Evolution Mining sees rising cash flow from Red Lake

Australian gold producer Evolution Mining (ASX: EVN) says performance improvements at its Red Lake mine in Canada are putting its turnaround plans for the operation ahead of schedule.

In the quarter ending Dec. 31 (Evolution’s second quarter of 2021), production from its Red Lake operation in Ontario rose 27% to 33,709 oz. gold at an all-in sustaining cost (AISC) of A$1,937 per oz. (US$1,481 per oz.), generating A$10.3 million in net cash flow. The company says that puts it ahead of schedule in its plan to increase annual production to 200,000 oz. at an AISC of less than US$1,000 per ounce.

During the previous quarter ended in September 2020, which was affected by a temporary suspension of operations due to forest fires in the area, the mine produced 26,638 oz. of gold at an AISC of A$2,074 per ounce

Evolution acquired the operation last April from Newmont (TSX: NGT; NYSE: NEM) in a US$475-million deal.

For the recent quarter, the company recorded the highest operating and net mine cash flows it’s seen from Red Lake since the acquisition, at A$34.2 million and A$10.3 million, respectively. (That compares with A$21.6 million and A$4.7 million, respectively, in the September quarter.)

In addition, Evolution expects a significant increase in Red Lake reserves in its next resource update in the first quarter. Total reported reserves when it acquired the mine were 1.2 to 1.4 million oz. gold.

Evolution released a JORC-compliant resource for Red Lake in September outlining 22.8 million indicated tonnes grading 7.77 grams gold per tonne for 5.7 million oz. gold, and 25.5 million inferred tonnes grading 6.49 grams gold per tonne for 5.3 million ounces.

Four underground rigs are currently working on infill drilling and resource expansion at the Cochenour deposit (which is connected to Red Lake via a five-km haulage drift) and the Twin Otter zone at Red Lake. Two additional rigs are focused on discovery drilling. For the quarter, 66 holes totalling 17,410 metres were completed.

The company plans to build a new surface decline at the operation with design work under way. Underground development is slated to begin in the June quarter.

Looking further ahead, Evolution expects to complete a concept study assessing long-term expansion options for the operation later this year. The company’s ultimate goal for Red Lake is production of 300,000 to 500,000 oz. a year.

Between its six mines in Australia and Canada, Evolution expects to produce a total of 670,000 to 730,000 oz. gold at an all-in sustaining cost (AISC) of A$1,240-1,300 per oz. for its full year 2021, ending in June.

So far, it’s produced 350,326 oz. at an AISC of A$1,182 per ounce.

Evolution ended the recent quarter with A$438.1 million in cash.

Canaccord Genuity analysts in Australia, Reg Spence and Henry Renshaw, lifted their rating on the company from hold to buy and raised their target price from A$4.75 per share to A$5.00 per share.

“Production from Cowal was better than expected on higher grades (+25% versus Canaccord Genuity estimates),” they wrote in a research note to clients. “As expected, Red Lake also delivered a stronger quarter-on-quarter performance (+10% vs Canaccord Genuity estimates) on a combination of higher tonnage, grades and recoveries. All other operations were largely in line with forecasts.”

The analysts said they are focused on Red Lake “given it forms the majority of LT production growth expected,” and said their base case “assumes a production run rate of ~ 200kozpa at an AISC of ~US$1,000/oz. from fiscal year (FY) 2023, contributing ~ 30% of group production.”

“Outside our base case, we see potential for further upside based on potential exploitation of the large, high grade Upper Campbell deposit, supporting an increase in production to 300-500kozpa. Key upcoming news flow includes Red Lake ore reserve update (MarQ21), concept study (1H’FY22) and PFS (CY22).”