Company Overview: OceanaGold Corporation is a gold mining company. The Company is engaged in the exploration, development and operation of gold and other mineral mining activities. The Company's segments are New Zealand, the Philippines, the United States and All other segments. The Company's assets encompass its flagship operation, the Didipio Gold-Copper Mine located on the island of Luzon in the Philippines. On the north island of New Zealand, the Company operates the high-grade Waihi Gold Mine. On the south island of New Zealand, the Company operates the gold mine in the country at the Macraes Goldfield, which is made up of a series of open pit mines and the Frasers underground mine. In the United States, the Company is constructing the Haile Gold Mine, an asset located in South Carolina along the Carolina Slate Belt.

OGC Details

Organic Growth Opportunity Ahead: OceanaGold Corporation (ASX: OGC) is engaged in the exploration, development and operation of gold and other mineral activities. The company operates one open cut gold mine and two underground mines in New Zealand. In addition, the company also has an underground operation at Didipio in the Philippines and one open cut gold mine at Haile in South Caroline, United States. The company’s ownership structure consists of three primary wholly-owned subsidiaries including, OceanaGold (Singapore) Pte. Ltd, Oceana Gold Pty Ltd and Romarco Minerals Inc. Asset portfolio of the company includes four material operations namely, the Macraes, Didipio, Waihi Gold Mine and Haile Gold Mine operations. In FY18, the company produced 533,286 ounces of gold, in-line with the full year guidance range of 515,000 – 545,000 ounces. Production of copper was also in-line with the guidance at 14,999 tonnes. During the year, the company continued to invest in the expansion of the Haile process plant with the installation of a pebble crusher. Over the period covering 2014 to 2018, the company witnessed a top-line CAGR growth of 8.2%, with 2014 revenue amounting to $563.3 million and 2018 revenue amounting to $772.5 million. Bottom-line CAGR growth stood at 2.2%, with 2014 and 2018 profits amounting to $111.50 million and $121.70 million, respectively.
During the quarter ended 30 June 2019, the company reported a higher production from Haile & Waihi operations and lower production from Macraes operation. Haile operations were characterised by a QoQ decrease in unit cash costs, unit mining costs and AISC. Gold production at the Waihi operations increased by 40% QoQ on the back of higher mill feed and head grade. On the other hand, production decreased for the Macraes operations due to lower grades mined and processed.

Going forward, the company is expecting the performance in the second half to be stronger than the first half. Costs in the second half are expected to be lower on the back of increased production. The company will drive further operational improvements at Haile operations and will drive growth through continued advancement of the Martha underground development & extensive exploration drilling across the operational footprint.


Revenue and PAT Trend (Source: Thomson Reuters)

Q2 FY19 Production and Sales Data: During the quarter ended 30 June 2019, the company reported total gold production of 129.3koz, representing an increase of 2.86% in comparison to 125.7koz in Q12019. Gold production for H12019 was reported at 255.0koz. Sales for the quarter stood at 125.6koz, as compared to Q12019 sales of 121.1koz. Copper produced during the quarter was reported at 4.0kt and total production for the half year stood at 7.9kt. During the quarter, the company sold 3.6kt of copper, as compared to 3.3kt sold in the previous quarter. All-in Sustaining cost for the quarter was reported at $1,118 per oz sold, as compared to $1,026 per oz in the previous quarter.


Operating Results (Source: Company Reports)

Q2FY19 Key Financial Highlights: During the quarter, the company generated revenue amounting to $186 million, increasing 3.33% in comparison to previous quarter revenue of $180 million. EBITDA for the second quarter stood at $71 million, as compared to $64 million in the previous quarter. During the period, the company reported an adjusted net profit of $22 million, representing an increase of 37.5% on previous quarter profit of $16 million. Adjusted earnings per share for the quarter stood at $0.03, similar to the EPS in the previous quarter.

 
Financial Results (Source: Company Reports)

Operational Highlights:

(a) Haile: During Q2FY19, total gold production from the Haile operations stood at 37.2koz and production for 1H19 stood at 62.9koz. Unit cash costs for the operations decreased by 39% QoQ. Unit mining costs and AISC decreased by 30% and 23%, respectively. In addition, the company reported positive reconciliation at the Snake pit in the second quarter. To capitalise on improved weather conditions, the company accelerated pre-stripping activities at the Red Hill pit, which is into ore mining.

(b) Didipio: Didipio reported a QoQ increase of 18% in underground ore mined. The implementation of ADAPT technology project in underground mining yielding improved mine productivity at the operations.

(c) Waihi: Ore mined and mill feed for the Waihi operations increased by 29% QoQ. Gold production increased at a rate of 40% on the back of higher mill feed and head grade. From the growth perspective, the company commenced the development of Martha Underground Project and submitted mining application for WKP project.

