Gold miners hammered after Evolution downgrade

Evolution’s disclosure in Cowal led to a 5.5 percent drop in Newcrest Mining shares as investors feared the nearby Cadia mine would have suffered similar amounts of rain; an ironic situation for two mines who were confronted drought stress barely two years ago.

Cadia is Newcrest’s main mine, but it is also exposed to WA’s recent COVID-19 wave through its fringe Telfer mine and Havieron growth project in the north of the state.

The three miners lost more than $1 billion in value each Monday. Evolution lost over 20 percent of its market cap in just one trading session.

It told investors in July last year that it was poised to reverse a trend that had caused production to fall consecutively for four consecutive years, suggesting that the 680,788 ounces produced in the year to June 2021 would be the company’s low.

That promise came the day Evolution promised to produce between 880,000 and 950,000 ounces in the year to June 2024; a pledge based on plans to renovate Canada’s Red Lake mine and expand Cowal mine in NSW.

Both pledges were revised down Monday, with Evolution said production in the year to June 30 would be “about 640,000 ounces.”

The cut means Evolution’s gold production has fallen for the fifth year in a row.

It said its gold production would increase to 720,000 ounces next year and 800,000 ounces in the year to June 2024, with both targets accompanied by a 5 percent margin of error.

Even if the company performed 5 percent better than its new target for 2024, it still wouldn’t meet the 880,000 and 950,000 ounces it promised for 2024 just 11 months ago.

time and money

Evolution expressed confidence that Red Lake would still live up to it, but that it would just take longer to reach its potential.

Executive Chairman Jake Klein had warned shareholders when he paid $375 million ($550 million) for Red Lake in 2019 that it would take more time and money to turn the operation into a lucrative asset.

Evolution’s expenditure on the asset will exceed $1 billion by the time it reaches its potential, based on its original purchase price, renovation expenditure, and acquisition of an adjacent asset that has provided a new mill for what is now a province of the company.

Red Lake was marginally cash flow positive in the March quarter, but was a cash drain when capital expenditures were included.

Evolution isn’t the only prospector to lower investor expectations recently; St Barbara lost 28 percent of its value last week after revealing new permitting delays for the Canadian project should be its growth project when acquired in 2019.

Northern Star is also having a harder time than expected to improve production from the Pogo gold mine in Alaska, which it bought in 2018.

Ramelius Resources cut its gold production target by about 2 percent last week after heavy rains disrupted transportation routes around its WA mines and exacerbated staffing problems related to the pandemic.

Gold was fetching $1,830 an ounce on Monday; a price very high by historical standards, but below the peaks of over $2,000 an ounce reached in 2020 and early this year.

Shares of Northern Star and Evolution are both down 57 percent since the first week of their November 2020 peak; a time when the former was in the process of merging with Saracen Mineral Holdings.

Gold stocks, which investors prefer in times of economic trouble, have fallen out of fashion after signs that the global economy was recovering from the 2020 pandemic shutdowns.

Copper and gold miner OZ Minerals cut this year’s copper production target by 13 percent due to rain, pandemic-related staffing problems and a conveyor belt failure.

The stock fell a relatively modest 3.4 percent on Monday.

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