Australia | Jan 21 2015
-Cash flow comfortable
-Reefton back to normal
-Acquisitions main risk
By Eva Brocklehurst
OceanaGold ((OGC)) is delivering the goods on all fronts, maintaining its status in the December quarter as a low cost producer with a strong balance sheet. As a result the gold-copper stock is a favourite among brokers, particularly in such times of extreme commodity price volatility.
The company's mines performed ahead of expectations in the quarter. Grades improved at Didipio, in the Philippines, with a record gold haul that was up 33% on the prior quarter. A quick return to normal at Reefton, in New Zealand, was a relief to brokers. Achieving guidance had been a concern but instead the mine delivered its strongest quarter for the year, after pit wall instability had impacted on June and September quarter production.
Higher Didipio costs did disappoint but this outcome was largely because of the expensing of more waste tonnage associated with the implementation of the optimised mine plan. Copper credits were also lower in terms of tonnage and price. These negatives were offset by a substantial reduction in costs in New Zealand, with more capitalised tonnage as the Coronation pit was opened at Macreas and a lower strip ratio was realised at Reefton. Lower fuel costs and a lower NZ dollar were also positive inputs.
UBS has upgraded to Buy from Neutral based on valuation and the strength of the December quarter report. Despite 2014 being tough going for gold producers, OceanaGold outperformed. The broker believes the company remains in a compelling position to repeat its performance in 2015, with the long life of Didipio and low cash costs providing protection to commodity price volatility. Catalysts for UBS include extensions at Didipio, development of the underground in the next 2 and a half years, potentially spinning off the NZ assets and advancing the El Dorado project in El Salvador.
After two consecutive years of beating guidance, Deutsche Bank expects 2015 will offer more of the same from OceanaGold, with a step up in production guidance to 295-335,000 ounces. The broker notes implied free cash flow at around US$34m in the December is above estimates, with a year-end balance of US$51m after paying down US$30m in debt. The production report also underscores Morgans' view that the stock is one of the best names in the sector, as management has built a solid track record of delivering on expectations and the stock continues to offer multi-mine, low-cost exposure to gold and copper. Significantly, the company managed to add cash and reduce debt during a period of a deteriorating US dollar gold price.
2015 guidance is in line with JP Morgan's estimates and the broker retains OceanaGold as one of its preferred stocks. The main risk is the potential for the company to make acquisitions. Morgans also considers this to be the biggest risk, particularly as an acquisition can become value destructive. Last September OceanaGold confirmed it made approaches to Alacer Gold ((AQG)), which were rebuffed, but the CEO has indicated that, while remaining committed to identifying and investing in new assets, the company intends to do so in a disciplined way.
Citi considers the stock fairly valued at the current price and retains a Neutral rating but acknowledges upside leverage exists at higher gold and copper prices as well as with ongoing exploration success at Didipio. FNArena's database contains five Buy ratings and one Hold (Citi). The consensus target is $2.78, which suggests 6.1% upside to the last share price. Targets range from $2.55 to $3.15.
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