Hot Stock: Evolution Mining (EVN.ASX)

Production record falls again

Friday 6th May 2016

What’s new?

Evolution Mining recently reported its 3Q16 results, with production increasing by a very impressive 102% compared to the same quarter in 2015, to a record 208,963 ounces of gold. The key drivers of this were the inclusion of production from the recently acquired Cowal and Mungari mines and a strong performance by the Mt Carlton mine. Both mines added a total of 104,766 ounces of gold to production for the reported quarter compared to zero for the same quarter in 2015. Moreover, the Pajingo mine added its weight to the better result with a modest improvement in production as well. Dragging on the result were the Mt Rowden and Edna May mines.

By-product silver production was significantly higher for the reported quarter, following a rise of 43% on the same quarter in 2015, to 242,327 ounces. Reporting improved production numbers were the Pajingo, Cracow and Edna May mines, while the Mt Rawdon mine recorded a fall. As a by-product, 278 tonnes of copper was produced from the company’s Mt Carlton mine for the March quarter.

In addition to the record production rate, Evolution Mining’s earnings for the quarter also benefitted from lower All-in sustaining costs (AISC). As a result of greater mining activity, group-wide AISC for the quarter declined by 1.0% compared to the outcome for the March quarter 2015, to A$1,015 an ounce. Over the remainder of 2016, the company continues to investigate new cost saving initiatives across all of its operations. These initiatives are expected to see AISC improve over the remainder of the year.

To partially protect operating margins against a falling gold price, the company had at 31 March 2016 a 795,688 ounce hedge position, with an average delivery price of A$1,620 an ounce. The hedge will deliver 88,669 ounces of gold into the current quarter at an average price of A$1,591 an ounce. With the gold price in Australian Dollars trading around A$1,528 an ounce, the average hedge price is “in-the-money”. We consider the position as prudent in the current pricing environment.

The company also announced that it voluntarily repaid A$80 million in early debt repayments during the quarter. A very strong cash flow has allowed the company to significantly reduce debt, which at 31 March 2016 had been reduced to A$400 million. Cash at the same date stood at A$35.3 million, down on the A$45.3 million held at 31 December 2015.

As a result of the early debt repayment, the company’s gearing on a net debt to earnings before interest taxation depreciation amortisation basis at 31 March 2016 improved further to 0.63 from 0.79 at 31 December 2015.

Outlook

Evolution Mining’s operations continue to move along at top gear, with the record quarterly gold production and lower operating costs having led to a further strengthening of the balance sheet and the payment of a dividend. Moreover, the company remains on track to meet management’s production guidance of 770,000 to 820,000 ounces of gold in 2016, which combines nicely with AISC guidance for a gold price between A$970 and A$1,020 an ounce.

Price

As a result of Evolution Mining’s favourable production and cost (i.e. yield) profile and given the positive outlook for the A$ gold price, the miner’s prospective earnings ratio is forecast to fall from 12.8 times in 2016 to 10.5 times in 2017. We also note that Evolution Mining’s strong investment fundamentals are complemented by a positive technical set up. In particular, we note that the long-term trend is clearly upwards, with the next major upside target being the 127.2% Fibonacci extension at $2.48.

Worth buying?

We hold firmly to the belief that Evolution Mining is well positioned to navigate through the current turbulent gold price environment, and also continue to seek out growth opportunities. In conjunction with seeking out such opportunities, the company has been able extract shareholder value from its asset base, through increased production and containing costs. Accordingly, we rate Evolution Mining as a buy around current levels.

David Lennox is a Senior Analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Evolution Mining is held within the Fat Prophets Concentrated Australian Share, Mining & Resources and Small & Mid Cap portfolios.

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