Gold might be hovering near a five-year low but that's not enough to dampen Credit Suisse's liking for EVOLUTION FPO (ASX: EVN).
The financial services group has slapped a $1.18 per share price target on the stock, up from previous guidance of $1.03 per share, whilst also giving it an "outperform" rating despite recognising its volatility. RBC Capital Markets is even more bullish on the company's prospects over the next 12 months, providing a target price of $1.20, up from prior guidance of $1 per share.
Indeed, their recommendations come at a time where the gold producers themselves are under enormous pressure to perform as the price of the shiny metal continues to decline. It's currenly hovering near a five-year low at around US$1,092 an ounce with many analysts forecasting greater falls in the near future – more on that in a moment.
However, Credit Suisse believes that Evolution Mining could still be an attractive prospect, especially thanks to its recent acquisition of the Cowal Gold Mine. Notably, the miner also acquired the Australian operations of La Mancha Resources Inc which, when combined, makes it Australia's second-largest gold producer by production scale, behind Newcrest Mining Limited (ASX: NCM) but ahead of Northern Star Resources Ltd (ASX: NST) and OceanaGold Corporation (ASX: OGC).
Source: Evolution Mining presentation
As quoted by the Fairfax press, Credit Suisse noted that: "Cowal appears to offer significant value enhancement opportunity via application of their lean operating approach to expand margins and conversion of substantial resource to reserve to profitably extend mine life."
Evolution Mining completed the Cowal transaction late last week for a grand sum of US$550 million.
Before investors get too excited however, it is important to note the strong headwinds that are currently facing the gold sector. With the US Federal Reserve poised to start hiking interest rates in the near future, the US dollar is tipped to strengthen which will apply downwards pressure on the price of gold.
Gold has already nearly halved in price since it peaked at US$1,921 an ounce in 2011 and Morgan Stanley believes that it could be destined to hit US$800 an ounce in the near future. It should be noted that US$800 is its 'worst case scenario' and would rely on a sharp increase in US interest rates and another crash in the Chinese stock market, although that may have already begun overnight with the SSE Composite Index (SHA:000001) plummeting 8.5%, absolutely shattering the market's confidence.
At the same time, others believe gold could fall even further to just US$750 an ounce which would destroy shareholder value across the sector. While Evolution Mining might be one of the more attractive prospects from the gold miners, investors would be wise to avoid it in favour of other investment opportunities.
