EVN: Gold-Copper Producer - The A$10 Billion Gold Price Question
EVN: Gold-Copper Producer - The A$10 Billion Gold Price Question
In a Nutshell
Executive Summary
In a Nutshell
Evolution Mining operates six gold-copper mines across Australia and Canada, generating 745,000 ounces annually at industry-low costs. At A$15.19 versus fair value A$5.17, the stock is 66% overvalued. The entire gap is a gold price bet: we assign 35% probability to mean-reversion from record highs, while the market prices near-zero reversion risk. Management executes well—Mungari came in 15% under budget—but 85% of profit growth stems from commodity prices, not operations.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★☆☆☆ | Dividend yield sits at 2.3% with 30–35 cents per share guided for FY26, representing a 50% payout ratio. The dividend is sustainable at current gold prices but faces compression risk if gold normalises—our base case (A$5,500/oz) still supports payouts, but bear scenarios (A$4,500/oz) would force cuts. Not compelling for income seekers given the gold price dependency and modest starting yield. |
| Value | ★☆☆☆☆ | Trading at 37x trough earnings (FY27E) and 6.9x peak EBITDA versus peer averages of 16x and 5.9x respectively. The 66% overvaluation requires sustained gold above A$7,500/oz—85% above the 10-year average—with zero reversion probability. Even our base case (A$5,500 gold, no recession) yields A$6.87 per share, 55% below market. This offers negative margin of safety for value investors under any plausible normalisation scenario. |
| Growth | ★☆☆☆☆ | Revenue forecast to decline 19% from FY26E (peak) to FY27E as gold normalises, with modest 3.4% recovery in FY28E driven by volume, not price. The A$780 million growth pipeline (E22 block cave, OPC, Bert) adds production from FY28–FY30 but merely replaces natural grade decline—three-year revenue CAGR of negative 5.2%. Organic growth is constrained by the mining life cycle. Not suitable for growth investors seeking sustained expansion. |
| Quality | ★★★☆☆ | Business quality scores 6.05/10—above-average for commodity producers. ROIC of 28% (cyclical peak) compresses to 15–18% mid-cycle but still exceeds the 10.3% cost of capital. Management executes well: Mungari 15% under budget, gearing reduced from 25% to 6% in 18 months, capital allocation scored 8.0/10. The moat is narrow (4.6/10) but durable for 8–12 years via copper credits and secured permits. Quality is evident but doesn't overcome commodity exposure and current valuation. |
| Thematic | ★★☆☆☆ | Gold exposure captures the structural thesis (central bank buying 1,000+ tonnes annually, de-dollarisation) and counter-cyclical qualities during uncertainty. Copper revenue at 23% (rising to 25%+ post-E22) provides energy-transition exposure. However, thematic appeal is already priced: the market embeds perpetual record gold with no cyclical reversion. For thematic investors, the entry point has passed—structural tailwinds are acknowledged but fully reflected in current multiples. |
Best Fit: None at current valuation. The stock might suit contrarian value investors if gold corrects materially—our bear case (A$4,500 gold) implies A$4.12 fair value, still 73% below market. Quality-focused investors can appreciate the execution track record and copper differentiation, but the 66% overvaluation overwhelms business fundamentals. This is a gold price speculation, not an equity investment case.
Executive Summary
Evolution Mining produces gold and copper from six mines spanning Western Australia, Queensland, New South Wales, and Ontario. Revenue derives primarily from spot gold sales (76%) with copper by-products (23%) providing critical cost offsets—Ernest Henry and Northparkes achieve negative all-in sustaining costs through copper credits. The H1 FY26 result delivered A$1,100 million net mine cash flow, more than double the prior period, driven by realised gold prices of A$5,726 per ounce (up 48% year-on-year) and all-in sustaining costs compressed to A$1,493 per ounce—lowest quartile among ASX peers.
The investment case hinges entirely on gold price trajectory. Management has approved A$780 million in growth projects (E22 block cave, OPC expansion, Bert deposit) using conservative A$4,000 per ounce base cases with 23–48% internal rates of return. Execution is strong—Mungari came in 15% under budget—and the balance sheet supports growth with 6% gearing. However, 85% of recent profit improvement stems from commodity prices, not operational gains. The critical question is gold regime: structural shift or cyclical peak?
At A$15.19 versus fair value A$5.17, the stock is 66% overvalued. This gap reflects a gold price disagreement: our probability-weighted A$5,500 mid-cycle assumption versus the market's implied A$7,500+ perpetual pricing.
Results & Outlook
What Happened?
H1 FY26 captured gold's surge to record levels. Revenue climbed 37% year-on-year to A$2,725 million while site costs rose only 16%, driving EBITDA margins to 57%—a cyclical peak. All-in sustaining costs fell 6% to A$1,493 per ounce through higher copper by-product credits (copper prices up 15%) and operational discipline. Mungari's full contribution (production up 36% on prior period) and Red Lake's turnaround (cash costs down 25%) offset Ernest Henry's flood disruption in December. Free cash flow reached A$900 million for the half, enabling 20 cents per share in dividends and A$300 million debt repayment.
| Metric | FY25A | FY26E | FY27E |
|---|---|---|---|
| Revenue (A$M) | 4,350 | 5,400 | 4,400 |
| EBITDA (A$M) | 2,088 | 2,900 | 2,078 |
| EPS (A$) | 0.58 | 0.69 | 0.41 |
| Gold Production (koz) | 685 | 745 | 700 |
| AISC (A$/oz) | 1,750 | 1,493 | 1,640 |
| FCF per Share (A$) | 0.30 | 0.89 | 0.49 |
What's Next?
FY26 will mark peak earnings on record gold. FY27 represents a normalisation trough: our base case uses A$5,500 per ounce gold (23% below current spot), compressing EBITDA 28% to A$2,078 million. From FY28, production recovers through Bert deposit commissioning and E22 block cave early works. Growth capex peaks at A$680 million in FY27 before moderating. The balance sheet transitions to net cash by year-end FY26, funding the entire A$780 million growth pipeline without leverage. Key catalysts include Q3 production updates (April 2026), full-year results (August 2026) revealing critical FY27 guidance, and E22 development milestones through FY28–29. Central bank gold purchasing data (quarterly) will validate or refute the structural demand thesis. If gold sustains above A$6,500 for 12 months, the structural case strengthens; decline below A$5,000 confirms cyclical reversion.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$5.17 |
| Current Price | A$15.19 |
| Downside | -66% |
| Fair Value Range | A$3.36–A$6.98 |
| Confidence Level | Low (57.5/100) |
What Could Go Wrong?
Gold price mean-reversion is the overwhelming risk, dwarfing all operational factors by an order of magnitude. Current spot at A$7,100 per ounce sits 85% above the 10-year average of A$3,850. Historical precedent from 2011–2013 shows gold can decline 35% over two years when central bank policy tightens and real rates rise. Every A$500 per ounce decline reduces annual EBITDA by approximately A$375 million. Our bear case (gold at A$4,500, copper at A$12,000) compresses EBITDA to A$1,400 million with near-zero free cash flow after growth capex, implying fair value of A$4.12—still 73% below current market pricing. The market embeds perpetual gold above A$7,500 with zero probability assigned to cyclical normalisation. If gold reverts to even our base case of A$5,500 (already 23% below spot), fair value falls to A$6.87, representing 55% downside. This is not a business quality issue—management executes well, copper provides differentiation, and the balance sheet is fortress-grade. The valuation gap is purely a gold price regime bet where the market and our analysis hold diametrically opposed views on reversion probability.