Evolution Mining Ltd. took advantage of a "small window of opportunity" to purchase Glencore PLC's majority stake in the Ernest Henry copper-gold mine in Queensland, Australia, to seize full control of the asset.
Under the deal, Evolution purchased Glencore's 70% stake in the Ernest Henry joint venture for A$1 billion. The mining company will utilize existing funds, plus the proceeds from a US$200 million private placement, to finance the acquisition.
In a Nov. 18 conference call about the transaction, Evolution's executive chairman, Jacob Klein, said the Australian company had its sights on eventually gaining control of Ernest Henry since taking a 30% stake in the operation in 2016, with the timing of Glencore's strategy shift coming at the right time.
Glencore decided to restructure its copper-zinc businesses in Queensland, which included Ernest Henry and the Mount Isa complex.
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| Evolution Mining Executive Chairman Jacob Klein. |
"With Glencore understandably shifting its strategic focus to its very large copper operations in Africa and South America, it was a small window of opportunity, and I mean very small, which we leapt through to engage with them on an exclusive bilateral basis to negotiate the transaction we are talking about today," Klein said.
"We will always look at things through the lens of improving the quality of our portfolio and ... things that are accretive to our shareholders. There are very, very few acquisitions that could be as aligned to our strategy as this one," Klein said, adding the purchase gives Evolution greater access to the mine's "consistently higher cash generation at exceptionally low costs."
In addition, Evolution sees Ernest Henry as a bigger part of its asset base, which includes the likes of Mungari and Red Lake, in contrast to Glencore, which saw the mine as a relatively small asset in its vast portfolio.
"One of the real motivations for us to take control of this asset is to be able to progress and optimize those mine life extensions for an Evolution portfolio. So, we will be doing some more drilling, we will be looking at what are the opportunities to potentially extend [the mine's life]," Klein said.
Klein noted that looking at Ernest Henry through the lenses of copper as a by-product credit or on a gold-equivalent basis only shows an upside to the asset, with an opportunity to extend the operation's life beyond the projected 10 years. A pre-feasibility study on extending the underground mine, which may deliver a mine life extension of up to five years, is underway and due for delivery in the September 2022 quarter.
"For the first 12-month period we own 100% of the asset, copper production increases to around 60,000 tonnes per annum and improve the all-in sustaining cost to an eye-watering negative A$4,650 an ounce at current spot prices. The cash generation complements our growth plans at our other cornerstone assets with operating cash flow of A$410 million and A$495 million in fiscal 2023 and 2024, that's at the A$11,000 copper price and a A$2,200 gold price. At current gold and copper prices, this increases to A$530 million and A$650 million in each of these two years," Klein said.
"There's immediate cash flow generation and results in a material reduction in our cost per ounce, and it has significant growth opportunities with mine life extensions and great geological potential," Klein added.
From a financial standpoint, Evolution CFO Lawrence Conway said the Ernest Henry purchase is a "perfect fit" for the mining company's balance sheet, with the asset already fully paying its initial investment and generating an average return of 26% per year since 2016.
"The capital investment required for the next few years at Ernest Henry is not material and with debt commitments of around A$100 million to A$150 million in each year, the immediate increase in cash generated will improve our dividend capacity," Conway said.
Evolution shares on the ASX closed at A$4.43 each on Nov. 18, for a 10.4% increase from the previous close.