Small Caps | Sep 15 2014
-Concern over Philippines govt policy
-Question over in-country processing
-Share price fall creates opportunity
By Eva Brocklehurst
Several brokers have reviewed OceanaGold's ((OGC)) optimisation study for the expansion of its Didipio mine in the Philippines and deduce that the plan is accretive to value. While more details will be forthcoming with the technical report, the acceleration of underground operations and a reduced life for the open cut mine are viewed favourably, in that 70mt of open pit waste movement will not occur and that will save around US$200m. The underground production rate is scheduled to increase to a proposed 1.6mtpa of high grade ore, from 1.2mtpa. The 3.5mtpa milling rate can be extended by ramping up the underground early and producing at the higher rate. The underground mine development is now expected, subject to permits, to commence at the beginning of 2015.
The update increases the valuation of the stock for both JP Morgan and Credit Suisse. Credit Suisse still wants more detail on the interpretation of the FTAA – Financial or Technical Assistance Agreement – with the Philippine government, with respect to capital recovery and the tax free period, as well as the date of commencement of the government's 60% net revenue share of cash flow. The broker is not confident in the earnings sharing implications of the revised plan, with respect to cost recovery and profit sharing.
There is also the uncertainty regarding speculation that the Philippine government may take the road of Indonesia and mandate in-country processing of minerals, rather than exporting unprocessed mine product. There are two bills before the parliament in this regard. Credit Suisse estimates operating cash flow will reduce in 2019, as New Zealand operations cease and ahead of a full ramp-up at Didipio from 2020. The broker retains an Underperform rating.
JP Morgan upgraded to Overweight from Neutral on the back of the optimisation study, because of improved valuation. The broker observes OceanaGold's stock price slumped after a weak June quarter report, although management had flagged reduced production as operations progressed through a low-grade portion of the ore body. The stock is now trading well below the broker's target of $3.10, hence, the upgrade. Key points from the study are the bringing forward of the development and the increased production rates. JP Morgan expects better rates of production will likely lead to a re-rating closer to full value. The stock is one of the broker's top picks in the Australian gold sector, with recent weakness providing an opportunity.
Offsetting some of the advantages is the acceleration of capital expenditure and what CIMB expects is a lower life-of-mine head grade from the underground mine as a result of a lower cut-off grade, driven by the increased production rates. The technical report due at the end of October is expected to provide more details on this issue. Besides this aspect, the broker believes the study comfortably meets market expectations on upside scenarios at Didipio. Reduced surface disturbance and infrastructure in a typhoon-exposed climate combined with hilly topography can only be an advantage in terms of risk reduction, in CIMB's opinion. The plan has a smaller footprint with a revised open pit design and a smaller river deviation is required.
CIMB considers OceanaGold offers gold price exposure via a well managed, multi-mine company with production growth at low cash costs versus its peers. The current market valuation does largely reflect this scenario on CIMB's estimates, and a Hold rating is retained. On FNArena's database OceanaGold has one Buy, two Hold and two Sell ratings. The consensus target is $2.78, suggesting 3.1% upside to the last share price. Targets range from $2.36 to $3.10.
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