The old adage that fortune favors the bold is put to the test in Australia’s mining industry, with one gold producer choosing to expand in a climate of high and rising costs, while another opts for safety .
The difference between Northern Star Resources (ASX:NST), which is planning a major investment, and Evolution Mining (ASX:EVN), which is postponing development proposals, is one of the key tests for investors in the next phase of the market. mining. – back off the bold, or follow the cautious.
Another split, which could be the difference between making money (or not), is following the breakout of takeover activity, which always follows a market correction, as smaller miners with potentially valuable assets are receiving takeover bids from cash-rich rivals.
The merger and acquisition (M&A) phase of the mining market has yet to begin, but it will become a target for takeover as asset-rich but cash-poor explorers.
Is M&A activity about to pick up?
Two events in the next four weeks could trigger M&A activity.
The first is to be found in the flood of quarterly reports for the period up to June 30, which will begin to flow in the coming days and peak in the last week of July.
The second event is the annual Diggers & Dealers mining forum in WA’s gold capital, Kalgoorlie, from August 1st.
D&D is a popular gathering for mining executives and stockbrokers and has been the seeding point for countless past deals.
This year’s conference will be the first in three years under near-normal travel conditions and although it has a jam-packed schedule with 75 presenters in just three days, it’s what happens behind the scenes that counts as the miners and bankers mingle in Kalgoorlie’s countless pubs.
Buy the target, sell the bidder
D&D’s news feed might provide a pointer (or two) to possible deals, in which case a savvy investor remembers critical advice covering most M&A activity, buy the target and sell the bidder.
This approach doesn’t always work because a merger can create value, but not so often due to the tendency of bidders to overpay in the rush to close a deal.
Picking a winner from the “expand or not” dilemma in an era of dramatically higher cost inflation is another challenge for investors in a market rocked by fluctuating commodity prices and war-induced distortions in Ukraine. and sanctions against Russia.
Northern Star and Evolution’s management could be making the right decision for their businesses given the different mix of assets, but the approaches to expanding or deferring risk are a test for investors.
On the face of it, and using stock price movements as a guide from the announcements made earlier this week, it appears Northern Star’s more aggressive approach is preferred – perhaps a case of fortune favoring the bold.
The growth versus caution scenario began on Monday when Evolution stunned the market with a production and cost warning, as well as delays on two proposed expansion projects.
Evolution executive chairman Jake Klein said the company had “failed” but was determined to fix its problems.
In many ways, Evolution’s operational update was a disappointment. June quarter gold production was missed, as was annual production.
Costs are rising and plans to expand ore processing plants at the Red Lake mine in Canada and Mungari in Western Australia are postponed due to blowouts.
“It’s like we’re back in the boom conditions of 2011,” Klein said in reference to a period of dramatically rising costs.
“I think it’s fair in today’s market to differ.”
Investors abandon Evolution
Investors were disappointed – wiping 20% off Evolution’s share price immediately after the announcement and continuing to sell with the stock, which is now down 30% at $2.42, which is its lowest in six years.
UBS was one of the major investment banks hampered by Evolution’s downgrade. Two weeks ago (June 17), the bank moved the stock from neutral to long by setting a stock price target of $4.05 on the day it was trading at $3.69. On Wednesday, UBS maintained its buy advice but set a new price target of $2.95.
Other banks and brokers expressed their displeasure at being blindsided by the downgrade. Credit Suisse, which has been a consistent seller of Evolution, pulled an additional $1.05 off its previous price target of $3.75 to set a new target (and updated sell tip) at $2.70. .
Investors buy into Northern Star expansion plans
Northern Star, which is due to deliver its June quarterly report on July 20 (an event that last year coincided with investor day and the company’s outlook presentation) received entirely different treatment in the market after announced plans for a possible major upgrade to its project flagship, the Kalgoorlie Superpit.
Company chief executive Stuart Tonkin said plans for the project (officially called Kalgoorlie Consolidated Gold Mines, or KCGM) were “compelling” with three possible ways to optimize and improve performance by investing between 440 million and $1.4 billion.
The choices are a bolt-on expansion to process 17 million tonnes of ore, a 70% plant refurbishment to increase throughput to 24 Mt or a new processing plant processing 22 Mt per year.
The 70% renovation seems the best option given its internal rate of return of almost 30% on the capital invested.
Unlike the selloff that rocked Evolution, Northern Star’s reinvestment plan received a boost from investors immediately after its announcement on Tuesday, with the stock adding 6% to $7.47 before returning to its pre-price. $7.04 ad.
Additionally, unlike Evolution, there is a universal consensus among banks and stockbrokers that Northern Star is a buy thanks to its expansion plans, with Citi leading the way with a price target of 11, $60, followed by Macquarie and Credit Suisse at $11.
Fortune, it seems, favors the bold – as long as they can keep their promises and it might not be easy for any business planning to expand in a time of steep price increases, which will make it difficult to cost containment.