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

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »