Trading update
Evolution Mining (ASX:EVN) has updated the market on its expectations for 2022 guidance for gold production and all-in sustaining costs, with the release not taken kindly to by the market, with the shares falling heavily. Evolution now expects 2022 production guidance to come in lower than its already downwardly revised guidance for the year. Unit costs on the other hand, are expected to come in above 2022 guidance, on forecast lower production numbers and rising inflationary pressures. The news was however not all bad with 2023 and 2024 looking to be expansion years. The following image shows the location of Evolutions’ operations:
Source: Evolution (ASX:EVN)
Evolution is guiding 2022 production to come in at 640,000 ounces of gold, because of weather events and lingering COVID, from the previous 650,000 ounces. Citing weather events at Cowal and staff absenteeism at its Mungari mine in WA, as having major impacts on the reassessment of 2022 production guidance. Although the 2022 guidance downgrade was disappointing, the causes are not within the full realm of Evolution’s control.
We believe this control aspect is reflected in the outlooks for 2023 and 2024 that Evolution has provided, and here the news is very good. Expectations are that 2023 and 2024 will be expansionary years. The following chart shows production guidance numbers for the next three year:
Source: Evolution (ASX:EVN)
As Members can see from the above chart, Evolution is forecasting gold production to rise to 800,000 ounces ± 5.0%, by 2024. We believe this number is readily achievable, given the five operating sites in Evolutions stable. Cowal will be the mainstay, with gold production expected to rise to 320,000 ounces ± 5.0% in 2024, after hitting 275,000 ± 5.0% ounces of gold in 2023. Pleasingly, Evolution is starting to make great progress at Red Lake where production has been a real challenge. Red Lake is forecast to deliver 200,000 ± 5.0% ounces of gold in 2024, after passing through 160,000 ± 5.0% ounces of gold in 2023. Evolution is now on a gold production pathway to 350,000 ounces by 2026 for Red Lake.
Copper production for 2023 is forecast to be circa 55,000 tonnes in 2023 and circa 50,000 tonnes in 2024. For 2021, Evolution produced 21,361 tonnes of copper, which is treated as a by-product and guidance numbers apart form 2023 and 2024, have not been provided. Evolution also produced 650,268 ounces of silver as a by-product, with no forecasts provided.
Looking through the noise and the short-term causes for the 2022 production downgrade, we believe the growth targets for 2023 and 2024, warrants ongoing support for Evolution. Â Â Â Â Â Â Â Â Â Â Â Â
The trading update covered off on unit cost guidance for 2022 and the news was again not good. Evolution sees all-in sustaining costs (AISC) printing a result above the top of its 2022 range of A$1,135 to A$1,195 a tonne, with a read of circa A$1,250 an ounce. Rising costs are a concern, with lower production numbers for 2022 and pressure across the cost spectrum, as inflationary pressure rises, are the major causes for the jump in 2022 AISC. An example of the challenging cost pressures Evolution faces in 2022 is electricity costs which are shown over the 2022 year-to-date:
Source: Evolution (ASX:EVN)
These cost pressures are not the sole domain of Evolution or the gold sector, these are industry wide pressures. Evolution is however, firmly focussed on maintaining margins over production ounces. On margins, with the Australian dollar gold price currently trading around A$2,635 an ounce, Evolution will continue to generate very comfortable operating margins and operating cashflows. Such are the benefits of being a low-cost producer, despite the rise in forecast 2022 AISC.
The short-term noise is however covering a key fact that Evolution expects AISC to flatten post 2022. The following chart shows annual AISC forecasts out to 2024 (in Australian dollars):
Source: Evolution (ASX:EVN)
AISC, as Members can see from the above chart, is forecast to remain flat at A$1,240 ± 5.0% an ounce. Under the same pricing scenario as above, Evolution will continue to generate robust operating margins and free operating cashflows. The two metrics will be further enhanced by a significant rise in volumes over the same two year period. The 2022 AISC forecast is disappointing, but the momentum changes in 2023 and 2024 are positive and again, we believe, warrant supporting Evolution.
Major capital expenditure for 2022 remains unchanged in the range of A$440 million to A$450 million, 2023 in the range of A$530 million to A$600 million and 2024 in the range of A$330 million to A$380 million. Evolution expects major capital works spending for 2022 will come in toward the lower end of its forecast range. Cowal and Red Lake will carry the bulk of the capital spending in the range of A$325 million to A$360 million and A$130 million to A$150 million respectively.
Evolution’s balance sheet remains in top condition, with it indicating a cash holding of A$540 million and undrawn facilities of A$360 million. The balance sheet provides the necessary support for Evolution to advance toward its annual production target of 800,000 ounces of gold.
We hold a positive view on the gold price for the remainder of 2022 and expect the price to rechallenge the US$2,100 an ounce high by years’ end, on a weaker US Dollar and rising inflation. Rising debt levels through ongoing stimulatory programme spending and a slowing US economy will be headwinds for the US dollar. Supply side squeezes across many industries will drive inflation higher deliver a tailwind for the gold price. This is despite many central banks now tightening cash rates.
Certainly, the trading update was disappointing on the surface, but digging into it there are extenuating circumstances for the 2022 changes in guidance. Looking through the short-term noise the 2023 and 2024 years are expanding years, as Cowal and Red Lake hit their straps. This growth profile and our positive view for gold are, we believe, a compelling story and is not reflected in the current share price action.
Consequently, we continue to recommend Evolution Mining (ASX:EVN) as a buy for Members with no exposure to the stock.
Disclosure: Interests associated with Fat Prophets holds shares in Evolution Mining (ASX:EVN).
