Strike gold with this mining stock

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This week's Hot Stock is courtesy of Peter Fay, head of research for Invast Australia.

Evolution Mining Limited (ASX: EVN)

Key statistics:

corporate bonds shares magellan global hot stock

Closing share price 09-8-16: $2.750

52-week high: $3.100

52-week low: $0.890

Most recent dividend: 1c

Annual dividend yield: 0.71%

Franking: 0%

Evolution Mining (EVN) has already significantly benefited from the 30% rise in gold since it bottomed out in December. The company has undertaken aggressive expansion over the past two years and the result has been an almost doubling of its production from FY2015 to FY2016. This production increase has been extremely well timed with the aforementioned increase in gold price and an Aussie dollar fluctuating between 69 and 78 cents over the same time frame.

Just as important as an intelligent acquisition plan is the ability and willingness to offload non- performing assets. The past few days have seen reports that EVN is fielding offers for its Pajingo gold mine. This mine is the most mature mine in EVN's stable but also the most expensive. So although a sale will likely see an $80 million hit to the book value, the corresponding fall in average production costs for the remaining mines will likely make a sale a good decision.

EVN has used its excess cash flow to pay down debt, last quarter it paid down $115 million which meant that the preceding 12 months have seen a $322 million debt reduction. The next 12 months should see the remainder of this debt paid down.

In the current geopolitical climate, we see gold remaining at or above current levels and the Aussie dollar at or below current levels, meaning there should be significant scope for increasing margins over the next year. Combine this with a doubling in dividend policy (from 2% of revenue to 4% of revenue) from FY 2016, and an expectation of franking these dividends as of 2017, means we think Evolution Mining is a buy at these levels.

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