Shares of Evolution Mining [ASX:EVN] fell by 5.77% on Monday, closing at $0.735.
Evolution shareholders have had a roller coaster ride this year. The share price was up over 100% at one stage, but has been on the reverse ever since.
Evolution has attracted interest following its growing gold production base over the past couple of years. Operations are full steam ahead. The company produced 427,703 ounces of gold last year and plans to do a similar result this year.
Furthermore, total costs for the company fell from AU$1,178 per ounce in 2013 to AU$1,040 per ounce last year. Next year, the company is aiming to produce its gold at in the range of AU$1,050–1,130 per ounce (US$970–1,050/oz). In my view, this cost of production is good but not great.
Nonetheless, the issue for the company is that its all in cost still stands at AU$1,289 (US$1,196) per ounce of gold.
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A company’s all in costs include its ability to cover finance and capital costs. In EVN’s case, this cost reflects the company’s true ‘breakeven’ cost. And there’s little margin remaining between the current gold price and the company’s breakeven price.
The gold price currently stands at US$1,305 per ounce. And it has been struggling to get momentum over the past month when it briefly touched US$1,330 per ounce. And based on my analysis, gold will head below US$1,000 per ounce heading in 2015.
I’ve provided significant fundamental and technical analysis on this in Diggers and Drillers.
If I’m correct, Evolution shareholders will likely be in for a world of pain heading into 2015.
Evolution is not a cheap stock. It has significant debt, totalling over $126.8 million.
Saying this, the company pays a small dividend (2% of gold production) and the management team has a proven track record of reliability.
Looking at the company’s cash generation capability, a concern for me is the rising Aussie dollar which is tightening margins. For the June 2014 quarter, the Aussie dollar averaged US93.3 cents. If it falls lower, this is good for shareholders.
Nonetheless, with a high breakeven price and leveraged balance sheet, the gold price is the most important indicator to watch for the stock.
As I’ve discussed in Money Morning, I’m bearish on the gold price. In this case, the volatile gold price remains the biggest risk for punters.
Jason Stevenson+
Resources Analyst, Money Morning
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