Company Overview: OceanaGold Corporation (ASX: OGC) is a multinational gold mining company with assets located in New Zealand, the Philippines and the United States. The company’s operating assets include: the Didipio Gold-Copper Mine in the Philippines; the Waihi Gold Mine and the Macraes Goldfield Mine in New Zealand; and Haile Gold Mine in the US. Notably, the company has a significant pipeline of organic growth and exploration opportunities in Australasia and the Americas. The company is listed on the Australian Securities Exchange (ASX) as well as on the Toronto Stock Exchange (TSX).

OGC Details 

Organic Growth Opportunities: OceanaGold Corporation (ASX: OGC) is a mid-tier, high-margin, multinational gold mining company with a significant pipeline of organic growth and exploration opportunities in the Australasia and the Americas. OGC’s exploration assets are located in the New Zealand, Philippines and the United States. OGC is focused on delivering strong returns to shareholders and enhancing profitability while remaining disciplined in allocating capital. Further, it seeks to create additional value for its shareholders through targeted exploration and prudent capital investments. Over the last few years, the company has made several investments in organic growth opportunities that have yielded strong results, including the growth of Mineral Resources at the Martha Underground at Waihi, the Horseshoe Underground at Haile, and the discovery of additional resources at Wharekirauponga (WKP) in New Zealand. Over the last five years, the company’s total revenue has increased at a CAGR of 6.41%.

Financial Summary (Source: Company Reports)

Amid COVID-19 pandemic, the company is working diligently to advance its exciting organic growth opportunities while managing the near-term risks associated with the COVID-19 pandemic. The company is focused on maintaining sufficient liquidity level to ensure continued investment in organic growth projects, particularly Martha Underground and Wharekirauponga (WKP) on the optimal timelines. Due to the ongoing challenges presented by COVID-19, the company has made a revision in its FY20 production guidance and it now expects to produce 295,000 and 345,000 ounces of gold at an AISC range between $1,150 and $1,250 per ounce sold. The company currently enjoys a significant pipeline of organic growth and exploration opportunities, and it intends to pursue additional growth opportunities via accretive investments in high-quality exploration to mitigate risks, and strengthen long-term profitability.

FY19 Performance Highlights: For the year ended 31 December 2019 or FY19, the company reported revenue of US$651.2 million and EBITDA of US$214.2 million. During the year, the company produced 470,601 ounces of gold and 10,255 tonnes of copper. All-in Sustaining Costs (AISC) for FY19 stood at US$1,061/ounce, up 38% on FY18, primarily due to lower gold sales. At the end of FY19, the company had Proven and Probable (“P&P”) Reserves of 5.3 Moz of gold, 3.5 Moz of silver and 0.16 Mt of copper.

Financial Summary (Source: Company Reports)

H1FY20 Results Highlights: For H1FY20, the company reported total gold production of 139.4koz and total gold sales of 153.3koz. Due to the COVID-19 restrictions imposed in the second quarter of FY20 and lower sales volume, the company’s H1FY20 results were severely impacted, causing the gold production revenue to decline to US$234 million, compared to US$366 million in H1FY19. The company reported reduced EBITDA of US$55 million, compared to US$135 million in H1FY19, mainly due to lower revenue, partially offset by lower operating costs. Further, the company reported net loss after tax of US$57.4 million compared to a net profit of US$27.7 million in pcp, mainly due to lower revenue, higher non-production costs of $16.3 million, higher depreciation and amortisation, and a higher unrealised loss on the fair value of undesignated gold hedges. At the end of H1FY20, the company had cash of US$148 million and net debt of US$170 million.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 1.84% of the total shareholding. Samarang Asset Management S.A. and Quaero Capital LLP hold maximum interest in the company at 0.71% and 0.25%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For June 2020 quarter, the company reported gross margin of 35.5%, higher than the industry median of 7.0%. For the same period, the company’s current ratio stood at 1.08x, compared to 1.18x of industry median. The company’s debt to equity multiple stood at 0.21x, higher the industry median of 0.14x of industry median.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Economic Analysis of Haile Gold Mine: The company recently released Material Information Summary for its Haile Gold Mine (HGM), as per which, the mine is expected to produce 2.47 million ounces of gold over a 14-year mine life at a rate of 183 koz Au per year with a RoM All-In Sustaining Cost (AISC) of US$799/oz. The company also released the combined open pit and underground resource statement, depicted in the below image.

