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On Friday, JPMorgan upgraded shares of Evolution Mining Ltd. (EVN:AU) (OTC:CAHPF), changing the stock rating from Underweight to Overweight and increasing the price target to AUD8.50, up from the previous target of AUD5.30. The upgrade reflects a revised approach to long-term (LT) pricing by the analyst at JPMorgan.
The firm has adopted a more dynamic LT pricing mechanism for gold, which is now set to mean revert from forward curves back to the approximate spot price at the time of mark-to-market (MTM). JPMorgan’s current LT price for gold is set at US$3,100 per ounce. This adjustment is a significant factor behind the upgraded rating and higher price target for Evolution Mining.
In addition to the adjustment in gold pricing, JPMorgan has marked both gold and silver prices to move up around 5% through the curve compared to their last update three weeks prior. These changes in commodity price forecasts are integral to the revised outlook on Evolution Mining’s stock.
Furthermore, JPMorgan has incorporated an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple to blend with their current discounted cash flow (DCF) based valuations. This new method is intended to better capture near-term momentum in the valuation of Evolution Mining.
The analyst’s comment from JPMorgan provides insight into the rationale behind the upgrade: "We have adjusted our LT pricing mechanism to be more dynamic, with gold now set at a mean reversion from forward curves back to the approximate spot price at time of MTM, with our current LT set at US$3,100/oz. We retain the use of forward curves for short-medium term forecasting, and have marked both gold and silver, which move up ~5% through the curve vs our last update just 3 weeks ago. We have also incorporated an EV/EBITDA multiple to blend with our current DCF based valuations to better capture near-term momentum."
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