Evolution Mining ((EVN)) has set its sights on achieving better grades at Cowal (NSW) in the second half while increasing the gold intake at Red Lake (Canada). The miner’s September quarter production was sequentially softer, down -22% with a 10% increase in all-in sustainable costs (AISC).
Management has retained FY21 guidance of 670-730,000 ounces at AISC of $1240-1300/oz. Several brokers expect costs may come in below guidance because of higher by-product copper price estimates while UBS asserts the quarter was not reflective of the underlying value of the portfolio.
Goldman Sachs retains forecasts at the low end of the cost guidance range for FY21 production because of a favourable copper price outlook. Nevertheless, the broker’s FY21 and FY22 estimates for operating earnings (EBITDA) are reduced -6% and -3%, respectively, after incorporating the quarterly result and updating AUD/USD forecasts.
The Cowal mill is currently being fed by lower grade stockpiles, while a turnaround at Red Lake requires time and capital. Nevertheless, UBS believes these two assets could drive production towards 900,000 ounces per annum over the next 4-5 years.
Production varied across the company’s assets, with Ernest Henry (Queensland) benefiting from higher copper prices and beating the internal budget. Along with Mungari (WA) and Cowal, this drove the bulk of cash generation.
Mungari had record mill throughput in the quarter while Mt Rawdon (Queensland) was affected by a rockfall in the open pit. Costs at Mount Carlton (Queensland) were much higher than UBS expected because of the drop in grade to 2.4g/t during the quarter and also because of lower by-product credits from copper.
While Mount Carlton has a short life, management envisages Crush Creek, an exploration project 30km away, has the potential to extend life. Mount Carlton remains a key concern for Morgan Stanley as costs are close to current spot prices.
The share price has underperformed the US dollar gold price since mid September, Citi observes, and with an opportunity to hold a quality stock that has two long-life growth opportunities in Cowal and Red Lake upgrades to Neutral from Sell.
Credit Suisse retains Evolution Mining as one of its preferred large-cap gold stocks, given strong cash generation and upside from execution on growth, noting the portfolio is also well diversified in tier-1 locations.
Catalysts
February should be a key catalyst and Credit Suisse will be most interested in the extent of conversion from the 11m ounces of resources at Red Lake to reserves, and the implications for mine planning.
UBS expects Evolution Mining will report growth in reserve tonnage at Cowal rather than grade while the focus for the maiden reserve at Red Lake is expected to be on grade and dilution rather than tonnage.
The company has made progress on the transformation plan at Red Lake with a surface decline study initiated. A decision on long-term milling optimisation is expected by June 2021. In the September quarter a fire had cause a temporary suspension of operations, resulting in a -11% reduction in operating time.
Cowal
Production was 51,800 ounces at Cowal in the September quarter, down -15% sequentially. The cutback is progressing and access to fresh ore should progressively improve grade in the remainder of FY21. The approvals process at Cowal underground continues to progress and management has indicated underground production could occur within 12 months of permits being received.
Approval of the 2.3km Galway decline is a vote of confidence by management in the potential scale of the Cowal underground, Citi asserts, while Shaw and Partners considers the submission of the mine development application a major milestone that could mean permits are gained by June 2021.
The size of the additional decline also impresses the broker and could be part of the underground mine in future. A feasibility study on the underground is due by June 2021.
Among those stockbrokers not monitored daily on the FNArena database, Shaw and Partners has a Buy rating and $7.00 target while Goldman Sachs, on the other hand, retains a Sell rating with a $4.80 target. FNArena’s database has three Sell ratings, based on valuation, two Hold and one Buy (Credit Suisse). The consensus target is $5.39, suggesting -4.2% downside to the last share price.
