Australia | Jun 20 2011
– OceanaGold has revised its mine plan for Didipio
– Brokers see this a key de-risking event
– The market is ascribing no value to the project
By Greg Peel
OceanaGold's ((OGC)) core mining operations are centred in New Zealand, but the company's exciting prospect for expansion comes in the form of its Didipio project in the Philippines. OGC has recently been revising its mine plan for Didipio, and brokers are enthusiastic about the changes.
Originally the open cut mine at Didipio was planned to run for 6 years and then the underground stage for 14 years to provide a 20-year mine life. Now, however, the plan is to run the open cut for 16 years and commence the underground from year eight for 6 years, reducing the total mine life from 20 to 16 years.
While this might sound like a downgrade, an expanded open pit supports increased mining rates and faster access to higher grade ore, Citi notes. OGC has upgraded the value of its reserves through higher gold and copper price assumptions, and has also increased its gold production forecast by 45% to 100koz per annum from 70kozpa. Furthermore, the processing plant capacity will be increased to 3.5Mtpa from 2.5Mtpa.
The new strategy will cost more nevertheless, such that capex guidance has increased to US$183m from US$140m. There will an offset in the form of a forecast increase in copper by-product production to 14ktpa from 9ktpa, but the life-of-mine cash cost assumption has jumped to US$356/oz of gold from an original US$128/oz. A lump of that increase relates to cost inflation, particularly with respect to the price of oil. Didipio is located in a remote area and relies on diesel power generation.
So how does this all add up? Well, RBS suggests the new Didipio strategy adds a little bit to valuation, such that the analysts have increased their target price for OGC to $3.00 from $2.95. But most importantly for RBS, the revised mine plan is a “key de-risking event for the project” because it provides certainty on timing, capex and production.
Aside from the Didipio specifics, OGC has also announced a new five-year, company-wide strategy which includes an aspirational target of 600kozpa of gold production reflecting management's goal to grow both organically and by acquisition. But construction at Didipio has now commenced and 90% of plant equipment has been secured, with most of it already on site, so it's all systems go in the Philippines.
The market does not, however, appear to have a great regard for the inherent risks involved in mining a remote part of the Philippines. Macquarie values OGC's existing New Zealand operations at about $2.30 per share and the last traded price Of OGC is $2.36. All of Citi, RBS and Macquarie are of a similar view, and that is to buy OGC now is to win a free option on the potential success of Didipio.
These are the only three brokers covering OGC in the FNArena database, and they provide an exercise in appreciating the “best guesstimate” valuation model inherent in this sort of blue sky operation. All three have Buy or equivalent ratings, yet while RBA has set a twelve-month price target of $3.00, Macquarie is on $4.40 and Citi is on $5.00.
The disparity is indicative of why “de-risking” thus becomes important. Macquarie believes upward momentum will emerge in the share price as the market becomes more comfortable with OGC's ability to develop and operate a mine in the Philippines.
It's not a “tomorrow” story, but a free option on potentially 100kozpa of gold production at US$356/oz is not to be sniffed at.
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