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Why Evolution Mining Ltd’s (ASX:EVN) results have investors cautious

Evolution Mining Ltd (ASX: EVN) shares sunk almost 4% on the day of its FY18 results release on August 17, closing the week’s trading off at $2.74.

Evolution shares are up 1% to $2.77 at the time of writing.

But with figures like a 21% increase in underlying NPAT from $206.6 million in FY17 to $250.8 million for FY18 and an EBITDA rise of 11% with mine cash flow also on the rise by 15%, what is it that has investors feeling wary?

If Evolution’s results tell us anything it’s that the company is getting bigger.

But is bigger always better?

Investors are often concerned too much success may see a company like Evolution make less than prudent acquisition decisions – a la BHP Billiton Limited’s (ASX: BHP) shale oil investments in the USA.

As a $4.64 billion market cap gold mining company, Evolution had a good run in the last year, with its share price steadily on the incline and its operations expanding, with Morgans upgrading it to an add this month with a price target of $3.20.

Production wise Evolution reported gold production coming in at 801,187 ounces for FY18 – at the right end of its guidance of 750,000 to 805,000 with low all-in sustaining costs of $797 per ounce.

Higher production at Ernest Henry offset lower production at Mungari, but overall production seems to be on the decline, year-on-year, which could add to the wariness of some investors going forward.

Evolution’s stellar NPAT result can be partly attributed to the divestment of its Edna May mine which the company parted with in late 2017 when Ramelius Resources Limited (ASX: RMS) picked it up for $40 million in cash and up to $50 million in extra payments.

Edna May was a high-cost asset and Evolution was able to improve its margins through the sell-off, announcing record group cash flow up 4% to $396 million for FY18 with its group EBITDA margin up 8% from FY17 against a flat gold price.

Overall, Evolution’s margin has increased 60% since 2014, as the gold price has risen only 14% which the company attributes to the benefits of selling the likes of Edna May to make way for the high-margin Ernest Henry which contributed a $231 million EBITDA for FY18.

For current shareholders, Evolution will deliver a fully-franked full-year dividend of 7.5c per share dividend – an increase of 50% on FY17 and equal to 8.25% of revenue.

Evolution’s guidance for FY19 looks promising, but gold prices will no doubt come under pressure over that time period, and it remains to be seen how capable Evolution is of managing those peaks and troughs.

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