Evolution’s Board has set out a broad range of mine life extensions based on aspirational reserve targets. A significant amount of work and capex is required over the next two years to backfill these targets. On paper, EVN looks bigger and better, but there is operational and geological risk to achieve it.
Ernest Henry has completed a Pre-Feasibility Study (PFS) to extend the mine life by 17 years to 2040. There is significant potential for further extension both underground and in adjacent areas. The PFS indicates the base case has an incremental NPV of $690m which requires capex of $450-500m although much of this capital won’t be spent until FY27/28. The PFS will deliver an additional 343kt of copper and 609koz of gold below the 1125mRL (depth).
The $250m mill expansion at Mungari remains an unattractive project, in our view. Only about half the implied production target to FY38 is underpinned by Ore Reserves suggesting the project’s ultimate economics depend on further resource conversion and discovery. The mill expansion is expected to lower AISC (all-in sustaining costs) to A$1,750 over the life of mine, but even at fully ramped up production, Mungari will represent only about 7% of group gold production.
EVN’s largest mine, Cowal (NSW) is now targeting production of ~320koz pa compared to a previous target of 350koz pa. This will depend on the performance of the underground segment of the mine and future open pit continuation where there are five satellite open pits available. The latter will require a significant relocation of the Cowal bund wall for an additional two years of mine life.
A key positive message was the debt restructure that extends the debt maturity profile from 5.5 to 7.5 years with an average cost of debt at a low 4.7%. Gearing is still elevated at 33% net debt to ND plus equity in FY23f but is falling. Repayments between FY24-26 are reduced by approximately $445m.
The outlook for AISC remains mixed with FY24f group guidance at A$1,370/oz. No specific AISC guidance was given beyond FY24, but we expect consensus estimates are too low at an average A$1,140/oz out to FY26f.
Investment View
The investor update defused concerns on the balance sheet but raised additional questions on EVN’s mine life extensions. The latter requires substantial capex (~$1.8bn) across FY24-26f for very little additional growth in profitable gold production.
The mine life extensions at Cowal, Ernest Henry, Mungari and Red Lake are targeting 15+ years of production, but this requires significant work to extend the current resource definition to accommodate the targets. The next two years will therefore focus on updates to the resource base before valuations can truly reflect the promise.
On current estimates, EVN is trading at approximately 1.5x its NPV which justifies our Sell recommendation.
Risks to Investment View
Operational risks are key for EVN as it expands production at its key assets. If the company can deliver on its plans without significant issues, then further growth options become a possibility which would enhance earnings potential. EVN is carrying higher debt than its peers exposing it to greater interest rate risk. If EVN can generate sufficient cashflow to reduce leverage in a timely manner, this would also enhance the outlook for the business.
Recommendation
We have retained our Sell recommendation.
