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Evolution Mining: Strong FY20 result and positive three year outlook

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Evolution Mining Ltd (ASX: EVN) is an Australian gold mining company. Evolution owns six gold mining operations - three in Queensland (Ernest Henry, Mt Rawdon and Mt Carlton) and one in New South Wales (Cowal), Western Australia (Mungari) and Canada (Red Lake). Evolution has a market capitalisation of A$10 billion.

 

EVN

 

What are the key points from Evolution’s FY20 report?

Evolution reported a strong result for FY20. In particular, Evolution’s underlying net profit after tax increased 86% to a record A$405.4 million (FY19: A$218.2 million). Revenue for FY20 increased by 29% to a record A$1,941.9 million (FY19: A$1,509.8 million). The higher achieved gold price of A$2,274/oz was partially offset by a slight decrease in produced ounces for the year to 746,463 ounces (FY19: 753,001 ounces). Mine operating costs increased by only 1.2% (A$8.0million) from FY19. Evolution reported All-In Sustainable Costs (AISC) of A$1,043 per ounce (or around US$700/oz). Evolution’s net bank debt 30 June 2020 was A$197.4 million comprising cash of A$372.6 million and bank debt of A$570.0 million.

Evolution will pay a final FY20 fully franked dividend period of 9.0 cents per share. This results in a record full year dividend for FY20 of 16 cents per share fully franked which equates to a 68% increase on FY19.

What is the outlook of Evolution in FY21?

Evolution is forecasting FY21 gold production of 670,000–730,000 ounces (FY20: 746,463 ounces). The fall in production in FY21 relative to FY20 is primarily due to the sale of the Cracow Gold Mine in Queensland effective from 1 July 2020 and processing low grade stockpiles at Cowal. AISC in FY21 is expected to be in the range of A$1,240–A$1,300 per ounce (FY20: A$1,043 per ounce). Assuming an $A/$US exchange rate of 0.72, Evolution’s forecast FY21 AISC equates to approximately US$890–US$940per ounce. The rise in FY21 ASIC is mainly due to rising costs at Red Lake (up A$200-215/oz) and processing lower grade or at other sites.

Investment in sustaining capital in FY21 is forecast to be between A$112.5 –A$137.5 million. Red Lake accounts for a significant amount of Group sustaining capital as Evolution invests in transforming the operation with key items including: replacement of mobile fleet, shaft decommissioning, resource definition and major maintenance and upgrades. Major capital in FY21 is expected to be in the range of A$260.0 –A$290.0 million. A large amount of the major capital is associated with expansion projects at Cowal.

What is the three year outlook for Evolution?

Interestingly, Evolution announced a three year outlook, with rising production and falling costs. Provided the gold price remains flat, this will result in rising profitability over the next three years. Production is planned to increase to from 700,000 ounces in FY21 to over 800,000 ounces over the period to FY23. Growth will be largely driven by the commencement of the Cowal underground mine in late FY22 and execution of the Red Lake transformation plan.

Investment in two significant growth projects at Cowal and Red Lake will materially increase production and transform the quality of Evolution’s asset portfolio. Major capital expenditure at Cowal, to enable production to increase from around 220,000 ounces in FY21 to above 300,000 ounces per annum by FY23, consists of development of the new underground and investment in the Integrated Waste Landform. Red Lake will continue to invest in mine development which is planned to enable annual production to increase from around 120,000 ounces in FY21 to in excess of 200,000 ounces.

Costs are expected to decline over the three-year period. Red Lake will initially increase Group AISC by A$200–A$215 per ounce before trending lower as the benefits of the transformation plan are realised. Group AISC is expected to decline from A$1,240–A$1,300 per ounce in FY21 to A$1,125-A$1185 per ounce in FY23.

What is the market reaction to Evolutions report?

The market reaction to Evolution’s FY20 result positive. Evolution share price is up around 2% and is currently trading at A$5.70 (13 August 2020). Evolution has a forward P/E in the low-twenties with an annual dividend yield of around 2%.

 


Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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