Gold Price Analysis – Evolution Mining (ASX:EVN) Looks to Divest From Mt. Carlton for $65 Million
Evolution Mining (ASX:EVN) is looking to sell its Mt. Carlton gold mine in Australia to Navarre Minerals (ASX:NML). The deal could be worth up to $A90 million (US$65 million), and would mark a significant divestment from Evolution’s first development project that was commissioned eight years ago in 2013.
The Mt. Carlton Gold Mine is located 150 kilometres south of Townsville and has generated an incredible average return of 19% per year according to the company. Of Evolution’s gold resources, Mt. Carlton represents 1.7% of reserves and the company originally forecasted the mine would produce between 45,000 and 50,000 oz. gold in this current financial year at all-in-sustaining costs of A$1,650 to A$1,700 per ounce.
The mine outperformed expectations in the 2020 fiscal year, producing 59,000 oz gold.
This sale will ultimately cut Evolution’s 2022 production to 670,000 to 725,000 oz. per year, and will include its Crush Creek joint-venture exploration project approximately 30 kilomtres southeast of the Mt. Carlton site.
This sale comes on the heels of a repositioning for the company as Evolution looks to focus on growth again. Evolution’s executive chairman, Jake Klein, commented on this aspect, “With the company focused on delivery of growth projects at the cornerstone assets in the portfolio, we believe now is the time to hand Mt. Carlton over to an emerging gold producer who can focus on extending the operation’s mine life. The exposure we have retained will enable Evolution shareholders to benefit from the future success of the operation.”
What’s the Deal?
The terms of the deal stipulate that up to A$25 million is contingent on cumulative gold production milestones from Crush Creek, with A$5 million payable upon achievement of 50,000 oz., another A$5 million if the company hits 100,000 oz., and finally, an additional A$15 million if the project is able to hit production of 175,000 oz. The deal is expected to close in the December 2021 quarter.
A 5% royalty worth up to A$25 million is also payable that would be linked to the gold price, as long as the overage spot price is higher than A2,250 per oz in any given quarter. That royalty would be payable and eligible on production from both the Mt. Carlton and Crush Creek projects, counting production starting from July 1, 2023 for a maximum period of 15 years.
The deal marks a significant step toward repositioning its portfolio. Evolution is looking to grow faster, by using organic and M&A investments over the long term. The transaction value could even be considered neutral, due to the modest size of Mt. Carlton’s NAV consideration. Letting go of an investment like Mt. Carlton and the Crush Creek project will give Evolution the cash it needs to invest in new projects and explore more growth-oriented avenues.
Gold Mining in 2021, and Beyond
Gold prices have been on a tear recently, starting in March 2020 when risks and economic shutdowns came into focus around the world. Investors flocked to gold as it is considered a safe-haven asset.
Strengthening demand and persistent inflation concerns have pushed gold prices up, while silver and platinum prices have been supported by the continued recovery in industrial activity and supply interruptions. Precious metal prices are expected to remain high in 2021 and decline slightly in 2022.
The dovish monetary policy of the US Federal Reserve this summer has supported the price of gold, leading S&P Global Market Intelligence to revise its consensus forecast of 0.8% in 2021 and forecast increases to 0.3% in 2022 and 2023. Gold reached an all-time high of more than $2,000 an ounce last year before retracing in early August to $1,700. Rising interest rates and the value of the dollar weigh on the gold price, but high inflation, low interest rates and a weak dollar support the gold price.
Gold moves against the US dollar because the metal is denominated in dollars, making it a hedge against inflation. The supply of gold has driven up production levels since 2016. Despite an increase in gold mining production over a ten-year period, nothing has changed since.
One of the reasons for this is how easily gold can be mined, as miners have to dig deeper to access high-value gold reserves. The demand for gold today, the amount of gold in central bank reserves, the value of the US dollar, and the desire to keep gold as a hedge against inflation and currency depreciation help to push the price of gold up. While gold is volatile in the short term, history suggests that it retains its value over the long term.
Other Vehicles for Gold Exposure
Analysts see gold and other precious metals as a haven because of how markets and the economy will react in 2021. We are living through unprecedented times, and experts are predicting that gold’s value will rise by the end of the year, suggesting the potential for high returns. If your investment objective is stable gold prices, assets that prove to be a hedge against inflation and periods of financial uncertainty can play a key role in a strong portfolio.
As a result, gold mining stocks are also a way for investors to gain exposure to gold prices and production. Trends affecting the industry often hit gold producers and explorers as well. While markets recover, gold will remain an excellent hedge against future fluctuations. Negative real interest rates could also boost gold demand and push up prices.
The pandemic itself, in conjunction with the post-pandemic recovery, will contribute to the volatile price of gold. The quantitative easing programs that we saw after the outbreak of COVID-19 will be noticed in the expansion of the money supply and will be seen as such, will have a positive impact on physical gold prices. The growth in gold prices in the second half of the year appears to be linked to physical investment demand in the form of gold ETFs, bullion, and coins, as well as futures markets.
No doubt this year brought a smile to the faces of gold traders with the gold price hitting an all-time high of $2,067.15 on August 7 this year. Since then, however, the prevailing trend has shifted downwards, and this month the price fell to its lowest level since July. The big question for investors and traders is whether the price will hit another record high next year or whether the downward trend will continue.
One asset class that has benefitted from the exploding gold prices are the gold exchange-traded funds (ETFs) which invest as their primary objective in precious metals. In a smaller market, these ETFs can be seen as an oasis of safety in the midst of a storm. The stability and diversification of ETFs combined with the relative stability of gold prices over the long term (years) could be an attractive option for nervous investors as uncertainty about recoveries continue and variants threaten national reopening programs around the world.