The Revolution at Evolution Mining
Jake Klein, the gold entrepreneur has lead an incredible transition at Evolution Mining (ASX: EVN), and over the past four years the Company’s valuation from an Enterprise Value to EBITDA ratio has tripled from sub 3X to nearly 9X to reflect this.
In the latter half of 2011, Evolution Mining was formed through the merger of Catalpa Resources and Conquest Mining and the concurrent purchase of Newcrest Mining’s interest in the Cracow and Mount Rawdon gold mines in Queensland. In return Newcrest owned a 32 per cent equity interest in the merged business. EVN had raised $152 million at $1.45 per share and EVN was on target to produce 350,000 ounces of gold at all-in sustaining cost (AISC) of A$1,225/oz.
In 2015, EVN made its second company transformational acquisition – the La Mancha Australian assets, which included the Frog’s Leg and White Foil mines, west of Kalgoorlie in Western Australia was purchased from the Egyptian-based Sawiris family for around 32 per cent equity interest in the Company, while also diluting Newcrest stake. This added around 150,000 ounces of lower cost annual production.
Soon after, EVN made a $60 million takeover bid for Phoenix Gold (ASX: PXG) – 47 per cent of which was funded from EVN scrip – and given it adjoined the La Mancha’s ground it made commercial and geological logic.
Before the ink was dry on the La Mancha deal, Evolution acquired the Cowal gold mine in mid-2015, located 95 kilometres South-West of Parkes, in Central NSW for close to A$750 million from Barrick Mining. The Company raised $248 million at $0.90 per share. Evolution’s management team believed they could eventually get more than 250,000 ounces annually out of Cowal, and they were hopeful of boosting the reserve and resource profile via successful exploration from the tenement package of 6,000 square kilometres.
Then came the 30 per cent economic interest in the Ernest Henry copper gold operation for A$880 million, purchased from Glencore in September 2016 when they were having some balance sheet trouble of their own. EVN raised $401 million at $2.05 per share to help fund it. In addition, Evolution has a 49 per cent interest in all gold, copper and silver production outside of the designated mine area, and with the strong current cash-flow there is further drilling currently taking place.
Jake Klein wasn’t just buying high quality, long life assets, he was also selling. The relatively mature Pajingo operation realised A$42 million in September 2016 and the relatively high cost Edna May operation was sold in October 2017 for a minimum A$40 million cash and incentive payments if certain production hurdles are met by the acquirer, Ramelius Resources.
Apart from the above transactions, Evolution enjoyed two wonderful tailwinds. The first tailwind was the decline in the Australian Dollar from US$0.94 to US$0.74 over the past four years, and this equated to a 27 per cent increase in the A$ gold price, assuming the US$ gold price was flat.
Second, the timing of purchasing the Ernest Henry interest was just about perfect with the 40 per cent increase in the Copper price in the ensuing two years. These factors have seen the all-in sustaining cost of Ernest Henry’s annual 90,000 ounces at around negative A$175/oz., and this compares with total figure for the Company of A$825/oz. including corporate costs. (Remember, this is now close to A$400/oz. lower than back in 2012). Cash-flow from Evolution’s interest in Ernest Henry, for example, has recently been running at over $200 million on an annualised basis.
Evolution now has 14.24 million Resource ounces of gold, 7.05 million Reserve ounces, an average nine-year mine life and the Company is spending selectively to strengthen its outlook. Jake Klein doesn’t like sitting still, and given the very low indebtedness and strong cash flow I’m sure he has itchy fingers to pursue more corporate deals, but I suspect the EVN Board is finding the price of high quality first world gold assets too expensive at present.
Overall, Evolution Mining has gone through a revolution, and the table below illustrates the change in the Company’s profile over the four years to June 2018.
|Year to June 2014||Year to June 2018*|
|Share Price at 30/6||$0.64||$3.51|
|Shares on Issue||710m||1,693m|
|Gold Production (oz)||428,000||800,000|
|AISC Cost per Ounce||A$1,083||A$825 (-24%)|
|Reserves/ Annual Production||6 years||9 years|
|A$ Gold price/oz.||$1,400||$1,700|
|EBITDA ($)||$207m||$720m (Est.)|
|Dividend per share||2.0||7.0 (Est.)|
* Most recent data available