I thought I did well to get in at $2.70-ish ... some confidence...

I thought I did well to get in at $2.70-ish ... some confidence given Austock's recent research note - highlights below...

Austock Securities - Research

Oceana Gold (OGC) - $2.92, TARGET PRICE $3.87

Strong Buy.

OGC remains one of the best value gold companies in our universe, with the market attributing little worth to the strong management/operational team and the excellent growth profile.

To reflect risk, we have reduced our target price from $4.35/share to $3.87/share, in line with our base case NPV.

We will review this price as various hurdles are met

• As expected, OGD reported a weak third quarter but it was even weaker than we d been expecting.
• An earlier ASX release had already flagged the quarterly gold production results, with gold sales of 42,107oz for the quarter. Yesterday s quarterly release contained cost information plus all the financial information as per TSX requirements.
• Reported cash costs were USD718/oz, versus forecast costs of USD604/oz. The cash operating margin was negative USD37/oz versus a forecast margin of USD72/oz – a net difference of USD109/oz, or some USD4.6m.
• As flagged in the earlier ASX release, CY 07 production guidance is now at 170-180koz. OGC now expects cash cost to be in the region of USD570-580/oz. This compares to guidance at the start of the year of approx. 205koz at USD501/oz, with the reduction largely reflecting a slower ramp-up at Reefton and increased expensing of stripping at Macraes.
• We have adjusted our CY 07 assumptions accordingly and as a result, we have reduced our core profit forecast from a loss of USD13.6m to a loss of $16.7m. This figure excludes the impact of unrealised hedge losses which could reduce the reported result to a loss of USD37m, based on current gold pricing.
• Operating cash flow for the quarter was neutral, with investing outflows of USD24.2m (including $4.4m for assets already in production) and net Financing inflows of $88.9m. The cash position stands at USD141.5m. Gearing is currently 16%.

Investment thesis

• OGC is one of the cheapest gold companies in our universe. It is trading at a discount to our valuation of $3.87/share and at some of the lowest gold multiples in terms of EV/reserve or resource ounce, EV/oz of forward production, forwards EV/EBITDA, etc.
• However, as this quarter demonstrates it remains captive to the grade at Macraes, at least until the new operations kick in (Reefton currently ramping up, Frasers from the start of 2008 and Didipio from mid-2009).
• We do expect that we have seen the bottom of OGC s operating performance, with Macraes grade expected to improve significantly in the 4th quarter and into 2008. The impact of grade is dramatic, with Macraes cash costs expected to reduce from USD568/oz in CY 07 to USD360/oz in CY 08 (even assuming a slight increase in costs per ton), as the forecast grade improves from an average 0.8g/t to 1.3g/t.
• We therefore expect earnings to improve from the USD16.7m loss in CY 08 to a profit of USD16.5m in CY 08, increasing to USD31.2m and USD58.2m in subsequent years.
• At spot commodity prices/FX, the CY 08F-10F earnings improve to USD21.7m, USD54.6m and USD114.5m respectively, while the valuation increases to $7.15/share.
• We continue to believe that OGC is undervalued, with the share price reflecting short term earnings and attributing no value to the strong management/operational team and the excellent growth profile (gold production more than doubling to approx. 400koz/pa with cash costs of USD200-300/oz, after copper credits). The development of Didipio should give OGC a footprint in the Philippines from which it can leverage off the excellent regional mineral endowment.
• Admittedly, this has to be tempered against sovereign risk and development risk (with the risk of additional capital requirements). For this reason we are reducing our target price from $4.35/share to $3.87/share, in line with our base case NPV, and in contrast to the 130% average premium in our universe of gold companies. We will review this target price as various hurdles are met, including improved grades at Macraes, ongoing ramp-up at Reefton, a smooth Frasers integration and continued progress at Didipio.

• With recent share price weakness, OGC REMAINS A STRONG BUY.