Evolution to pay A$880m for stake in Glencore’s Ernest Henry

JOHANNESBURG (miningweekly.com) – In line with its strategy to build a globally relevant, midtier Australian gold producer, Evolution Mining has moved to buy an economic stake in a large-scale, long-life copper/gold mine near Cloncurry, Queensland, for A$880-million.

Evolution will buy a 30% economic stake in diversified miner Glencore’s Ernest Henry mine and will be entitled to 100% of the mine’s gold production, subject to an agreed life-of-mine (LoM) and block model, adding about 85 000 oz/y of gold to its production profile at a “very low” all-in sustaining cost (AISC).

The acquisition, which was announced on Wednesday along with a A$401-million capital raising, adds to two value-accretive buys in the last 12 months – the Cowal mine, in New South Wales, and Mungari mine, in Western Australia. Evolution also recently announced that it would sell its Pajingo mine, in Queensland, to a Chinese miner for A$52-million.

“The addition of low-cost gold production from Ernest Henry to our portfolio gives us exposure to another high-quality, long-life asset that further underpins the future success of our business. Evolution is building a portfolio of high-quality assets that will prosper through the gold cycle,” executive chairperson Jake Klein commented in a statement.

Evolution has agreed to buy all future gold produced from the agreed LoM area and 30% of further copper and silver produced from the LoM area. In addition to the A$880-million upfront payment, Evolution has to contribute 30% of future gold production costs in respect of the LoM area.

In the year ended June 30, 2016, Ernest Henry produced 67 000 t of copper and 88 000 oz of gold in concentrate. On a proforma basis, Evolution’s interest in Ernest Henry would have delivered an AISC of negative A$59/oz and generated a net mine cash flow of A$142-million, the company highlighted.

As a result of the transaction, Evolution has lowered its AISC guidance for 2017 to between A$900/oz and A$960/oz, while increasing its production guidance to between 800 000 oz and 860 000 oz.

Evolution stated that it had entered into agreements with Glencore for potential future regional acquisitions and exploration activities on tenements near Ernest Henry. “There are several existing identified exploration targets and regional opportunities that Glencore and Evolution are already focused on further analysing. The long mine life and strong free cash flow expected to be generated from Ernest Henry should allow Evolution to explore and develop upside opportunities.”

The Ernest Henry mineral resource is estimated at 96.1-million tonnes grading 1.17% copper and 0.59 g/t gold for 1.1-million tonnes copper metal and 1.8-million ounces gold. The processing plant has the capacity to operate at 8.5-million tonnes a year and can be upgraded to 11-million tonnes a year.

FUNDING THE DEAL
Meanwhile, Evolution announced it would raise A$401-million through an underwritten prorata accelerated renounceable entitlement offer to partly fund the transaction. The 2-for-15 underwritten offer will be priced at A$2.05 a new share, representing a 13.4% discount to the theoretical ex rights price based on the adjusted last closing price of Evolution on Tuesday.

The company’s largest shareholder, La Mancha, has confirmed that it will take up A$60-million.

The balance of the A$880-million will be funded by a new A$500-million term loan, with a five-year tenor.

The transaction is subject to customary regulatory approvals and is expected to close by the end of the fourth quarter of 2016.

The transaction forms part of Glencore’s debt reduction plans initially announced in September last year.