Hot Stock- Evolution Mining (EVN.ASX)

Monday 12th September 2016

Fat Prophets’ Hot Stock – Evolution Mining (EVN.ASX)

A golden opportunity

What’s new?

Evolution Mining announced on the 24 August 2016 that it was raising up to A$401 million by way of an accelerated renounceable rights issue offer to its shareholders. The funds raised from the offer will be used to part fund the acquisition of an economic interest in the Ernest Henry copper gold mine in Queensland for A$880 million.

The entitlement issue is fully underwritten, so the company will receive the full funds required to complete the Ernest Henry acquisition. Settlement of the new shares will occur on 23 September 2016.

The shareholder entitlement offer is an accelerated renounceable entitlement offer to invest in new shares. The ratio is two (2) new shares for every 15 shares already held. The issue price has been set at A$2.05 per new share. The eligibility date to participate in the entitlement offer was 29 August 2016, with normal trading for the new shares west to resume on 27 September 2016.

Encouragingly for retail investor, the institutional component of the entitlement offer was accelerated, with settlement having occurred on 29 August 2016. The company has since advised that A$311 million was raised through institutions, with this making up the bulk of the $401 million target. Furthermore, the institutional entitlement was priced at A$2.22, compared to the retail entitlement price of A$2.05.

Outlook

In combination with the A$401 million expected to be raised from the entitlement offer, Evolution Mining will use a A$500 million debt facility to fund the balance of the A$880 million purchase of an economic interest in the Ernst Henry copper gold mine in Queensland.

The acquisition is expected to secure 100% of the gold produced by the Ernest Henry mine over the life of the mine and 30% of the copper produced. Over the estimated 11-year life of the Ernst Henry mine, the company will be required to contribute 30% of the future operating costs of the mine.

We consider the purchase price of A$880 million for Ernest Henry to be fair, given that Glencore as the seller is not a mainstream gold producer. We also see the potential of the Ernest Henry mine in the hands of Evolution, as a focussed gold producer as a major positive going forward.

The Ernst Henry mine region, we believe, hosts an ongoing potential to improve the value of the acquisition beyond the current life-of-mine of eleven years. Having delivered a record FY16 result, Evolution Mining is guiding to FY17 gold production in the range of 800,000 to 860,000 ounces, with AIC of A$900 to A$960 an ounce.

Price

Evolution Mining is currently trading at around 12 times the earnings estimate for FY17 with a prospective dividend yield of 1.5 percent. These metric are, in our view, complementary to Evolution Mining’s technical set up, which remains in favour of the bulls, as backed by the bullish moving average crossover in place since early 2015 (50-day moving average crosses above the 200-day moving average).

Worth buying?

We hold firmly to the belief that Evolution Mining is well placed to navigate through the turbulent gold price environment of the recent past. During that time, the company has made astute acquisitions that have positively impacted on its operations and shareholder value. In conjunction with acquiring new assets, the company has been able to extract further shareholder value from its existing asset base, through increased production and containing costs.

David Lennox is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Evolution Mining is held within the Fat Prophets Concentrated Australian Share, Mining & Resources and Small & Mid Cap portfolios.

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