The ASX-listed gold miners have lagged this year’s rally in the physical gold price, which is out of step with the sector’s long-run tendency to outperform the gold price during gold bull markets.
While this has been driven in part by lingering operational challenges on both the production and the capex/cost front, this environment has nevertheless created an attractive opportunity to invest in the sector at a time when valuations are on a discount to history, aggregate company guidance has been lowered to realistic levels, and consensus earnings momentum is poised to turn positive in line with the rising gold price.
Given the positive outlook for gold as a commodity, the stage is set for our preferred exposure, Evolution Mining (EVN), to outperform over the medium term.
Miners Offer Leveraged Returns in Commodity Bull Markets
While investing in mining companies carries additional risks (i.e., operational, environmental, and political), which has been evident across the industry in recent years, there are benefits to investing in gold miners that can underpin significantly higher returns than merely owning physical gold.
The major advantage of owning gold mining companies during gold bull markets is operational leverage. Given their largely fixed cost bases (which are agnostic to the gold price), as the gold price increases (with zero impact to their operating costs) mining companies see a proportionally larger boost in their earnings as their margins expand.
This is why gold miners have historically outperformed the gold price during periods of gold price appreciation, and ultimately underpins our expectations that the sector will outperform over the medium term (given our positive outlook for the gold price).
Earnings Upgrades on the Horizon
Notwithstanding the headwinds to production (for some miners) and costs (industry wide), the major gold miners are generally poised to deliver strong earnings growth over the medium term, as the benefit of leverage to a higher gold price will outweigh the impact of cost inflation. This is not yet adequately reflected in consensus earnings expectations.
With the gold price currently at ~US$2,350/oz, consensus earnings estimates will almost certainly have to be revised higher by analysts in the coming months, which should provide consensus earnings momentum that will be supportive of the sector’s performance.
Panning for Gold on the ASX
Our approach to the gold sector is focussed on miners with:
- High grade, low cost assets
- Scaled, producing miners operating in tier one jurisdictions
- Production growth, allowing for earnings growth that is not reliant on positive gold price movements
- Attractive free cash flow
- Balance sheet strength, with future capex and/or merger and acquisition (M&A) plans well funded
| Gold production volume (Kozt) (CY24e) | All in sustaining costs (AISC) (US$/oz) (CY24e) | 12 mth fwd PE | 12 mth fwd EV/EBITDA | FCF yield % CY24 | FCF yield % CY25 | Dividend yield % CY24 | Dividend yield % CY25 | Franking | |
| EVN | 762 | 832 | 10.8 | 5.5 | 6.6% | 9.4% | 2.7% | 3.8% | 100% |
| NST | 1,763 | 1,150 | 16.3 | 6.4 | 3.9% | 5.8% | 2.6% | 3.0% | 0% |
| NEM | 6,493 | 1,443 | 13.2 | 6.5 | 4.2% | 6.0% | 3.1% | 3.3% | 0% |
Source: Visible Alpha, Refinitiv, Wilsons Advisory.
Evolution Mining Remains Our Preferred Exposure
Evolution Mining (EVN) was added to the Focus Portfolio at a 3% weight in July 2023, and remains our preferred exposure within the ASX gold mining sector.
The company owns and operates a number of long-life, low-cost gold/copper assets in Australia and Canada, including its Cowal mine in NSW (~43% of production), Redlake in Ontario Canada (~17%), Mungari in WA (~17%), and Ernest Henry in QLD (~11%).
Our investment thesis is underpinned by:
1. Leverage to gold price strength
EVN offers attractive leverage to the rising gold price with 95% of its production being unhedged. This will help drive strong earnings growth, and consensus earnings upgrades over the medium to long term, if gold prices remain buoyant around current levels. Using spot gold price assumptions for FY25e implies ~21% upgrades will be needed to ‘mark-to-market’ current consensus earnings before interest and taxes (EBIT) estimates.
2. Highly profitable, low cost assets
EVN is the lowest cost gold miner on the ASX on an All in Sustaining Costs (AISC) basis, with its AISC of US$832/oz in CY24e underpinning highly attractive margins at current gold prices of ~US$2,350/oz. Being a low-cost producer provides a degree of cash flow and balance sheet protection against a weaker gold price.
3. Solid production growth in the medium term
Following a period of significant capex, EVN is set to deliver solid production growth over the coming years, driven by its Red Lake, Mungari and Cowal assets in particular. This underpins a consensus EBIT compound annual growth rate (CAGR) of ~21% between FY24 and FY26, with risks skewed to the upside given our positive copper/ gold price outlooks.
Near term, looking to the full year result, management has lowered its production guidance for Red Lake amidst now resolved materials handling constraints, although the company still expects FY24 production to fall within the lower end of its guidance range (i.e., ~750Koz), which it says will be supported by better-than-expected performance from its other sites (namely Cowal).
As consensus expectations have been lowered to 725Koz, below the bottom end of management’s guidance range, the bar has been set low by the street. Given the market’s skepticism, EVN’s performance against its guidance is a key upcoming catalyst. The achievement of guidance would likely be well received by investors and could help to restore investor confidence in the business.
4. Copper exposure
EVN has material copper exposure, which is set to grow with production growth at Northparkes and Ernest Henry. Given our positive structural outlook for the copper price, with supply deficits and declining ore grades on the horizon, this is a key source of relative appeal for EVN (Read Dr Copper’s Healthy Prognosis).
EVN’s copper exposure underpins the attractive economics of the business with copper sales ultimately being credited as a reduction to its gold unit costs (i.e., based on AISC). In effect, higher copper prices translate to stronger gold margins.
5. With capex requirements falling, cash flow is set to improve in FY25
EVN’s capex is set to decline in the near term, on an aggregate and per ounce basis, following a period of heavy investment. This will underpin improving free cash flow margins and will allow the balance sheet to be de-geared with net cash expected by FY27 when spend will be required for Ernest Henry and Northparkes growth/expansions.
EVN’s falling capital intensity is particularly attractive in the current environment where capex/cost blowouts are prevalent, and stands in contrast to Northern Star Resources (NST) and Newmont Corporation (NEM), which still have significant capex planned in the coming years.
As such, EVN’s medium-term cash flow profile is attractive, with the business trading on a consensus free cash flow yield of 9.4% in CY25e, comfortably above NST and NEM at 5.8% and 6.9% respectively.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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