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Defying Australia's energy woes, Evolution keeps costs low

Despite Evolution Mining Ltd. witnessing soaring energy prices at its Australian operations, the ASX-listed gold company says it is now among the lowest-cost producers of gold globally.

CFO Lawrie Conway said during a Feb. 16 conference call that power pricing for 2017 has increased by 6% to 8% for the company's operations in the eastern states and 12% to 20% for its Western Australian operations.

Rising temperatures in the eastern states of Australia have led to power shortages in South Australia and New South Wales as the grid fails to cope with increased demand.

Newcrest Mining Ltd. Managing Director and CEO Sandeep Biswas raised concerns over the situation earlier this week, noting that the Australian gold major has energy contracts that come to an end in the next 12 months.

Conway noted that although power costs have increased, Evolution's C1, all-in sustaining and all-in costs declined in the first half of the 2017 financial year by 2% to 8% and the outlook for the second half is for a further improvement of 2% to 10%.

"I proudly now say that Evolution is now one of the lowest-cost gold producers in the world," Executive Chairman Jake Klein said during the call.

Evolution now has an EBITDA margin of 50% and an all-in sustaining cost of A$978 per ounce.

In comparison, Barrick Gold Corp. — the top global gold producer according to SNL Metals & Mining data — hit an AISC of US$730 per ounce in 2016, and US$732 per ounce in its latest quarter. Fellow gold major Goldcorp Inc. also reported a full year AISC of US$856 per ounce for 2016 and US$747 per ounce for the fourth quarter of that year.

"I should note that we expect these numbers to fall over the second half of FY'17 as the full impact of the Ernest Henry deal is reflected in the numbers," Klein added, commenting on Evolution's own costs going forward.

Evolution completed the A$880 million deal to acquire an economic interest in Glencore Plc's Ernest Henry copper-gold mine in Queensland, Australia, in November 2016.

There is one operation, however, that is still not meeting Evolution's expectations and that is the Edna May gold mine in Western Australia.

The mine produced 38,600 ounces of gold at an all-in sustaining cost of A$1,475 per ounce in the first half of the 2017 financial year.

Costs remained high following a decrease in production and an increase in CapEx for the underground operation.

Evolution said in its half-year financial report that the lower material movement in the prior year due to weather events and mine scheduling issues continued to impact performance during the period.

"Obviously we are not happy with the position of Edna May even though it did increase its margin during the period," Conway said.

"As outlined during the December quarterly call last month, work is underway on improving the production and cost performance, which we expect to see by the end of FY'17."

As a result of continued cost reductions, Evolution is on track to meet its three-year guidance targets.

Conway noted that the company has been able to renegotiate a number of its supply contracts, which has resulted in a 9% to 13% saving on the cost of milling consumables and a 5% to 15% reduction on the cost of chemicals and reagents.

SNL Metals & Mining is an offering of S&P Global Market Intelligence.