Australia | Nov 03 2014
-Well placed to meet 2014 guidance
-Blackwater has potential
-But is Blackwater a good investment?
By Eva Brocklehurst
OceanaGold ((OGC)) has fulfilled hopes that Didipio will provide the cornerstone to value creation going forward. The mine in the Philippines was the star performer in the September quarter, delivering stronger production in the face of a weaker outcome in the other assets in New Zealand. The production increase at Didipio occurred as stage 3 of the open pit accessed higher grade ore and lifted mill grades, supported by higher throughput. Further improvements are expected in the December quarter and management expects full year guidance will be exceeded.
On the NZ stage, geotechnical issues at Reefton were known late in the June quarter and are accommodated within unchanged full-year guidance. Macraes is expected to produce similar results in the December quarter compared with the preceding two quarters.
The Didipio optimisation study has brought forward the underground mining operation to a start in 2017. There is also potential at Blackwater in New Zealand and this scenario, coupled with a strong balance sheet and leverage to copper prices, ensures an Overweight rating for JP Morgan. The broker considers the stock a top pick in the Australian gold sector, with the price now providing an opportunity as it is well below the broker's target of $3.05. CIMB also expects the December quarter will be strong, with the company well placed to meet, or exceed, the top end of production guidance.
Clarity on the optimised plan at Didipio adds confidence to forecasts. Open pit material movements are reduced and near-term grade profile is strengthened. The increased scale of the underground has reduced the broker's operating cost assumptions while the smaller surface footprint and reduced environmental impact are also positive. CIMB upgrades to Add.
Revenue and earnings were below Deutsche Bank's forecasts in the quarter, because of lower sales and weaker realised prices. Free cash flow was also disappointing and a $30m debt repayment in the current quarter will more than offset the expected strong operating cash flow. Still, Deutsche Bank expects a better free cash flow yield will return in the December quarter with the company expected to deliver 14% over the next two years.
On the subject of the technical report for the optimisation study, the broker notes that while the new mine plan proposes an earlier start to the underground, more significantly the open pit mine life has been reduced by seven years. Accelerated mining is expected to deliver 19.7mt of ore over the next three years compared with the previous estimates of 25.6mt out to 2024. This ore will be stockpiled for blending with the underground ore to sustain the 3.5mtpa milling rate for 14 years. A smaller open pit allows underground mining earlier access to high grade ore, although the overall grade profile is below Deutsche Bank's previous expectations.
Credit Suisse finds the plan for Didipio adds more value than previously indicated and the broker remains hopeful there could be more upside to come. For the New Zealand assets, delivery of a credible plan for Blackwater underground will add value to the portfolio but Credit Suisse concludes that this small project, while good, may not be the best investment of OceanaGold's resources.
The challenge is that a significant portion of the capital required to bring Blackwater to production is needed to develop the decline, in order to gain access so that the ore body can be drilled out. While capital risk is small it can limit the company's near-term capacity to undertake more transformational investments. The broker suspects that, if a portion of the balance sheet capacity, development team and management time is consumed in pursuing a small non-strategic project, the remaining capacity may be constrained.
Reefton is the one blot on the copy book, as limited ore access suggests it might struggle to achieve guidance. Nevertheless, the geotechnical challenges were signalled by the company in the June quarter and the broker is confident Didipio will rescue the numbers over the balance of 2014. Credit Suisse concludes that the NZ portfolio is probably approaching decision time, when management needs to commit on starting new projects or offload the opportunity to a new team.
FNArena's database contains four Buy ratings and one Hold. The consensus target price is $2.76, suggesting 47.6% upside to the last share price. This compares with $2.88 ahead of the quarterly report. Targets range from $2.55 to $3.05.
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