Less Gold At Evolution Mining’s Mt Carlton

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

Evolution Mining has forewarned of a downgrade to reserves and resources at its Mount Carlton gold mine while highlighting the need to seek alternative water supplies at Cowal.

-Gold production guidance for Mount Carlton reduced
-Battle to contain costs in FY20 envisaged
-Enhanced strategy to reduce fresh water consumption at Cowal

By Eva Brocklehurst

Evolution Mining ((EVN)) has endured a setback, with December quarter preliminary results indicating a reduction in gold production from Mount Carlton. The company has also forewarned of a downgrade to reserves and resources at the mine.

FY20 guidance has been reduced to 70-75,000 ozs from 95-105,000 ozs for Mount Carlton, Queensland. The mine comprises 10% of group gold production and, while this appears to be a small proportion overall, Mount Carlton has outperformed and generated robust cash outcomes in the past.

Gold bearing veins at the base of the V2 pit, extending into the planned underground development, are now narrower than previously estimated. This is the main driver of the downgrade to production expectations. A resource update from the geological review is due in February 12 and should reveal the extent of narrowing.

Morgan Stanley suspects gold production could be reduced further into FY21 as the narrowing ore bodies affect pit and underground modelling. Macquarie reduces production run rate estimates by -36%, to around 66,000 ounces, while lifting cost estimates to around $1330/oz. Given the narrower veins are also in the underground extension the broker, too, expects there is likely to be an impact over the longer term. The lodes in the open pit are tapering into a series of narrower structures at a shallower depth.

FY20 group production has been reduced to the lower end of the guidance range of 725-775,000 ounces. All-in sustainable costs guidance (AISC) for FY20 is unchanged at $940-990/oz, despite the December quarter AISC at $1069/oz. Credit Suisse believes there is a risk this will not be achieved.

The broker finds it difficult to envisage where material cost reductions can occur, given that just delivering in the middle of guidance amid flat production implies a second half AISC of $890/oz. Nevertheless, Credit Suisse upgrades to Outperform as the share price has declined significantly over recent months. The broker's forecasts and valuation do not include Red Lake in Canada.

Citi also notes the share price has fallen -33% since its September high because of the run-up in costs, flat US dollar gold prices and a muted response to the acquisition of Red Lake. Evolution Mining still has one of the lowest AISC bases across the broker's coverage and, given the expected news flow from exploration at Cowal, Citi retains a Buy rating heading into the full December results on January 29.

Macquarie lowers its forecasts for FY21 earnings per share by -18% with a -10% reduction in estimates out to FY24 and, as a result, downgrades to Neutral from Outperform.

Cowal

Water is increasingly in the spotlight in drought-ravaged NSW and the company's Cowal mine is a case in point. Cowal is reducing its use of surface freshwater by increasing the number of bores and groundwater usage as well as recycling. Currently, the company uses around 30% of its daily water requirements from the Lachlan River.

Brokers are somewhat divided in the outlook for water supply at the mine. Credit Suisse believes the risk is moderating because of the company's strategy to secure water from alternative sources, such as saline bores, that are independent of the NSW-mandated restrictions. A number of bore projects are due for completion in 2020 and there is increased pumping capacity coming from existing bores.

Yet both Morgan Stanley and Ord Minnett have flagged the potential for stage 3 water restrictions to tighten further if drought conditions continue, restricting the company's access to water. Macquarie highlights the fact that an increase in the salinity of processing water will affect processing costs at Cowal.

Meanwhile, Evolution Mining has announced $3m in funding to Rural Aid Australia, NSW Rural Fire Service and Queensland Rural Fire Service to support bushfire and drought relief.

FNArena's database has two Buy ratings and five Holds. The consensus target is $4.15, signalling 14.1% upside to the last share price. Targets range from $3.80 (Macquarie, Morgan Stanley) to $4.51 (Morgans, yet to comment on the latest update).

See also, Risky Move For Evolution Mining on November 27, 2019.

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.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms