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Why the Evolution Mining share price jumped even on profit drop

The Evolution Mining Ltd (ASX: EVN) share price was a rare riser on the market today even after it reported a drop in full year profits.

This wasn’t enough to take the shine off the stock with the EVN share price jumping 1.6% to $5.24 on Thursday when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index crashed 2.9%.

The relatively modest increase in the gold miner’s share price was enough to put it among the top five performers on the ASX 200 along with its peers, the St Barbara Ltd (ASX:SBM) share price and the Northern Star Resources Ltd (ASX: NST) share price.

EVN share price shines even as profit drops

The flight to the safety of gold can be credited for the group’s outperformance as investors hit the panic button as warning signals from the bond market of a looming recession flashed.

Evolution Mining couldn’t have picked a better day to unveil a 13% decline in FY19 net profit to $218.2 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) fell 8% to $730.3 million and EBITDA margin contracted 10% to 48%.

Management blamed lower copper and silver prices and volume for the drop as the higher gold price couldn’t offset the weakness. There was also a marked increase in operating costs from a mix of higher input prices and activities, and the completion of White Foil cutback that moved close to $28 million in costs into operating expenses from capex.

However, the results may not have come as a big surprise as investors had a glimpse of some of the issues when the miner released its June quarter production update last month.

Turning gold into an yielding asset

Management also put a positive spin on the margin contraction by pointing out that 48% is really still pretty good and that it was focused on improving this through productivity improvements to capitalise on the high gold price, which by the way had climbed to a six-year high last night on the back of the market meltdown.

What’s more, Evolution Mining appeased shareholders by lifting its final dividend to 6 cents from 4 cents a share.

This is the 13th consecutive dividend payment and the first under management’s new dividend payout policy that is based on free cash flow before debt and mergers and acquisitions (M&A).

Given the amount of cash its mines are generating, it’s a policy that will win over many shareholders as it potentially paves the way for even bigger dividends down the track and prioritises cash distributions over debt management and corporate action.

Gold may not pay a dividend but precious metal miners do and this means investors relatively newfound love for this ASX sector may have some ways to run yet.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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.

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