Australia | Feb 24 2015
-2014 profit and dividend
-Valuation full, hence downgrades
-M&A potential increases
By Eva Brocklehurst
Times are difficult for resource companies and brokers rarely sing from the same song sheet on a particular stock. OceanaGold ((OGC)) is one of the rarities, after turning out a 2014 profit with a surprise 4c maiden dividend. Brokers welcomed the results on several scores. Free cash flow is robust and some debt and lease liabilities were re-paid over the year. Gold output grew and costs were lower.
The company now has the option to balance shareholder returns, debt repayments and growth, in Deutsche Bank’s view. Without a significant acquisition, the balance sheet should build further and dividends lift. Even after dividends, debt & lease repayments and capex outlays, the broker believes OceanaGold can generate $44m in cash in 2015, which equates to a 6.0% free cash flow yield.
There remains head room on credit facilities and Deutsche Bank notes debt providers are keen to issue more should it be required. Still, any acquisition is likely to be funded by majority scrip, in the broker’s view, as there is limited ability to offer a cash component without drawing on further debt. That said, Deutsche Bank hails the company’s disciplined and patient approach to acquisitions.
Citi expects something will happen on the merger or acquisition front in the next 12-18 months, as the company is seeking opportunities to lift its production footprint. The broker flags the fact this is only the fourth annual profit since 2006, and the first at over $50m. Citi expects the company to remain in profit for at least the next five years. The dividend policy is for an annual 2c payment while retaining potential for discretionary payments. The broker lifts 2015 earnings forecasts by 12%, having softened the near-term tax profit in line with the benefit in 2014. A Neutral rating is retained based on a full valuation.
Credit Suisse also considers the valuation is full and therefore downgrades to Neutral. The broker notes no impairments occurred in 2014 – none were expected – after the comprehensive impairment of the New Zealand operations in 2013. Cash will be needed for the Didipio underground development in the Philippines and to pursue growth options in order to replace the winding down of NZ operations. Reefton will cease at the end of this year and Macraes in 2017. Frasers underground has been extended and is expected to continue as long as mill capacity at Macraes is underpinned by Macraes base load production.With NZ facing near-term closure, the broker suspects corporate activity to deliver the necessary asset replacements could occur in 2015.
A downgrade to Neutral was the go for UBS as well. This is because of recent share price strength as the stock remains one of the broker’s favourites in the gold sector, supported by low cost production from Didipio. Costs have remained low despite the company not benefitting from a falling domestic currency relative to the US dollar as is the case for many of its ASX-listed peers. With the initiation of the dividend UBS believes the stock will appeal to a broader range of investors. Should either the El Dorado project in El Salvador or exploration upside at Didipio be advanced further, significant value could be added to the stock, in the broker’s view.
The results reinforced the company as a premier name in the sector and Morgans notes a solid track record has been built in both operations and financial results. This is a rarity in the sector in the broker’s opinion, while management is also showing a disciplined approach to capital and share returns despite a period of weaker commodity prices. Morgans retains an Add rating. JP Morgan lauds the stock too but considers the ongoing pursuit of acquisitions may act somewhat as an overhang. In this regard the broker points to the confirmation in September last year that OceanaGold had made several approaches to merge with Alacer Gold ((AQG)).
FNArena’s database contains three Buy ratings and three Hold. The consensus target is $2.89, suggesting 13.6% upside to the last share price. Targets range from $2.79 (Citi) to $3.20 (JP Morgan).
See also, OceanaGold Retains Its Favoured Status on January 21 2015.
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