Not a flag contender

4Q23 PRODUCTION

Need To Know

• Balance sheet still highly geared while major project expansions are underway.
• FY24 gold production guidance 770koz.
• EVN FY24f free cash flow yield is weak at 3%, Sell rating retained.

Investment Implications

Evolution’s recent Investor Day set the goal posts for production across FY23 and FY24. At ‘half-time’, the company is behind on the scoreboard and needs to lift its game to achieve what the market is already pricing in. The task looks harder as the balance sheet is short of oranges.

4Q23 gold production fell short of expectations leaving the full year 651,156oz also a touch behind guidance of 660,000 oz. Wet weather at Ernest Henry (impact ~$160m on cash flow) didn’t help and the operational struggles at Red Lake are proving difficult to smooth out. Increasing copper production at Ernest Henry is providing appeal as it heads towards 50ktpa next year. Costs (AISC) averaged A$1,450/oz in FY23 with guidance of A$1,370/oz in FY24.

FY24 is a pivotal year for EVN as it undertakes a range of expansion projects that will require project capital of $325-350m and mine development capital of $125-140m on top of the sustaining capex budget of $190-230m. While the achieved gold price remains elevated, operating cash flow should be comfortable enough to handle the investment load, but we are concerned that the current cash balance of $46m looks skinny for a company of this size. EVN will continue to draw down on its revolver facility in the meantime. This was surprising given the recent debt restructure extending the maturity profile to 7.5 years and with gearing at 33%.

The capex programs are not all gilt-edged either. We think the Mungari mill expansion ($250m) is an unattractive project as only about half the capacity is underpinned by existing ore reserves. Red Lake too seems be grappling with operational issues quite apart from the development risks of the expansion program. The Ernest Henry and Cowal expansions will attract most attention with the former expected to update its future reserves outside the PFS area in the September quarterly. The Cowal underground mine is operational and although the June quarter production was a bit meh, it too will provide investors with long term enthusiasm.

Investment View

After thinking the balance sheet issues had been addressed in the June investor briefing, we were surprised to see such a low cash balance appear. While not a big red flag, it does reiterate the risk factors pervading EVN at the moment, despite the promise of major project expansions and mine life extensions. On a relatively poor FY24f free cash flow yield of 3% we retain our Sell recommendation.

Figure 1: EVN gold production and guidance