Company Overview: Evolution Mining Limited (ASX: EVN) is a leading, growth-focused Australian gold miner that operates five wholly-owned mines – Cowal in New South Wales, Mungari in Western Australia, Mt Rawdon, Mt Carlton in Queensland, and Red Lake in Ontario, Canada. The company also has an economic interest in the Ernest Henry copper-gold mine in Queensland. The Cowal gold operation is a world-class, open-pit gold operation located 350km west of Sydney.  The company was listed on ASX on 20 August 2002.

EVN Details

Increasing Production Profile and High-quality Assets to Support Future Growth:

The growth strategy of Evolution Mining Limited (ASX: EVN) is focused on sustainable high-margin ounces. The company’s future growth is supported by its strong platform of high-quality, long life, low cost, high margin assets that are located in the safe jurisdictions of Australia and Canada.

• Cowal and Red Lake Growth Projects to Create Significant Value: The Board of EVN has recently approved the development of the Cowal underground mine and restoration of Red Lake. Both these operations demonstrate the organic growth opportunities within EVN’s portfolio.
• Robust Three-Year Outlook: EVN recently provided an updated three-year outlook for group production, costs, and capital. As per the outlook, the production is expected to grow by around 30% to over 900,000 ounces during the three-year period to FY24.
• Improving Bottom Line: For H1FY21, the company had reported a statutory net profit of $228.7 million, up 55% on H1FY20, driven by favourable inventory movements, increase in gold revenue, and decline in operating costs.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Takeaways from June 2021 Quarter Highlights:

• Improved Gold Production: For June 2021 quarter (Q4FY21), the company reported total gold production of 169,146 ounces at an AISC of A$1,239/oz, up from the production of 161,316oz in the March 2021 quarter.
• Decent Cashflows: For Q4FY21, the company reported mine operating cash flow of $211.8 million, up from $194.3 million in Q3FY21. Net mine cash flow for the quarter stood at $99.7million.
• Decent Performance from Ernest Henry: During the quarter, the company achieved record low costs at Ernest Henry, a copper-gold mine in Queensland. Ernest Henry produced 20,947 ounces during the quarter and generated net mine cash flow of $77.2 million.
• Cash and Debt Scenario: As of 30 June 2021, the company reported cash in the bank of $160.1 million and bank debt of $620.0 million.

FY21 Operating Results Highlights: With the recent release of Q4FY21 results, the company has also provided an update on EVN’s FY21 operating results.

• Decent Cashflows Underpinning Future Growth: For FY21, the company reported operating mine cash flow of $937 million and net mine cash flow of $555 million.
• Resilient Production Performance: Despite the challenges created by the COVID-19 pandemic, the company’s total gold production for FY21 stood at 680,788 ounces. This was within the original guidance of 670,000 – 730,000 ounces and ~2% below the bottom end of the revised guidance of 695,000 – 710,000 ounces.
• Battle North Gold Acquisition: In May 2021, EVN completed the acquisition of Battle North Gold, providing EVN with an opportunity to expand its footprint and create value by leveraging the infrastructure of the two operations.
• Returning Cash to Shareholders: The company expects its FY21 final dividend to be in the range of 4 – 6cps.

Key Metrics:

For H1FY21, the company reported EBITDA margin of 52.4%, up from 47.8% in H1FY20. ROE for H1FY21 stood at 9.2%, up from 6.1% in H1FY20. Current ratio for H1FY21 stood at 2.12x, slightly down from 2.15x in H1FY20. Cash cycle days got reduced in H1FY21 to 28.9 days, as compared to 40.0 days in H1FY20.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 34.91% of the total shareholding, while the top four constitute 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:               

(Source: Analysis by Kalkine Group)

Latest Developments:

• Cowal Underground Board Approval: The Board of EVN approved the development of the Cowal underground mine, which provides a higher-grade ore source that will be blended with the current E42 open pit and stockpiled ore. The investment in Cowal underground development is expected to improve the quality of the asset.
• Restoration of Red Lake: The Board of EVN has also approved the restoration of Red Lake to a premier Canadian gold mine producing low-cost gold. It is expected that the investment in Red lake will extend its mine life to beyond 15 years.
• Exploration Update at Cue: The drilling at the Cue Joint Venture project has discovered a new high-grade gold zone hosted in a differentiated dolerite sill over a strike length of 400m which remains open in all directions.

Key Risks:

• Fluctuation in Commodity Prices: The company is exposed to the risks related to the fluctuations in the prices of gold and copper as it could impact the company’s financial performance.
• Foreign Currency Risks: EVN’s operations are also located in Canada, exposing it to the risks related to the foreign exchange fluctuations.

Outlook:

Looking ahead, the company is planning to invest in growth projects at Cowal and Red Lake, which will materially increase production and transform the quality of Evolution’s asset portfolio. As a result of the ramp-up of the Cowal underground mine and an increasing production profile at Red Lake, the company expects its production to increase by at least 30% to over 900,000 ounces during the three-year period to FY24. It expects its FY22 total production to be between 670 - 730 koz. Sustainable capital in FY22 is expected to be in the range of A$120 – A$150 million. The company is planning to release its FY21 financial results in August 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: 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 has corrected by 10.97% and is currently trading lower than the average 52-week price level band of $3.790 and $6.585, offering investors a decent opportunity for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peers, considering the decent June quarter performance, approval received for Cowal and Red Lake Growth Projects, and modest three-year production outlook. We have taken peers like Newcrest Mining Ltd (ASX: NCM), IGO Ltd (ASX: IGO), Kirkland Lake Gold Ltd (ASX: KLA). Considering the company’s high-quality, long life, low cost, high margin assets, expected growth in the company’s production over the next three years, the acquisition of Battle North Gold Corporation, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $4.180 as on July 20, 2021, 2:30 PM (GMT+10), Sydney, Eastern Australia.

EVN Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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