Evolution Mining: Digging Into The FY2020 Reserve Update
Summary
- Evolution Mining released its FY2020 Reserve & Resource update in mid-February and reported a 50% increase in mineral reserves across its projects.
- This sharp increase in reserves was driven by a maiden mineral reserve at Red Lake and an increase in reserves at Cowal, the two pillars of Evolution's growth.
- While not included in the reserve statement due to timing, the Battle North acquisition should add another ~0.7 million ounces of reserves, pushing total reserves to ~10.6 million ounces.
- While Evolution might look expensive at a premium to its peers per reserve ounce, I continue to see the stock as reasonably valued with a good shot at continued reserve growth in FY2021.
The Q1 Earnings Season for the Gold Miners Index (GDX) has finally begun, with most companies finally finished releasing their FY2020 Mineral Reserve statements. Evolution Mining (OTCPK:CAHPF) was one of the first miners to release its results and posted an industry-leading 50% increase in reserves thanks to the acquisition of Red Lake. This massive boost to reserves has given Evolution a leading position among intermediate producers, despite using the lowest gold price in the industry to calculate reserves. So, while Evolution might appear expensive at ~$607.00/oz, I see the stock as reasonably valued with a good shot at continued reserve growth in FY2021.
(Source: Company Presentation)
Evolution Mining released its FY2020 Reserve & Resource statement in mid-February and reported total reserves of 9.9 million ounces of gold (GLD), up from 6.6 million ounces in the year-ago period. This was an exceptional result in a sector where we saw a dearth of reserve growth net of mining depletion. On a resource basis, the growth was even more impressive, with mineral resources coming in at 26.4 million ounces, up 76% year-over-year. This significant reserve base gives Evolution a strong foundation for future growth, with a significant mine life at its two pillars for future growth: Red Lake and Cowal. Let's take a closer look at the results below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, Evolution reported an increase in reserves at two of its seven assets with reserves in FY2020. Still, the increase in Cowal and Red Lake more than outweighed the drop in ounces at the company's smaller operations. At Cowal, mineral reserves came in ~4.59 million ounces, up from ~4.44 million ounces, driven by an increase in underground reserves to more than 1 million ounces since the July update. Given the total resource base at Cowal of ~5.0 million ounces separate from reserves, there is strong potential to grow this reserve base, supporting the goal to produce ~350,000 ounces per annum from this operation. This would translate to 60% growth from Evolution's guidance of ~217,000 ounces in FY2021.
(Source: Company Presentation)
Moving over to Red Lake, Evolution acquired the asset from Newmont (NEM) in Q4 of 2019 and has seen tremendous growth in the asset thus far. Reserves at the company's Red Lake Mine came in at ~2.9 million ounces at 6.9 grams per tonne gold, up from ~2.1 million ounces at 7.0 grams per tonne gold at the time of acquisition. It's worth noting that the resource base is massive and came in 11.05 million ounces at 7.19 grams per tonne gold. If we assume just 50% of the indicated resource that's separate from reserves is converted into reserves, we would see an additional ~1.7 million ounces added to the reserve base at similar grades. I would argue that this is a pretty conservative conversion rate, which would push the total reserve base at Red Lake to ~4.6 million ounces.
(Source: Company Presentation)
Evolution's initial goal was to get production to 200,000 ounces per annum at all-in sustaining costs below $1,000/oz. The company is progressing well towards this goal so far, with key projects being restarting the Red Lake Mill, building up surface stockpiles, and getting mining rates above 1 million tonnes per annum. However, the company's new long-term goal is 300,000 to 500,000 ounces per annum at Red Lake, and this new ~2.9 million-ounce reserve base supports nearly 10 years of mine life at the low end of the target production profile. However, with the potential for a 4.6 million ounce resource base as noted above, the mine life looks like it could be closer to 15 years at a ~300,000 ounce per year run rate.
