{"id":60261,"date":"2012-07-16T12:18:20","date_gmt":"2012-07-16T02:18:20","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/07\/16\/golds-mid-tier-evolution\/"},"modified":"2012-07-16T12:18:20","modified_gmt":"2012-07-16T02:18:20","slug":"golds-mid-tier-evolution","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/07\/16\/golds-mid-tier-evolution\/","title":{"rendered":"Gold’s Mid-Tier Evolution"},"content":{"rendered":"

\n\t – BA-ML initiates with Buy rating on Evolution
\n\t – Production growth an attraction
\n\t – Exploration is key
\n\t – Mid-tier gold stocks outperform
\n\t <\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tEvolution Mining ((EVN<\/span>)) is the creation of a three-way merger between Catalpa, Conquest and the Queensland assets of Newcrest<\/span> Mining ((NCM<\/span>)). The company has four operating mines and is developing an additional project, with a target for gold production of 400,000-800,000 ounces annually. Current production is around 350,000 ounces per year.<\/p>\n

\n\tBA Merrill Lynch has initiated coverage on Evolution with a Buy rating, supported by signs of an operational turnaround and strong leverage to the gold price. The turnaround has been most evident at the Mt Rawdon<\/span> and Pajingo<\/span> projects, where BA-ML notes both production and costs have improved since the creation of the merged entity. <\/p>\n

\n\tAs an example, BA-ML notes June quarter production of 97,000 ounces was better than the 90,000 ounces the broker had forecast, while cash costs were also about $10 per ounce better than had been expected.<\/p>\n

\n\tFurther gains are expected as the turnaround at the Edna May project is not yet complete. Achieving such gains would be a positive as BA-ML points out Evolution doesn't screen well relative to global peers on a cost curve comparison given cash costs of around US$900 per ounce. This also makes Evolution highly leveraged to the gold price.<\/p>\n

\n\tAlong with high costs, Evolution's assets also suffer from relatively short mine lives, meaning the assets are not 'A' grade mines , as BA-ML notes. The mine life issue is a major one for Evolution, as BA-ML suggests maintaining base load production of more than 300,000 ounces per year beyond 2017 will be difficult based on current resources. This reflects the fact both the Cracow<\/span> and Pajingo<\/span> mines are expected to finish production over the next five years.<\/p>\n

\n\tThe need for further reserve growth means Evolution's value is strongly correlated with further exploration success. As an example, BA-ML's model shows an additional four years of mine life at all key operations would translate to a 36% increase in the broker's base net prevent value to $2.20 per share. BA-ML remains confident of further exploration success and an extending of mine life at Evolution's operations.<\/p>\n

\n\tProviding a short-term boost to production will be Evolution's Mt Carlton project, which should be ramped-up in 2013. This will add a further 60,000 ounces to production for the group and also offers some growth optionality<\/span> and exposure to silver, both of which are viewed positively by BA-ML.<\/p>\n

\n\tAdding in the expected production at Mt Carlton would solidify Evolution as a mid-tier producer. This would be a positive for the company, as BA-ML notes the mid-tier producers have outperformed the global gold majors since 2001. <\/p>\n

\n\tThe lack of mine life for Evolution is reflected in the share price in the view of BA-ML, as the current earnings multiple for the stock is considered attractive. On its numbers Evolution is trading on an earnings multiple of 3.5 times in FY14<\/span>, which is well below the peer average of 5.6 times. Price to free cash flow is also below that of peers.<\/p>\n

\n\tBased on its forecasts, BA-ML has set a price target for Evolution of $1.80 per share. This compares to a consensus price target according to the FNArena<\/span> database of $1.94. Targets range from Credit Suisse at $1.70 to RBS<\/span> Australia at $2.15.<\/p>\n

\n\tBA-ML initiating coverage on Evolution brings to four the number of brokers in the database to cover the stock. All rate Evolution as a Buy. RBS<\/span> sees scope for further M&A activity involving the company, while Macquarie is positive on the recent move to acquire the Holleton<\/span> gold project as it would help build a tenement package around the Edna May project. This highlights management's focus on moves to build reserves going forward.<\/p>\n

\n\tAcquisitions should be part of the process of building reserves, as BA-ML notes a recent capital raising leaves Evolution with net cash of more than $200 million. While some of the funds will be use to develop the Mt Carlton project, there will be money available for further acquisitions in the broker's view.<\/p>\n

\n\tShares in Evolution today are higher in a stronger overall market and as at 11.45am the stock was up 3.5c at $1.34. This compares to a range over the past 12 months of $1.24 to $2.02, the current share price implying upside of around 46% relative to the consensus price target in the FNArena<\/span> database.  <\/p>\n

\n\t
\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

BA Merrill Lynch has initiated coverage on Evolution Mining with a Buy rating, seeing the stock as an attractive mid-tier producer with strong leverage to the gold price and increases in reserves.<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[22],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60261"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=60261"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60261\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=60261"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=60261"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=60261"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}