The Evolution Mining Ltd (ASX: ASX: EVN) is one of the best performing stocks on the market on Wednesday after a few brokers upgraded the stock.
The EVN share price surged 5% in after lunch trade to $5, making it the fourth best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. The gold miner was only beaten by the Bravura Solutions Ltd (ASX: BVS) share price, Collins Foods Ltd (ASX: CKF) share price and Gold Road Resources Ltd (ASX: GOR) share price at the time of writing.
Evolution Mining was under pressure over the past three months or so as the gold price was on the backfoot. Improving risk appetite meant that safe haven assets like gold were shunned.
But sentiment towards the stock improved sharply after Citigroup upgraded Evolution Mining to “buy” from “neutral” after the miner announced the US$375 million acquisition of the Red Lake gold complex in Canada from Newmont Goldcorp Corporation.
“Canada screens well from a risk perspective but we think there will be investors concerned about geographical dispersion and the complexities it can bring,” said the broker.
“If there’s a chance to turnaround the asset, then we argue that there’s sufficient reward.”
Red Lake isn’t a distressed asset but underinvestment led to a drop in mine output in recent years and the ore body sits in a complex geology.
Value starting to shine through
This is why Citigroup resisted increasing its price target of $4.60 a share on Evolution while the miner embarks on a three-year turnaround of the asset. The miner aims to make Red Lake a 200,000 plus ounce of gold per year producer with an all-in sustaining costs (AISC) under US$1,000/oz.
The recent share price pullback is the key reason behind Citi’s decision to lift its recommendation on Evolution Mining.
However, the analysts at Macquarie Group Ltd (ASX: MGQ) have little hesitation to upgrade the valuation on the stock. The broker bumped up its price target on the stock b 4% to $5.60 a share.
Red Lake turning green
“The deal is well within EVN’s balance sheet capacity and will be accretive on production and reserve/resource metrics,” said Macquarie.
“EVN’s cost target of US$1,000/oz for Red Lake suggests that it is willing to give up some margin in return for increased group production.
“However, in our view, there may be opportunities to regain lost margin by shedding higher cost ounces a short mine life assets such as Cracow or Mungari.”
Macquarie reiterated its “outperform” recommendation on Evolution and estimates that the stock can return around 40% over the next 12-months if dividends are included.
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Brendon Lau owns shares of Evolution Mining Ltd and Macquarie Group Limited. Follow him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Bravura Solutions Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Bravura Solutions Ltd and Collins Foods Limited. 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.