Company Overview: Evolution Mining Limited (ASX: EVN) is engaged in the exploration, mine development, mine operations and the sale of gold and gold/copper concentrate in Australia and Canada. The company owns and operates mines: Cowal in New South Wales; Mt Rawdon and Ernest Henry in Queensland; and Mungari in Western Australia and Red Lake. The company started trading on ASX in August 2002.

EVN Details

Rising Mineral Resources and Ore Reserves to Underpin Future Business Growth: The company experienced a growth of ~329% and ~195% in mineral resources and ore reserves since its inception. EVN has added 14.3 million resources predominantly by drilling and optimised engineering. The portfolio mine life has been extended to 14 years from 5 years. As of 31 December 2021, gold mineral resources rose by 12% YOY net of mining depletion to 29.6 million ounces and gold ore reserves were up by 5% YOY net of mining depletion to 10.3 million ounces. During the quarter ended March 2022 (Q3FY22), EVN witnessed exceptional contribution from Ernest Henry, which was acquired on 6 January 2022. The fact is evident by the tripling of copper production to 13,352t and generated $173.8 million of net mine cash flow during the quarter. Looking forward, the company is focused on growing high-margin, low-cost ounces by using sector low Gold Ore Reserve price assumption of A$1,450/oz.

Insights of Q3FY22: During Q3FY22, the company’s focus on ESG performance was recognized, and EVN achieved an improved rating from Sustainalytics, ranking 26 out of 123 companies in the precious metals industry. At the end of the quarter, the company had a cash balance of $537.8 million and net debt of $1,295 million (excludes pre-paid loan fees).

Operational Summary (Source: Analysis by Kalkine Group)

1HFY22 Highlights: At the end of 1HFY22, the company had a strong balance sheet to finance future growth. EVN maintained gearing well within the 35% limit at 12.5%. The company pleased shareholders with its 18^th consecutive dividend and has paid a total of $988 million since 2013.

Financial Summary (Source: Analysis by Kalkine Group)

Drilling Updates: Recently, the company noted assay results from diamond and aircore drilling programs on the Cue Joint Venture with Musgrave Minerals Ltd. Diamond drilling continues to identify multiple new gold lodes, and aircore drilling has extended the mineralised footprint to more than 2.1km at West Island.

Top 10 Shareholders: The top 10 shareholders together form ~34.73% of the total shareholding, while the top 4 constitute the maximum holding. Van Eck Associates Corporation and AustralianSuper are holding a maximum stake in the company at ~11.57% and ~6.78%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY22, the company recorded a current ratio of 3.43x against 2.12x in 1HFY21. It posted a cash cycle of 78.9 days in 1HFY22 as compared to 81.1 days in 1HFY21.

Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Gold Price Risk: The company’s business could be impacted by the adverse movement in the prices of gold as it generates a major portion of revenue from the sale of gold.
• Change in Climate: The company’s operational and financial performance could be affected by the extreme change in climate, which may pause its operations temporarily.
• COVID-19 Uncertainties: The company is exposed to risks arising from the uncertainties in relation to the COVID-19 pandemic.

Outlook: The company expects the gold production of minimum of 40,000 ounces at Red Lake in the June 2022 quarter. EVN is optimistic about growth opportunities at the Mungari operation, which would be backed by a significant mineral resource of almost 5 million ounces and ore reserve of 1.2 million-ounces, district consolidation along with the highly prospective Zuleika Shear zone, and potential for further extensions at Kundana and East Kundana. For FY22, the company expects to produce ~ 650,000 ounces of gold against the previous guidance of 670,000oz due to extreme rainfall events and COVID-19 impacts. The company expects AISC in the ambit of $1,135 – $1,195 per ounce. For FY23 and FY24, the company expects gold production in the range of 775-830koz and 855- 915koz at an AISC of between 895-955 A$/oz and 990- 1,050 A$/oz, respectively. In addition, the company anticipates copper production of ~60kt each in FY23 and FY24.  

Valuation Methodology: P/E 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 of EVN is trading below its 52-week low-high average of $3.270 - $5.440, respectively. The stock has been corrected by ~9.93% in the past one month. The stock has been valued using a P/E 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’ average, considering the COVID-19 uncertainties and volatility in the gold prices, etc. For the purpose of valuation, a few peers like Newcrest Mining Ltd (ASX: NCM), Northern Star Resources Ltd (ASX: NST), and Silver Lake Resources Ltd (ASX: SLR) have been considered. Considering the expected upside in valuation, rising revenue, growing mineral resources and ore reserves, increasing gold sales, a decent contribution from Ernest Henry, optimistic long-term outlook, current trading levels, and key risks associated related to COVID-19 and heavy rainfall, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $3.880, down by ~2.020% as on 03 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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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