Jane Goldsmith

Friday, June 19 2015


THE final quarter of the 2015 financial year has been one of Evolution Mining’s biggest to date, with the mid-tier gold producer landing three significant deals – including a couple which earned it international prominence – in just 35 days.

In late April, the company announced its first deal: a binding $400 million agreement with Egyptian billionaire Naguib Sawiris and his company La Mancha Group International to acquire La Mancha’s Australian-based Mungari operations.

Ten days later, it confirmed a smaller but highly strategic exploration joint venture with Goldfields explorer Phoenix Gold to develop five Kalgoorlie-based tenements.

On 25 May, the company then told shareholders it had consolidated a US$550 million agreement with Barrick Gold Australia Pacific to acquire the world-class Cowal gold mine in NSW.

Although the La Mancha deal is subject to a shareholder vote in July and Cowal’s financing needs to be fully consolidated following Evolution’s recent $248 million oversubscribed capital raising, the expected settlements will take the miner’s holding from five to seven wholly-owned operational mines.

Evolution Mining executive chairman Jake Klein labelled the pending developments some of Evolution’s most remarkable yet.

“Right from the start of where the journey began, we aimed to build a globally-relevant mid-tier gold producer,” he said.

“Evolution is moving into that space now, where – at around 800,000oz of low cost production coming from seven 100 per cent-owned mines – we think we’ll start to get onto the radar screen of international investors.”


The company

Evolution was established in November 2011 from a merger between junior producers Catalpa Resources and Conquest Mining, with concurrent acquisitions of Newcrest’s Cracow and Mt Rawdon mining tenements.

In the next four years, the company expanded its portfolio to five operations – Queensland-based Cracow, Mt Carlton, Pajingo and Mt Rawdon, and the WA-based Edna May – each producing combinations of gold, silver and copper.

In the March 2015 quarter, Evolution produced 103,305oz of gold at an all-in sustaining cost (AISC) of $1024 per ounce, to deliver $26.9 million free cash flow. It also made a voluntary $35 million debt repayment – reducing its debt position by 28 per cent to $91.8 million – and paid a $5.6 million cash dividend to its shareholders.

For the full FY2015, the company forecast total gold production of between 400,000oz and 440,000oz of gold equivalent, with C1 cash costs and AISC expected to total between $750/oz and $820/oz and between $1,050/oz and $1,130/oz, respectively.

With the new La Mancha and Cowal acquisitions, Evolution’s FY2016 production was expected to double to 800,000oz per annum of gold.

“Through the acquisitions, we’re implementing the strategy we’ve talked about for a long time,” Mr Klein said.

“We have consistently communicated a very clear strategy of our intention to leverage our operating success to upgrade the quality of our asset portfolio.

“We’re going to be a significantly changed business with these two new assets, the Cowal mine and the Mungari operations; we will have doubled our production, but only added two additional mines.”


La Mancha

On 20 April, Evolution confirmed the La Mancha Australia acquisition, for a consideration of 322 million new, fully-paid Evolution shares (31 per cent of Evolution’s enlarged share capital). The deal included La Mancha’s Mungari portfolio, 20km west of Kalgoorlie, which comprises the high-grade Frog’s Leg underground gold mine, the adjacent White Foil open pit mine, a newly built 1.5 million tonne per annum Mungari carbon-in-leach processing plant, and a 340 square kilometre regional exploration portfolio.

Frog’s Leg’s current reserves are forecast to produce more than 90,000oz per annum of gold under Evolution’s direction. As of December 2014, the asset had mineral resources (including reserves) of 3.76mt of ore grading 6.37 grams per tonne of gold for 770,000oz of gold.

White Foil, 2km west of Frog’s Leg, is expected to produce 40,000ozpafrom mineral resources (including reserves) of 35.95mt of ore, grading 1.62g/t of gold for 1.86moz of gold.

The combined annual production from the two operations is expected to hit between 130,000oz and 160,000oz of gold at an AISC of between $950/oz and $1000/oz.

Although some analysts stated the La Mancha assets may have been overpaid, the deal notably included an additional $100 million direct investment from Mr Sawiris.

Mr Klein said the investment was more valuable to Evolution as an indication of Mr Sawiris’ commitment, as an ongoing strategic partner.

“La Mancha and Evolution have a shared vision of building a major regional gold miner with the scale, operating profile and cash flow generation sought by global investors,” the company stated.

“The two companies believe that the combined group will be very well positioned to take advantage of future growth opportunities, especially in the current market environment.

“As a future long-term strategic partner, La Mancha intends to support Evolution in the development and execution of its growth strategy. Consistent with this vision, La Mancha has provided Evolution with an initial in-principle commitment of up to $100 million of additional capital to take advantage of any value accretive growth opportunities that may present themselves.

“This additional capital may take the form of a pro-rata contribution to any potential future equity raisings by Evolution, or any other form of funding support as may be agreed between the parties.”


Cowal gold

Evolution’s acquisition of Cowal in late May was the second deal of international status for the quarter.

The mine, 40km northeast of West Wyalon in NSW, is a large scale, long life operation with estimated annual production of between 230,000oz and 260,000oz of gold at an AISC of between $850/oz and $900/oz. The mine’s current permitting extends to 2024, but current drilling data suggests expansions are possible beyond this.

Mr Klein said the Cowal deal was only feasible following La Mancha’s capital commitment.

“…the acquisition of La Mancha…both improved the quality of our portfolio and aligned us with a strategic partner willing to support the acquisition of Cowal with a commitment to fund an additional equity contribution of $112 million.

“This support was critical in enabling us to submit an offer for the Cowal acquisition.”

Mr Klein said the La Mancha and Cowal acquisitions would together increase Evolution’s workforce from 800 people to about 1250.

“Cowal gold is a really unique, tier one asset, with about 250,000oz of low cost production with a long mine life. It is a very important asset for us, and it’s very unusual that a major would be selling an asset of that quality,” he said.

“[This] addition to our asset portfolio is an exciting step forward and provides us with a cornerstone asset of the highest quality, which we will shape our future around.

“It’s also nice we finally have an asset in NSW, as we’re a NSW-based and incorporated company.”


Market outlook

Mr Klein said that although he was cautious about the global gold trading price going forward, he labelled the Australian gold market a “bright spot” in an otherwise gloomy marketplace.

“We’re in for a tough period. Sentiment is set in US dollars and sentiment for US dollar gold price is poor. There is little on the horizon to suggest there are positive capitalists going forward, until we see some changes in the macro global economy,” he said.

“In the current market, we’ve performed reasonably well but sentiment for gold stocks is low. Stock prices are well down from their highs from previous years. The gold price is below US$1200/oz, so on a relative basis we’re happy with our performance, but on an absolute basis, we’d prefer to see a greater upside going forward.”

Mr Klein said the company’s priority for the remainder of 2015 would be to smoothly incorporate the two new assets into the company portfolio.

“We need to maintain our track record of delivering operational predictability; we’ve never missed guidance yet,” he said.

“We need to demonstrate to the market that we are equally good at operating seven assets as we were five.

“We’re fortunate that all our mines are in Australia [and] all of them are 100 per cent owned. We also trade in Australian dollars, and all the things considered on the global gold landscape, the Australian producer is in a very bright spot.

“We’ve put ourselves in a fantastic space, and we are well positioned for the future.”