EVN – Evolution Mining | Aussie Stock Forums

December 13, 2011

“In The Footsteps Of Newcrest: Evolution Mining’s Path To Growth Looks Likely
to Lead Into Asia”
By Chris Cann
www.minesite.com/aus.html (Free registration)

There has been much made of the need for consolidation in the junior gold sector in the past 18 months, in Australia no less than anywhere else. Looking ahead, the paucity of available finance would seem to dictate that further deals will be likely, and when they come, shareholders could do a lot worse than look in Evolution Mining’s direction for precedent. Evolution has recently emerged as a force on the ASX following the merger of Capalta Resources and Conquest Mining.

The final stages of that deal, the retail portion of a A$152 million fundraising deal, have now completed, and the company has now set its sights firmly on the future. And for the time being, that looks to be less about production growth, and more about cost reduction.

“I don’t see a need to grow in scale”, Evolution executive chairman Jake Klein told Minesite. “I think intermediate scale at 400,000 ounces to 800,000 ounces of gold production is good and we’ve pretty much got there. But I do think there is a need to reduce our operating costs, which are currently about US$800 to US$850 per ounce. To me, the Holy Grail is getting to the lowest cost quartile, which means we have to improve the quality of the portfolio.”

But there’s quality, and there’s quality. “The reality”, says Klein, “is that if you want to get down to that lower cost quartile you have to venture into areas you would consider geopolitically less attractive but geologically more attractive. Those areas are probably in Asia.”

Evolution’s portfolio now comprises a combination of Conquest’s and Capalta’s mining assets, along with a contribution from Newcrest, which held stakes in some of the projects, and now holds a 39 per cent stake in Evolution itself. The producing assets are Cracow, Mt Rawdon and Pajingo, all in Queensland, and Edna May in Western Australia. The Mt Carlton project, also in Queensland, is set to come online late next year.

Production for the year to June 30th rang in at a little over 300,000 ounces but that should climb to between 410,000 ounces and 465,000 ounces in the year to June 2013, allowing for organic growth at the three producers, plus the new contribution from Mt Carlton.

The addition of high grade ore from Mt Carlton will bring the group’s average cost per ounce down to between US$700 and US$750 but this is still midway along the cost curve. Most Australian operators would consider this a good effort, but Klein will not be satisfied. The natural solution is to use the company’s relationship with Newcrest to explore for potential acquisitions in those less attractive geopolitical but more attractive geological addresses. Klein says that Newcrest’s chief executive Greg Robinson sees Evolution as a growth vehicle.

“Clearly one of the advantages we have”, he says, “is that Newcrest has a world class understanding of the geology in Australasia and knows how to operate in these jurisdictions – places like Papua New Guinea, Indonesia and Fiji. So what we’re looking for are things that tick the box for Newcrest from a geological perspective and from a geopolitical perspective, but don’t meet the company’s size threshold. We want to work in the shadow of Newcrest, essentially, where we potentially get the cover they can provide by their significant presence.”

Though the addition of one or more lower cost operations will of course add ounces to the overall portfolio, production growth is not something Klein is chasing. In fact, the opposite is true and he will be doing his best to ensure Evolution remains a lean group of efficient mining operations.

“There’s no rocket science behind why we think this merger is good for all shareholders,” Klein says. “The mid-tier space is where gold companies have consistently delivered superior returns to shareholders. On the very large side – the Newmonts, Barricks, Newcrests and Gold Fields – it’s very hard to move the needle in terms of growth. With the juniors, they tend to be constrained from a capital perspective and they find it very hard to fund their growth.”

So what’s so great about the mid-tier space? “The mid-tier space”, Klein explains, “is one where you can produce enough operational cash flow to fund growth, and that that growth is meaningful. So you get the two things that I think institutional investors want: a level of operational predictability, and the capacity to fund meaningful growth without having to come back to shareholders all the time.”

And if anyone wants proof that his strategy would be effective, they need look no further than the commitment of specialist resources funds Black Rock Investment Management and Baker Steel Capital Managers. The two funds invested $50 million into that A$150 million entitlement offer to help fund the future growth. In terms of a vote of confidence, Klein won’t get much bigger than that.


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