Evolution gobbles up Northern Star's Kundana gold mines to chart path to 1Mozpa

Evolution Mining (ASX:EVN) could become the ASX’s third Australian based million ounce gold miner by 2024 after buying the Kundana gold operations from neighbour Northern Star Resources (ASX:NST) for $400 million.

After producing 681,000 ounces in FY2021 Sydney-based Evolution is the third largest Australian gold miner behind Northern Star and Newcrest Mining (ASX:NCM) by volume, but had been losing ground to its peers in recent years on the back of executive chairman Jake Klein’s “quality over quantity mantra”.

Evolution last week chartered a path to 880,000–950,000ozpa by 2024 through organic means by expanding its existing mines in Australia and Canada.

With Kundana added to the mix its ceiling has been raised, with Evolution now looking to hit 940,000–1,010,000oz by FY2024.

Acquisition based on logic

Northern Star’s Kundana operations have moved out of the limelight since its transformative 2020, which saw the gold miner buy Kalgoorlie’s famous Super Pit and then consolidate the 129-year-old Golden Mile under one owner for the first time by merging with co-owner Saracen Mineral Holdings.

The company met guidance and produced a record 1.6Moz in FY2021 at an AISC of A$1,483/oz, that was led by the Super Pit and improvements at the Pogo mine in Alaska.

Kundana, which includes the 51% owned East Kundana JV shared with Rand Mining (ASX:RND) and Tribune Resources (ASX:TBR) and 100%-owned Millenium mine, produced 120,943oz and hosts a combined Resource estimate of 2.4Moz, including Reserves of 579,000oz.

That ore currently has to get trucked across town to the Kanowna Belle mill and roaster to get processed, with some even being hauled around 150km away to the Carosue Dam processing plant.

Instead Evolution will combine Kundana with its next door Mungari project – a recent under performer where its only source of high grade ore at the Frog’s Leg underground mine is declining. That will reduce haulage by around 85%.

There are other aspects that make the deal appetising for Northern Star, and in hindsight the sale was on the cards for a while.

Back in 2018 Northern Star made an opportunistic and failed $150m bid to buy out Rand and Tribune from the EKJV after the companies run by reclusive mining executive Anton Billis were pinged by ASIC because the cross-holdings allegedly disguised the true ownership structure of the companies.

Morgan Stanley was appointed to sell Rand’s stake in Tribune. The winner of the auction? Evolution for the princely sum of $41.3m.

Seismicity forced the closure of the Raleigh mine at the EKJV last year, but the consolidation still makes sense for Evolution.

It will make a cornerstone asset of the marginal Mungari, which will also get a major mill expansion to 4.2mtpa, becoming a 200,000oz+ producer with a mine life of over 13 years.

“This is a pivotal transaction that will transform Mungari to establish the operation as the fourth cornerstone asset in the Evolution portfolio,” Klein said.

“It presents a unique strategic opportunity for Evolution to consolidate the Eastern Goldfields region given our existing presence at Mungari, resulting in Evolution being one of the largest tenement holders in the Kalgoorlie region.

“The Acquisition Assets are located in close proximity to Mungari’s processing infrastructure, with all key mining operations and identified orebodies located within 8km of the Mungari mill.

“This unlocks the ability to capture valuable unique synergies and provides significant operational flexibility for the combined operations.”

Evolution will run an institutional placement at $3.85 per share (a 5.4% discount to its last traded price) to raise $400 million for the purchase, with another $50m to be raised from existing shareholders in a share purchase plan.

RBC’s Kaan Peker said the acquisition was broadly in line with the market value, rating the NAV of Kundana operations at $430m.

Light shining back on gold

An incremental lift in the US dollar gold price and waning Australian dollar have brought the Australian dollar gold price back up to six month highs, generating ~$1000/oz margins for big producers.

$12 billion capped Northern Star, which saw its second leadership change in a year today with former Saracen boss Raleigh Finlayson stepping aside and NST CEO Stuart Tonkin moving up to the MD chair, performed strongly to outstrip analyst cash flow estimates.

Newcrest today announced it had produced 542,000oz of gold at all in sustaining costs of just US$797/oz in the June term, with a June quarter AISC margin of US$983/oz.

Co-credits generated by record copper prices saw its massive Cadia ops in New South Wales produce almost 200,000oz at NEGATIVE US$377/oz, beating its calendar year guidance of 680,000-760,000oz by turning out 764,895oz for FY21.

Overall Newcrest was well within is 1.95-2.15Moz guidance range for FY21, producing 2.093Moz at US$905/oz, generating a 49% AISC margin of US$884/oz.

On the exploration and development front its exciting new Havieron mine in WA is also progressing, with a PFS due in the second half of the year, with impressive recent deep drilling results including hits of 99.7m at 2.5g/t and 0.85% copper from 1308m and 85m at 11g/t Au & 0.29% Cu from 1345m.