Is Evolution Mining a bargin at $3?

Evolution Mining (ASX: EVN) shares sold off almost 20% on Wednesday to a near 10-month low of $3.10. The company's December quarter figures came in well-below analyst expectations and raised concerns over whether its full-year guidance is achievable.

The steep selloff places Evolution in a tricky spot from both a technical, valuation and operational perspective. Here are some key contrasts:

• Technical: The stock has not been this oversold since February 2023. It has an RSI of only 25 suggesting the growing likelihood of a bounce.

• Projects: Evolution owns five quality gold assets (Cowal, Mt Rawdon, Mungari, Ernest Henry and Red Lake). But in the short-term, operations are having a hard time (e.g. rainfall and continued issues at Red Lake).

• Exposure: Australia's largest gold producer Newcrest was acquired by Newmont and removed from the ASX on 7 November 2023. When it comes to large cap gold exposure, the options rather limited to Northern Star and Evolution.

• Capital raise: Evolution raised $525 million in December 2023 at $3.80. The selloff brings all cap raise participants underwater, down around 18.5% in just two months.

• Earnings outlook: Most analysts expect Evolution earnings and cash flow to improve from FY24.

• Production outlook: Despite the production miss, Evolution reaffirmed its FY24 guidance. Does this set the company (and share price) up for more failure given the challenged quarter? Or an opportunity to deliver an improved second half performance?

Evolution 12-month price chart (Source: Market Index)

With so many contrasting data points and narratives, let's see what major brokers are thinking.

Risks Remain – Morgan Stanley

"In recent weeks the stock has been driven by risks around the recent transaction and poor asset performance," said Morgan Stanley analysts.

"Furthermore, near-term guidance risk keeps us cautious. While the stock has 11% upside to our price target, we still see Evolution as Equalweight."

Morgan Stanley has a $3.45 target price for Evolution.

Guidance Looks Tough But Value Beckons – Citi

Citi expects Evolution to miss its full-year guidance and modelled 749,000 ounces at AISC of A$1,430 an ounce vs. guidance midpoint of 789,000 ounces of gold at A$1,340.

That said, the analysts believe the selloff is overdone due to:

1. De-leveraging is ahead of consensus expectations and net debt gets better from here

2. Evolution provides leverage to copper, which accounts for ~30% of Group revenues

3. Quality assets, with the recently acquired Northparkes proving it is cash generative only two weeks in

4. The pullback is an opportunity to own leverage to gold – which Citi believes will reach a nominal record in 2024 of US$2,150 an ounce

Citi upgraded the stock to a Buy but kept its target price unchanged at $3.95.

Buy Rated on Valuation, Deleveraging – Goldman Sachs

Goldman Sachs lowered its price target to $3.70 from $4.20 but remains Buy rated on:

1. Attractive valuation: Evolution is forecast to generate free cash flow yields of circa 10% in FY25-26

2. Strong margins: Steady cost and margin performance is expected in the medium-term, supported by factors such as Ernest Henry and Northparkes copper credits. Evolution is viewed to have the strongest margins vs. peers

3. Deleveraging with diversified growth options: With more growth options across the portfolio, the analysts see Evolution's growth outlook as more diversified and lower risk than some peers. Significant deleveraging is expected to take place in the near-term and Evolution is expected to have a net cash position by FY27

Despite the positive takeaways, Goldman expects Evolution to produce 734,000 ounces of gold in FY24 vs. the company's guidance of 789,000.

Putting It All Together

Evolution's FY24 guidance is at risk amid wet weather impacts, persistent issues at Red Lake, higher-than-expected costs and recent management changes.

Production and cost momentum is expected to improve in FY25-26 and generate attractive free cash flow yields of more than 10%. When coupled with significant debt deleveraging, copper exposure and a positive outlook for gold – Analysts find it hard to not to view this as a value play.

Of course, Evolution needs to stabilise the recent poor performance across its assets and demonstrate a strong second half. Otherwise, it might end up in an all too familiar situation where a value play continues to overshoot towards the downside.