Company Overview: Evolution Mining Limited (ASX: EVN) is an Australian gold mining company with a portfolio of assets located solely in Tier 1 jurisdictions. 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 on 20 August 2002.

EVN Details

Improving Quality of Portfolio: Evolution Mining Limited (ASX: EVN) has a track record of identifying and securing opportunities that are both accretive and improve the quality of the portfolio. On 6 January 2022, EVN notified that it has completed the acquisition of full ownership of the Ernest Henry copper-gold mine. The Ernest Henry copper-gold mine is expected to increase the company’s copper production and also reduces Group All-In Sustaining Costs (AISC) by around 12% on a full year basis. In line with its strategy of upgrading the quality of its portfolio, EVN has also completed the sale of the Mt Carlton gold mine to Navarre Minerals Limited (ASX: NML).

2021 AGM Highlights: On 25 November 2021, the company held its 2021 Annual General Meeting (AGM), wherein, the management highlighted that the company is focused on investing in growing production and extending mine life at its high margin assets. Some of the key highlights of 2021 AGM are as follows:

• FY21 Results: For FY21, the company reported production of 680,788 ounces of gold at an AISC of A$1,215 per ounce. Further, the company reported statutory net profit after tax of A$345.3 million, up 14.5% on the prior year.
• Reducing Greenhouse Gas Emissions: The company is focused on reducing its Scope 1 and 2 greenhouse gas emissions by 30% by 2030 and achieving net zero greenhouse gas emissions by 2050.
• Increase in Dividend Paid: During FY21, the company paid record A$273.4 million in fully franked dividends, representing 23.5% increase on FY20.
• 3-year Outlook: As per the company’s three-year outlook, EVN expects its production to grow to 855,000 – 915,000 ounces in FY24, and its All-in Sustaining Cost decrease to A$990 – A$1,050 per ounce.

NPAT Trend (Source: Analysis by Kalkine Group)

September 2021 Quarterly Highlights:

• Decent Production Performance: For the quarter ending 30 September 2021 (Q1FY22), the company reported total gold production of 170,681 ounces, which is higher than the June 2021 quarter production of 169,146oz.
• Decent Cashflows: Operating and net mine cash flow for the quarter stood at A$193.7 million and A$67.5 million, respectively.
• Completed Kundana Assets Acquisition: Over the quarter, the company completed the acquisition of Kundana assets comprising a 51% interest in the East Kundana Joint Venture (EKJV), and a 75% interest in the West Kundana Joint Venture.

Key Metrics: EBITDA Margin for FY21 stood at 48.4%, down from 52% in FY20. Net margin for FY21 stood at 18.5%, up from 15.5% in FY20. ROE for FY21 stood at 13.8%, up from 12.4% in FY20, demonstrating the company’s improved profitability. Current ratio for FY21 stood at 1.33x, down from 1.99x in FY20. Cash cycle for FY21 stood at 79.7 days, down from 86.9 days in FY20.

Net Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 30.72% 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 9.66% and 6.78%, respectively, as also highlighted in the chart below:    

(Source: Analysis by Kalkine Group)

Key Risks:

• 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.
• 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.

Outlook: The company is planning to increase its production by at least 30% to around 1 million ounces during the three-year period to FY24, supported by the ramp up of the Cowal underground mine, increasing production profile at Red Lake and increased production at Mungar. The company’s Cowal underground mine is progressing well and is on schedule to reach target of 350,000 ounces of low-cost gold by FY24. For FY22, the company expects its gold production to be in the range of 670,000 – 725,000 ounces at a sector leading All-in Sustaining Cost of A$1,135 – A$1,195 per ounce.

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 six months, the stock has corrected by ~6.44% and is trading lower than the average 52-week price level band of $3.27- $5.44. 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 discount to its peers, considering the uncertainty surrounding the COVID-19 pandemic and fluctuations in gold prices. For the purpose of valuation, peers like IGO Ltd (ASX: IGO), Kirkland Lake Gold Ltd (ASX: KLA), Northern Star Resources Ltd (ASX: NST), etc., have been considered. Considering the company’s decent production performance in September 2021 quarter, expected benefits of Ernest Henry copper-gold mine, modest outlook, current trading level, and indicative upside in valuation, we give a “Buy” rating on the stock at the current market price of $3.90 as on 18 January 2022, 3:30 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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