Australia | Jun 29 2017
OceanaGold has hit a few bumps at its Haile project and reduced production estimates for 2017. Brokers are not overly concerned as prospects elsewhere should mitigate the downgrade.
-Downgrade to Haile offset by higher guidance from Didipio
-Risk of suspension at Didipio reduced considerably
-Further considerable upside to New Zealand portfolio
By Eva Brocklehurst
OceanaGold ((OGC)) has hit a few bumps at its Haile project in the US. The ramp-up has been slower than expected and has led to a 25% reduction in 2017 production estimates to 120,000 ozs. Nevertheless, ramping up mines is seldom a smooth going and this reduction does not change broker forecasts, or their longer term favourable views of the project.
The Haile optimisation study projects a mine life of more than 16 years at an expanded 4mtpa rate from 2021. Commissioning challenges still exist but should be resolved by the end of the year for little expenditure. Meanwhile, the company also offered a positive update across its other projects, and brokers note the downgrade to Haile has been offset by higher guidance from Didipio in the Philippines.
Haile
The company is disappointed by the commissioning challenges that have resulted in a downgrade to 2017 guidance at Haile and suggests that the commissioning risk may have been better understood if the plant was designed in-house. Macquarie is encouraged by the plans in place to rectify the problems, noting the company has one of the best mine building teams but acquired the project during construction and, therefore, was not in complete control of the design.
As a result, the broker continues to monitor operational performance, including grade control reconciliation, as the company defines controls and the geological picture. Many of the problems stem from design issues, which the company intends to resolve over the next six months at a cost of US$3-4m. At this point, capital expenditure of US$250m is expected to be outlaid between late 2018 and 2020.
UBS is mostly concerned that the market's current focus on the enterprise value/operating earnings (EBITDA) may overlook the cash that is generated by the business over the next few years because of the significant re-investment. The delays warrant some conservatism, in Deutsche Bank's opinion, perhaps even into early 2018. Permits remain the key challenge and for this reason the broker keeps the 4mtpa option outside of the base case valuation.
Exploration has also been successful at the Palomino and Snake open pit targets, part of a prospective 1km corridor that includes the Horseshoe target. Credit Suisse finds this aspect most compelling, as it demonstrates continuity of high-grade gold mineralisation beyond current mine designs.
Didipio
Credit Suisse observes a subtle change in that the company is acknowledging looking at opportunities to further mitigate the geopolitical risk in the Philippines. A final resolution of the suspension order is expected in the next couple of months but the mine continues to operate without any disruption, other than a deliberate high-grading strategy that is being maintained to offset the weaker contribution from Haile.
This essentially takes grade from 2018 and brings it forward to 2017. The implied “hole” in 2018 is expected to be addressed by increasing mill throughput to 4mtpa from the current limit of 3.5mtpa, subject to approval, and a revised underground mining sequence.
UBS observes the risk of suspending Didipio has reduced materially with a change of leadership in the relevant government department. A formal suspension order remains in place but, assuming the company's appeal is treated favourably – with a decision in the December half expected – this should remove any residual overhang.
UBS believes this will then signal the stock is more appealing to the general investor. Australian investors have considerable choice locally but the company's leading position on costs and its diversified asset base should not be overlooked, in the broker's opinion.
The exposure to the Philippines accounts for around 30% of UBS forecasts revenues and valuation and sentiment has been adversely affected by the changes to mining policy. As the company appears committed to reducing geopolitical risk further, the broker suspects acquiring assets could be difficult, as most of the sector, at least in Australia, has de-geared and this leads to higher competition for assets.
Nevertheless, further diversifying away from the Philippines would probably be well received over the longer term although in the short term it may cause investors to stay cautious.
New Zealand
Macraes continues to extend the high-grade Coronation North resource and there is potential for modest extensions to Golden Point and Frasers West while Waihi continues to yield results from multiple vein extensions that are currently being mined. Drilling at Waihi continues to intercept typical grades and widths and supports management's aspiration for more than 10 years of mine life. Credit Suisse observes these all “fill the mill” and buy time before future commitments are necessary for the potential 10-year opportunity if Round Hill can be extracted economically.
OceanaGold remains one of Macquarie's top picks in the sector for 2017. Haile is now the company's largest asset at 39% of net asset value and there is upside in the New Zealand portfolio, as the company benefits from the weakening New Zealand dollar and the potential at the Waihi asset.
There are three Buy ratings and three Hold on FNArena's database. The consensus target is $4.73, suggesting 14.7% upside to the last share price. Targets range from $4.20 (UBS) to $6.00 (Macquarie).
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