UBS Global Research
26 July 2019 OceanaGold Corporation Didipio Regulatory Risk Back in Focus
Weaker than expected quarter on costs
Production for the quarter was 129.3koz, +3%q/q and +3% ahead of UBSe. Cost
performance was far worse than we forecast however, with AISC of $1,118/oz +27%
compared to UBSe of US$879/oz. Some of this higher cost position is due to a heavy
pre-strip focus in the quarter, with US$46m of prestrip YTD, compared to full year
guidance of US$45-55m. So there will be a benefit in future quarters from higher
access to ore and lower stripping costs. Oceana is highly leveraged to the gold price
and the share price has not rallied with the sector due to the recent operating and
regulatory issues. We maintain a Neutral rating on Oceana as despite these issues, there
is value to be unlocked if the future of Didipio can be secured. At $4.23ps, the
company is trading at ~5.6x EV/EBITDA, well below peers of 6-9x.
Didipio locked again in regulatory battle
Didipio in the Philippines has faced a number of regulatory challenges, most recently
since 1-Jul-19 from the local government preventing access of materials to site. This is
being challenged legally through the courts and appeals. Oceana is also lobbying the
Federal Government which has the power over regulating mining and the Mines and
Geosciences Bureau has confirmed that the Didipio Mine is permitted to continue
operations pending confirmation of the Financial or Technical Assistance Agreement
renewal. In the short term, this has led to a cessation of mining activities, but the mine
has vast lower grade stockpiles available so ore processing continues but with lower
grade, will produce less gold. It is uncertain when this issue will be resolved. We have
decided today to cut our production forecasts at Didipio. We now assume that mining
does not resume until Q4 and until then lower grade stockpiles are processed, but
concentrate not sold. There is downside risk to this assumption if the appeals processes
are protracted. Didipio forms $A1.47ps of our A$4.40ps valuation. The rest of the
business is worth ~A$3ps.
Modelling Changes
Valuation: A$4.40ps (DCF, 5% discount rate).
Our price target of A$4.40ps (was $4.75ps) is based on our revised NPV.
OGC Price at posting:
$3.93 Sentiment: Hold Disclosure: Held
