Evolution Down On Wet Weather And COVID Related Staff Absenteeism

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EVN Down On Wet Weather Impacts And COVID Related Staff Absenteeism

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  • FY22 gold production now expected to be 640,000 oz, compared to 650,000 oz original FY22 target
  • Cost of production $1250/oz, compared to FY22 guidance estimate range of $1,135 - $1,195/oz
  • Higher production costs likely to persist into FY23 and FY24
  • Integration of Ernest Henry mine is progressing well; $400M cash flow forecast for FY22
  • Low production costs compared to global peers and a focus on operating margins over volume supports positive long-term earnings outlook.

Evolution Míning (‘Evolution’ or the ‘Çompany‘) owns and operates five wholly-owned mines in the safe jurisdictions of Canada and Australia, including the Ernest Henry mine, previously operated by Glencore. A significant by-product of the Ernest Henry mine is copper and to a lesser extent, silver. This by-product revenue assists in the reduction of all in sustaining costs of production at this mine.

Evolution seeks to own a portfolio of high-margin assets, by acting counter-cyclically to acquire assets at attractive valuations from motivated sellers. The Company’s consistent and clear strategy is to prioritise margin over ounces produced, from sites with an average mine life of at least 10 years. The production weighted average mine life across the portfolio is currently 14 years.

Operations Update

COVID related staff absenteeism and wet weather has impacted FY22 gold production which is now expected to be around 640,000 ounces. This production volume falls marginally below the 650,000 ounces that was originally targeted for FY22. Production for the June quarter is expected to be a 15 percent improvement on the March 2022 quarter, at around 170,000 ounces.

Wet weather continued to impact production at Cowal, which is an open pit mining operation located 350 kilometres west of Sydney. Production at Evolution’s Mungari mine, located 600 kilometres east of Perth, was impacted by COVID related staff absenteeism. More than 30 percent of the 500 workforce personnel at this site have been absent for at least 7 days due to COVID infection or being deemed a close contact.

Cost of production, as measured under the All-in Sustaining Cost (AISC) convention, is estimated to come in at above guidance and be approximately $1250/oz for FY22. The original guidance range was $1,135 - $1,195/oz.

On a positive note, integration of the recently acquired Ernest Henry mine is progressing well and is on track to deliver over $400 million of mine cash flow for FY22. An updated Mineral resource model is scheduled for release in the September 2022 quarter. The model includes 42 kilometres of additional drilling between May 2021 and May 2022. The updated Mineral Resource and Ore Reserve Statement is likely to reveal a broader mineralised zone than currently modelled.

Evolution maintains a strong balance sheet that includes around $900 million of liquidity. The Company is expected to have around $540 million of cash at the end of FY22.

Outlook

Industry-wide inflationary cost pressures and COVID related staff absenteeism will continue to impact Evolution’s operations in the period ahead. This is reflected in the AISC guidance for FY23 and FY24 of $1,240/oz, +/- 5 percent. This compares to FY22 guidance of approximately $1250/oz.

These higher production cost estimates are not limited to Evolution, which remans one of the lowest cost global gold producers anywhere in the world.

Slightly higher sustaining capital expenditure guidance for FY23 relates to the fleet replacement at Ernest Henry, which is positive because it supports the expansion and mine life extension of this strategically important asset.

Evolution remains attractive because of its low production costs compared to other global miners and its focus on operating margins over volume. This is backed up by a strong balance sheet, which underwrites an attractive return on capital over the long term.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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