Evolution Mining’s Expansion Draws Attention

This story features EVOLUTION MINING LIMITED. For more info SHARE ANALYSIS: EVN

-Positive grade uplift at Mt Carlton
-Value of Mt Carlton understated?
-Considerable upside for Cowal
-Evolution Mining now larger scale
 

By Eva Brocklehurst

Evolution Mining ((EVN)) has been elevated to Australia's second largest gold producer with the consolidation of recently acquired assets and several brokers are upbeat about the potential.

Guidance for FY16 production broadly met Morgan Stanley's expectations, with a record final quarter, while the pay down of debt has also been faster, supporting a view that Evolution Mining will be net cash by the second half of FY17, although possibly earlier if gold prices and FX are favourable.

The company plans to lift its dividend policy to 4% of revenue, from 2%, and this demonstrates to the broker that the board is confident in the future cash-generating ability of its projects. The company's all-in sustainable cost guidance of $985-1045/oz covers Morgan Stanley's forecast for FY17. Production guidance is 800,000-860,000 ozs.

The Mt Carlton, Queensland, site visit has led to further understanding of the positive grade reconciliation and the extension opportunities that exist. Plans to advance plant optimisation are afoot. Credit Suisse notes the operations excelled in FY16, with production of 113,000 ozs materially exceeding the 80-87,500 ozs guidance.

Recovery has lifted considerable and this signals that actual production could again exceed guidance in FY17, set at 90-100,000 ozs. Exploration success and a stronger gold price, as well as positive grade reconciliation have combined to create new value in the project, the broker maintains.

Deutsche Bank also suspects the Mt Carlton FY17 guidance is conservative, as it does not factor in any positive reconciliation. Moreover, the asset generates cash and, with continued positive reconciliation, should be able to maintain its performance beyond the current six-year reserve life.

Further to the site visit Credit Suisse suspects the value of Mt Carlton is being understated by modelling only reserves, as the reserves are being depleted at a 30% slower rate than previously assumed. The broker predicts a 10-year life, based on known reserves and blending rates on lower grade ore but does not envisage an extension to defined mineralisation.

Deutsche Bank notes the level of cover and alteration in the Mt Carlton region makes exploration difficult. Hence, proving up an underground reserve is more crucial to the future of the Mt Carlton mine.

The underground targets are being pursued because of the very high grade/small scale which means they can only be used as a supplementary ore source. As a result, they need to be brought into production as soon as possible, Credit Suisse notes. A 160,000 tonne, 44 grams/tonne, underground potential has been defined already.

Cowal, NSW, has also revealed material progress is being made in extending the mine life. Credit Suisse observes there is upside in the near term from productivity gains and cost reductions. The broker considers the operation is well run with a clear line of sight on life for 16 years without further work, with potential for 20 years.

Drilling is revealing broad intersections at consistent grades which supports pit extension and high grade underground potential. While only early days under Evolution Mining's ownership (acquired 2015), Credit Suisse considers the acquisition overwhelmingly positive, with considerable upside ahead. The company has moved very fast to unlock the potential of a mine which had been starved of capital and exploration by the previous owner (Barrick).

Cowal has increased the company's geographic and asset diversity and puts it on stronger footing by providing increased purchasing power and scale to compete for larger opportunities as well as investor attention. FNArena's database has three Buy ratings and three Hold. The consensus target is $2.11, suggesting 21.2% downside to the last share price. Targets range from $1.98 to $2.40.
 

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