Australia | Dec 12 2012
– OceanaGold's gold production in NZ is high cost
– The Didipio project in the Philippines is anticipated to transform the company
– Didipio offers low costs and long mine life
By Greg Peel
When one thinks of gold mining countries, New Zealand doesn't exactly leap to mind. But when Macraes Mining acquired tenements from two companies in 1989, one being the then BHP New Zealand, the move was a precursor for the subsequently renamed OceanaGold ((OGC)) to list on the ASX in 2004 and put Kiwi gold mining on the map.
Decades on, Oceana's New Zealand gold assets are mature and now recovering gold at relatively a high cost. Indeed, at the highest cash cost within JP Morgan's gold stock coverage universe at around US$1000/oz. However, the future of the miner is secure since it began development of the Didipio project in the Philippines, JP Morgan asserts. Unlike Oceana's legacy Kiwi assets, Didipio offers long life at a low cost.
Didipio is set to drive JPM's forecast 75% gold production growth measured over the period 2011-2014. The broker estimates some 400% earnings growth will be derived. Combing the Didipio numbers, which the analysts have set at 50% of the Oceana's net present value, with the company's legacy operations throws up a net cash cost of a much reduced figure of around US$450/oz.
For Oceana, Didpio is a transformational project, JP Morgan believes. Yet the stock's current trading price represents a discount to the analysts' base-case net present value, which does not include consideration for expansion (10-15cps), mine life extension (10cps) or further exploration (?). This likely reflects, however, a discount for the sovereign risk of the Philippines.
Despite boasting significant mineral riches, the Philippines rates very poorly in “places to do business” surveys, JP Morgan concedes. However, the analysts believe recent developments such as the ratification of the Mine Act of 1994, which allows 100% foreign ownership of resource projects, should pave the way for a more stable legislative mining code ahead. Such confidence was demonstrated by international major Goldfields back in April when it acquired 40% of the Far South East project.
JP Morgan has derived a sum-of-the-parts net present value for OGC of $3.71 and has set a target of $3.70 – some 37% above the current trading price. The broker has initiated coverage with an Overweight rating.
In so doing, JPM has joined three other FNArena database brokers covering OceanaGold, each of whom have a Buy or equivalent rating. The database consensus target price now stands at $3.67, with Citi the most positive on $4.30.
Last month Citi posted its own report selecting OceanaGold as the broker's top pick in the gold mining sector. Citi similarly values the "step-change" in production levels and reduction in cash costs Didipio offers. Aside from the primary target of gold, Didipio, as is usually the case with gold deposits, offers copper reserves within the mix. Offsetting copper revenues will bring the effective "gold" cash cost into the negative for the first six years of operation. The company is pencilling in a negative US$79/oz net cash cost, but the broker notes this is based on a conservative average copper price of US$3.00/lb. Using US$3.50/lb (current spot US$3.65/t), the broker derives a negative cost of US$270/oz.
Citi is little concerned about Philippines country risk. Didipio is the first project to proceed to production under new mining agreements established under the government's Executive Order 79 on mining reform. In setting a $4.30 target however, the broker has applied a greater discount than for non-Philippines peers with regard to the typical commissioning and ramp-up risk of any mining project.
Alongside number one pick OceanaGold, Citi's second choice is Beadell Resources ((BDL)). Both offer their own specific risks which may lead investors to prefer the "safer" gold miner options of Newcrest ((NCM)) or Regis Resources ((RRL)). However, Citi considers both to be fully valued on their own estimates.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.