Evolution Mining Limited (ASX: EVN) is an Australian gold mining company. Evolution owns five gold mining operations. Three are in Queensland, one in New South Wales and one in Western Australia. Evolution has a market capitalisation of A$8.5 billion.

 

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What are the key points from Evolution report?

Gold production was 165,502 ounces in the March quarter 2020, down 3% compared with the previous quarter. Silver production was 118,224, down 13% compared with the previous quarter. Copper production was 4,832, down 13% compared with the previous quarter.

The achieved gold price in the March quarter 2020 was 13% higher than the previous quarter. This higher achieved gold price was the key reason why Evolution’s net cash flow increased by 11% in the quarter.

Evolution also noted that the acquisition of Red Lake has been completed following all conditions precedent having been satisfied. Evolution announced on 26 November 2019 plans to acquire 100% of the Red Lake Gold Mine for US$375 million from Newmont Corporation. Only 10% of Red Lake’s workers are unable to work due to travel restrictions. To date, production and mine development have not been materially impacted by COVID-19, which is another short-term positive for Evolution.

A five-year term loan of A$570 million from a syndicate of six banks has been utilised to fund the acquisition and related transaction costs. Due to the strong cash position of the business, the final term loan amount is A$30 million less than contemplated at the time of announcing the transaction.

Over the quarter, Evolution received A$18.8 million in April 2020 from Red Lake’s net cash generation in the March 2020 quarter. The mine also produced 37,895 ounces. Evolution is executing the company’s plan deliver a longer-term operational transformation with key objectives of reducing AISC to below US$1,000 per ounce and increasing production to above 200,000 ounces per annum.

What is the outlook of Evolution?

The long-term outlook for Evolution is positive. Evolution’s FY20 guidance remains unchanged at (excluding Red Lake Gold Mine) of around 725,000 ounces at an AISC of A$940 –A$990/oz. In addition, should current spot metal prices be maintained during the June quarter, net cash flow is expected to be A$90–95 million higher, but AISC would be negatively impacted by ~A$20–25/oz due to higher royalties and lower by-product credits.

All commodity producers benefit from the falling $A. Gold producers such as Evolution are benefiting from both a rising gold price of gold and a falling $A. Even though there has been a recent rally in the $US/$A exchange rate, the it remains at low level in the low to mid 60s. If this operating environment continues where $US/A$ exchange rate remains low with an increase gold price, gold producers should see increases in revenue over time. Consequently, investors that want exposure to gold producing companies they could consider Saracen (ASX: SAR), Evolution and Northern Star (ASX: NST).

What is the market reaction to Evolution report?

The market reaction to Evolution’s quarterly activities report is positive. Evolution share price is up around 2% and is currently trading at A$5.09. However, the gold sector is strong today as the gold price increased overnight. Evolution has a forward P/E in the mid-twenties with an annual dividend yield of around 2.3%.


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April 23, 2020