Australia | Aug 05 2015
-Delivers on diversity
-Adds mine life
-But is it priced right?
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By Eva Brocklehurst
OceanaGold ((OGC)) has made all the right moves in 2015, in Citi’s opinion. Firstly it lifted its New Zealand gold production profile with the acquisition of Waihi from Newmont Mining earlier this year. Now the company proposes to acquire Canada’s Romarco Minerals, which owns the Haile gold mine in South Carolina, US, currently under final construction.
The all-scrip bid for Romarco, which has the blessing of both boards, values the target at $890m. The combined entity should have a market cap around $1.8bn, Citi calculates, doubling the company’s current capitalisation.
Combined production in FY17 is estimated to be 540,000 ozs with all-in sustainable costs of less than US$550/oz. Citi believes the acquisition elevates OceanaGold to a more significant mid-cap, low-cost gold miner which would be a welcome addition to ASX and could attract a valuation premium from investors.
The company’s June quarter production was largely free of problems, although production was lower than the March quarter and cash costs up 37%, to what the broker considers is a a still-low US$549/oz. Citi acknowledges the premium being paid for Romarco is full but in view of the challenging conditions in the sector, views the deal as a positive. The broker retains a Neutral rating based on valuation.
UBS notes Didipio in the Philippines is OceanaGold’s star mine, with its low-cost production continuing to find favour among investors. On the other hand, the broker finds the NZ assets have little appeal because of their higher costs and limited longevity.
The acquisition of Romarco, therefore, improves the company’s ability to grow geographically and add operational diversity. Nevertheless, with the limited life at Macraes, UBS wonders whether the Haile mine will just be replacing NZ production beyond 2017-18, along with a significant up-front acquisition cost to shareholders. Hence, the question must be asked in the broker’s view: is this really a growth acquisition or will it just sustain current output over the long term?
JP Morgan considers the acquisition of Romarco to be fully priced. OceanaGold is now trading well below valuation but, with gold prices declining to below the broker’s near-term forecasts, a Hold rating is considered appropriate.
Credit Suisse is more comfortable with the prospect of added mine life and diversity and likes the Haile asset, believing the company has done a deal on a largely de-risked, fully funded, tier 1 asset with material upside.
Moreover, life extensions to the company’s NZ mines beyond projected closure in 2017 appear increasingly likely, following low-strip strike extensions, higher NZ dollar gold prices, lower diesel prices and achievements on management costs. Credit Suisse upgrades the stock to Outperform from Neutral.
Romarco is listed on the Toronto exchange and the open pit mine at Haile is expected to deliver first gold in the September quarter of 2016. Mine life is 14 years and there remains potential for an underground development in later years. The scrip-based bid offers 0.241 OceanaGold shares for each Romarco share, a 72.7% premium for Romarco stock based on July 29 closing prices.
Credit Suisse is not perturbed by this premium, considering it to be necessary to close the deal. It appears Romarco’s current share price reflects a stock overhang created by a capital raising earlier this year via a bought deal which did not go to plan. This left significant amounts of stock in the hands of unintended owners in the face of a falling gold price and no demand for gold equity. Hence, OceanaGold offers a material gain to these owners at a price they would not be able to achieve unless gold were to rally strongly.
Post completion, OceanaGold shareholders will own 51% of the merged group. While the company’s production will contribute 69% in 2017 and Haile just 31%, this appears skewed in Romarco’s favour with 49% of the shareholding. Still, Credit Suisse flags the fact that 2017 is the most favourable year for this comparison.
There are three Buy ratings and three Hold on FNArena’s database. The consensus target is $2.96, suggesting 29% upside to the last share price. Targets range from $2.80 (Credit Suisse, Morgans) to $3.08 (UBS).
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