of 25 cps.

Evolution will benefit from the rising gold price, with ~95% of gold unhedged and no copper hedging. Gold hedging comprises 110,000oz, with 10,000oz to be delivered in the June quarter and 50,000oz for delivery in each of FY25 and FY26 at an average price of $3,185/oz. If EVN successfully manages its costs in the June quarter, we could see a sizeable growth in cash flows in 2H24.

With 504koz gold produced year to date, we are expecting EVN to produce ~245koz of gold in the June quarter. Assuming ASIC at its guidance of ~$1,410/oz and if we plug in an average realised gold price of $3,500/oz (around 7% less than current prices in AUD), we can expect 4Q24 operating mine cash flow to grow to ~$500,000. This will take FY24 cash flow to over $1.5 billion.

Our investment case in the earlier coverage continues to hold true. There is substantial growth to come from EVN as copper and gold production ramps up.

Recommendation

Evolution Mining has sorted out its operational challenges, and now the company’s costs are decreasing at a time when gold and copper prices are surging. This has turned into a double positive and has led to significant growth in cash flows. If commodity prices remain at these levels, we can expect around a 30% growth in operating mine cash flows in 4Q24 as EVN remains largely unhedged. The company has maintained production and cost guidance, but with surging gold and copper prices, there is a reasonable chance that it will outperform consensus forecasts for FY24. We retain our ‘Buy’ recommendation up to $3.80 and sell above $5.20.


Source: Tradingview.com

 

 

1H24 Earnings Analysis – 19th February 2024

Evolution Mining (ASX: EVN) owns and operates several gold and copper mines in Australia and Canada. They hold large resources and long-life mines.

FY24 guidance is for gold production of 789koz and 62.5kt copper at a group AISC (All In Sustaining Costs) of $1340/oz.

The group has a strong acquisition track record except for Red Lake in Canada, which hasn’t lived up to expectations but still has strong potential.

The Mt Rawdown is expected to close in FY25, which will strip out about 64koz of gold production. EVN is investigating the possibility of a pumped hydro renewable energy storage joint venture project using the depleted mine. If the project goes ahead, it could provide stable long-term cash flow to offset the reduced gold sales.

With a large resource base, EVN provides a strong play for rising gold and copper prices.

1H24 Results Deliver Growth and Cashflow

The 1HFY24 results delivered strong growth in line with analyst expectations. The big winners were cash flow and underlying profit, with a boost to resource reserves and an optimistic outlook as a bonus.

Revenue jumped 18% to hit $1,340 million. EBITDA increased 10% to $487 million.

The big disappointment for the market came from a higher than expected AISC of $1615/oz. The company has been guiding an FY24 AISC in the $1300s/oz for a while, and they haven’t been close yet. However, they’ve certainly hit those levels in recent years.

They have recommitted to hitting $1340/oz for the full year, which means the second half will have to come in with an average AISC of about $1100/oz. That looks like an ambitious target based on recent results. But they’ve got a couple of aces up the sleeve.

The first is the Northparkes acquisition, with its $150/oz AISC. The company previously advised that Northparke’s lower cost of production would reduce the entire group AISC by $55/oz. The balance of the gains then has to come from lower sustaining capex and higher production levels.

So whether or not EVN can deliver on their AISC promise is the key question for investors right now.

It’s worth noting that EVN considers itself a gold producer. Their AISC is the cost of producing gold. They don’t provide AISC for the production of copper or their small value of silver as they consider these commodities byproducts, which are used essentially as input credits to offset the cost of producing gold.

Their real AISC is much higher than what they publish. This also makes it much harder to understand their assets and business performance. Many assumptions go into the offsets from these other commodities, such as the market prices of silver and copper.

With Northparkes now in the portfolio, bringing a step change in copper production, we may see the company change their AISC reporting methodology to separate gold and copper into two core products with their own AISCs in their reporting.

Cash Flow Improves

Operating mine cash flow increased a respectable 30% to $617.9 million. Net mine cash flow increased an impressive 136% to $203 million. The biggest boost to net mine cash flow came from a reduced major capital investment of $230.8 million from $301.8 million. This brought total capital investment down from $389.9 million to $313.5 million.

Major capital per oz fell 21.5% to $723. Combined with a high average realised gold price of $3000/oz, this has led to the All-In-Costs (AIC) margin increasing from $173/oz to $600/oz. That’s an impressive 250% margin increase.

At the group level, cash flow has improved, with 2Q FY24 hitting a positive $79 million and the half sitting at $52.4 million. This is a $169.3 million improvement on the 2H22 result of negative $116.9 million.

Source: Evolution Mining 1H24 Financial Results Presentation

Strong positive cashflow momentum is set to continue as the group enters a new higher cash generation phase of life. Cash generation is expected to improve further in the second half, and the immediate focus will be on deleveraging the balance sheet.

Underpinning a better group cash flow is increased production, with Cowal underground mining ramping up, Red Lake production increases, and the integration of the new Northparkes acquisition.

The Balance Sheet

With improved cash flow comes the opportunity to strengthen the balance sheet. This should be a priority for the board above dividends and buybacks to win short-term favour with shareholders.

