Evolution Mining: Gets green signal to extend Cowal gold operations

Published: 2024-12-17 09:57:55 ET EVN.AX

By Joshua Cooper

Evolution Mining (ASX: EVN) secured regulatory approval from New South Wales Department of Planning, Housing and Infrastructure on December 10, 2024, to extend its Cowal gold operations until 2042. The approval permits the continuation of open-pit mining at Cowal, the expansion of the E42 pit, and the creation of three additional open pits. Ore processing at the site will proceed at annual rate of up to 9.8mn tonnes. The stock has reacted positively to the news, rising around 5% on the same day.

EVN is a leading Australian gold miner headquartered in Sydney. Established in 2011, the company currently operates six mines across Australia and Canada. These includes Cowal, which contributed 31% of FY24 (ended June 2024) revenue, Ernest Henry (28%), Mungari in Western Australia (12%), Red Lake in Ontario, Canada (11%), Northparkes in New South Wales (9%), and Mt. Rawdon in Queensland (7%). The mines are fully owned by EVN, except Northparkes mine in New South Wales, of which 80% was acquired in December 2023. In addition to Gold (70% revenue), EVN also produces copper (29%) and Silver (1%).

During FY24, EVN advanced its organic growth studies with favorable drill results at Ernest Henry, Northparkes and Cowal. At Ernest Henry, drilling confirmed high gold and copper grades in the Bert ore, extending beyond previously modeled boundaries. At Northparkes, near-surface copper-gold mineralization was found in open pit targets at Major Tom and E51. New drill results from Cowal revealed a potential resource between the open pit and underground in a previously unexplored area. Furthermore, EVN entered into earn-in agreements for two early-stage exploration projects: Cloncurry North, near Ernest Henry in North Queensland, and October Gold, southwest of Timmins, Ontario. These agreements enhance EVN's growth potential. In FY25, EVN plans to continue investing in resource growth and new discoveries to expand its portfolio.

The company has delivered record financial performance in FY24 (ended June 2024). EVN’s sales increased by 44% YoY to AUD3.22bn, driven by robust 60% YoY growth in copper revenues due to higher copper prices, acquisition of the Northparkes, and the recovery of Ernest Henry's from weather. Additionally, gold revenues increased 38% YoY, driven by higher gold price (up 23% YoY) and sales volume (up 11% YoY).  Furthermore, the company reported record Underlying EBITDA of AUD1.5bn, aided by higher gold and copper production and prices. EBITDA margin expanded by 900 basis points (bps) to 47%, driving the group FCF to AUD325mn compared to FCF outflow of AUD288mn in FY23. Supported by the strong financials, gearing improved to 25% from 33%. In addition, EVN paid out its 23rd consecutive final dividend of AUD5.0 cents per share, up 150% YoY, implying a dividend yield of 2.2%.

EVN expects high cash flow generation momentum to continue in FY25 and anticipates material cash flow upside at current spot prices (Gold AUD3,750/oz and Copper AUD13,700/t). EVN projects operating mine cash flow of AUD1.8bn in FY25 compared to AUD1.5bn in FY24 and expects further deleveraging of balance sheet. Additionally, the company has provided production guidance of 710,000 - 780,000 ounces of gold and 70,000 - 80,000 tons of copper.

Over a longer time frame, EVN has registered a steady increase in revenues over the last three years, delivering a CAGR of over 19% to AUD3.22bn. EBITDA grew at a CAGR of 18% and EPS surged from AUD0.13 in FY22 to AUD0.22 in FY24. Additionally, cash from operation increased to AUD1.3bn from AUD777mn, improving the debt-to-equity to 49% from 57% in the same period. The company’s peers, Westgold Resources (ASX: WGX) and Ramelius Resources (ASX: RMS), also demonstrated revenue and EBITDA growth over the last three years, albeit at a lower rate. WGX revenues and EBITDA grew at a CAGR of 8% and 4% to AUD716mn and AUD265mn, respectively, whereas RMS registered a CAGR of 12% and 11%, reflecting sales of AUD883mn and EBITDA at AUD439mn, respectively, in FY24. On the margin front, WGX demonstrated a larger expansion in EBITDA margins compared to its peers over the last three years. The EBITDA margin increased by 629 bps to reach 37.0% in FY24, compared to an increase of 552bps increase for RMS to 49.8% and of 267bps for EVN to 45.8%. However, investor should be aware that RMS and WGX are pure gold mining companies whereas, EVN have copper in its portfolio and plans to expand it further.

EVN’s valuation looks attractive as compared to its historical averages, despite over 25% YTD run-up in stock prices. The stock is currently trading at a P/E of 14.2x based on FY25 estimated earnings of AUD0.348 per share, compared to its 10-year historical average of 22.5x. However, it looks expensive when compared to its local peer such as WGX and RMS, which are trading at 6.8x and 8.1x, respectively. Furthermore, it is trading at an EV/EBITDA of 6.1x based on FY25 estimated EBITDA of AUD1.8bn, compared to its 10-year historical average of 7.6x. The EV/EBITDA also looks expensive when compared to WGX at 3.3x and RMS at 3.1x. Most of the 16 analysts covering the stock have significantly upgraded FY26 & FY27 revenues and earnings over the last few quarters. Despite earnings upgrades, most of the analyst have a ‘Hold’ recommendation, with an average target price of AUD4.77. However, the recent surge in prices means the target has been achieved, providing no room for upside.

Overall, EVN’s recent exploration results in selected mines have come in positively indicating increased production in the long-term. The financial results are very positive and EVN is expected to benefit from the positive gold and copper price outlook. Investment risks include additional cost in exploration, lower than expected production, drastic fluctuation in commodity prices and delay in obtaining necessary licenses, which can impact the revenue and margins.

Joshua Cooper