Company Overview: Evolution Mining Limited is a gold company. The Company is engaged in operating, identifying and developing gold related mining projects in Australia and New Zealand. Its segments are Cowal, Mungari, Mt Carlton, Mt Rawdon, Edna May, Cracow, Pajingo, Exploration and Corporate. It owns and operates approximately seven gold mines, including Cowal in New South Wales; Cracow, Pajingo, Mt Carlton and Mt Rawdon in Queensland, and Mungari and Edna May in Western Australia. The Cowal operation is an open pit mining operation with production from a range of different faces within the single pit. The Edna May gold mineralization consists of high-grade reef structures and associated stockwork veining hosted within approximately three en-echelon tonalitic gneiss intrusions (Edna May, Greenfinch and Golden Point). The Mt Carlton project is a high-sulfidation epithermal style deposit with mineralization occurring within felsic volcanic rocks on the northern margin of the Permian Bowen Basin.


EVN Details

Decent three year outlook for production and cost: Evolution Mining Ltd.’s (ASX: EVN) stock rose 5.19% on September 04, 2018, after the company issued three year outlook through to FY21 for production, costs and capital. The company is engaged into exploration for gold, copper, and silver deposits. The company identifies develops, and operates majorly gold related projects in Australia and New Zealand for growth. EVN focusses on margins compared to the production growth. The company has now planned the production to be in excess of 700,000 ounces of gold for the next three years. The production will fall from FY18 level due to divested asset and grade trending to reserve level. It has shown consistent contribution across the company’s portfolio, and expects a base case with upside potential. The production target for copper for 3 years is in the range of 20-22ktpa. Of EVN’s production expectation projection, 2% is comprised of an Exploration Target. Moreover, EVN expects for three years, the all-in sustaining costs to remain relatively flat throughout the period. The company is reducing the impact of cost pressures and lower grade. There is potential for lower costs through the delivery of upside potential or growth options and outperformance of grade. Additionally, EVN expects capital expenditure to remain high in FY19 due to the investment in major projects at Cowal, but then it is expected to decline from FY20 onwards. For the production of various projects during the next three years, the company expects capital expenditure of A$70-75M in FY19 & FY20 and of A$60-65M in FY 21 for Cowal Stage H  project. The company expects capital expenditure for Cowal plant expansion of A$40-45M over FY20-21 and of A$20-25M over FY19-21 for Mt Carlton UG project. The company expects capex for Mt Rawdon cutback of A$25-30M in FY19 and for Mungari regional pits & White Foil UG of A$25-30M in FY21. In addition, the company is investing A$40-55M in FY19 for exploration.


Three Years’ Outlook (Source: Company Reports)

Strong mine cash flow: EVN expects during the three years’ period to FY 21, to continue with strong mine cash flow. EVN projects all mines to have a positive cash flow after the investment over next three years. There is an expectation for higher cash flow from grade and associated copper production. The company has opportunities to sustain and increase cash generation through the plant expansion & higher grade (from GRE46) at Cowal, Mungari Project achieving 150koz of production profile and extensions at Cracow.

Strong FY 18 Financial & Operational Performance: In FY 18, EVN delivered 21% rise in statutory net profit after tax to A$263.4 million and 21% rise in underlying net profit after tax to A$250.8 million. The sales revenue in FY 18 rose by 4% to A$1,540.4 million on back of a full 12-month sales contribution from Ernest Henry of aggregate A$347.4 million versus A$163.3 million in FY 17. This was partly offset by the impact of the disposal of the Edna May Operation that has resulted in a decline in revenue of A$79.7 million on the prior year. The company has sold total gold of 798,101oz, including deliveries into the hedge book of 205,915oz at an average price of A$1,564/oz (30 June 2017: 248,493oz, A$1,584/oz). The company has sold the remaining 592,186oz at spot price and achieved an average price of A$1,673/oz (30 June 2017: 568,830oz, A$1,666/oz). The Group's hedge book is of 250,000oz as at 30 June 2018 at an average price of A$1,711/oz with deliveries through to June 2020. In FY 18, the company has posted 11% increase in EBITDA to A$795.1 million, while AISC fell by 12% to A$797 (US$618) per ounce. EVN in December 2017, has made its first income tax payment with a total of A$48.4 million of income tax during the year including tax paid for FY 17 (A$30.7 million) and tax instalments for FY18 (A$17.7 million). The company’s operating mine cash flow in FY 18 rose by 15% to A$811.8 million. The company has witnessed 17% rise in net mine cash flow to A$539.9 million. EVN’s cash balance enhanced by A$285.8 million to A$323.2 million in FY 18. Additionally, in FY 18, the total gold production of the company is of 801,187oz, which was at the upper end of original guidance for the year of 750,000oz – 805,000oz. However, gold production fell by 5%. The company has posted record low AISC of A$797/oz, which represented a fall of 12% on the prior year and was well below original guidance of A$820/oz – A$870/oz. Meanwhile, EVN has completed the sale of the Edna May Operation to Ramelius Operations Pty Ltd in FY 18 for total proceeds of up to A$90.0 million. The consideration included a A$40.0 million upfront cash payment and contingent consideration in the form of either a cash royalty, Ramelius shares, or a combination of both up to A$50.0 million.


FY 18 Financial Performance (Source: Company Reports)

Capital Management: In FY 18, the company has reduced the net bank debt by A$325.8 million to $71.8 million compared to the net bank debt of A$397.6 million in FY 17. As a result, gearing reduced to 2.7% in FY 18 compared to 15.9% in FY 17. The company has proven track record of appropriate use of debt with gearing of 10-15% in normal environment and gearing of 25-35% for growth or acquisition. EVN is willing to return excess cash and uses hedging to protect balance sheet up to 25% of annual production. Moreover, EVN has dividend policy of 50% of net profit, fully franked and will review this based on cash and franking credit position during the three year period. The company has no plans for buy-backs as of now.

FY 19 Outlook: EVN is projecting gold production to be in the range of 720,000 – 770,000 ounces of gold for FY19. Group C1 cash costs for FY 19 are expected to be in the range of A$560 – A$610 per ounce and Group AISC is expected to be in the range of A$850 – A$900 per ounce. As per the average AUD:USD exchange rate of 0.7752 for the one year to 30 June 2018, EVN’s expectation for FY19 costs is being among the lowest of global gold producers and this equates to C1 cash costs in the range of US$430 – US$470 per ounce and AISC of US$660 – US$700 per ounce. The company’s investment in sustaining capital in FY19 is expected to be in the range of A$105.0 – A$135.0 million. The majority of the investment will be for Cowal Project, that comprises of tails facilities, mobile fleet major repairs and equipment replacement. The company’s investment in tails facilities is being planned to take place at Mungari, Mt Carlton, Mt Rawdon and Cracow. EVN’s investment in growth (major project) capital and exploration is apart of the costs included in AISC. The investment in major capital in FY19 is projected to be in the range of A$150.0 – A$180.0 million. The major part of the project capital investment is related with expansion projects at Cowal along with mine development in the range of A$70.0 – A$75.0 million and Float Tails Leach project investment in the range of A$6.0 – 9.0 million. The major project capital investment at Mt Carlton, Mt Rawdon and Cracow is mostly related to mine development. Moreover, the exploration investment in FY 19 is expected to total approximately to A$40.0 – A$55.0 million. This is a substantial rise on the FY18 exploration spending of A$31.6 million. Cowal (A$15.0 – A$20.0 million) and Mungari (A$15.0 – A$20.0 million) is expected to receive the largest allocation of the investment in FY19.


FY 19 Outlook (Source: Company Reports)

Stock Recommendation: Meanwhile, EVN stock has fallen 17.44% in three months as on September 04, 2018 and is trading at a P/E of 18.24x. The fundamentals reflect that the return on equity has been above industry median of 11.1% while operating and EBITDA margins have improved over the years. The technical analysis reveals that post the high level of around $3.58 in June 2018 while witnessing resistance for the next couple of months, the stock fell down to the levels of $2.65 and is now gaining momentum from this support trendline. Catalysts through the three year strategy are expected to help in recovering back to higher levels as the company has issued positive three year outlook through to FY21 for production, costs and capital. EVN expects strong mine cash flow during the three years’ time period till FY 21 and eyes for improved financial performance overall. The group has the potential to perform well despite a challenging environment wherein gold prices have been on a volatile trend. This comes at the back of balance sheet position, sector-leading free cash flow and M&A opportunities. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 2.84.
 

EVN Daily Chart (Source: Thomson Reuters)

 
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