Gearing fell to 29.7% from 32.8% during the half. Total assets increased 22% to $8,248.2 million, including a $144.9 million increase in cash after the $525 million institutional share placement and a new $200 million 5-year debt facility. The Northparkes acquisition soaked up $521 million in cash.

Total liabilities increased 27.5% to $4,400.7 million, with the bulk of the change coming from a $601.6 million liability for the Triple Flag stream agreement as part of the Northparkes acquisition. This liability will be written down over time as the copper and silver are delivered to Triple Flag under the agreement. Interest bearing liabilities increased by $113.7 million.

The total average cost of debt is ~4.99%, which indicates a fairly well-hedged loan book, given the current RBA official cash rate is 4.35%. EVN debt is rated as investment grade, meaning they can raise debt on good terms.

The group has $716 million of available liquidity. There is $475 million in debt maturities by FY28, which is manageable, given that the current quarterly group cash flow of $79 million comes out to $316 million annually, and we expect this to continue to improve.

Source: Evolution Mining 1H24 Financial Results Presentation

Dividends

While EVN is ramping up in scale and cash flow, dividends will steadily increase. As much as we’d love to see the board push all that free cash flow into debt reduction and pay a token dividend, they have committed to a 50% free cash flow payout where possible.

The interim fully franked dividend of 2 cents will be paid on 5 April 2024, with trade ex-dividend on 27 February. This dividend payment will total $39.5 million in cash for the business, equating to 75% of the $52.4 million group cash flow for the half.

Again, we would much rather see debt reduction be prioritised, knowing that the real cash flow from EVN is yet to come, and every dollar that is pumped into debt reduction now will pay off in greater cash flow down the track.

Analysts expect a 3.975 cent dividend for the second half dividend. FY25 expectations are for a jump in full-year dividends to 12.3 cents. Based on the last closing price of $3.04, this equates to a forward FY25 yield of 4% plus franking credits.

Of course, these estimates are subject to high uncertainty, with no small part played by the price of copper and gold in the intervening period.

Resource Expansion and Exploration Potential

EVN has done a great job of steadily increasing its owned resources through acquisitions and a robust exploration program.

In the recent 1H24 release, mineral resources of gold increased 8% to 32.7Moz, and copper increased 134% to 4.1Mt. This reflects the total resources they think they have in their tenements. However, not all of these resources may be financially viable to extract.

Ore reserves are a subset of the mineral resources that include resources within current mining plans yet to be mined. They also increased for gold by 15% to 11.4Moz and copper by 100% to 1.3Mt.

Source: Evolution Mining 1H24 Financial Results Presentation

The company has lots of upside exploration potential with existing tenements. They’ve also demonstrated a strong ability to convert exploration and development into mineral resource growth. This is one of EVN’s strengths. So, while the group’s contained resources are already impressive, the potential for further upside is strong.

The Northparkes Acquisition

EVN recently acquired an 80% stake in the Northparkes gold, copper and silver mine in NSW. The mine has a 30-year life and a large 101Mt ore reserve with 0.53% copper for 537kt and 0.27g/t gold for 880kz.

The scale of operations enables the site to run very efficiently, with a forecast AISC of $150/oz at the current mill throughput of 7.6Mtpa.

The site contains a substantial total mineral resource of 628Mt with 0.55% copper for 3,435kt and 0.2g/t gold for 4,099koz. So there’s strong potential to expand operations and extend mine life.

The market has been wary of the unnecessarily complicated deal structure, which sees EVN keep 80% of the mined copper and 26% of the gold. They’ll also receive 10% of the spot price on 54% of the gold and 80% of the silver mined. The 54% of gold and 80% of silver will be delivered to Triple Flag under an existing agreement that EVN is taking over.

Despite the market’s scepticism, the deal provides majority ownership of a great low-cost asset. Additionally, after 630koz of gold is delivered to Triple Flag, their share will be reduced by half. The same goes for silver after 9moz is delivered. While hitting these targets will take many years, it gives EVN long-term growth prospects.

Northparkes also helps the company diversify further into copper, boosting the FY24 production forecast by 50% and bringing it up to 30% of total revenue for FY24.

EVN certainly sees itself as a gold producer more than anything else. A bit of copper exposure to balance out the gold is a wise move. The copper and silver taken under the Triple Flag deal will yield a small byproduct revenue that the company will use to report a smaller AISC for their gold production.

We’d like the company to signal an intention to continue growing the copper side of the business, which has a stronger future demand profile than gold. Separating out the AISC of gold and copper would be a good first step, although that would require them to acknowledge the reality of their mining costs.

Outlook

The analyst consensus is for FY24 revenue of $3,025 million, implying a 26% lift to $1685 million for 2H24 from $1340 million in 1H24. FY25 is expected to deliver a further 13% lift in revenue to $3,423 million as the company gets a full year of benefit from Northparkes.

EBITDA is forecast at a respectable $1,356 million for the full year. After $487 million for 1H24, this implies an impressive 79% growth in 2H24 EBITDA. FY25 carries an expected 23% growth in EBITDA to $1673 million.

