Ground Breakers: Evolution pays $1 billion to head into copper with Ernest Henry transaction

Copper is one of the most sought after commodities in the world right now, and Evolution Mining (ASX:EVN) has become the latest major gold miner to bet big on the “decarbonisation” commodity.

Evolution will pay Glencore $1 billion to acquire all of the Ernest Henry mine, 38km north of Cloncurry in Queensland.

It paid $880 million for the gold rights and 30% of the copper and silver rights at the operation back in early 2016.

The new deal, which will be funded by debt and a US$200 million private placement, is designed to reduce Evolution’s operating costs and increase its exposure to the red metal.

On a 100 per cent basis, the mine produced 64,000t of copper and 92,000oz of gold in FY21.

Copper hit an all time high twice this year (in May and October) and is trading well above long-run averages at US$9,421/t — a price at which most copper producers are printing cash.

With the metal prized for its use in electric vehicles, renewable energy and the expansion of electrical cabling and wiring needed to support that shift, it is seen as one for the future.

That has underpinned a string of top of the market acquisitions in recent months, including Sandfire’s (ASX:SFR) $2.6 billion purchase of the 100,000tpa MATSA Mining Complex in Spain and South32’s (ASX:S32) US$1.5 billion splash on 45% of the Sierra Gorda operation in Chile.

Deal will cut Evolution costs

Gold miners love copper because they account for copper tonnes as by-product credits on their All-in Sustaining Costs.

For that reason, mines like Ernest Henry and Newcrest’s (ASX:NCM) Cadia often report negative all-in sustaining costs in high copper price environments.

Newcrest, Australia’s biggest gold miner with a production profile of more than 2Mozpa, has also spoken openly of its desire to increase copper production by 37% out to 2030.

With the half year benefit from the new Ernest Henry deal, Evolution expects to see its copper production total 34-38,000t in FY2022, rising to 60,000t in FY23 and FY24.

Gold production is expected to increase from 670,000-725,000oz in FY22 to 775,000-830,000oz in FY23 and 855,000-915,000oz in FY24.

AISC will come down from $1135-1195/oz in FY22 to $895-955/oz in FY 23 and $1050-990/oz in FY24, a 12% reduction over three years, mitigating the impact of development at the Red Lake mine in Canada.

Ernest Henry has a mine life of around 9-10 years, with a pre-feasibility study on an extension below currently planned levels of 4-5 years currently at the PFS phase. A study is due in the September quarter with 15km of drilling planned in the 2022 calendar year.

Evolution executive chairman Jake Klein told analysts on a conference call this morning the deal remains a sound one even before future extensions are taken into account.

“There’s another way to look at it, and not from an accounting perspective, is five years ago we paid $880 million, we got $1.2 billion back in return,” he said.

“So we’ve got kind of a net $300 million or net $500 million for roughly half the asset, a bit less than half. And we’ve just acquired the other half for $1 billion dollars.”

“So we’ve now got for really an entry price into this asset of a billion and a half dollars at 9-10 year plus mine life, 380,000 ounces of gold equivalent ounces or 85,000 ounces of extraordinarily low cost gold.”

Evolution leads the large caps

It was a watershed day all round for the Sydney-based gold miner, which added Ernest Henry to its long list of corporate dealings this year, alongside its $400 million deal to buy Northern Star’s (ASX:NST) Kundana mines near Kalgoorlie and the divestment of the smaller Mt Carlton mine to junior Navarre Minerals (ASX:NML).

$7.9 billion capped Evolution was up more than 7% ,and was the runaway leader among the large cap stocks on the ASX.

A mini-run in the gold price to levels a touch below US$1870/oz assisted, with Northern Star, De Grey (ASX:DEG) and Ramelius (ASX:RMS), which has now secured 62.41% of $181 million takeover target Apollo Consolidated (ASX:AOP) also up.