Evolution Mining Limited

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

September 2021 Quarterly Highlights: During the September 2021 quarter, the operational performance of Evolution Mining Limited (ASX: EVN) exceeded the FY22 quarterly guidance profile, and it sustained decent cash generation supporting investment in growth projects. Some of the key highlights of the September 2021 quarter are as follows:

• Decent Production Performance: For the September 2021 quarter, the company reported total gold production of 170,681 ounces, which is higher than the June 2021 quarter production of 169,146oz and also higher than the guidance of 155 –167koz. All-in Sustaining Cost (AISC) stood at A$1,413 per ounce, lower than the guided AISC of A$1,450/oz.
• Decent Cashflows: Operating and net mine cash flow for the quarter stood at $193.7 million and $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.

FY21 Result Highlights:

• Decline in Revenue: During FY21, the company produced 680,788 ounces of gold at an AISC of A$1,215 per ounce. The production was down in comparison with 746,463 ounces in FY20, due to COVID-19 challenges. The company reported total revenue of $1,864.06 million, down by 4% on the previous year, mainly due to the decrease in produced ounces for the year.
• Rise in NPAT: The company reported statutory net profit after tax of $345.3 million in FY21, up 14.5% on the previous year.
• Paid Final Dividend: EVN has paid a fully franked final dividend of 5 cents per share, taking the total full year dividend to 12 cents per share, which represents a payout rate of 64% of cash flow.

NPAT Trend (Source: Analysis by Kalkine Group)

Recent Developments:

• Growing Mineralization at Cue: In an exploration update provided on 12 October 2021, the company informed that follow-up aircore drilling at West Island on Lake Austin has identified more thick zones of regolith gold mineralisation over more than 1.6km of strike. The drilling results have significantly increased the footprint of the mineral system at Lake Austin.
• Divestment of Mt Carlton Gold Mine: On 5 October 2021, the company announced that it has entered into an agreement to divest Mt Carlton gold mine for up to A$90 million. This divestment is in line with the company’s strategy of upgrading the quality of its portfolio.

Key Metrics: Gross Margin for FY21 stood at 31.1%, down from 33.8% 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.

Net Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 34.28% 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:

• 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.
• 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.

Outlook: Looking ahead, the company expects the production to increase 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, an increasing production profile at Red Lake and increased production at Mungari. Over the next three years, the company expects its costs to remain stable as its growth strategy continues to focus on extending life of high margin mining assets. For FY22, the company expects its gold production to be in the range of 670,000 – 725,000 oz at an AISC of A$1,200 – 1,260/oz. Investment in sustaining capital is expected to be between A$125 – A$155 million in FY22.

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: The stock has corrected by 14.16% in the last three months and is currently trading lower than the average 52-week price level band of $3.27 - $6.46. 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), and Newcrest Mining Ltd (ASX: NCM), have been considered. Considering the company’s decent operational performance in September 2021 quarter, improved bottom line in FY21, modest production outlook, current trading level, and valuation, we give a “Buy” rating on the stock at the closing price of $3.540 as on 02 November 2021, down by ~1.39%.

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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