Haile Combined Open Pit and Underground Resource Statement as of as of June 30, 2020 (Source: Company Reports)

Results of Updated Haile Technical Report: The company recently revealed the results of the updated Haile Technical Report, as per which, the Reserve Gold Price Case pre-tax net present value (5% discount rate) stood at US$930 million and life of mine is extended to 2033, demonstrating long-term value and significant organic growth opportunity for the operation. During the life of the mine, the company expects to produce 2.5 million ounces of gold with an average annual life of mine gold production of approximately 180,000 - 200,000 ounces. AISC is estimated to be around US$800 per ounce and life of mine cash costs are estimated to be US$590 per ounce.

Technical Report Haile Production & Cost Profile (Source: Company Reports)

Macraes Mine Life Extension Update: The company recently announced that the mine life at the Macraes operation has been extended to 2028 with the inclusion of Golden Point Underground along with new open pit opportunities such as those at Deepdell. The Mineral Reserves at Macraes has also been increased by 240,000 ounces of gold, net of mine depletion inclusive of Golden Point’s initial Mineral Reserves of 160,000 ounces of gold. The development of Golden Point Underground is expected to commence late in 2020 and the first production from Golden Point Underground is expected in 2021. The average sustaining capital for the mine is expected to be between US$35 million to US$45 million per year.

Strengthening Balance Sheet Via Forward Gold Sale Arrangement: In response to the uncertainties surrounding the COVID-19 pandemic and to further strengthen its balance sheet, the company entered into a new forward gold sale arrangement with members of its existing bank group. As per the new arrangement, the company will deliver 40,000 ounces of gold in the second quarter of 2021 and for this, it will receive a pre-payment of around US$77 million.

What to expect: Currently, the company is focused on managing the near-term risks of COVID-19 while executing its current operating plans and investing in organic growth opportunities. The company is committed to managing its balance sheet in a prudent manner to ensure sufficient liquidity to ensure continued investment in organic growth projects.

The company continues to advance the Waihi District opportunities which are expected to deliver the large organic growth for the company. At its Macraes Goldfield, the company is focused on resource conversion and expansion on multiple surface and underground targets. At Haile, the company is focused on further defining underground opportunities in an effort to extend the life of these operations beyond the initial five-years. The company intends to drill new underground targets, Pisces and Aquarius, in the near future.

The company expects Haile’s 2020 production to be between 135,000 and 175,000 ounces of gold with AISC to be in the range of US$1,100 and US$1,400 per ounce sold. For FY20, the company expects its total production to be between 295,000 and 345,000 ounces of gold at an AISC range between US$1,150 and US$1,250 per ounce sold. The total capital expenditure in FY20 is expected to be between US$230- US$265 million.

Capital Investment Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Approach (Source: Refinitiv, Thomson Reuters)             

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of OGC has provided a return of 38.24% in the past six months, but it has corrected by 24.19% in the last three months. The stock is currently inclined towards its 52 weeks low price, offering a decent opportunity of accumulation. On a technical analysis front, the stock has a support level of ~A$2.236 and a resistance level of ~A$2.94. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like St Barbara Ltd (ASX: SBM), Regis Resources Ltd (ASX: RRL), and Resolute Mining Ltd (ASX: RSG). Considering the company’s new forward gold sale arrangement, its organic growth opportunities and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$2.360, up by 0.426% on 29 September 2020.

OGC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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