(d) Macraes Operations: In-line with the company’s expectations, production witnessed a QoQ decrease due to lower grades mined and processed. Total material mined increased by 18% QoQ. The company is seeking to extend the mine life through exploration and mine planning. Investigation is being conducted at Golden Point for a potential standalone underground operation.

Balance Sheet Position: As at 30 June 2019, net debt on the balance sheet stood at $108 million with net debt to EBITDA ratio of 0.40x. Cash balance at the end of the period came in at $84.7 million, excluding an approximate amount of $44.3 million held in strategic equity investments.

An Overview of OGC’s Cash Flows: During the first half, the company generated operating cash flows of $125.2 million comprising $86.2 million in the second quarter. The increase in cash flows during the second quarter came in as a result of higher EBITDA combined with favourable working capital movements. Cash flows used in investing activities increased due to higher pre-stripping investments at Haile and Macraes.
Going forward, costs are expected to go down as a result of increased production which will give rise to a stronger performance in the second half of 2019. The company is aiming at growth through extensive exploration drilling and is looking forward to further improve safety culture and performance.

Recent Updates:

(a)Appointment of Director: The company recently announced that it has appointed Catherine Gignac as a Non-Executive Director on the Board of Directors with effect from 30 August 2019. She holds over 30 years of experience in capital markets and has been associated with leading global brokerage firms as a mining equity research analyst.
 
(b)Key Takeaways from Diggers & Dealers Conference: In the presentation released to the exchange, the company talked about the Martha Underground Project pertaining to Waihi Gold Mine. As of January 2019, the company had completed 30.7 kilometres DDH and is planning an additional 50 kms DDH by 2019. The company is expecting to come up with the next resource update for the project in 3Q2019 with end of the year resource update expected in 1Q2020. The company also updated that a significant resource of 3.3 moz of gold at Macraes operation represents a strong leverage to the gold price. With regard to Argentine exploration, drilling for Pedernales JV is expected to commence in November 2019.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 3.08% of the total shareholding. Vanguard investments Australia Ltd. holds the maximum interest in the company at 1.72%, followed by J.P. Morgan Asset Management (Hong Kong) Ltd, holding 0.31% of the shares.
 

Top Ten Shareholders (Source: Thomson Reuters)
 
Key Metrics: In Q2 FY19, the company had a gross margin of 46.4% as compared to 43.7% in the previous quarter. EBITDA margin for the second quarter improved to 37.6%, as compared to previous quarter margin of 35.7%. In addition, the EBITDA margin of the company was much higher than the industry median of 8.3%. Net margin for the quarter increased from 6.9% in Q1 FY19 to 8.2% in Q2 FY19, which was again higher than the industry median of 7.5%. The company maintained a debt/equity ratio of 0.12x in both the quarters in FY19, which was lower than the industry median of 0.18x.


Key Metrics (Source: Thomson Reuters)

Outlook & Guidance: In 2019, the company has forecasted gold production to be in the range of 500,000 – 550,000 ounces.Copper production for the year is expected to be in the range of 14,000 – 15,000 ounces. All-In Sustaining Costs for the year are expected to be in the range of US$850 – US$900 per ounce. The company has been delivering value through organic growth with significant progress across operations and new opportunities. The four strong operations have been delivering over 500koz per annum, along with substantial organic growth and discovery pipeline. Q4FY19 is expected to be the strongest quarter of the year, that will result in a stronger second half performance. In addition to the improved performance, the company is also aiming for further operational improvements at Haile, continued advancement of the Martha Underground development and extensive exploration drilling.


Key Valuation Metrics (Source: Thomson Reuters)
 

Historical PE Band (Source: Thomson Reuters)

Stock Recommendation: The stock of the company generated negative returns of 16.94% and 9.49% over a period of 1 month and 3 months, respectively. During 2QFY19, the company improved on its revenue performance on the back of higher sales and average gold price. EBITDA for the period also increased as a result of increase in revenue and Haile operational improvements. Operational cash flows in the quarter increased by 121% in comparison to the previous quarter. The period saw significant improvement in Haile operations with quarter-on-quarter production increase of 45% along with a reduction in unit cash cost and AISC. QoQ production increased slightly as a result of stronger production at Haile and Waihi, offset by expected lower production from Macraes. Moreover, the period also saw improvements in relevant margins including EBITDA margin and net margin. In addition, the company maintained a debt/equity ratio lower than the industry median. The company is now looking forward to growth through continued exploration drilling across its operations which will further increase chances of significant resource growth. Considering the above scenario and the business prospects over the long-term, we have valued the stock using four-and-half-year average P/E market multiples of 19.92x for FY20E with consensus EPS of $0.19 and have arrived at a target price upside of lower double-digit growth (in % terms). At CMP of $3.320, the stock of the company is trading at a P/E multiple 17.63x of FY20E EPS. Hence, we recommend a “Buy” rating on the stock at the current market price of $3.320 per share, down 5.949% on September 10, 2019 (given the gold price scenario).

 
OGC Daily Price Chart (Source: Thomson Reuters)

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