On Wednesday, Morgan Stanley adjusted its stance on Evolution Mining Ltd. (EVN:AU) (OTC: CAHPF), upgrading the stock from Equalweight to Overweight and increasing the price target to AUD3.95 from AUD3.35. The firm highlighted a significant upside potential for the mining company, citing an approximate 17% upside to the new price target and an expected free cash flow yield of around 11% for the fiscal year 2025.
The upgrade is based on Evolution Mining's financial forecasts, which suggest an increase in free cash flow (FCF) and dividend yields from fiscal year 2024 to 2025. For the fiscal year 2024, the estimated FCF and dividend yields stand at 2.6% and 0.9%, respectively. These figures are projected to rise in fiscal year 2025 to 6.1% and 3.0% under the base case scenario. If spot prices are considered, the FCF and dividend yields could climb even higher, to 11.3% and 5.6%, respectively.
Morgan Stanley also pointed out Evolution Mining's favorable position in the market, with an implied gold price of approximately US$1,650 per ounce, which is higher than the spot gold prices of its peers. This suggests that Evolution Mining has the largest upside to current spot gold prices within the firm's coverage.
In addition to the financial metrics, the firm expressed a positive view on Evolution Mining's hedging strategy. With only about 5% of its gold production hedged, Evolution Mining is well-positioned compared to its competitors, Regis Resources (OTC:RGRNF) Limited (RRL) and Northern Star Resources Ltd. (NST), which have 0% and approximately 25% of their gold production hedged, respectively.
The upgrade takes into account the current spot gold price, which is trading near US$2,200 per ounce. This is substantially higher than the current Morgan Stanley estimate and consensus for calendar year 2024, which are US$2,019 and US$2,039 per ounce, respectively, and the long-term nominal estimates of US$1,622 and US$2,024 per ounce. The firm suggests that there is potential for forecast upgrades for Evolution Mining if the spot gold prices remain strong.
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