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Monsters of Rock: Should Evolution sell this ~$850 million gold mine?
Mining
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- Is now the time for Evolution Mining to sell Mungari and go deep on copper?
- Ramelius stuns with gold guidance beat, Westgold sinks on staggering miss
- Develop and ERA round out the Monstar Mash
Evolution Mining (ASX:EVN) has been floated as a potential acquirer of assets dropping out the backside of the big Newmont (ASX:NEM)-Newcrest merger completed in 2023.
But with a couple of laggards in its portfolio, could it take advantage of rising gold prices to capture a bit of value from its lower performing mines?
That’s the question being asked by Jarden analysts Jon Bishop, Ben Lyons and Adam Bennett ahead of the miner’s quarterly results.
They’ll be closely watched for two reasons.
Number 1: Gold prices have gone through the roof, dramatically upgrading the earnings potential of the big gold miners.
Number 2: Last quarter was a disaster for EVN, largely because of the persistent underperformance of its Red Lake mine in Canada.
That one may be a hard sell if Jake Klein, Lawrie Conway and Co. decide to cut their losses, but the Mungari mine in WA may present an opportunity for the company to delever.
There’s some sunk capital already in this one, with a big investment into upgrading the mine’s process plant following on from the $400 million purchase of Northern Star’s (ASX:NST) complementary Kundana assets, also located near the WA gold hub of Kalgoorlie.
But Evolution is a fundamentally different company to when that transaction was announced back in 2021. It has since purchased the share of the Ernest Henry copper-gold mine it didn’t already own from Glencore and the majority stake in the Northparkes mine from China Molybdenum.
That’s made copper around 30% of the $7.5 billion gold miner’s production profile but also lifted its debt accordingly.
In light of that, Jarden’s number-crunchers view Mungari as ‘non-core’.
“Whilst the exploration is exciting, we do not consider the operating intensity a logical long-term fit for EVN’s business and growth aspirations,” they said.
“We acknowledge the economies of scale benefits in terms of growing the economic inventory base but we remain cautious regarding the level of management time to aggregate the various ore sources, all the while preserving margin.
“We value the asset at $835m – on par with Red Lake but a distant fourth to Ernest Henry, Cowal and Northparkes in that order – realiseable value that could materially retire debt and free-up capacity to focus on the longer life, higher margin assets in the portfolio.
“Copper contribution would rise from c30% to nearly 45% of our total forecast revenues.”
Rising tide, all boats, etc.
But gold prices could spare the embarrassment of a shocking guidance miss, they note.
LBMA prices crossed US$2250/oz overnight for the first time, closing the afternoon session in London at US$2264/oz — almost $3500/oz Aussie.
That’s well above Jarden’s long term spot forecast of US$1700/oz, with copper passing US$9000/t yesterday as well, way beyond the advisory firm’s US$3.50/lb long term mark.
If these spot prices hold firm for just 24 months, it will mean a lift in earnings per share for EVN from 19.7c to 22.7c in FY2024 and 29.2c to 35.8c on Jarden’s numbers in FY25 (consensus 34.9c). FY26 would see that fall back to 20.9c, though consensus is brighter at 33.1cps.
Operating EBITDA would peak at $1.78b in 2025, more than double 2023 levels.
It would paper over the cracks of a guidance Jarden says appears ‘stretched’.
Despite a big miss at Red Lake, EVN maintained its plan to hit the lower end of a forecast 789,000oz +-5% (750,000oz at the low range) in FY24.
Jarden’s analysts say a 470,000oz runrate in the June half looks difficult, projecting that it would need to produce at an equivalent of 1Mozpa through the last three months of the year.
They think EVN will more likely deliver 720,000oz in this financial year.
“However, we suspect that at commodity prices nearing A$3,500/oz gold and US$4/lb copper, any guidance miss will likely be taken in the market’s stride,” they said.
“Further, if this translates to margin and FCF to reduce gearing levels, we expect the market will likely look to EVN with renewed optimism. At spot prices maintained over the next 24 months, we estimate that net debt would fall to $1.2Bn or 40% Debt:Equity (26% ND:ND+E) from 43% and 32%, respectively.”
Jarden lifted its 12 month price target on Evolution 12c to $3.12, but it remains underweight with EVN trading at $3.77 at the time of writing.
Jarden expects to see average gold prices of US$2112/oz through the second half of the financial year.
Evolution Mining (ASX:EVN) share price today
Ramelius delivers a banger of a quarter
Speaking of gold miners already pulling in the gains from the bull run, Ramelius Resources (ASX:RMS) stormed 7.7% higher before lunchtime after demolishing guidance at its Mount Magnet and Edna May gold mines in WA.
The mid-tier miner churned out 86,928oz, eclipsing a record dating back to June 2020 and well above its 70,000-77,500oz quarterly guidance.
