Evolution Mining Limited

EVN Details

Approval to Acquire Battle North Gold Corporation: Evolution Mining Limited (ASX: EVN) is engaged in operating and developing gold mining projects in Australia and New Zealand. The company has announced on 12 May 2021, regarding approval from the shareholders of Battle North Gold Corporation (TSX: BNAU) to sell all its outstanding shares to EVN. The company will be paying C$2.65 per share for a total consideration of C$343mn to acquire BNAU. The transaction is subject to the approval of the supreme court of British Columbia, scheduled on 17 May 2021. If the transaction is approved by the court, the transaction is expected to be completed on 19 May 2021.

Update on Q3FY21 Activity Report: EVN has reported Gold production of 161,316 oz at an All-in Sustaining Cost (AISC) of $1,268 per ounce. The company has posted a mine operating cash flow of $194.4mn in Q3FY21. EVN has reported net bank debt of $166.9mn in Q3FY2, post interim dividend of $119.6mn. 

Production and Sales Summary (Source: Company Reports) 

1HFY21 Financial Highlights: The company has registered an increase in its sales revenue to $982.21mn in 1HFY21 against $898.16mn in 1HFY20. The company has posted an increase in profit to $228.69mn in 1HFY21 against $147.21mn in 1HFY20. EVN has posted a decline in cash inflow from operating activities to $445.66mn as on 31 December 2020 against $455.36mn as on 31 December 2019.

Key Risks: The company holds interest-bearing liabilities. Thus, any severe change in interest rate may lead to financial losses for the company. The company is engaged in the production of gold. Henceforth, any fluctuation in the gold prices may lead to financial losses for the company.

Outlook: EVN has provided its guidance on FY21. Under the guidance, the company expects an improved AISC in a range of $1,190-$1,220 per ounce from previous guidance of $1,240-$1,300 per ounce. The company expects its production in a range of 695,000-710,000 ounces streamlined from previous guidance of 670,000-730,000 ounces. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of EVN gave a return of ~11.40% in the last one month and a return of ~5.95% in the last three months. The current market capitalisation of EVN stands at ~$8.62bn as of 11 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$3.790-~$6.585. On the technical analysis front, the stock has a support level of ~$4.374 and a resistance of ~$5.755. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in sales revenue and improved guidance on AISC for FY21. For this purpose, we have taken peers IGO Ltd (ASX: IGO), Newcrest Mining Ltd (ASX: NCM), Alkane Resources Ltd (ASX: ALK). Considering the increase in sales volume in 1HFY21 and profits in the same period, boosting gold production with the acquisition of BNAU, current trading levels and valuation, we recommend a “Hold” rating on the stock at the current market price of $4.98, down by ~1.387% as on 12 May 2021.

EVN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)  

Stanmore Coal Limited

SMR Details 

Trading Update for 1QFY21: Stanmore Coal Limited (ASX: SMR) is engaged in coal mining activities, which includes the development of operation of coal mines in Queensland, Australia. During the 1QFY21, SMR has reported a decline in its ROM coal production to 514kt against 813kt in 1QFY20, indicating a reduction in fleet capacity. Similarly, the saleable coal produced has seen a decline to 428kt in 1QFY21 against 665kt in 1QFY20.   

Change in Trading Name: SMR has announced on 10 May 2021, regarding confirmation of its name change to Stanmore Resources Limited. The trading symbol will remain be the same as approved by the shareholders on 28 April 2021.

Entered in a Joint Venture: The company has announced on 15 April 2021, regarding a 50/50 joint venture with M Resources to acquire the Millennium and Mavis Downs Mine from Peabody Energy Australia for a cash consideration of $1.25mn. The company see it as a low investment opportunity to operate a high-quality metallurgical coal asset with JORC resources of 37mn tonnes. The company expects to commence mining from July 2021. 

FY20 Financial Highlights: The company has posted its coal sales and other revenue to $136.30mn in six months to 31 December 2020 against $364.48mn in 12 months to 30 June 2020. The company has registered a loss to $16.12mn in six months to 31 December 2020. The company has registered an increase in other income to $11.78mn in six months to 31 December 2020 against $5.60mn in 12 months to 30 June 2020. The company has posted a decline in its cash and cash equivalents to $5.04mn as on 31 December 2020 against $32.24mn as on 30 June 2020.

Cash and Cash Equivalents Position (Source: Company Reports)

Key Risks: The company is exposed to foreign currency fluctuation risk, which may lead to hedging losses for the company. The company is engaged in exploration of coal, thus, any fluctuation in the prices of related commodity may lead to financial losses for the company. 

Outlook: SMR expecting construction and mining activities in the second half of FY21, including relocation of the Dragline from Isaac Plains East to Isaac Downs. Looking forward, the company expects to reduce its excavator fleets to optimise the cost base. This, in turn, is likely to see a lower production from Isaac plain operations.

Stock Recommendation: The stock of SMR gave a return of ~-14.55% in the last one month and a return of ~-7.53% in the last three months. The current market capitalisation of SMR stands at ~$178.46mn as of 12 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.500-~$1.005. On the technical analysis front, the stock has a support level of ~$0.528 and a resistance of ~$0.833. On a TTM basis, the stock of SMR is trading at a P/B multiple of 1.2x, lower than the industry median of 2.2x. Considering the company is focusing on optimising costs, acquiring a high-quality metallurgical coal asset, associated risks with the business, and valuation on TTM basis, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.675, up by ~2.272% as on 12 May 2021.

SMR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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