Survival of the fittest

By InvestSMART · 25 Sep 2013

By InvestSMART ·
25 Sep 2013

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What's new Evolution Mining delivered a record level of gold production in fiscal 2013, up 13 per cent year-on-year to 392,920 gold equivalent ounces. Production for the year was at the upper end of management's prior guidance of 370,000 to 410,000 gold equivalent ounces. As with all gold companies in this volatile pricing environment, Evolution has been trying to cut costs. Direct cash costs in 2013 were contained, rising by 2.5 per cent on 2012, to $US790 per gold equivalent ounce. In 2014 the company expects its direct cash costs to fall by about $770 to $820 per gold equivalent ounce. With the gold price in Australian dollars trading at about $1430 an ounce, it should generate ample operating margins.

Evolution Mining paid a maiden dividend of 1¢ in 2013, following the board's decision to establish a gold-linked royalty payout policy. We are confident of the company's ability to continue paying future dividends. Gearing is just 13 per cent.

Outlook For 2014, the company has provided production guidance in the range of 400,000 to 450,000 gold equivalent ounces. Furthermore, management expects to maintain a positive cash flow position, now the peak in capital spending for Mt Carlton has passed. After capital spending hit $375 million in 2013, it is expected to drop to $160 million to $185 million in 2014. Furthermore, cost saving initiatives will continue to be introduced in 2014.

Price Evolution Mining's share price has not been immune to the "gold price rout" that hit the gold sector earlier this year.

Worth Buying? Evolution Mining has a diversified asset base. As capital expenditures tail away, we expect the company's free cash flow to improve significantly. Furthermore, the company boasts the balance sheet capacity to fund the latent exploration potential to expand all its project sites. Consequently, we believe stock is worth buying at around the current level.

Greg Smith is managing director at Fat Prophets sharemarket research. To receive a recent Fat Prophets report, call 1300 881 177 or email info@fatprophets.com.au.

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Frequently Asked Questions about this Article…

What was Evolution Mining's gold production in fiscal 2013?

Evolution Mining delivered a record gold production result in fiscal 2013 of 392,920 gold equivalent ounces, up about 13% year-on-year and at the upper end of its prior guidance of 370,000 to 410,000 gold equivalent ounces.

What were Evolution Mining's cash costs in 2013 and what are the 2014 expectations?

Direct cash costs for Evolution Mining in 2013 were about US$790 per gold equivalent ounce (a 2.5% rise on 2012). Management expected 2014 direct cash costs to fall to roughly US$770–US$820 per gold equivalent ounce.

Has Evolution Mining started paying dividends and what is its dividend policy?

Yes. Evolution Mining paid a maiden dividend of 1 cent in 2013 after the board established a gold-linked royalty payout policy. The article expresses confidence in the company’s ability to continue paying future dividends, noting a conservative gearing level of about 13%.

What production guidance and cash-flow outlook did Evolution Mining give for 2014?

For 2014 the company provided production guidance of 400,000 to 450,000 gold equivalent ounces. Management expects to maintain a positive cash-flow position as the peak in capital spending for Mt Carlton has passed.

How much did Evolution Mining spend on capital expenditure in 2013 and what is expected for 2014?

Capital expenditure peaked at about $375 million in 2013. It was expected to drop substantially in 2014 to roughly $160 million–$185 million, which should help improve free cash flow.

How has the gold price rout affected Evolution Mining's share price and is the stock considered a buy?

The company's share price was not immune to the gold-price rout that hit the sector earlier in the year. However, the article notes Evolution’s diversified asset base, lower upcoming capital expenditure and balance-sheet capacity for exploration, and concludes the stock is worth buying around the then-current level.

What cost-saving measures and cash-flow improvements is Evolution Mining pursuing?

Evolution Mining has been implementing cost-saving initiatives in response to volatile gold prices and expected its direct cash costs to decline in 2014. With capital spending set to fall from 2013 levels, the company anticipates a significant improvement in free cash flow.

What market factors should everyday investors watch when considering Evolution Mining stock?

Investors should monitor gold price volatility (which influences revenues and share price), the company’s reported cash costs and whether they trend down as expected, production outcomes relative to the 400,000–450,000 ounce 2014 guidance, and capital-expenditure trends now that Mt Carlton’s peak spending has passed.