Evolution Mining’s Cowal mine is in the bottom half of the list of Australia’s 10 biggest gold mines. But it’s not hard to believe its claim to being the most spectacular.
From a lookout high above the mine, the waters of Lake Cowal seem almost to butt up against the mine’s pit. In the distance, farmlands show the ravages of the drought that has slammed NSW; it’s dry and dusty around the town of West Wyalong.
Cowal is Evolution’s biggest and most important mine, the flagship of its portfolio.
But what also makes Cowal important in the Evolution world is the fact it represents an important organic growth opportunity in a company that has been famous for doing deals under Jake Klein, the company’s executive chairman
Klein, who built and sold Sino Gold for $2 billion, joined Evolution in 2011 after the company merged with Conquest Mining, where he was also executive chairman.
Over the next seven years he oversaw a string of deals as he looked to reshape the Evolution portfolio, with a focus on reducing its overall costs and extending the lives of its mines.
Evolution bought the Cracow and Mt Rawdon mines in 2011, and the Mungari and Cowal mines in 2015, and bought a stake in Glencore’s Ernest Henry mine in 2016; along the way, it sold off the Pajingo and Edna May mines. Over the past five years, Evolution’s all-in sustaining costs have fallen from $1228 per ounce to just $797 per ounce.
Cowal, purchased in May 2015, could have been the deal that tripped up Klein. Many thought he had paid Barrick Gold too much for a mine that, at that point, had a mine life that ended in 2024.
But Evolution has almost doubled its ore reserves, such that the mine’s life now extends until 2032, with a raft of exploration and development projects set to extend this further.
The company will plough in $15 million to $20 million for exploration in the 2019 financial year, and announced at its investor day on Tuesday that it had identified a new high-grade gold lode at Cowal.
Evolution will (presuming the successful obtaining of permits) also make a start on an underground exploration decline that would cost about $25 million in total – and potentially change Cowal forever.
“The field is actually wide open from an exploration perspective,” Klein says.
Evolution’s eventual goal is that the mine can sustain a production rate of 300,000 ounces (it produced 258,000 ounces in 2018) for 20-plus years.
At the mine site on Wednesday, the enthusiasm among the mine’s leadership team to get to this target was obvious, as they outlined a raft of projects under way and planned.
Still, the pressure for the next deal is starting to mount, in an industry where the success of gold producers such as Evolution means investors and analysts are not as worried about costs as they once were.
But while Klein might not have started life as a miner – his first gig in Australia was working for Macquarie Bank – the lessons of the sector have clearly not been lost on him.
“We are not sweating on the next one,” he insists. “In the past there’s been criticism of the gold sector that we’ve fallen into the trap of growth for growth’s sake.
“We are a margin and money story. We are looking for opportunities, but we don’t believe they are worth doing if they erode shareholder value.”
What Klein generally needs for a deal to work is what he calls a motivated seller – a company under pressure for some reason, often capital constraints.
He says Australian gold producers and explorers are in pretty good shape; while the Australian dollar gold price has held up in the past 12 months, falling about 1 per cent, the US gold price has been under pressure, falling 11 per cent over the same period.
This has put North American gold companies under pressure. The GDX index, which measures their performance, is down 22 per cent since the start of the year.
So Australian gold companies have been hunting in North America for deals. Last week, Evolution’s great Australian rival, Northern Star, paid $365 million for a mine in Alaska.
Klein is hunting too, but says there is a central question his M&A team need to work through: are these North American miners struggling because their assets are poor, or because their execution is poor.
Evolution’s view on what it is seeing is perhaps best shown by its lack of announcement.
“We’re active, but we haven’t bought anything,” Klein says.
Still, with Evolution’s balance sheet in good shape, Klein can have the best of both worlds: another deal, should it arrive, and organic growth opportunities at mines such as Cowal.
The writer travelled as a guest of Evolution.