Basic EPS of 5.23 cents for 1H24 is forecast to be eclipsed by an FY24 EPS of 24 cents before climbing to 34 cents in FY25. This implies a forward FY24 PE of 12.7 and 8.9 for FY25.

Total capital investment fell from $389.9 million to $313.5 million in 1H24. A small bump higher for the second half is currently expected to bring the full year to $770 million. FY25 is forecast to continue the falling spending trend at $658 million.

Even with the increased production tonnes expected in 2H24, it’s hard to see EVN hitting their AISC target of $1340/oz. If we rely on analyst consensus estimates at current commodity prices, we can forecast a rough AISC for the second half of $1497/oz.

EVN doesn’t share their rationale for hitting an average of $1340/oz AISC for FY24. We must assume they would only maintain that guidance if it were realistic. We are keen to see how they will get there, but we are sceptical.

Regardless of the exact metrics they’ll hit this financial year, the company is at an exciting time of growth with a strong future outlook.

Recommendation

The EVN stock price was hammered lower on disappointing December 2023 quarterly results. AISC is tracking well above the company’s guidance for FY24, and although guidance remains unchanged, the market does not believe it.

However, these results only include two weeks of the Northparkes acquisition. Future quarterly results could show a dramatic reduction in group AISC as the more efficient Northparkes operations are recognised.

Once Mt Rawdown ceases operations, group AISC will fall further as this higher-cost production is removed.

This short-term disappointment is an opportunity to get into the stock on a pullback. While weakness may continue in the short term, a solid support level at $3.06 is currently slowing the fall, although it is certainly being tested.

Below that, an intermediate level at $2.60 could attract new value buyers.

An intermediate level at $3.99 will likely cap the price until the company can deliver improved results. In particular, the market will be watching for AISC to come down into the guidance range, a strong free cash flow, debt reduction and the performance of the new Northparkes acquisition.

We recommend a “Buy” up to $3.80 and sell above $5.20.

Source: TradingView / Shares in Value

 

 

 

Evolution Mining (ASX: EVN) Initiation – High Conviction Buys – 21st January 2024

Who is Evolution Mining?

Evolution Mining (ASX: EVN) owns and operates several gold and copper mines in Australia and Canada. They hold large resources and long-life mines.

FY24 guidance is for gold production of 789koz and 62.5kt copper at a group AISC (All In Sustaining Costs) of $1340/oz.

The group has a strong acquisition track record except for Red Lake in Canada, which hasn’t lived up to expectations but still has strong potential.

The Mt Rawdown is expected to close in FY25, which will strip out about 64koz of gold production. EVN is investigating the possibility of a pumped hydro renewable energy storage joint venture project using the depleted mine. If the project goes ahead, it could provide stable long-term cash flow to offset the reduced gold sales.

With a large resource base, EVN provides a strong play for rising gold and copper prices.

The Northparkes Acquisition

EVN recently acquired an 80% stake in the Northparkes gold, copper and silver mine in NSW. The mine has a 30-year life and a large 101Mt ore reserve with 0.53% copper for 537kt and 0.27g/t gold for 880kz.

The scale of operations enables the site to run very efficiently, with a forecast AISC of $150/oz at the current mill throughput of 7.6Mtpa.

The site contains a substantial total mineral resource of 628Mt with 0.55% copper for 3,435kt and 0.2g/t gold for 4,099koz. So there’s strong potential to expand operations and extend mine life.

The market has been wary of the unnecessarily complicated deal structure, which sees EVN keep 80% of the mined copper and 26% of the gold. They’ll also receive 10% of the spot price on 54% of the gold and 80% of the silver mined. The 54% of gold and 80% of silver will be delivered to Triple Flag under an existing agreement that EVN is taking over.

Despite the market’s scepticism, the deal provides majority ownership of a great low-cost asset. Additionally, after 630koz of gold is delivered to Triple Flag, their share will be reduced by half. The same goes for silver after 9moz is delivered. While it will take many years to hit these targets, it gives EVN long-term growth prospects.

Northparkes also helps the company diversify further into copper, boosting the FY24 production forecast by 50% and bringing it up to 30% of total revenue for FY24.

How to play Evolution Mining?

The EVN stock price was hammered lower on disappointing December 2023 quarterly results. AISC is tracking well above the company’s guidance for FY24, and although guidance remains unchanged, the market does not believe it.

However, these results only include two weeks of the Northparkes acquisition. Future quarterly results could show a dramatic reduction in group AISC as the more efficient Northparkes operations are recognised.

Once Mt Rawdown ceases operations, group AISC will fall further as this higher-cost production is removed.

This short-term disappointment is an opportunity to get into the stock on a pullback. While weakness may continue in the short term, a solid support level at $3.06 could halt the slide. Below that, an intermediate level at $2.60 could see buyers enter.

An intermediate level at $3.99 will likely cap price until the company can deliver improved results.

Buy up to $3.80 and sell above $5.20.

Source: TradingView / Shares in Value

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