Evolution Mining: Red Lake production rattles confidence

About the author:

Author name:

By Mat Collings

Job title:

Research Analyst

Date posted:

28 January 2022, 10:30 AM

Sectors Covered:

Mining

• Q2 production reporting has rattled the market despite reaffirming group guidance for FY22 (admittedly at the bottom end of 670koz of gold).
• Red Lake’s result was particularly soft with both tonnes and grade below expectation.
• Management is pointing to a planned stronger H2 led by improving grade at Red Lake and Cowal, but we remain cautious with an FY22 production estimate of 662koz of gold.
• We reduce our 12-month target price to (login to view), but move to an Add recommendationgiven the pull back in EVN’s share price on today’s results.

Event

Q2 reporting reveals lower production impacted by rain at Mt Rawdon, lower grade at Red Lake and the sale of Mt Carlton.

Analysis

Judging by the questions management fielded on the Q2 conference call, the market is beginning to question when the long-promised turnaround of grade (along with gold production and costs) will begin at Red Lake.

Management has talked the long game at Red Lake from day one, with three and five year targets for improving production.

It is approaching two years since the Red Lake acquisition and the message today was that the teams focus to date has been on development activities but the benefits of this will start to be seen in the current (March) quarter, with improvements starting in the last month of the December quarter.

Group guidance was reaffirmed, at the lower end of the 670-725koz range.

Forecast and valuation update

We adjust our production estimate down from 678koz to 662koz, slightly below guidance, and make minor adjustments to our short-term copper price outlook.

While we anticipate the second half will be stronger, in line with management, we maintain some conservatism until performance (particularly at Red Lake) is demonstrated. The impact of changes on our financial estimates is outlined in more detail on page 4, (login to view).

Our 12-month price target, using a sum of the parts NPV method, moves to (login to view). We move to an add rating on the weakness in the share price after today’s update.

Investment view

The turnaround of operations at Red Lake now becomes critical to EVN’s near term share price performance. If the grade, in particular, does not show a material improvement in the next quarter, we get the sense the market may lose patience.

We maintain some conservatism in our near-term forecast but anticipate management will be able to deliver in the medium term.

Price catalyst

Any interim updates showing improved Red Lake performance should be positive for the company.

Commodity price rises for gold or copper, given EVN’s increased production profile, will be positive for the company.

Risks

Labour impacts related to Covid-19, while broadly easing for the company, are a key risk to achieving FY22 guidance.

Cost escalation for materials may place pressure on the cost of EVN’s growth projects