Gold

UBS still sees value in Aussie gold sector: Evolution upgraded to Buy

Fri 17 Jun 22, 11:31am (AEST)
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Key Points

  • UBS has upgraded Evolution Mining to Buy
  • The broker now believes up to 30% improvement in quarterly performances is required to get some gold stocks to the lower end of their guidance
  • Macquarie believes Evolution has one of the highest earnings risk exposures to higher Australian east coast electricity prices

Despite concerns that gold miners could be impacted by higher electricity prices, due increased demand, rising fuel costs and unplanned coal generator outages, UBS still sees value in the local sector and has upgraded Evolution Mining (ASX; EVN) to Buy from Neutral (target price $4.05).

To the uninitiated, Evolution Mining owns four mines in Australia plus a mine in Ontario, Canada, and has a production guidance of about 650 thousand ounces of gold for FY22.

Threat of higher prices aside, Evolution’s share price has been struggling on the back of Wall Street’s S&P 500 market falling into a bear territory with gold prices also hitting a nearly four-week low on the back of the strong US$.

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Despite operational delivery risks of production and costs, plus covid-related absenteeism and disruption the broker sees more value in the ASX gold sector and more need to hedge the rest of its portfolio.

Lower end of guidance

UBS’s preferred gold names are Northern Star (ASX: NST), SSR Mining (ASX: SSR), Gold Road (ASX: GOR), and De Grey (ASX: DEG) but notes the weaker start to FY22 has pressured the June quarter.

The broker now believes up to 30% improvement in quarterly performances is required to get some gold stocks to the lower end of their guidance.

Does the sector look cheap?

UBS reminds investors that while share prices may get a little cheaper heading into June quarter FY22 production reports and FY23 guidance, the sector offers substantial production growth or 10-25% into FY23 and is trading on sub-5 times earnings.

Due in part to a low exchange rate and potential tailwinds for some operations, the gold price remains at healthy levels ($2,600/oz).

However, caution reigns for risks to FY23 production and cost guidance heading into results season.

As a result, UBS prefer newer mines benefiting from new infrastructure, highest grades and limited or brownfield capex.

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Evolution share price over three months.

What other brokers think

Evolution’s share price is down -22.77% over the last 12 months but was up 4.57 at the open on the back of the UBS upgrade.

Consensus on Evolution is Hold.

Based on the seven stocks covering Evolution (as reported on in FN Arena) the stock is currently trading with 23.5% upside to the target price of $4.32.

Based on Morningstar’s fair value of $4.17 the stock appears to be undervalued.

Given the upside risk to power prices in eastern states of Australia, Macquarie believes Evolution, Newcrest Mining (ASX: NCM), Aurelia Metals (ASX: AMI), and Oz Minerals (ASX: OZL) are among Aussie miners facing the highest earnings risk.

In 2021, the broker estimated that around 3% of operating costs for gold miners in general were related to electricity consumption.

Having concluded that Evolution has one of the highest earnings risk exposures to higher Australian east coast electricity prices, Macquarie maintains an Underperform rating and $4.00 target price.

While Morgans suspects the company's targeted 650koz gold production for FY22 will be slightly missed, the broker believes there is potential for an upside surprise.

The broker's target price rises to $4.45 from $4.20 due to Red Lake’s outlook, exploration updates, and a new long-term mine life expectation. Hold rating maintained. (22/04/22).

For Evolution to continue outperforming, Citi believes further improvement at Red Lake remains essential. (22/04/22).

Based on lower production, the broker has reduced its own projections, downgraded to Neutral from Buy, with the target remaining at $4.60.

Written By

Mark Story

Editor

Mark is an award-winning investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics, a diploma in journalism and has completed the Institute of Directors course. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content.

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