Some good news, a bit of bad news and spending hundreds of millions of dollars didn’t win the minds of investors on Friday for Evolution Mining.
The shares lost more than 5% after the company confirmed $1 billion worth plans to expand its Cowal underground mine in central NSW, its Mungari mine in WA and upgrading its Red Lake mining in Canada but admitted it had missed upgraded production guidance for the year to June and cut final dividend.
The production miss and dividend cut are why the company wants to spend heavily on mine expansion over the next two to five years.
Usually plans to upgrade gold mining assets are greeted favourably by investors and while the production guidance miss was only small – Evolution made its original forecast, not the higher one issued earlier in 2021 – compared to 2019-20 output for the year was noticeably weaker.
The shares closed at 4.69, down 5.2% but still up 2.6% for the week. However the shares still remain down 6% for the year to date, indicating a running scepticism among investors about the company.
And when you dug into the quarterly report you find reasons for the share price slide and investor questions.
Buried in the quarterly report was news that the final dividend could cut by more than 50% – the company said the final dividend wold be in the range of 4 to 6 cents a share.
Evolution paid a final last financial year of 9 cents a share for a total for 2019-20 of 16 cents a share.
The payout now looks like being a maximum of 13 cents a share, or a low of 11 cents.
The production guidance miss was front of mind for the market on Friday and the full year and June quarter performance was noticeably weaker than 2019-20.
Evolution said full-year gold production was 680,788 ounces which was within its original guidance of 670,000 to 730,000 ounces, but 2% under revised guidance of 695,000 to 710,000 ounces issued in April.
The outcome was sharply lower than the 746,463 ounces produced in 2019-10.
The company said June quarter production was 169,146 ounces which was sharply lower than the 218,104 ounces produced in the June quarter of 2020.
Investors ignored the ‘good’ miss on costs (which is usually a bugbear for nervy punters).
Evolution’s all-in sustaining costs of $1,215 per ounce (or US$907/oz) — below the original guidance of $1,240 to $1,300 per ounce and within its revised guidance range of $1,190 to $1,220 per ounce.
Given the realities of the production data and the dividend cut it’s no wonder expansion was front of mind for executive chairman Jake Klein in his commentary in the report.
He emphasised the expansion of the Cowal and Red Lake operations will grow production by 35% to over 900,000 ounces of low-cost gold over the next three years and reversing 2020-21’s slide.
The expansion of the Cowal open cut by developing an underground mine will boost the 210,847 ounces produced in 2020-21 by 60% when completed in mid 2023, he pointed out.
The company sees Cowal producing 350,000 ounces of low-cost gold a year by 2023 and extending its life out beyond 17 years.
Evolution said the expansion of Cowal will see $380 million will be invested during the 2022 and 2023 financial years with $240 million for surface infrastructure, paste plant, process plant modifications and accommodation village, and $140 million of initial mine development costs.
Evolution will spend around $120 million upgrading its Mungari mine in the WA Goldfields.
But the biggest spend will be on the Red Lake upgrade – close to half a billion dollars as the Evolution board approved more work to significantly boost production at the Canadian gold mine by 2026.
Evolution plans to expand gold production at Red Lake to 350,000 ounces a year by 2025-26.
Evolution said the Stage One plan to produce 200,000 ounces a year “is on track with the operation successfully achieving production and cost guidance in the 2021 financial year.”
“Red Lake’s growth plans to deliver value from of its 11Moz Mineral Resource have now been accelerated with the completion of the Battle North acquisition in May 2021.
“Investment in the operation in the coming years is appropriate to extend Red Lake’s mine life to beyond 15 years and enable a production to ramp up targeting 350,000 ounces a year by FY26.”
The bottom line from the Evolution statement on Friday is that to avoid stagnating, and then going backwards, mining companies have to continually invest to stand still, let alone grow.
Miners can build new capacity of buy it, but with gold prices around $US1,800 an ounce, that’s expensive.
Evolution has a market value of $8.45 billion, so the billion dollar spend over the next five years will take a big chunk of cash flow and any new debt – and that would see it out of the mergers and acquisition business for quite a while.