UBS Global Research 19 June 2020 Evolution Mining Downgrade...

UBS Global Research
19 June 2020
Evolution Mining
Downgrade Highlights Full Valuation

Evolution Downgrades production at Mt Carlton
Evolution today downgraded production guidance for FY20-21 at Mt Carlton and
guided to a $75-100m write-down post tax. We think this news again highlights the
premium embedded in the share price relative to peers. A premium that we don’t think
is justified due to the 3 short life assets (2 post sale of Cracow). Short life assets should
naturally trade at low single digit earnings multiples. As evidence, Cracow was sold for
$125m, a FY21e EV/EBITDA of ~1-2x, due to its 2-3 year life. At first glance, Evolution
appears to be trading in-line with Newcrest on an EV/EBITDA basis of ~9x. But with a
significant portion of this being short life (2-5 years) compared to Newcrest (>20 years)
we do not think this is justified. Excluding the 2 remaining short life assets, Evolution
would be trading on a ~11x EV/EBITDA pro forma. Our new NPV for Mt Carlton today
of $85m is ~1x FY21e EBITDA, which reflects its 2 year life. Mt Rawdon has a 5 year life
and our valuation implies a ~3x EBITDA multiple. The share price is trading at a
premium to our NPV of $4.87ps. We maintain a Sell rating on valuation.

Red Lake turnaround a large lever that could in time justify valuation
The Evolution portfolio is improving, with new longer duration assets like Red Lake
replacing the shorter life assets. Red Lake was purchased for A$564m, a ~5x FY21
EV/EBITDA multiple on our current forecasts. Our valuation for this asset is now
A$1.3bn, modelling both a turnaround in performance and a higher gold price post
acquisition. We model production lifting from ~130kozpa now to ~260koz in FY25e
with costs falling from ~A$2,200/oz now to A$1,300/oz. A key risk to our Sell thesis is
if Evolution can exceed our expectations on this asset turnaround.

Modelling Changes
The downgrade to Mt Carlton drives a 2% downgrade to our FY20e NPAT and a 9%
downgrade to FY21e. The impact is modest to FY20e because the performance of the
other assets appears to be ahead of our forecasts, but not enough to offset lower
production at Mt Carlton. Our NPV is cut by 8% to $4.87ps, partly due to the
downgrade, partly due to a stronger A$ of US$0.69 vs our prior assumption of A$0.65.

Valuation: $4.87ps, DCF (5% WACC and US$1,700/oz gold price)
Our price target of $4.90ps (was $5.30ps) is based on our NPV.