“We don’t believe bigger is better – margin is what we should focus on rather than volume,” he says. “We always said six to eight assets, while continually upgrading the quality of your portfolio.”
Klein – a mining industry veteran who founded ASX-listed Chinese gold miner Sino Gold in the 1990s, sold the company to Eldorado for $2 billion in 2009, joined Conquest Mining and sealed a merger to create Evolution Mining – has steadily been working to achieve this goal.
When the gold price is weaker, that’s when there are “stresses in the system”, says Klein. And that’s when he has previously seized on deal-making opportunities, using debt to fund a succession of strategic acquisitions in recent years.
“Right now, the Australian sector is in rude health – very few companies are under stress, capital is available … how are you going to improve the quality of your portfolio?” he asks. “In a cyclical sector, you’ve got to do things that are counter-cyclical.”
Now the second-largest ASX-listed gold miner, Evolution has become a cashed-up mid-tier miner with a portfolio of six assets – wholly owning Cowal in NSW, Mt Carlton, Cracow and Mt Rawdon in Queensland and Mungari in Western Australia, while holding an interest in Glencore’s Ernest Henry copper-gold mine in Queensland. In November, Klein also sealed a $500 million deal with the world’s bigger gold miner, Newmont Goldcorp, to buy its Red Lake gold mining complex in Canada, with the acquisition expected to be completed by next month.
Australia’s mid-tier gold sector – including the likes of Evolution, Northern Star, St Barbara and Saracen – has generally delivered better returns for their investors than the majors, says Klein.
“The mid-tier space has been the best space for shareholders,” he says.
Evolution has faced setbacks at two of its mines in the past six months. First, pit wall instability problems disrupted its Mr Rawdon mine in the September quarter. Then in January, Evolution announced drilling had revealed that the orebodies at Mt Carlton were narrower than its modelling had first forecast. The discovery slashed the mine’s expected output by 27 per cent for the full year.
The bad news from Mt Carlton caused Evolution to warn its entire group production would come in at the lower end of its guidance of 725,000 to 775,000 ounces and sent its share price on a brief slide. “A shaky start to the year,” as one analyst put it. But with more promising exploration potential recently uncovered at its Cowal and Mungari gold mines, and the announcement that Evolution was now debt-free with cash in the bank of $170 million after repaying a bank debt of $275 million, analysts appeared largely unfazed by the setbacks, pointing out that Evolution remained one of the lowest-cost and highest-margin gold producers both on the ASX and globally.
As for its latest acquisition, the Red Lake mine in Canada’s Ontario province is currently making a loss, requiring substantial investment to turn it around. Red Lake is a high-cost asset, presently producing gold for about $US1600 an ounce. Once the acquisition is completed, Evolution has committed to spending $US100 on existing operations and $US50 million on exploration in an effort to improve the asset’s performance over the next three years.
“It’s a case of demonstrating Red Lake was a really good acquisition,” says Klein. “It’s a ‘show-me’ phase for that asset.”
Business reporter for The Age and Sydney Morning Herald.