OGC?s relative weakness has been driven by a 17-Jan Reuters?...

OGC?s relative weakness has been driven by a 17-Jan Reuters? article which reported Philippines Human Rights Commission (PHRC) allegations of violations to indigenous people?s rights by OGC at the Didipio project area. OGC responded to the media reports, highlighting that the company:

 Has met, and continues to meet the human rights of the local community;
 Remains compliant with all laws and regulations;
 Maintains obligations under the leasehold agreement with the Filipino

Government and local community stakeholders.
Pre-construction has commenced at the site and the project is on schedule to commence production in Q1 2013.

Attractive Value Even Under Bear Case

While the seriousness of the allegations remains unclear, we believe it is highly unlikely that any adverse decisions will be made by the pro-mining Filipino Government. Despite this, OGC?s share price has been sold off to the point where we see good valuation support even if we incorporate nil value for the Didipio project.

What?s in the Price?

Major global gold mining companies have historically traded at ~2x NPV. Midtier gold producers will typically trade at a reasonable discount to this due to a higher risk profile associated with less operational diversification. We think that a P/NPV multiple of ~1.3-1.5x represents reasonable value.

With NCM trading on 1.6x and the mid-tier trading on an average of 1.2x we see attractive value across the space. With OGC trading on 1.15x even under our bear case analysis above, we have considered what we would need to factor in to see a P/NPV of around ?fair? value.

The results show that even if OGC were to see cash costs rise by 10% at the NZ assets in conjunction with the loss of the Didipio project, we would still see OGC trading within what we would consider a ?fair? value range.

Didipio ? Our Key Assumptions
With the revised technical report complete and funding requirements provided for, we have factored the Didipio project into our base case estimates. We have modeled the project using the following key assumptions, which are broadly in line with OGC?s published project parameters:

 Capex US$140m;
 Commencement in 2013;
 20 year mine life;
 OGC to fund and operate the project solo;

Based on these assumptions, we derive an NPV of US$221m, equivalent to ~A$1.00/share to the group NPV. The project is scheduled to commence operations in 2013, and at present our conservative long-term base and precious metals prices kick in at 2016. Hence, our NPV estimate reflects a relatively modest market outlook. Our conservative long-term price forecasts are currently as follows:

 Gold US$800/oz (~40% below spot);

 Copper US$2.20/lb (~50% below spot).

We anticipate when the new CEO, Mick Wilkes, commences his role, a review of the Didipio parameters will be high on the list of priorities. We would not expect to see any material changes to the existing assumptions; however with Mick?s strong operational experience at Sepon, his initial views will be of significant interest.

Compelling Valuation Support

We think the opportunity to buy a gold stock on sub 1x NPV represents a compelling opportunity. OGC?s share price at current levels is factoring in unlikely outcomes, and provides investors with a medium to long-term view with an exceptional opportunity to take advantage of the short-term volatility.

While it remains unclear when the Filipino Government will provide some formal clarity around the allegations put forward, in the meantime the project is proceeding as planned and remains on schedule.

Our current near-term gold price forecasts inc incorporate relatively robust gold prices of US$1,444 in 2011 & US$1,342 in 2012. While spot prices have weakened from the ~$1,425 top reached in late 2010, rising political instability in North Africa and increasing focus on inflation particularly in emerging markets should see gold remain well supported.

We maintain our Buy recommendation on OGC, with our $5.00 price target now offering the best upside (87%) across our Metals & Mining coverage universe.

OceanaGold

Valuation

Our target price of A$5/share is derived 30% from FY10E and FY11E PE of 15x, 40% from 100% premium to NPV and 30% from a gold reserve multiple set at US$300/oz. Our NPV uses published resources, a 10.2% nominal discount rate and long-term values of US$800/oz for gold, US$2.20/lb for copper and A$/US$ exchange rate of US$0.80.

Risks

We rate OGC as a High risk stock based on the relative comparison universe to the remainder of our Australian Metals & Mining coverage universe. The key risks to OGC are:

Commodity Price: Gold prices continue to remain increasingly driven by investment demand rather than the fundamental supply/demand balance.

Investor demand is powering the gold market and is expected to continue so long as economic and financial uncertainty prevails.

Production growth: OGC is aiming to increase its production to +300koz of gold through the development and expansion of their New Zealand assets. The Didipio operation could add a further 120koz of gold and 15ktpa of copper production pending feasibility work.

Currency risk: Whilst OGC reports in USD terms, its cost base is primarily in NZD. Therefore any significant strengthening of the domestic currency versus the USD is likely to have a negative impact on the groups cost profile as well as the translation of the group accounts into USD terms.

If the impact on the company from any of these factors proves to be greater/less than we anticipate, the stock will likely deviate from our target price.