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(ASX: EVN) | EVOLUTION MINING LIMITED | (ASX: EVN)

Apr 7, 2024

Sentiment: Bullish

Type of Trade: High Growth, Dividend | Defensive

Industry: Gold

Sector: Materials

As per 1H FY24

Evolution Mining stands as a prominent player in the global gold mining industry. Operating six mines, including Cowal in New South Wales, Ernest Henry and Mt Rawdon in Queensland, Mungari in Western Australia, and Red Lake in Ontario, Canada, the company also holds an 80% share of Northparkes in New South Wales.

The company holds high quality, long life, low cost, high margin assets in Australia and Canada with average mining life of 15 years. In additional to that, Northparkes also offers copper exposure to ˜30%.

In December 5, 2023, Evolution Mining’s informed the market about the acquisition of an 80% Interest in Northparkes Copper-Gold Mine, as result the short term performance of the stock was highly affected.

The transaction was funded through a combination of mechanisms:

  • Cash Consideration: Evolution Mining paid an upfront cash consideration of US$400 million.
  • Contingent Consideration: Additionally, there’s contingent consideration of up to US$75 million.
  • Equity Raising: To finance the acquisition, Evolution conducted a A$525 million fully underwritten institutional placement and a non-underwritten share purchase plan for eligible retail shareholders, raising up to A$60 million. These funds were used to assist with integration costs related to the transaction and for general working capital.
  • Debt Facility: Evolution also secured a new A$200 million 5-year Term Debt Facility to further support the acquisition and its operations.

Advantages:

  • Cash Flow Generation: The acquisition positions Evolution Mining in a cash flow generation mode, benefiting from substantial prior investments and offering immediate cash flows to support balance sheet deleveraging.
  • Low Capital Intensity Profile: Northparkes presents a low capital intensity profile with a pipeline of projects, providing flexibility in mining methods.
  • Large-Scale Deposits: The mine hosts multiple large-scale porphyry copper and gold deposits, suitable for bulk cave mining operations, aligning with Evolution’s expertise.
  • Mineral Resource Potential: With a significant Mineral Resource base, there’s potential to increase mine life by converting resources into Ore Reserves, enhancing long-term sustainability.
  • Diversification: The acquisition diversifies Evolution’s portfolio and provides exposure to copper, with copper revenue expected to comprise around 30% of total revenue in FY24E.
  • Regional NSW Investment: Being in Evolution’s backyard, the acquisition aligns with the company’s long-asset life strategy and demonstrates a commitment to growth in regional New South Wales.

Disadvantages:

  • Contingent Consideration: The acquisition involves contingent consideration of up to US$75 million, which could increase the total cash outlay beyond the initial US$400 million.
  • Offtake Agreement: The offtake agreement with IXM S.A. locks Evolution into selling copper concentrates from Northparkes to IXM, potentially limiting flexibility in marketing arrangements.
  • Triple Flag Stream Obligations: Evolution assumes obligations under the Triple Flag Metal Purchase and Sale Agreement, requiring the delivery of a percentage of gold and silver production from Northparkes to Triple Flag, which could impact revenue streams.
  • Debt Financing: The acquisition is funded by a significant equity raising and a new Term Debt Facility, which may increase leverage and interest expenses, impacting financial flexibility.
  • Integration Costs: Integration costs related to the transaction may weigh on near-term profitability and cash flows.
  • Dependence on Copper Prices: As the acquisition increases exposure to copper, Evolution’s financial performance may become more sensitive to fluctuations in copper prices, adding to market risk. Nevertheless, it is important to know that copper price outlook is extremely positive for the upcoming years and that rather than be a short term disadvantage, could revert into a direct earnings benefit should copper prices keep moving up.
  • Negative short term impact on the company’s stock price.

✅ Cash Generation increased 136% to $203 million.

✅ Underlying NPAT (net profit after tax) up 54% to $158m.

✅ Underlying EBITDA up 28% to $573m, with solid 43% margin.

✅ Gearing down 29.7% with $716m liquidity, with low cost of debt with rate average of 4.99%, USPP (fixed interest) of 4.5%.

✅ Gold Mineral Resources up 8% to $32.7Moz Au and ore reserves of 11.4Moz Au (up 15%).

✅ Copper mineral resources up 4.1Mt Cu to 134% and ore reserves of 1.3Mt Cu (up 100%).

Very low AISC, in the range of: A$1,340/z, to put in perspective and compare to other gold producers:

Company NameAISC (All in sustainable cost)
(ASX: NST) | NORTHERN STAR RESOURCES LTD A$1,810-1,860/oz for Q3 FY24.
(ASX: PRU) | PERSEUS MINING LIMITEDA$1,503/oz for 1HFY24
(ASX: RMS) | RAMELIUS RESOURCES LIMITEDA$1,700-$1800/oz for FY24 Guidance
(ASX: RSG) | RESOLUTE MINING A$2,255/oz for FY24
(ASX: WGX) | WEST GOLD RESOURCESA$1,800-2,200/oz for FY24 (Guidance)
(ASX: KSN) | KINGSTONE RESOURCESA$2,053/oz for FY24 (Guidance)
(ASX: EVN) | EVOLUTION MINING A$1,340/oz for FY24 (Guindance)

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✅ Gold is frequently regarded as an inflation hedge, and it performs well when inflation is high. This is due to the fact that as the purchasing power of fiat currencies declines due to inflation, the relative value of gold rises. As a result, during periods of high inflation, investors may turn to gold as a store of value, driving up demand and price for gold. Recently gold has reached its all times high, trading at USD$2,300 levels, therefore generating huge profits for producers with low AISC such as Evolution mining.

✅ When interest rates begin to fall, gold may perform well as well. This is because lower interest rates can cause the value of the currency to fall, increasing the relative value of gold. Furthermore, when interest rates are low, the opportunity cost of holding gold, which generates no interest or dividends, falls, making gold more appealing to investors.

✅ As inflation rises, manufacturing in China resumes, and interest rates in the United States are expected to fall in 2023, many investors are shifting their focus to gold stocks. For some investors, investing in gold may be a good option, but it is critical to understand the risks involved. During times of economic uncertainty, inflation, and market volatility, gold stocks tend to perform well. Gold is frequently regarded as a safe haven investment, and investors may flock to it during times of turmoil, as is currently occurring.

✅ 1HFY24 Interim dividend fully franked of 2c per share unchanged (˜$39m).

Guidance

Group AISC $1,240/oz – In the current gold market, where the price of gold is sitting almost $2,000 per ounce, an AISC of $1,240/oz would mean that the company is making a profit margin of around $760 per ounce. This is a relatively healthy profit margin for a gold mining company, and suggests that the company’s mining operations are generating significant revenue.

(AISC stands for All-in Sustaining Costs and is a measure used by gold mining companies to indicate the total cost of producing an ounce of gold. AISC includes all direct and indirect costs associated with producing an ounce of gold, such as mining, processing, exploration, corporate, and sustaining capital expenditures, royalties, and taxes.

AISC is considered to be a more comprehensive measure of the cost of production than other metrics such as cash costs or total costs, as it takes into account the full lifecycle of a gold mine, including exploration and development costs as well as ongoing sustaining capital expenditures.

The calculation of AISC varies depending on the mining company and the specific mine. However, it typically includes costs such as mining and processing expenses, exploration expenses, sustaining capital expenditures, general and administrative expenses, and royalties and taxes. By using AISC as a measure, gold mining companies can provide investors with a more complete understanding of the costs associated with producing an ounce of gold, and therefore a better understanding of the company’s financial performance.)

Life Mine

Long life mine across most projects offering very compelling long term prospect for Evolution.

✅ Hernest Henry mineral resources increased as at December 2022 by 36% in contained copper to 1.2Mt year on year and 37% increase in continued gold to 2.3Moz year on year with significant growth opportunities existing beyond currently modelled doming.s

✅ Cowal mine life to 2040+ with 4.3Moz contained Gold Ore Reserves and 8.8Moz contained Gold Material Resources.

Technical Analysis

Over the past 52 weeks, Evolution Mining’s stock has shown a modest 9% increase, indicating relative underperformance compared to its peers. Much of this gain can be attributed to the acquisition of the Northparkes Copper-Gold Mine in December 2023. Presently, the stock is trading at a technically fair price, hovering just below levels that may trigger fear of missing out (FOMO), while exhibiting sideways movement since April 2023. The Simple Moving Average (SMA) over 40 days is currently at $3.2, and the SMA over 250 days stands at $3.52. We are expecting a breakout of the $3.90-$4 resistance levels as gold continue to move higher.

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