That had a major influence on all in sustaining costs, pulled down from second half guidance of $1700-1800/oz to $1375-1475/oz — among the lowest in the industry.
Interestingly it appears to be the secondary Edna May mine where higher throughput is driving the outperformance, RBC’s Alex Barkley noted.
The mine outperformed by 14,000oz in the quarter and is tracking to deliver 132,000oz in FY24, above RMS guidance of 102,500oz. Barkley warned the acceleration could hit FY25 guidance.
Previously it had been the jewel in the company’s crown, the ultra-high grade Penny satellite mine at Mt Magnet, that had driven its recent improvements in production and costs.
H2 guidance remains at 140,000-155,000oz at $1700-1800/oz, though the March quarter was some 20% above consensus.
The upshot of all this was free cash flow for the quarter of $125.3m, with cash and gold on hand of $407.1m, well ahead of the $94m estimated beforehand by RBC.
What will Ramelius do with all that junk, all that junk inside it’s trunk? Not buy Karora Resources, after walking away from discussions over the TSX listed owner of Kambalda’s Beta Hunt gold mine last month.
Meanwhile, it was a less exciting day for investors in Westgold Resources (ASX:WGX). The Mid-West gold miner was poleaxed, own 15.2% early doors after cutting its production guidance from 245,000-265,000oz at $1800-2000/oz to 220,000-230,000oz at $2100-2300/oz.
The culprit was weather and an operational pause at the Paddy’s Flat underground mine which will take 5000oz and 27,000oz out of the mine plan for the second half of the year.
Westgold says it has taken a ‘conservative approach’ to revising its full year guidance, with scenarios being advanced to regain the lost production.
It produced 52,100oz in the March quarter at average selling price of $3138/oz, raking in $9m in free cash.
“We remain focussed on recovering lost ounces in FY24 but remain unremorseful in pausing mines that cannot deliver the returns our shareholders expect,” WGX boss Wayne Bramwell said.
“The operational and weather issues encountered during Q3 increase pressure to prematurely commence mining at the Great Fingall mine in Q4, FY24 but rushing the mining execution without the requisite data escalates operational risk and cost.
“This is not our preferred operating model and as such, Westgold will systematically complete its evaluation on the early mining of shallow flat structures at Great Fingall with a view to commence mining in Q1, FY25.
“Positively, our Starlight mine continues to exceed expectations, our drilling at Bluebird-South Junction continues to expand the mine footprint and with 12 drills operating we continue to focus on reserve growth across our portfolio of assets.”
Ramelius Resources (ASX:RMS) and Westgold Resources (ASX:WGX) share prices today
Bill Beament’s copper dreams
Bill Beament’s Develop Global (ASX:DVP) says it can have its Woodlawn copper and zinc mine up and running by the first half of calendar 2025 at a cost of jus $42m.
The former Northern Star (ASX:NST) boss, whose firm bought the New South Wales base metals mine at a cut price from administrators, says it has boosted ore reserves by 80% to 6Mt at a 2.8% CuEq, lifting cash flows 60% to $1b over a 10 year mine life.
It’s now looking into funding options, including the sale of part of the asset to a strategic investor.
It comes as copper prices lifted above US$9000/t overnight on supply issues and Chinese manufacturing data that suggested its factory activity has returned to growth.
“This exceptional scenario sits against a backdrop of a very bullish outlook for copper and zinc, particularly in tier one locations,” Beament said.
“In light of this enviable position, Develop has commenced exploring several funding options. These include potentially selling a minority interest in Woodlawn to a strategic investor, traditional project finance and offtake financing.
“The sale of a minority interest would enable us to recycle some capital and may provide us with a model which we can apply to our Sulphur Springs mine at the appropriate time.
“We have already received an elevated level of interest in Woodlawn from potential financiers, strategic partners and customers and we will now test this appetite more thoroughly.
“Completion of this milestone, which will be our major focus this quarter, will put us in the home straight for a production restart.”
Meanwhile, Rio Tinto (ASX:RIO) has taken the reins to spearhead the cleanup effort at the Ranger uranium mine in the Northern Territory.
The rehab project’s costs have blown out well beyond $2 billion, with Rio unwilling to mop up minority shareholders hoping for the holding company Energy Resources of Australia (ASX:ERA) to ignore or twist the arm of traditional owners and develop the untouched Jabiluka deposit.
ERA and Rio have promised never to develop the mine without the approval of the Mirarr traditional owners, but ERA recently drew their ire after applying to extend the lease, something ERA said was essential to ensure an agreement that includes veto rights for the Mirarr remains in tact.
The ASX materials sector fell 0.67% as of 1.30pm AEDT, with mid-tier gold miners the top performers.
