Is OceanaGold Primed For Re-Rating?
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OceanaGold ((OGC)) endured softer production in the March quarter but brokers remain upbeat about the outlook. 2018 guidance for 480-530,000 ozs of gold, 15-16,000t copper and all-in cash costs of US$725-775/oz are maintained.
March quarter gold production of 126,000 ozs was down -24% quarter on quarter. Costs rose 42% quarter on quarter, because of lower output amid temporary reliance on low-grade stockpiles at Didipio.
Production it is expected to be weighted to the December half and capital expenditure guidance is unchanged. The company has commenced the permit process for a 10-year mine life extension at Waihi, which should take 18-24 months.
Credit Suisse notes Waihi was constrained by equipment availability, Macraes benefited from a full year of the elevated Coronation North ore while Haile lost nine days because of severe winter freezing at the plant.
At Didipio production eased with the milling of lower grade stockpiles while development of the high-grade underground continues. The company is on target for 500-600,000t of underground material in 2018 and 1.6mt in 2020.
UBS is now more confident that the worst is behind the company and guidance is achievable. The broker believes the stock is offering good value compared with peers and the asset diversification, mine life, low costs and improving balance sheet warrant attention.
Citi agrees that the shares are trading at an unjustified discount to peers and fair value. The broker notes the stock generates a competitive free cash flow yield of 9% in 2018 rising to 15% in 2019.
Catalysts that could close the valuation gap include a mine life extension at Waihi, expansion of Haile towards 4mtpa in the second half of this year and de-leveraging of the balance sheet along with a potential increase in the dividend.
Canaccord Genuity acknowledges the stock appears undervalued versus ASX-listed peers but believes OceanaGold may continue to lag until stronger cash flow can be demonstrated.
2018 remains a comparatively heavy year in terms of capital expenditure and the broker suggests investors may have to wait for 2019 for a re-rating of the shares.
Canaccord Genuity, not one of the eight stockbrokers monitored daily on FNArena database, maintains a Buy rating on valuation and a target of $4.55, based on revised forward curve gold price assumptions.
Haile produced 37,000 ozs on higher grades which were partly offset by lower mill throughput. The focus is on debottlenecking the plant ahead of capacity increases.
High-grade underground ore will be accessed in the current quarter and UBS is watching closely, believing any delay could risk expectations for long-term upside.
Haile was affected by adverse weather and unplanned equipment failures in the March quarter but ore extraction is expected to lift over the remainder of the year. Nameplate capacity is expected to be exceeded in 2018.
Credit Suisse observes Waihi can be volatile quarter by quarter depending on the underground stoping sequence and available grade. With limited production sources any short-term challenges cannot be hidden so the broker looks at the full year guidance rather than the quarterly performance.
The commencement of a permit process for a 10-year life indicates management is confident in the outlook for the operation and Credit Suisse acknowledges exploration results have continued to support future resource and reserve growth.
FNArena's database shows five Buy ratings. The consensus target is $4.30, suggesting 21.8% upside to the last share price.
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