The importance of Ernest

RESULTS ANALYSIS

Need To Know

• EVN still trading well above its peer group.
• Ernest Henry upgraded adding 1-2 years additional resource with more drilling to come.
• Balance sheet stretched; limits company's options.

Investment Implications

Result Overview:

Underlying EBITDA $845m, in-line with consensus

Underlying net profit $205m, -6% below consensus

FY23 result. No surprises in EVN’s FY23 result following recent Investor Day and production report. The higher realised gold price of A$2,592/oz lifted total revenue by 7.8% to $2.2bn consisting of 75% gold revenue and 25% copper revenue.

Outlook. FY24 production guidance is 770k oz relying on good execution at Cowal and Red Lake in particular. Normal operations will have resumed at Ernest Henry and Mt Rawdon. AISC (all-in sustaining cost) is guided to $1,370/oz and capex will fall to approximately $720m.

Deleveraging the balance sheet is seen as a priority and we concur. With modest free cash flow expected in FY24, debt reduction will not be swift. The tight leverage position will limit EVN’s scope to increase capital returns or buybacks, creates extra risk in the event of further operational outages and constrains the company in terms of acquisition potential.

EVN will be facing wage increases of 5-6% in FY24 in a tight labour market. Labour costs represent about half the total cost base.

Over 95% of production is unhedged which could boost revenue given the spot price has risen further to A$2,950/oz at the time of this result announcement. That would add roughly $270m extra cash if realised.

New drilling at Ernest Henry has increased the mineral resource adding 101.5Mt of copper at 1.25% grade and 0.73g/t gold. The total resource now measures 1.3Mt copper and 2.4Moz of gold. More drilling over the next 3-4 months will lift this again with results known around February next year. However, much of the growth is outside the Extension Feasibility Study footprint and is unlikely to be included in Reserves.

Investment View

EVN’s mindset is to chase margin over ounces which requires a heavy focus on cost management. While production guidance is higher, it has been whittled down over the past year as issues at Red Lake and Mungari impinge. The latter is still an unattractive project, in our view, as only about half the capacity is underpinned by existing ore reserves.

The elevated share price keeps our recommendation at Sell.