Two Growth Stories In Gold

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-Cowal central to Evolution's outlook
-Dacien renews interest in Mt Morgans
-Battle looms for Phoenix assets
 

By Eva Brocklehurst

Evolution Mining ((EVN)) has evolved quickly, becoming the second largest gold producer on ASX in just five years and recently choosing to make some strategic acquisitions to expand its production profile. Seven gold mines form a portfolio which stretches across Australasia. In FY16, the company plans to focus on its two newest acquisitions, Cowal And Mungari, as well as its Tennant Creek JV with Emmerson Resources ((ERM)) and Puhipuhi in New Zealand.

Towards the small end of the scale, Dacian Gold ((DCN)) is reinvigorating the Mt Morgans gold project in Western Australia. With recent exploration, resources at this project have risen to over 3.0m ounces. Canaccord Genuity believes this development now has the critical mass to support a stand-alone operation. Further drilling is expected to add to and move the resource base to higher confidence categories ahead of feasibility studies due in 2016.

Mt Morgans comprises the Westralia underground and Heffernans open pit and the asset has a varied gold mining history dating back to the early 1900's. Based on conservative assumptions, Canaccord Genuity envisages potential for an 8-year mine life. On the positive side, infrastructure is largely in place.

With lower-than-average capital intensity required, the broker expects this deposit to be in the sights of mid-cap gold producers looking to bolster production over the medium term. A reserve conversion rate of 65% is expected in the underground and 50% in the open pit, underpinning an average of 180,000 ozs per annum at an all-in cost of $1,060/oz.

Dacian Gold was listed on ASX in 2012. Canaccord Genuity assumes the company will raise $20m in the first half of FY16 to provide adequate working capital to complete the feasibility studies and arrive at a funding decision by the end of 2016. The broker believes the current register is resistant to any opportunistic raider. The top 10 on the register hold 55% of the stock and the top 20 hold 75%. So any successful bid would require a significant premium.

Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, initiates on both stocks. Dacian Gold has a speculative Buy rating with a 95c target and Evolution Mining has a $1.15 target and a Hold rating.

Evolution Mining represents a quality exposure to Australian dollar gold prices. The lower risk profile is driven by the diversity of asset and location. Still, the broker finds the share price factors in these attractive qualities. Hence, the Hold rating. Cowal is considered a transformative deal, which provides scale, low costs and drives a step up in quality for the assets.

Morgan Stanley will take a peek at Cowal mine this week. The broker values the mine at $670m, in line with the acquisition price, and will seek out further detail on three aspects – the new mine plan, the cost profile and resource upside.

At present, the broker assumes the stockpiles at Cowal are processed after completion of mining in the E42 pit but there may be the potential to reduce pit volumes and use earlier stockpiles, which may saving on mining costs and extend life. The broker expects the company to spend around 35% of its $25-30m FY16 exploration budget at Cowal.

Cowal mine in central NSW was developed by Barrick Gold, with production commencing in 2006. Evolution Mining completed its acquisition in July this year. Cowal is one of Australia's largest gold mines, producing up to 240,000 ozs per annum at all-in costs of $900/oz over a remaining mine life of nine years.

Evolution Mining has also announced a takeover bid last month for Phoenix Gold ((PXG)) for the shares it does not already own. The offer remains subject to Foreign Investment Review Board approval, and the spot gold price not falling below $1,250/oz.

Phoenix Gold's projects are within 40km of Evolution Mining's Mungari plant, so the strategic rationale of the bid is obvious. The strategic location is also obvious to Zijin Mining, which has, via subsidiary Norton Goldfields, recently received FIRB approval for its bid for Phoenix Gold.

Evolution Mining has established five Buy ratings on FNArena's database, with one Hold (Morgan Stanley). The consensus target is $1.22, which signals 3.7% upside to the last share price. Targets range from $1.05 (Morgans) to $1.32 (UBS).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms