OceanaGold posts strong finish in 2013

OceanaGold (TSX: OGC; US-OTC: OGDCF; ASX: OGC) exceeded its gold and copper production guidance for 2013 at lower than planned costs, while slashing debt by US$45 million in the fourth quarter, the company reports.

The Melbourne-headquartered company produced 325,732 oz. gold and 23,059 tonnes of copper last year at cash costs net of copper by-products of US$426 per oz. and all-in sustaining costs of US$868 per oz. In the fourth quarter, OceanaGold produced a record 115,219 oz. gold and 7,536 tonnes of copper.

In the Philippines, increased mill-feed tonnage, higher gold and copper grades and better recoveries in the fourth quarter at the Didipio mine pushed that operation’s full-year production to 66,277 oz. gold and 23,059 tonnes of copper. Commercial production at the high-grade, low-cost mine in northern Luzon started on April 1, 2013, and the mine is expected to produce an average of 100,000 oz. gold and 14,000 tonnes of copper a year over the next 15 years.

In New Zealand, strong performances at the company’s Macraes goldfield in the Otago region of the South Island (consisting of the Macraes open-pit mine and the Frasers underground mine), combined with its Reefton open-pit mine, also on the country’s South Island, drove OceanaGold’s total gold production in the country to 259,455 oz. gold. Mining at the Macraes open-pit mine is scheduled to continue until the end of 2017, while the Frasers underground mine is expected to cease production in mid-2015.

“We’re very pleaed with the results and it just demonstrates in particular the capability of Didipio,” Sam Pazuki, Oceanagold’s Toronto-based manager of investor relations, says in an telephone interview. “We’ve been saying for a while now that it is a high-quality, low-cost asset and it’s going to produce significant cash flow. We started seeing that in the third quarter and affirmed it again in the fourth quarter and this year we’re going to continue to ramp it up. We expect higher production of gold this year, and copper production will remain as strong as it was in 2013, so that would translate into an increase in cash flow, which would position us to further strengthen the balance sheet and position us for new value-add opportunities.”

The intermediate gold producer ended the year with about $25 million in cash, up from about $15 million at the end of the third quarter of 2013 and according to the company’s unaudited financial results, has about US$145 million in debt excluding mining leases.

Looking ahead, the company forecasts that this year it will produce 275,000 to 305,000 oz. of gold at cash costs of US$400-450 per oz net of copper by-product credits and all-in sustaining costs of US$750-850 per oz. net of copper by-product credits. Copper production from Didipio is expected to be between 21,000 and 24,000 tonnes of copper in concentrate.

Pazuki notes that the company’s primary focus this year is on further strengthening the balance sheet— “meaning paying down more debt and building up the treasury”—which he says it can do with cash flow from Didipio and isn’t ruling out potential aquisitions. “We have been looking at other opportunities and that would mean something that is high grade and low cost,” he says. “You want to look for something below the industry average for all-in sustaining costs…Our main focus is Asia-Pacific because that’s where our current assets are, but the Americas are not too far behind.”

While he acknowledges the company is looking at potential opportunities in both parts of the world, he notes that the company has very strong support from its shareholders to grow in the Americas, given that 50% of its shareholder base is in North America and another 20% is in Europe.  At the same time, however, the company doesn’t “need to do anything,” he adds. “We’re going to be very selective; we’re not going to do an acquisition just to do an acquisition. It has to be accretive to shareholders and make sense and fit within our portfolio.”

In a research note to clients, Jeff Killeen and Jeff Jackson of CIBC point out that the company “offers investors exposure to near-term free cash flow, with the Didipio build largely complete and ramping up towards the nameplate capacity,” and note that the cash flow “will be put to use in deleveraging the balance sheet and/or acquiring the next development project for the company, both of which should support the company’s share price in the coming 12-18 months.”

At Macquarie Equities Research, mining analysts Michael Siperco and Valeriy Dolgopolov calculate that at spot gold and copper prices, Oceanagold’s free cash flow in 2014 will be about $80 million and in 2015 about $107 million, yields they say of 13% and 18%, compared to the producer average of 3% and 4% respectively. The analysts also see “plenty of upside left” at Didipio. “Between potential exploration success (to feed the Didipio mill), underground development and expansion scenarios … there is ample room for growth in the Philippines,” they write in a research note.

Reg Spencer, an analyst in Canaccord Genuity’s office in Australia, estimates that Oceanagold has outstanding debt including finance leases of US$186 million and notes that based on expectations of strong free cash flow in 2014, he thiniks Oceanagold “could move to a net cash position in early 2015.”

Oceanagold “has capped a transformational 2013 with an impressive DecQ production result,” he writes in a client note. “The big jump in free cash flow has allowed Oceanagold to make a substantial dent in its debt position, and based on an equally robust outlook for 2014, we anticipate further improvements in the balance sheet over the coming 12 months.”  

Over the last year in Toronto, Oceanagold has traded within a price range of $1.04-2.96 and at presstime the company was trading at $1.96 per share.

Macquarie has a 12-month price target of $2.50 per share while CIBC has a 12-18 month target price of $2.15 per share.