Ground Breakers: Inflation, Covid and supply chains 'cast a shadow' on large gold miners as downgrades fly

Evolution Mining shares fall hard after heavy downgrade to three-year guidance
Evidence “boomtime” construction market could hurt investment, with gold miner deferring WA expansion
OZ Minerals expects 17% increase in costs across copper and gold portfolio

A few years ago the Aussie gold sector lifted itself off the canvas and emerged as the shrewdest in the world, defying a global mining downturn to emerge as a major growth sector.

Led by visionaries like Bill Beament and Jake Klein, the method of revitalising Australian mines companies like Newmont and Barrick seem to have forgotten were in their portfolios proved a winner.

Gold prices are still good — fetching $2,645/oz today, a price few companies could have imagined back in 2015 — but other things like diesel and labour are more expensive too.

With mines getting older and grades falling, that is posing some challenges for the ‘do no wrong’ crowd that rose up the leaderboards of the ASX 200 a couple years back.

Many have already blamed Covid cases and supply chain issues – not without cause – for a swag of production downgrades.

Today, more news of that ilk, with Klein’s Evolution Mining (ASX:EVN) and copper-gold miner OZ Minerals (ASX:OZL) revealing a hit to future plans.

‘Back to the boomtime’

Evolution was early out of the blocks today with some bad news for investors.

It expects to produce 640,000oz in the almost finished FY22, despite a 15% lift in the March quarter to 170,000oz with a similar 15% lift to 38,000oz at its troubled Red Lake operations in Canada.

But the $5 billion gold producer will see all in sustaining costs well above guidance at $1250/oz (compared to $1135-1195/oz) due to a recent dive in copper prices, which will reduce the by-product credits from its Ernest Henry mine that help EVN knockdown its AISC numbers.

Longer term EVN says it plans to lift production 12% to 720,000oz in FY23 and another 11% to 800,000oz in FY24. It last year announced a three-year outlook that would have seen the company produce 880,000-950,000oz by FY24.

The slower than expected ramp up of Red Lake is a major factor. But supply chain and inflation issues have reared their heads as well. Klein said a number of issues outside Evolution’s control had “cast a shadow” on its operational performance.

Labour costs (half of EVN’s cost base) are expected to be 5-6% higher in FY23, with diesel 130% higher than July 2021 and power “significantly higher” and several contracts to be renewed in the coming year.

Evolution is planning major capex of $530-600m in FY23 and sustaining capex of $190-240m, but has deferred a decision on a plant expansion at its Mungari mill in WA due to “boomtime” prices in the WA construction market.

“Labor market conditions in Western Australia have been challenging and disruptive at Mungari. It does feel like we are back to the boomtime conditions when commodity prices last peaked in 2011,” Jake Klein said.

“In our view, these conditions are not sustainable.

“And whilst we will complete the plant expansion study by the end of this calendar year as scheduled, we have decided to defer any commitment to this expansion and focus on optimising the current operation.

“This will allow us to produce approximately 127,000oz for each of the next two years and mitigate the risks of undertaking a major construction project in the current WA labor and cost environment.”

Evolution shares tumbled 17% on the downgrade, on what Klein acknowledged was a “tough day for shareholders”.

Evolution Mining (ASX:EVN) share price today:

OZ says Covid will hit guidance

South Australian copper miner OZ has reduced its guidance for calendar 2022 from 127,000-149,000t copper to 120,000-135,000t after hitting operational issues at its Carrapateena and Prominent Hill mines.

The announcement was highlighted by a 13% hit to Carra guidance from a mix of damage to the material handling system at the mine and the impact of Covid absenteeism and wet weather.

Costs are also rising, with OZ’s AISC guidance a massive 17% higher thanks to the drop in production and an 8% blowout in inflation around labour, transport, fuel, explosives and ground support.

But OZ has been shielded by a fixed price electricity contract that means it is not exposed to east coast electricity surges.

AISC will rise from 135-155 US cents per pound of copper to 160-180 cents, although gold production remains unchanged at 208,000-230,000oz.

OZ has its own call on a potential WA mine development coming up, with an investment decision on the $1.1 billion West Musgrave nickel and copper mine due in the second half of the year.