Company Overview: Company Overview: Evolution Mining Limited (ASX: EVN) is an Australian gold mining company with a portfolio of assets located solely in Tier 1 jurisdictions of Australia and Canada. The company’s exploration portfolio includes Cowal mine in New South Wales, Mungari in Western Australia, Mt Rawdon, Mt Carlton in Queensland, and Red Lake in Ontario, Canada. EVN also has an economic interest in the Ernest Henry copper-gold mine in Queensland. The company was listed on ASX stock exchange on 20 August 2002.

EVN Details

Mungari Operations to Support Overall Production Growth:

• Transforming Mungari to a Cornerstone Asset: On 22 July 2021, the company entered into an agreement with Northern Star Resources Limited (ASX: NST) to acquire the Kundana Operations (100%), a 51% interest in the East Kundana Joint Venture (EKJV), the Carbine Project (100%) and a 75% interest in the West Kundana Joint Venture (WKJV) (together, the “Acquisition Assets”). EVN plans to pay NST A$400 million in cash upon closing of the transaction. It is expected that this transaction will transform Mungari operations as the fourth cornerstone asset in EVN’s portfolio.
• Improved Production Outlook: As a result of the transaction with NST, EVN has improved its three-year gold production outlook to 700 – 760koz in FY22; 815 – 875koz in FY23; and 940 – 1,010koz in FY24.
• Completed A$400 million Placement: On 23 July 2021, EVN completed a A$400 million fully underwritten institutional placement which received strong interest from shareholders. The proceeds of the acquisition will be used to fund the transaction with NST.

Q4FY21 and FY21 Operational Highlights:

• Improved Production in June 2021 Quarter: 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. This took the total FY21 production to 680,788 ounces which is ~2% below the bottom-end of the revised guidance of 695,000 – 710,000 ounces .
• Decent Cashflows: For Q4FY21, the company reported mine operating cash flow of A$211.8 million, up from A$194.3 million in Q3FY21. For FY21, the company reported operating mine cash flow of A$937 million and net mine cash flow of A$555 million.
• Decent Performance from Ernest Henry: During the June 2021 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 A$77.2 million.
• Returning Cash to Shareholders: The company expects its FY21 final dividend to be in the range of 4 – 6cps.
• Cash and Debt Scenario: As at 30 June 2021, the company reported cash in the bank of A$160.1 million and bank debt of A$620.0 million.

Improved Bottom Line in H1FY21: 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 Metrics:

ROE for H1FY21 stood at 9.2%, up from 6.1% in H1FY20. Gross margin for H1FY21 stood at 36.9%, up from 29.1% 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 35.08% 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 9.87%  and 7.48%, respectively, as also highlighted in the chart below:  

(Source: Analysis by Kalkine Group)

Latest Developments

• US$550 million Debt Via US Private Placement: On 12 August 2021, the company priced a maiden debt private placement in the United States totalling US$550 million. Notably, the placement received strong interest from investors with a significant level of oversubscription. The proceeds from the placement will be used to repay the existing Term Loan facility associated with the acquisition of Red Lake (for A$450 million) and for general corporate purposes.
• Update on SPP: Following the completion of its A$400 million institutional placement, EVN is now conducting a share purchase plan (SPP) to raise around A$50 million. The proceeds of the SPP will be used to fund the acquisition of NST’s assets. SPP is expected to close on 20 August 2021 and the quotation of new shares is expected on 30 August 2021.

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.
• COVID-19 Uncertainties: The uncertainties surrounding the COVID-19 pandemic and associated restrictions could disrupt the company’s operations and impact the cost of doing business.

Outlook: EVN plans to release its FY21 results on 19 August 2021. The acquisition of NST’s assets (Acquisition Assets) is expected to be completed in late August 2021. Following the completion of acquisition, EVN will focus on consolidating its Mungari Operations with the objective of reducing costs, increasing production and extending mine life. With its recently announced US private placement, the company seems well-placed to fund the pipeline of its growth projects, future growth initiatives and maintain flexibility around its dividends. For FY22, EVN expects its gold production to be in the range of 700 – 760koz with AISC of between A$1,220 – A$1,280/oz.

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: The stock has corrected by ~27.18% in the last three months and is currently inclined towards its 52-weeks low price of $3.79, offering a decent opportunity for accumulation. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average EV/EBITDA (NTM trading multiple), considering recent capital raising activities, expected production growth in future years, and modest outlook. For the purpose of valuation, peers like IGO Ltd (ASX: IGO), Kirkland Lake Gold Ltd (ASX: KLA), and St Barbara Ltd (ASX: SBM) have been considered. Considering the company’s decent June 2021 quarter performance, improved production outlook, expected benefits from the recently announced acquisitions, current trading level, and valuation, we give a “Buy” rating on the stock at the market price of $3.89, as on 17 August 2021, 1:30 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 decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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