(Source: Company News Release)
It's worth noting that the Red Lake growth plans got another boost earlier this year after Evolution acquired Battle North Gold for its Bateman Project in the Red Lake area. This deal has not only boosted processing capacity to above ~1.5 million tonnes per annum but it's also added significant landholdings in the Red Lake area and another ~670,000 ounces of reserves. Longer-term, and with strong execution and additional permits, this suggests that Evolution could be sitting on more than ~1.9 million tonnes of processing capacity per annum, based on just the Campbell Mill and Bateman Mill. If we include a restart of the Red Lake Mill, which can operate at ~3,000 tonnes per day, the processing capacity is enormous, coming in close to ~3.0 million tonnes per annum.
It's important to note that Evolution has not included these reserves into its reserve statement due to the timing of the acquisition and because it will need to complete its own work on the reserve base. The reserves at Bateman are calculated at a $1,400/oz gold price vs. Evolution's gold price assumption of $1,115/oz, so they are not completely comparable to Evolution's mineral metal price assumptions for its reserves. However, I would not expect much change to the reserves at Bateman and have assumed a ~10.5 million-ounce reserve base for Evolution, with over 90% of these reserves likely to be included in the updated reserve estimate.
(Source: Company Filings, Author's Chart)
Moving over to Red Lake's other assets, we did see declines in reserves after depletion, with reserves falling from 568,000 ounces to 454,000 ounces at Mungari, which translates to less than five years of mine life based on FY2021 guidance of ~125,000 ounces. This is not ideal and is a very short mine life for this operation. However, with Evolution using the lowest metals price assumption in the industry at $1,115/oz and a total resource base of ~2.2 million ounces at Mungari, the company has lots of room to add to reserves here through resource conversion, even assuming a lack of success with exploration.
(Source: Company Filings, Author's Chart)
At the company's Mt Rawdon asset, reserves are also quite low at 398,000 ounces vs. FY2021 guidance of ~90,000 ounces. This translates to less than four years of mine life based on current reserves at this mine, which makes up a little over 12% of total gold production. However, similar to Mungari, Mt Rawdon does have over 885,000 ounces of resources, so resource conversion is possible, especially if Evolution decides to increase its metals price assumption to $1,200/oz. Even if Evolution were to increase its gold price assumption for reserves to $1,200/oz or $1,250/oz, this would still be well below the industry average of $1,300/oz.
The good news is that with Red Lake looking like ~250,000 ounces per year could be a chip shot, and Cowal set to see 60% growth as well to ~350,000 ounces, Evolution could have a base of ~625,000 ounces per annum by FY2024 from these two mines alone. This would negate the loss or divestment of a smaller asset if reserves can't be fully replaced, which means that the short reserve lives at Evolution's less significant assets aren't a deal-breaker by any means. Let's see how Evolution stacks up relative to peers:
(Source: Company Filings, Author's Chart)
As shown above, Evolution trades well above the trendline for estimated fair value on a reserve size vs. valuation per reserve ounce standpoint, which would make the company appear overvalued. However, when we factor in Evolution's significant organic growth potential, its industry-low metals price assumption for reserves, and its Tier-1 jurisdictions, the stock actually looks reasonably valued, adjusting for these metrics. In fact, one could argue that Evolution is cheap relative to Agnico Eagle (AEM), which has these same three traits yet trades at more than $725.00 per reserve ounce currently.
(Source: Company Filings, Author's Chart)
If we look at Evolution from a reserve grade vs. valuation per reserve ounce standpoint, Evolution stacks up similarly, well above the valuation of most of its peers, but with this justified by a very high likelihood of double-digit reserve growth in FY2021. Therefore, I don't see the current valuation per reserve ounce of ~$607.00/oz as alarming, and dips below $550.00/oz closer to the trendline would provide low-risk buying opportunities.
(Source: Company Presentation)
Evolution posted arguably the most impressive reserve update sector-wide in FY2020 with 50% growth in reserves and 76% growth in resources despite no change to its metals price assumptions. With a 10+ million-ounce resource base at Red Lake, the ~2.9 million-ounce reserve base is looking conservative, and the multi-million-ounce potential processing capacity in the area makes this a transformational asset and incredible acquisition for Evolution. However, at ~$607.00/oz, Evolution does not have what I would argue to be enough margin of safety baked in just yet. If the stock were to dip below US$3.40, though, this would offer a low-risk buying opportunity.
This article was written by
Analyst’s Disclosure: I am/we are long GLD, NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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