USB Global Research
23 February 2018 OceanaGold Corporation
Decks cleared – Upgrade to Buy
Buy – We think the worst is now behind OGC, and a re-rating is possible
Following a recent production downgrade, which included higher capex, we think the
worst is now behind OGC and we upgrade OGC to Buy from Neutral. At 1.0x P/NPV,
OGC is cheap compared to gold peers given its low cost position, long mine life and
asset diversification. Key to our increased confidence is revised guidance at Didipio that
sees the asset now make nameplate production by the end of 2019. While further
delays cannot be ruled out, we think at least the share price is now reflecting a more
balanced risk outlook. We set our target price at 1.25x P/NPV from 1.1x to reflect the
expected return in market confidence. We note EVN & NST are trading at 1.4x & 1.5x
P/NPV.
Didipio guidance now conservative, risks shift from the downside to upside
Our key concern going into 2018 was the transition and ramp up of Didipio. OGC is
now guiding nameplate production from the underground of 1.6Mtpa by 2019. 2018
production is therefore lower than previously expected at 87koz (was 120koz). Our
2019 production forecasts lift ~10% higher with increased grade. We look for an AISC
of US$380/oz, but higher copper prices could see this lower. 2018 guidance also
delivered disappointingly high AISC for the NZ operations at US$750/oz. Haile cost
guidance also moved higher. The net result is for our 2018 production forecast to fall
4% to 504koz with the AISC lifting 38% to US$783/oz. We expect this to maintain
into 2019. On capex, guidance of US$233m compares to our initial forecast for
US$150m, with US$60m of the higher spend coming from the NZ assets.
CY18 FCF weak, but should lift in 2019; Haile permitting on watch
With revised guidance, we forecast 2018 free cash flow of just US$50m this places
OGC on a <5% FCF yield. 2019 looks better with FCF of US$175m. We think the worst
is behind OGC as expectations have been reset lower. While it may take time for OGC
to re-capture its premium valuation, we believe the risks to the downside have abated
for now. The most significant risk is Haile permitting, which is for the development of
high grade underground that commences in 2021 as well as for increased material
movements & waste facilities. Permitting is expected to commence in the June quarter
2018. A delay could see long term expectations for upside and Haile deteriorate.
Valuation: A$3.17/sh (DCF, 8-10%)
We raise our price target from $3.40 to $4.00. Price target set at 1.25x P/NPV, from
1.1x for gold price and exploration upside.
PIVOTAL QUESTIONS
Q: Can OGC find investor support with more Haile capex on the horizon?
Yes. At this stage, capex of US$250m is expected to be spent between late 2018 and 2020 on an
expanded open pit and underground that takes production from 135koz in 2018 to 230koz by 2021.
Permitting is still outstanding, but with updated capex and guidance, the risks have started to reduce.
Q: Can the NZ assets deliver a mine life beyond 5 years?
Waihi has an underground reserve of 1.1Mt, which implies a 2 year mine life. But a much larger
resource of 2.9Mt and a track record of resource discovery, suggests Waihi will continue to have a
2 year mine life in 2 years time. Open pit-able material could provide further upside, but is
dependent on permitting. At Macraes, longevity beyond 5 years will likely force the relocation of the
mill. With updated cost guidance, we have increased confidence in the short to medium term outlook.
Q: Is Didipio at risk of suspension?
With an early 2017 change of leadership in the Philippines Department of Environment and Natural
Resources (DENR), the risk of a Didipio suspension has reduced materially. While the formal suspension
order remains in place, we understand that OGC's appeal to the Office of the President is still
pending. We think the issue is now dormant.
UBS VIEW
We rate OGC a Buy based on valuation. With Didipio timing clarified and updated cost and production
guidance across the company's assets, risks have reduced. Australian investors still have considerable
choice locally, but we think OGC's low cost position and diversified asset base should not be
overlooked.
EVIDENCE
A series of capex increases and unfavourable guidance changes has dented investor sentiment.
WHAT'S PRICED IN?
We use an 8-10% discount rate, at 5%, our NPV approaches A$3.60/sh. At 1.0x P/NPV, OGC is not being priced like a conventional gold stock. With updated and likely conservative guidance now in place, there is time for OGC to recapture a premium rating.
