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Evolution Mining Setbacks Polarise Views

Australia | Apr 12 2023

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

Brokers weigh a surging gold price against weather-impacts from Ernest Henry plus production concerns at the Red Lake operations in Canada.

-Evolution Mining lowers FY23 production guidance
-Six-week recovery plan for Ernest Henry is on-track
-UBS believes the bull case for the company has been undermined
-Concerns around production at Red Lake 

By Mark Woodruff

Evolution Mining ((EVN)) is suffering the consequences of violent storms that closed its Ernest Henry operations on March 8, with the gold and copper producer lowering FY23 production guidance.

Management has quantified the impact from the weather event with a gold and copper output loss of -17koz and -10kt, respectively.

It was only weeks after Ernest Henry was shut down, Morgans nominated both Evolution Mining and Newcrest Mining ((NCM)) as top selections from among its coverage of the local gold sector, as recent banking contagion had resulted in increasing appeal of safe haven assets.

After an initial dip to below $2.60 following the Ernest Henry closure, the Evolution share price closed yesterday at $3.51. The strong rebound elicited an immediate response from Macquarie, who downgraded its rating to Underperform from Neutral.

The company’s preliminary third quarter gold production and copper output missed the broker’s forecasts by -6% and -11%, respectively, but Macquarie has retained its $3.00 target price.

Management reassured the market the previously announced six-week recovery plan for Ernest Henry remains on-track.

Updated FY23 gold and copper production guidances of 660koz and 48kt, respectively, were in line with Overweight-rated Morgan Stanley’s forecasts.

New all-in sustaining cost (AISC) guidance was 4% better than this broker expected, as was sustaining and major capex guidance, decreased to the lower end of respective ranges.

Overall, Morgan Stanley considers the production update was positive and the analyst remains comfortable with the company’s debt and liquidity position.

Sell-rated UBS has lowered its target to $2.65 from $2.70 and highlights that while production for Red Lake in Canada improved by 13% quarter-on-quarter, the 28koz total was well short of expectations, and was largely responsible for the -10% fall in group production for the third quarter.

Apart from improving commodity prices, this broker feels the bull case for Evolution has been undermined, as it relied upon higher production rates and benefits that would accrue in the wake of a heavy capex program.

It is now clear to the analysts FY24 guidance of 800koz is out of reach and there appears to be an underspend on capex.

Citi holds similar concerns to UBS over weaker-than-expected production metrics at Red Lake and requires greater conviction on this project and its upcoming capex commitments, as well as those at Mungari (WA) and Ernest Henry, before upgrading from its Sell rating.

The Outlook

Despite the abovementioned misgivings, Citi reminds investors Evolution’s balance sheet is highly leveraged to the gold price. Citi has raised its 12-month target price to $3.10 from $2.90 on higher gold price forecasts across FY24 and FY25.

UBS lists upcoming catalysts this quarter including results of the mine extension pre-feasibility study (PFS) at Ernest Henry and ongoing developments at the Mt Rawdon pumped hydro project.

In addition, this broker awaits the definitive feasibility study (DFS) at Mungari as it moves to a large, open-pit operation of potentially 4mtpa.

UBS also remind investors that progress at Red Lake is a key sentiment driver, and any production updates from the Upper Campbell deposit in the December quarter will be closely monitored.

The average target price for Evolution Mining, derived from six brokers monitored daily, is $3.15, which suggests around -10.3% downside to today’s share price of $3.51. It should be noted both Ord Minnett and Morgans are yet to update  following the preliminary third quarter production update.

The six brokers generate two Buy ratings (or equivalent), one Hold and three Sell recommendations.

Outside of the daily coverage, Jarden has an Underweight rating ($2.79 target), while Canaccord Genuity is Buy-rated with a $3.20 target. Both brokers are yet to release updated research.

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