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

Rise in Gold Price and Stock Movement: Evolution Mining Ltd (ASX: EVN), engaged in the identification, development, and operations of gold related projects in Australia and New Zealand, is operating five wholly-owned gold mines that are located in Cowal in New South Wales, Cracow, Mt Carlton, and Mt Rawdon in Queensland, and Mungari in Western Australia. The company also has an economic interest in the Ernest Henry copper-gold operation in Queensland. EVN’s stock rose 3.8% on October 03, 2018 to A$2.73 with the positive sentiment again picking up on the stock. The stock has an immediate support at $2.62 and resistance at $3.10 level. Overall, the gold stocks are rising due to rise in gold price. This is due to optimism surrounding the deal that took place  between the United States and Canada to restore NAFTA as a trilateral pact with Mexico. The December delivery has surged by USD 17.80 to USD 1,209.50 an ounce. The price of gold is expected to remain around a level between $1,180-$1,210 an ounce in the near term given the stability in the US dollar. To break out of its range, impact from sharp fall in equities or some other global event needs to be watched for. EVN will definitely benefit from this rise in gold prices. The lately provided extended guidance with key assets continuing until at least FY 2021 and focus on returns and margins while costs and volumes need a check, do indicate for a better scenario in medium to long term. EVN’s Cowal is seen to be a key opportunity for growth along with Mungari.

Strong mine cash flow: EVN expects during the three year period to FY 21, to continue with strong mine cash flow. EVN projects that all mines will 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. With Ernest Henry, there was a significant uplift in the free cash flow with support from copper price and with this, the group is in a better position to pay the debt. There is a low single digit increase expected in the FY19 free cash flows considering these aspects.


Key Parameters (Source: Company Reports and Thomson Reuters)

$6.5 million Joint Venture Agreement with Andromeda Metals Limited over Drummond Gold Project: EVN has signed a binding Earn?In and Exploration Joint Venture Agreement with Andromeda Metals Limited (ADN) for the formation of the Drummond Gold Project Joint Venture that covers Andromeda Metals’ 100% owned Drummond Epithermal Gold Project. The Drummond Project includes four tenements located in the northern Drummond Basin, that comprises of an area considered to have high grade epithermal gold deposits such as Pajingo. EVN has previously owned and operated the Pajingo gold mine. As per the terms of the Agreement, EVN will sole fund $2.0 million within two years of execution to earn a 51% equity interest in the Drummond Project. This is Stage 1 Commitment. Meanwhile, ADN will also receive $300,000 cash consideration from EVN within 10 business days after the agreement is signed. After the completion of Stage 1 Commitment, EVN can elect to sole fund a further $4.0 million over an additional two years to increase its equity to 80%, and will be required to pay ADN a further $200,000 in cash at the time of the election and expenditure of an additional $4.0 million ($6.5 million in total) over a further 2 years (4 years in total). This is Stage 2 Commitment. EVN will act as manager and operator of this Joint Venture. The transaction will ultimately result in considerable exploration effort meant towards the Drummond Gold Project by a successful Australian Gold Miner that has an experience in the region and will allow ADN to focus efforts towards the progress of the Poochera Halloysite?Kaolin Project.

Cowal’s Project Permit for Operations extended to 2032: Cowal, which has world class deposit, has been said to have permit to carry on operations being extended to 2032. This supports current LOM, that includes Stage H. Cowal Project’s previous permit to operate till 2024, with plant throughput at 7.5Mtpa. EVN has enabled the plant expansion now up to 9.8Mtpa, comprising of Integrated Waste Landform (IWL) and upgrades of infrastructure. Moreover, the extension of the permit will unlock further potential. This includes the major changes like new pits or underground mines that are expected to accelerate a major amendment. Further, it will require full Environmental Impact Study (EIS) with the approval of more than three years. Additionally, Stage H cutback is on track and the major capital stripping is expected to be completed in FY 21. Float Tails Leach Project is expected to increase the recoveries by 4% to 6%. GRE46 Underground development planned to start from June 2019 half year. The work has started there. Overall, the planning for the project is underway in order Cowal achieves a consistent production rate of more than 300kozpa for more than 20 years.

Decent outlook for production, costs and capital over three years: The company has issued positive outlook for three years to FY21 for production, costs and capital. The company has planned the production to be more than 700,000 ounces of gold for the next three years. The production is expected to fall from FY18 level due to divested asset and grade trending to reserve level. The production target for copper over 3 years is expected to be 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 this 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 will 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 over 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)

FY 19 Outlook: EVN is projecting FY19 gold production to be in the range of 720,000 – 770,000 ounces of gold. 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 are among the lowest of global gold producers and this equate 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 has also 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 in the range of A$40.0 – A$55.0 million. Further, Cowal (A$15.0 – A$20.0 million) and Mungari (A$15.0 – A$20.0 million) are expected to receive the largest allocation of the investment in FY19.


FY 19 Outlook (Source: Company Reports)

Stock Recommendation: Meanwhile, EVN stock has fallen 24.43% in three months as on October 02, 2018 and is trading at a P/E of 16.89x. EVN is likely to benefit from the rise in price of gold and solid support comes from the key assets. With this, the group reported for FY18 NPAT growth of 21.04% to $263.39 million while revenue from ordinary activities were up 4% from last year. EVN is a sustainable low cost producer of gold that has low-cost high margin business, and it invests to grow production profile while we see upside potential from a number of assets. Further, the company’s assets are self-funding and have the capacity to generating high returns on investments. The stock has lately been in an oversold territory as reflected through its relative strength indicator and other factors such as stochastic stock indicator. With strong balance sheet and improving dividend policy with better fundamentals and economics in place, we give a “Buy” recommendation on the stock at the current price of $ 2.730.
 

EVN Daily Chart (Source: Thomson Reuters)

 
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