OGC announced its December quarter production report. Impact
4Q10 sales disappointing. December gold sales of 68.027koz were 9% below our expectations. While a detailed production and financials report will be forthcoming on 17 February, we believe the shortfall is likely to come from Macraes open pit due to reduced throughput and grades as well as a higher proportion of ore going to direct leach, resulting in lower recoveries (that is, higher proportion of Reefton ore through the autoclave). Full year sales of 268koz were below management's guidance of 270-290koz.
Cash costs in line with expectations. Unaudited cash costs were US$596/oz in the quarter (1% above our forecast) and US$570/oz for the full year, within previous guidance. Going forward, cash costs are expected to increase to US$645-685/oz (vs Macquarie: US$655/oz) as production trends lower YoY. FY11 production guidance is 260-280koz Au.
Recent share price weakness represents buying opportunity. We cite recent allegations of human rights violations at the Didipio Project (Reuters Report, "Philippine Rights Body wants OceanaGold deal revoked", 17 January 2011) and weakness in the gold price (down ~6% since start of 2011) as the reason for share price weakness over the past few weeks. We understand these same issues were raised and officially resolved in 2008-09 with no finding of any violation. To date, OceanaGold has not received any formal notification by the Commission on Human Rights of the Philippines with regards to these issues. As far as we are aware, OceanaGold is compliant with all laws and regulations pertaining to operating as a foreign company in the Philippines.
Earnings and target price revision
2010E: -7.0%, reflecting lower gold sales (law of small numbers); 2011E: +0.2%, 2012E: -1.5%, modelling adjustments.
Price catalyst
12-month price target: A$4.20 based on a 1.2x DCF methodology.
Catalyst: Realisation of unsubstantial claims at Didipio.
Action and recommendation
We consider the resurfaced Didipio allegations to be mere noise and see them as unlikely to be substantive. As such, we maintain our Outperform recommendation and A$4.20 target price. We remain confident about the company's commitment to develop the Didipio Project and its intention to reach commercial production in 1Q13.
OGC Price at posting:
$2.67 Sentiment: Buy Disclosure: Held