1Q19; Off the pace a tad
Evolution Mining (ASX:EVN) has just released its September quarter results to 30 September 2018, and in doing so has revealed a soft start to fiscal 2019. The company had provided guidance that 2019 would deliver softer production numbers which has played out in the first quarter for 2019. Despite the softer production outcome, the company did reiterate its 2019 guidance. Higher operating costs were reported for the quarter, while the balance sheet remained in good shape. Higher precious metal prices were a bright spot for the quarter.
Group gold production for the first quarter 2019 declined by 9.4% year-on-year compared to the first quarter 2018, to 200,218 ounces of gold.
The following chart shows quarterly gold production:
Source: Evolution Mining (ASX:EVN)
The sale of the Edna May mine removed 21,639 ounces of gold that was included in the year earlier result. On a like-for-like basis, gold production was effectively flat for the reported quarter, rising only 0.4% from the year earlier result. Operations were split down the middle with three of the six mines delivering production increase, while the remaining three reported a slip in production.
Silver production for the September quarter fell by 35% compared to the year earlier result, to 189,553 ounces. All six of the company’s mines reported softer production numbers, with Mt Carlton the standout.
Mines that reported better gold production numbers for the September quarter included the Mungari, Mt Rawdon and Ernest Henry mines with the standout being the Mt Rawdon mine. Conversely, Cowal, Mt Carlton and Cracow all delivered falls in gold production with Mt Carlton reporting the worst result.
The Mt Rawdon mine delivered a 37% rise in gold production compared to the year earlier result, to 29,712 ounces.
The following chart shows quarterly gold production for the Mt Rawdon mine:
Source: Evolution Mining (ASX:EVN)
More ore throughput in the mill on improved efficiencies, gold recoveries and gold grade all drove the result. Milling hit 845,000 tonnes, representing a 6.3% rise on the same result for 2018. Gold recoveries rose to 90.8% from the 87.3% reported for the first quarter 2018. The gold grade was also higher at 1.20 grams per tonne (g/t) gold to add to the positive momentum.
The other mines to report positive production numbers were Mungari and Ernest Henry with increases of 15.7% and 8.3% respectively on the same results for 2018, to 35,120 ounces and 25,638 ounces.
Gold production at Mt Carlton fell to 26,197 ounces, representing a fall of 12.7% on the same result from a year earlier. The following chart shows quarterly gold production for the Mt Carlton mine:
Source: Evolution Mining (ASX:EVN)
A fall in milling efficiencies and a lower gold grade drove the result. Ore throughput fell by 4.4% on the first quarter 2018, to 195,000 tonnes. Adding to the downward momentum was the gold grade that fell to 5.47g/t gold from 5.87g/t gold from a year earlier. To finish-off, gold recoveries fell to 87.7% from 91.2% for the earlier year result.
The other mines to report a fall in gold production included the Cracow and Cowal mines. Cowal reported a 12.7% fall and Cracow a 4.7% fall on their 2018 results, to 61,300 and 22,291 ounces respectively.
Importantly, gold production guidance for 2019 was maintained and is forecast to be in the range of 720,000 to 770,000 ounces of gold, with production for 2020 expected to be in the same range.
For 2021, gold production is forecast to fall in the range of 700,000 to 750,000 ounces of gold.
Turning to the daily chart, and after a strong run through to June, the corrective share price action that unfolded appears to have reversed. Prices have bounced off the upward sloping green trend-line and reclaimed support at the February intra-month high of $2.94, as well as at the 50-day moving and 200-day moving averages. A move above the next level of resistance at $3.15 would further embolden the technical picture.
Silver production came in lower for the first quarter 2019, following the printing of an 35% fall on the same quarter in 2018, to 189,553 ounces.
All six of the company’s operations reported lower silver production, as the company focused on gold. The Mt Carlton mine reported a 49% fall on the year earlier result, to 64,376 ounces, and was the standout. Silver is treated as a by-product.
The other by-product, copper, also printed a fall in production for the first quarter 2019 of 0.9%, to 5,866 tonnes of copper. The two copper producers reported divergent results for the quarter. Ernest Henry saw higher production while Mt Carlton reported a fall. Copper production for Ernest Henry rose by 4.2% on the same result for 2018, to 5,557 tonnes. Mt Carlton printed a fall in production of 48% over the same comparative period as Ernest Henry, to 309 tonnes.
All-in sustaining costs (AISC) for the company extended the June trend and pushed higher in the September quarter. The following chart shows the company’s quarterly AISC costs per ounce:
Source: Evolution Mining (ASX:EVN)
Overall, group-wide AISC for the reported quarter deteriorated by a significant 12.6% on the first quarter 2018, to A$885 an ounce. For the quarter, five of the company’s operations reported higher costs, with Mt Carlton the standout. Only Ernest Henry reported a better September quarter result, with the mine reporting a cost credit of A$617 an ounce compared to a cost credit of A$614 an ounce from a year earlier.
Mt Carlton reported a 94% increase in AISC for the reported quarter compared to a year earlier, to A$831 an ounce. The result was driven by lower silver and copper by-product credits of A$230 an ounce compared to A$169 from a year earlier. The Cowal mine also reported a 35% increase in AISC compared to the September quarter 2017, to A$958 an ounce. Higher processing costs primarily drove the result, increasing by 38% on the September quarter 2017 result.
Guidance for 2019 is for AISC to fall into the range of A$850 to A$900 an ounce and to remain in the same range for 2020.
For 2021, AISC is expected to fall in the range of A$870 to A$920 an ounce.
At 30 September 2018 the company held 212,500 ounces hedged at an average delivery price of A$1,715 an ounce.With the gold price in Australian Dollar terms trading around A$1,723 an ounce, the average delivery hedge price is “out-of-the-money”. The company did wind-back its hedge which one year earlier stood at 410,498 ounces with an average delivery price of A$1,656 an ounce. We consider the position as prudent in the current volatile pricing environment.
With reference to the monthly chart, a cluster of support was respected between $1.72 and $1.83. This is made up of the 50% Fibonacci retracement (blue set of retracements) and the October 2010, September 2011 and October 2012 resistance (horizontal dashed-blue line) respectively. In addition, a ‘bullish doji’ candlestick pattern formed as of the close of trading in December 2016, which is a sign of positive sentiment to arise over the medium-term. From a broader perspective, prices have also moved above the 78.6% Fibonacci retracement at $2.74 (red set of retracements). Long-term momentum is favoured to the upside, with an upward sloping trend-line (in green) still evident. The 127.25 Fib retracement at $3.43 is now in focus.
Net debt at 30 September 2018 stood at $A$78.2 million, with a gearing read of 3.0%. These figures compare favourably to the A$392 million net debt position from a year earlier and a gearing of 13.6%. We certainly have no concerns over the structure of the company’s balance.
The first quarter for 2019 has delivered a soft result, although guidance for 2019 has been maintained. With the growth profile forecast to remain static out to 2021 we will remove our high conviction notation. We continue to believe however that the company has the financial firepower and a suite of prospective sites to successfully navigate through the next few years.
Consequently, we recommend Evolution Mining (ASX:EVN) as a buy for Members with no exposure to the stock.
Disclosure: Evolution Mining (ASX:EVN) is held in the Fat Prophets Global Contrarian Fund and managed account portfolios.
