Evolution Mining’s Spending Spree

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

New guidance for Evolution Mining’s assets includes greater capex than analysts had assumed. Yet greater clarity also provides greater faith in the miner’s longer term plans.

-Strategy updates for Evolution Mining’s NSW assets highly anticipated
-Capex assumptions much greater than forecast
-Clarity provides for greater confidence
-Buy ratings continue to dominate

By Greg Peel

Evolution Mining ((EVN)) owns or owns stakes in gold-copper projects In NSW (Northparkes, Cowal), Queensland (Ernest Henry, Mt Rawdon), Western Australia (Mungari) and Canada (Red Lake). Last week, the company hosted analyst site visits to the NSW projects. Cowal was acquired in 2015 and Northparkes (80%) in December last year.

Both are large-resource, long-life deposits. Analysts have been waiting to learn how Evolution plans to go about developing Northparkes and extending Cowal, which mining processes could best be used, which takes us into the realm of geology and the business of mining beyond the understanding of the average reader.

So we’ll try to keep things as simple as possible. To that end, Jarden has provided one of the more easy-to-read updates on the visit.

What to do?

Since acquisition, and following what Jarden understood to have been extensive due diligence, the Northparkes strategy has remained unclear. Block caving (BC) or sub-level caving (SLC) of the E22 ore body was the initial consideration. However, more recently, a strategy to complete an SLC of the narrower portion of the E48 ore body emerged.

Though still in conceptual study phase, management advised the -$45-60m per year (FY25-27) development will start in the coming weeks. This will likely result in development of E22 not occurring until around 2027, enabling feasibility and optimisation work to be completed in FY25.

The Cowal visit also provided the first capex guidance of -$200-230m per year (FY25-29) for the Cowal Stage I open pit, the need for open pit fleet replacement, expected timelines and sustaining capex of -$40-50m per year. Implied total capex over the next five years was therefore between -$130-200m per year above consensus.

Though the outcomes of the feasibility study are pending, it remains Jarden’s view the E22 BC represents the most economic approach to extend life-of-mine at Northparkes due to the grade and volume of material it should deliver.

However, the likely associated capex, indicated to be around -$600m before any plant modifications, would otherwise coincide with the -$475m flagged for Ernest Henry life extension, the more than -$1bn in major capex outlined at Cowal, and the balance of Mungari expansion capex.

The more conservative approach apparently being taken is further notable given the tour highlighted the operational execution in expanding Northparkes’ milling capacity to 7.6mtpa despite the operation only running at 5.4-6.2mtpa over the past five quarters.

Goldman Sachs sees the improved clarity on the medium-term outlook across both assets and the broader portfolio as lessening the risk of significant capex increases/production softness relative to expectations versus peers, and reducing uncertainty. The timing of major capex later this decade across Northparkes, Cowal and Ernest Henry is not seen as a risk, where assets largely fund their own capital requirements. The broker forecasts Evolution to be net cash by FY27.

In the miner’s favour, but clearly also a risk, are the current spot prices for gold and copper.

Free Cash Flow

Prior to the site visit, UBS had Evolution producing nearly 15% free cashflow yield near-term, based on the brokers’ gold/copper price forecasts. Post model updates this is reduced to 8-11% over FY25-27.

While the site visit reiterated long-term asset quality and organic growth options, UBS’s investment thesis was based on anticipated elevated levels of free cashflow near-term. The broker is alert to more capex and cost surprises not just from Evolution, but across the industry — as we move into guidance season, but for now sees better gold options elsewhere.

UBS cites those better options as Northern Star ((NST)), Bellevue Gold ((BGL)), Gold Road Resources ((GOR)) and De Grey Mining ((DEG)).

While Citi hasn’t been a fan of Evolution’s piecemeal guidance update strategy over the past few months, the site visits should provide a rebase, the broker suggests. Few other gold companies have provided this detail of operating expenditure and capital expenditure profile to the end of the decade.

Targets Trimmed, Views Little Changed

Cowal and Northparkes are both meaningful operations for Evolution Mining, Macquarie suggests, but meaningful capital is required for their next phase. This view is consistent among brokers.

Before the site visits, all five brokers monitored daily by FNArena covering Evolution Mining held Buy or equivalent ratings. (Ord Minnett actually held an Accumulate rating, which sits between Hold and Buy on the broker’s five-tier system.)

Post the visits, only UBS, who as noted sees “better options elsewhere”, has downgraded, to Neutral from Buy.

All brokers, taking on board increased cost expectations and updated production forecasts, have nonetheless downgraded their free cash flow yield and net present value estimates to arrive at lowered target prices. The consensus target among the five brokers, which includes Morgan Stanley among those otherwise mentioned, has fallen to $4.04 from $4.31.

Goldman Sachs also retains a Buy rating, and has trimmed its target to $4.00 from $4.25.

Jarden is the odd one out, having held an Underweight rating pre site visits which it has left unchanged. Jarden was also the only broker to have previously set a price target below that of the prevailing share price ($3.39 at time of writing), being $2.91.

Jarden has now dropped that target to $2.84, which it calculates on long-term (2027) forecasts of US$1,700/oz gold, US$3.50/lb copper and US$0.70 Aussie dollar. The broker highlights the risks to its forecasts as rising inflation, tight labour markets, execution risk, general market risk and commodity prices.

Those commodity prices, Jarden notes, affect big swings in valuation, hence upside risk is also on offer.

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