Company Overview: Evolution Mining Limited (ASX: EVN) is a leading, low-cost Australian gold mining company with five wholly-owned operating gold mines: Cowal in New South Wales; Mt Carlton and Mt Rawdon in Queensland; Mungari in Western Australia; Red Lake in Ontario, Canada; and an economic interest in the Ernest Henry Copper-Gold Operation (100% of gold and 30% of copper and silver) in Queensland. The company’s objective is to deliver long-term shareholder value through safe, low-cost production in an environmentally and socially responsible manner.

EVN Details

Financial Growth Backed by Operating Efficiencies: Evolution Mining Limited (ASX: EVN) is a leading Australian gold mining company, operating high-quality assets with an average reserve life of approximately ten years.  The company’s assets are located in the jurisdictions of Australia and Canada in an attractive operating environment. As at 2 February 2021, the market capitalisation of the company stood at ~$8.23 billion. The company is focused on operating its projects safely and efficiently and developing them to their full potential. It intends to become a premier global mid-tier gold company portfolio of 6 to 8 assets generating superior returns with an average mine life of at least 10 years. The company’s strategy is focused on maintaining financial discipline across the business and operating an active pipeline of quality exploration and development projects.

From 2015 to 2020, the company’s revenue and NPAT have grown at a CAGR of 23.9% and 24.7%, respectively.

Revenue and NPAT Trend (Source: Company Reports)

Looking ahead, the company is focused on upgrading the quality of its asset portfolio and expects to deliver exciting organic growth in the coming years, mainly driven by Cowal and Red Lake. Over the next three years, the company expects its costs to decline and production to increase to over 800,000 ounces by FY23. The company is focused on maintaining financial discipline across the entire business and is open to all quality gold, silver, and copper-gold value accretive investments.

FY20 Result Highlights: During the year ended 30 June 2020, the company produced 746,463 ounces of gold at an AISC of $1,043 per ounce. Further, the company reported operating Mine Cash Flow of $1,121.4 million, up 45% on the previous year. During the year, the company’s revenue and royalties grew by 29% and 20%, respectively, due to higher metal prices and increased metal sold.  The company reported record underlying profit A$405.4 million, up 86% on FY19. Statutory net profit after tax increased 38% to a record A$301.6 million in FY20. During the year, the company purchased Red Lake Gold Complex in Ontario, Canada for US$375.0 million.  For FY20, the company paid a final dividend of 9.0 cents per share, taking the total full year dividend to 16 cents per share fully franked, representing an increase of 68% on FY19.

FY20 Result Summary (Source: Company Reports)

Key Metrics: During FY20, the company reported decent improvement in margin performance, reflecting higher metal prices and increased metal sold. Gross margin for FY20 stood at 33.8%, higher than 25% in FY19. EBITDA margin for FY20 stood at 52%, up from 46.7% in FY19. Current ratio for FY20 stood at 2.03x, lower than 2.31x in FY19.

Past 5-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 37.22% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and AustralianSuper are holding a maximum stake in the company at 10.47% and 5.61%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

December 2020 Quarter Highlights: During the December 2020 quarter, the company reported total gold production of 180,305 ounces at an AISC of A$1,166/oz. Mine operating cash flow and net mine cash flow for the quarter stood at A$258.9 million and A$170.5 million, respectively. Over the quarter, Cowal produced 54,926oz of gold at an AISC of A$958/oz and EVN’s interest in Ernest Henry delivered 24,473oz of gold and 4,972t of copper at an AISC of negative A$710/oz. From Red Lake, gold production increased 27% (QoQ) to 33,709oz and AISC reduced 7% to A$1,937/oz. The company sold 176,668oz of gold during Q2FY21 at an average gold price of A$2,416/oz. The company ended the quarter with a cash balance of A$438.1 million and bank debt of A$525.0 million equating to net bank debt of A$86.9 million.

Group Production and AISC Trend (Source: Company Reports)

Completes 100% Acquisition of Crush Creek: On 10 December 2020, the company announced that it has completed the acquisition of 100% interest in the Crush Creek project which hosts low sulphidation epithermal gold mineralisation and has significant potential to provide mine life extensions at Mt Carlton.

Gold Targets Defined on Evolution JV: In September 2019, the company had entered into an earn-in joint venture with Musgrave Minerals Limited (ASX: MGV) over the Cue Project located in the Murchison Province of central Western Australia. Recently, MGV reported assay results from the recent regional scout aircore drilling program on the Cue Joint Venture. Notably, the results from Lake Austin have defined new gold regolith anomalies at West Island and extended the gold anomalism at Lake Austin North. MGV has noted that many drill holes from the aircore programs have terminated in anomalous gold, highlighting potential proximity to basement mineralisation.

Change in Substantial Holding: Recently, one of the company’s substantial holder, BlackRock Group, reduced its holding in the company from 9.19% to 8.11%. BlackRock Group now holds around 138,609,066 shares of the company.

Key Risks: The company is exposed to the risks related to the change in the prices of gold and copper. Further, the company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. EVN is exposed to the risks related to the foreign exchange fluctuations and general economic conditions, increased costs and demand for production inputs, the speculative nature of exploration and project development.

Outlook: Over the next three-year period to FY23, the company’s production is expected to increase to over 800,000 ounces, driven by the commencement of the Cowal underground mine in late FY22 and execution of the Red Lake transformation plan.

For FY21, the company expects its gold production to be between 670,000 – 730,000 ounces with AISC expected to be in the range of A$1,240 – A$1,300 per ounce. Investment in sustaining capital in FY21 is forecast to be between A$112.5 – A$137.5 million. Further, exploration investment in FY21 is expected to be between A$70.0 – A$100.0 million.

Three-year Outlook (Source: Company Reports)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of EVN has corrected by ~18.18% and is trading below the average of its 52-weeks’ price band of $3.285 and $6.585, offering decent opportunity for accumulation. On the technical front, the stock has a support level of ~$4.35 and resistance of ~$5.42. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). We believe that the company might trade at a premium as compared to its peer median P/E (NTM Trading multiple), considering its high-quality assets, low-cost operations, and positive outlook. We have taken peers like Northern Star Resources Ltd (ASX: NST), Alkane Resources Ltd (ASX: ALK), and IGO Ltd (ASX: IGO). Considering the stock’s current trading level, next three-year outlook, expected increase in the production, decent FY20 performance, and valuation, we give a “Buy” recommendation on the stock at the closing price of $4.77, down by 1.038% on 02 February 2021.

EVN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.