Earlier this year the Executive Chairman of gold miner EVOLUTION FPO (ASX: EVN), Jake Klein, appeared on Bloomberg Business and talked up the company's outlook. "Evolution is making a lot of money at these prices" he announced, noting that the gold mining industry was at a "low point in the cycle" and was on its way to recovery.
Well, a recovery may have been optimistic, but, to be fair, things were looking rosy for gold producers at the time. The gold price was sitting nicely at around US$1,200 per ounce, the Aussie dollar was lower than the year prior, oil was cheap and labour was becoming more accessible as iron ore producers cut back staff.
Since then the price of gold has plummeted, now sitting below US$1,100 per ounce, but so too has the Australian dollar. This hasn't been good for Newcrest Mining Limited (ASX: NCM), which has a large pile of debt priced in U.S. dollars which suddenly costs a lot more to pay back, but what about Evolution Mining?
Evolution's largest source of debt (as at 31 December, 2014), was a drawn-down credit facility set in local dollars, so the company doesn't have the same negative exposure to the U.S. dollar as Newcrest does.
Likewise Northern Star Resources Ltd (ASX: NST) also has its debt set in Aussie dollars. This gives Evolution and Northern Star far more benefit when using any free cash flow to pay back debt.
So is Evolution still raking in the cash? Here is how the company stacks up for the most recent June quarter when comparing All-In Sustaining Costs per ounce (AISC/oz) to the average price of gold received:
Company (code) | Reported AISC/oz | Average gold price received |
Evolution FPO (ASX:EVN) | $1,084 | $1,533 |
Newcrest Mining Limited (ASX:NCM) | $978 | $1,532 |
Northern Star Resources Ltd (ASX:NST) | $983 | $1,497 |
Source: Company June quarter updates
Evolution reported slightly higher AISCs than Newcrest Mining and Northern Star, but at an average Australian dollar gold price of $1,533, it still made a theoretical margin of $485 per ounce.
Since Jake Klein's comments in April the price of gold has fallen around 10.5%, while the Aussie dollar has fallen around 7%. The net result would be a just a slight decrease in the margin Evolution was getting back in April, if the company maintains costs.
Evolution has a history of consistent production growth and looks well positioned to produce free cash under current gold price and currency conditions. However both factors can change quickly, despite even the best laid plans, which is why I won't be adding Evolution to my portfolio today.