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

Evolution Mining Ltd (ASX: EVN) is engaged in the identification, development, and operations of gold related projects in Australia and New Zealand. The company is primarily into exploration for gold, copper, and silver deposits. It 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; and has an economic interest in the Ernest Henry copper-gold operation in Queensland. The latest results have helped EVN being ranked as one of the lowest cost gold producers in the world. With all-in sustaining cost in the range of US $600-US $700 per ounce and current gold price scenario, the group seems to have good margins with decent cash flow generation. Growth potential at Cowal can boost EVN stock while the group has stated to maintain future production at decent levels. The group is expected to witness further improvements in EBITDA and operating margins.

Cowal Receives Regulatory Approval to Commence Development of the GRE46 Exploration Decline: EVN has received regulatory approval for the construction of the Galway-Regal-E46 (GRE46) exploration decline and the approval has come straight from the NSW Department of Planning and Environment (DP&E).The construction of the exploration decline will allow EVN to conduct further resource definition and discovery drilling of a maiden GRE46 underground Mineral Resource of 5.90Mt at 3.17g/t for 603,000 ounces of gold; and will help in carrying out the drilling and delineation of the recently discovered high grade Dalwhinnie Lode. The development of the Galway-Regal-E46 is anticipated to commence early in the March 2019 quarter and will involve capital expenditure of approximately A$20 – A$22 million over FY19 and FY20. The investment in underground drilling of A$6 – A$7 million is projected to be spent on an initial 36,000m drill program. Getting the approval is an important step towards the achievement of objective of increasing Cowal’s production rate to over 300,000 ounces per annum on a sustainable basis. The Cowal gold operation is a world-class, open pit gold operation situated 350km west of Sydney. The mining approval has been granted at Cowal until at least 2032 and this is a long mine life that offers a runway to capture additional upside.


Planned GRE46 exploration decline at Cowal (Source: Company Reports)

All operations continued to be cash flow positive in the First (September) Quarter of FY 19: During the September 2018 quarter, the company has delivered positive cash flow for all the operations after meeting their operating and capital needs. The company has paid an aggregate of A$67.7 million for the FY18 final full franked dividend of 4 cents per share to shareholders during the September quarter. EVN’s deliveries into the hedge book had totaled 37,500 oz at an average price of A$1,681/oz with the remaining 158,521oz of gold delivered on spot markets at an average price of A$1,657/oz. As at 30 September 2018, Evolution’s hedge book stood at 212,500oz at an average price of A$1,715/oz. EVN has generated operating mine cash flow of A$196.9 million, which is lower than June 2018 quarter of A$221.9M. The lower cash flow was on the back of timing of gold sales in the September quarter and a lower realised copper price. The company’s net mine cash flow was still strong at A$129.3 million (Jun 2018 qtr: A$136.0M). This was after investing a total of A$67.6 million in capital, which is split between A$27.3 million in sustaining capital and A$40.3 million in major project capital.

Decent net mine cash flows: During the September quarter, Cowal continued to deliver strong financial performance with A$24.0 million in net mine cash flow compared to June 2018 quarter of A$5.8M. This is despite the heavy investment in future production through the Stage H development. Ernest Henry net mine cash flow of A$53.8 million was lower than the June 2018 quarter, mainly due to a lower achieved copper price. Mungari net mine cash flow of A$17.4 million was a significant improvement on the June quarter (A$3.3M) driven by higher production and a lower capital spend. Overall, the capital expenditure for the September quarter was A$67.6 million (Jun 2018 qtr: A$85.9M). Major capital expenditure items comprised of Cowal Stage H capital waste stripping and Float Tails Leach project costs (A$19.5 million), capital waste stripping at Mt Rawdon (A$11.0 million), Mt Carlton (A$2.9 million) and Mungari (A$1.0 million); and underground mine development at Cracow (A$3.1 million) and Mungari (A$1.9 million). During the September quarter, Discovery expenditure had totaled A$9.1 million (Jun 2018 qtr: A$9.4M). Despite decreased expenditure, the company’s drilling activity was considerably higher in the September quarter of 80,051m (June 2018 qtr: 51,436m). Corporate administration costs were A$5.4 million (Jun 2018 qtr: A$7.1M). The Group cash balance decreased to A$296.8 million (Jun qtr: A$323.2M). Additionally, EVN during the quarter made a A$20.0 million debt repayment to the Senior Secured Term Facility D. Total outstanding bank debt of the company now stands at A$375.0 million. Net debt was A$78.2 million and unaudited gearing was at 3.0% as at 30 September 2018. The company’s net debt was affected due to the dividend payment and a A$12.0 million cash payment related to the ownership restructure of the Castle Hill gold deposit.


Cashflow for the September Quarter (Source: Company Reports)

Decent Production & Operational Developments: For the September 2018 quarter, the group’s gold production was of 200,218 ounces (Jun qtr: 202,254oz) at an AISC of A$885/oz (Jun qtr: A$846/oz). By using the average AUD:USD exchange rate for the September quarter of 0.7315, Group AISC equated to US$647/oz, which has ranked Evolution as one of the lowest cost gold producers in the world. Evolution has sold 196,021oz of gold at an average gold price of A$1,662/oz during the September quarter compared to 208,239 oz at A$1,675/oz of June 2018 quarter. The capital project at Cowal, was the key driver of Evolution’s organic growth, which had progressed well during the September quarter. Material movement in the Stage H cutback was slightly ahead of plan. The Float Tails Leach project, which is anticipated to expand recoveries by 4 – 6%, is on schedule for commissioning in the December 2018 quarter. Subsequent to the end of the September quarter Cowal had also received regulatory approval to expand the plant’s processing rate by 31% from 7.5Mtpa to 9.8Mtpa. Further, the successful drilling at Cowal’s GRE46, GRE46 South and E41W has resulted in the high grade nature of this mineralised system. The company has also delivered strong results from Mungari drill programs including high grade intersections at Scottish Archer and Castle Hill. Moreover, during the September quarter, Evolution had signed an agreement with Norton Gold Fields to restructure ownership of the Castle Hill gold deposit. Evolution now owns 100% of this project with Ore Reserves of 236,000 ounces, and this is expected to provide a material extension to the operating life at Mungari. Additionally, during the September 2018 quarter, Evolution has signed an earn-in joint venture agreement with Andromeda Metals over the ~520km Drummond exploration project. The project is located close to Evolution’s Mt Carlton gold mine and leverages the Company’s expertise in epithermal gold deposits.


Consolidated production and sales summary (Source: Company Reports)

Healthy Outlook: EVN expects December 2018 quarter gold production to be between 185,000 – 195,000 ounces. EVN for FY19, expects the group 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 is 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 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 a part 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 risen 12.1% in three months as on November 20, 2018 and is trading at a P/E of 20.23x. The company’s stock is trading at A$3.18 and has an immediate support at $2.62 and resistance at $3.58 level. For FY 18, the company’s total gold production was of 257,951oz, which was above the top end of the guidance range of 235,000 – 245,000oz. FY18 AISC of A$877/oz was below the bottom end of the A$950 – A$1,000/oz guidance range. With FY19 guidance trending well and  consensus rise in earnings per share, the stock can witness a low double digit increase in terms of percentage in the next 24 months. Based on the potential, we give a “Buy” recommendation on the stock at the current price of $ 3.18.
 

EVN Daily Chart (Source: Thomson Reuters)

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