Evolution Mining Outperforming, Too Much

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

In the climate of a surging gold price, Evolution Mining is reaping the benefits. But is the market too far ahead of the game?

–Successful March quarter for Evolution Mining
-Expansion projects on track
-Capex guidance as expected
-Valuation too rich for brokers

By Greg Peel

Gold/copper miner Evolution Mining ((EVN)) posted March quarter gold production of 180koz, some 5% ahead of consensus. The beat came despite a 28-day mill shutdown at the Cowal gold mine (NSW), which was offset by 6koz of extra production from an elution circuit drawdown that will reverse in the June quarter.

Cowal’s above-expectation production served to offset weakness at the Red Lake mine (Canada), which was impacted by lower grades.

Copper production of 19.5kt was a 2% beat to consensus, while overall group costs were also 2% ahead of expectation, including the Mt Rawdon mine (Qld), which is due to be shut down in FY25 ahead of conversion to a pumped hydro facility.

Management has made no change to FY25 gold production guidance of 710-780koz at a cost of $1475-1575/oz. Year to date, Evolution has achieved 76% of production guidance and costs are tracking to the top end of guidance.

Expansion Projects

Evolution’s mill expansion at its Mungari gold mine (WA) is now complete nine months ahead of schedule and -9% below budget. More importantly for UBS, the asset holds significant optionality to current elevated AUD gold prices as a large new piece of processing infrastructure in the Kalgoorlie region.

Management’s proposed Cowal Open Pit Continuation (OPC) Project has been approved by the board and construction will commence in the September quarter FY26. The project is expected to increase the life-of-mine at Cowal by ten years to at least 2042. Exploration at Cowal continues to identify highly prospective new areas as potential underground opportunities, Morgans notes.

A number of feasibility study updates at the Ernest Henry (Qld) and Northparkes (NSW) mines are due in coming quarters.

Capex

Such expansion does not come without cost. Management has reiterated capex guidance of an average of -$750-950m over the next five years, with a Cowal OPC committed capex budget of -$430m over the next seven years.

UBS remains a little cautious regarding the profile of some -$4bn in coming years and suspects the market might continue to underestimate the cost, especially in the current high price environment (of inputs). Evolution is coming off a period in which it was managing capex for cashflow, UBS notes, and while options to bring forward might be limited, it may start optimising more for value.

Approval of the Cowal OPC project was nevertheless expected by all and capex guidance for the project is for now in line with consensus expectations.

Cash Flow and Debt

Evolution Mining continues to benefit from its effectively unhedged gold position, Bell Potter notes. During the quarter, group free cash flow increased by 25% quarter on quarter. Following an accelerated debt repayment of $60m during the quarter, gearing is now below management’s target level of 20%, to 19% at end-March.

The company’s net debt position improved by $200m quarter on quarter, for a net cash addition per ounce of production of $1,112/oz. This was a record result on Bell Potter’s measures. Evolution’s CEO emphasised a commitment to capital discipline, banking the cash being generated in the high metal price environment for increased shareholder returns.

Ord Minnett nevertheless suggests reduced debt may aid M&A ambitions (copper or gold), as the miner has historically levered up to some 30% of gearing during growth or acquisition phases. Absent M&A, Ord Minnett sees Evolution returning excess free cash flow to shareholders, while prioritising organic opportunities that meet internal hurdles such as internal rate of return.

Morgans expects Evolution to further accelerate the repayment of its term loans, with its June quarter scheduled debt repayment paid early, as a result of strong operating cash flows from record gold prices.

Too Rich

On Goldman Sachs’ long term gold price forecast of US$2,850/oz and copper price of US$4.57/lb, Evolution is trading at around 1.1x net asset value, or pricing of around US$3,080/oz gold (peer averages 0.95x and US$2,690/oz), while near-term free cash flow yields of 5-10% appear increasingly in line with peers.

While ongoing deleveraging will likely continue to support the equity outlook, with growing upside to capital returns, Goldman Sachs sees this as more than priced in versus its gold/copper outlook and maintains a Neutral rating and $7.40 target.

While Canaccord Genuity continues to like Evolution’s attractive free cash flow yield profile, enhanced balance sheet flexibility providing capital management optionality, and unique investment offering (full gold/copper leverage noting the dearth of quality copper names on ASX), this broker maintains a Hold recommendation on valuation, with a target increase to $7.75 from $7.25.

Among brokers monitored daily by FNArena, Morgans notes Evolution Mining’s share price has performed extremely well with the continued strength in both gold and copper prices. Further appreciation in both commodities will act as tailwinds for the share price, along with continued operating success and further potential exploration success, which at this stage appears likely.

However, Morgans sees Evolution’s current share price as fully valued given its 64% year to date share price gain versus 20% for the gold price, and sees its ongoing deleveraging and exploration upside as fully priced in. The broker maintains a Hold rating. A change in valuation model sees Morgans’ target price increase to $8.00 from $5.90.

Following increases to gold and copper forecasts in recent days, UBS retains an unchanged $8.00 target and Neutral rating.

While Evolution Mining has given up some outperformance versus Northern Star Resources ((NST)) over the past month on weaker copper, Citi maintains a preference for Evolution. Even taking a bearish copper view, earnings momentum on gold alone continues to be positive.

Citi retains a Neutral rating and $7.00 target.

Bell Potter has increased its target to $8.10 from $7.89 but has lowered its rating to Hold from Buy on recent share price appreciation.

Evolution Mining continues to de-lever its balance sheet while pursuing organic growth, notes Macquarie. This broker downgrades to Underperform from Neutral following a 71% year to date share price performance.

We won’t split hairs. Macquarie’s target is $6.30.

Ord Minnett has lifted its target to $6.75 from $6.25, maintaining a Lighten rating on valuation grounds.

Morgan Stanley retains its Underweight rating and $5.55 target.

That leaves four Hold or equivalent ratings and three Sells among brokers monitored daily by FNArena covering Evolution Mining, for a consensus target of $7.10.

That’s on a range from $5.55 (Morgan Stanley) to $8.10 (Bell Potter).

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