Ground Breakers: Outrageously low costs show value in Evolution’s $1bn Ernest Henry buy
Link copied to
Evolution Mining (ASX:EVN) paid $1 billion for Glencore’s controlling share of the Ernest Henry copper-gold mine at the start of the year.
Despite the price tag that is already paying off.
Evolution reported outlandish costs of negative $2011/oz at Ernest Henry, a famous iron oxide copper-gold mine in Queensland’s Mt Isa mining region.
Before your mind boggles, that doesn’t mean Jake Klein’s mob were paid $2000 for the pleasure of mining the stuff.
It comes from copper credits. Because EVN counts its costs against gold sales and copper is a by-product of gold production at Ernest Henry, the money it rakes in for the red metal is all gravy.
Copper is fetching near record prices of over US$10,000/t ATM, and EVN’s purchase of Glencore’s Ernest Henry share saw it triple copper production to 13,352t.
That generated $184.7m in operating mine cash flow and $173.8m in net mine cash flow, a sizeable chunk of the company’s take for the quarter.
Ernest Henry produced a modest 17,833oz of gold in the December quarter, but so impressive is the copper price that on a gold equivalent basis it would have delivered 95,000oz at an annualised rate of 380,000oz at AISC of $1149/oz.
“I am confident that there will be very few gold mines in Australia that generated $175 million in net mine cash flow this quarter,” EVN exec chair Klein said.
Not all is smooth sailing however.
At Cowal, EVN’s top producer, 25% of the workforce contracted Covid knocking output down from 60,371oz at $998/oz in the December quarter to 53,321oz at $1292/oz, while wet weather hampered access to the pit at the Mt Rawdon mine.
Evolution has reduced guidance from 670,000oz to 650,000oz for FY22, but has maintained all in sustaining cost guidance of $1135-1195/oz.
It delivered 148,787oz of gold in the March quarter at $990/oz, down 27% on costs in the December quarter.
Its Red Lake mine in Canada is improving, up from 19,832oz at $3060/oz in the December quarter to 33,056oz at $2394/oz in March but Klein admits Evolution is 12 months behind where it’s supposed to be.
He said the mine was “undercapitalised” when EVN bought it in 2019 from Newmont for US$375m ($551m).
“Red Lake had 165,000 ounces of guidance this year, that’s been the root cause of our miss this year,” Klein said.
“We’ve overestimated our capacity to transform the operation.
“We rebased it, we think we’re on track … nothing in what we’ve seen at the operation gives us doubt that it can be achieved. But we are definitely 12 months behind where we expected to be on delivery.”
Gold’s run above US$1900/oz in the wake of Russia’s invasion of Ukraine has prompted forecasters to turn more positive on bullion’s outlook.
This week bearish RBC said revisions to its forecasts would lift average price targets by 21% across the Aussie gold sector and earnings per share up 34% in FY23 on the investment bank’s previous estimates.
Klein has long pushed the barrow that gold will be a beneficiary of wild inflation numbers in the USA, which hit 8.5% in March to climb to rates not seen in 40-plus years.
“My thoughts are that it’s going higher,” he said.
“The Federal Reserve I think has a very, very challenging job of trying to bring inflation down from eight-and-a-half per cent last quarter without plunging the country into recession, that has very rarely been done successfully.
“And therefore I expect inflation to continue and that is always good for the gold price.”
Klein said at Australian dollar gold prices of $2464/oz in the March quarter, EVN was still drawing an average margin of $1474/oz.
“If we were able to keep the same mix of production on that quarter and we increased the AISC (all in sustaining cost) to $1740 an ounce or $1750/an ounce, which I think will be more in line with the industry standard in Australia, that’s the equivalent of us producing 300,000 ounces of gold at our AISC,” he said.
“Our view is it’s much better to produce less gold and higher margin and make lots of money.”
Shares in EVN, the third largest pure play Australian gold miner, were down 3% to $4.42 this morning.