Equity Strategy
17 April 2024
Striking Gold: Opportunities in the ASX Gold Mining Sector
Gold Miners Have Underperformed the Gold Price this Year

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.

Figure 1: Gold miners have lagged the gold price in this year’s rally
Figure 2: Large cap gold miners’ PE multiples are near cyclical lows

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). 

Figure 3: Despite underperforming in recent years, ASX gold miners have significantly outperformed the gold price over the last decade…
Figure 4: … driven by strong outperformance during gold bull markets

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.

Figure 5: The spot gold price is now well above consensus gold price assumptions

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 
Figure 6: ASX 100 Gold Miners Summary
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.

      Figure 7: EVN’s forward consensus earnings will need to be upgraded to reflect higher gold prices

      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. 

      Figure 8: EVN is the lowest cost producer on the ASX

      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.

      Figure 9: Production volumes are set to increase over the medium term

      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.

      Figure 10: EVN offers the most copper exposure out of the gold majors

      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. 

      Figure 11: EVN’s capex is rolling off…
      Figure 12: …driving an attractive free cash flow yield over the medium term


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      Written by

      Greg Burke, Analyst

      Greg is an experienced analyst in the Investment Strategy team. 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.

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