revisiting, page-7

I think OGC is a very misunderstood company, and unfortunate corporate events in tandem with the ongoing worldwide economic crisis have battered this company much more than is appropriate.

Simply stated, many investors are wary of companies with a high debt load - and certainly OGC fits this bill. However, the debt is primarily convertible notes, and the first issue does not come due until 2012, a full year after unhedged cash flow. These are not callable loans and OGC should be able to handle this readily, provided of course, the obvious - no crash in the gold price, and maintenance of reasonable operating costs. Nonetheless, even during 2009 and 2010 with burdensome hedges, OGC, given relatively stable conditions will have no problem with debt costs.

As for the hedges, this creates the saddest part of the OGC story. Without hedges, and a USD 850/ounce price and about USD 500/ounce cost, OGC can do $20 million in operating cash flow a quarter with 70,000 ounces of production. For a $40-45 CDN market cap company, that borderlines on ridiculous. However, investors have also decided that these hedges for the next two years create enough risk as to maybe question OGC's ability to handle debts, commitments, and operations, nevermind any contingencies that pop up. OGC has handled this somewhat with the Dipidio decision, with less capital ex outflow required, but that also will have to be resolved soon. Overall, I think that once again, investors have become too worried about this problem. Looking at this from a math perspective, if OGC could possibly achieve operating costs of $450-475 range (optimistic) then they "break even" on the hedged production, and essentially become a 180,000 to 200,000 ounce producer in 2009, which still makes OGC very, very undervalued if they can get $850 an ounce on the remaining cash flow. They can probably do USD $30-35 millioni in operating cash flow for 2009 under present conditions, assuming there aren't problems with the mines. Meaning, that they are trading at below one times cash flow considering their market cap in USD.

Of course, I cannot consider myself more intelligent than all the risk averse shareholders who have unloaded. So, how do I justify this is such an undervalued situation. Well, first off, Ospraie management, one of the largest commodity funds nosedived and had to make two large distributions, and of course, not a company they held was spared. Massive selling - on the TSX, you could see the relentless blocks at 15 cents that were sold. Large share crosses occurred also. This appears to have finally concluded - in reality, all stocks, and especially commodities, were pounded in this downturn, but OGC was very odd due to their production and their reserve and resource base (at 11 million ounces less 2007 and 2008 production).

As for Dipidio, it is odd that the statement from the mining minister equivalent from Philippines might actually help expedite this situation. Of course, the longer term holders of OGC realize that Dipidio was the first dagger, as it was a difficult process and it became disappointing. Now, it looks like it will be only a matter of weeks or a couple of months until something is worked out. At this point, nothing would suprise me - an outright sale, JV, or multiple JV. As long as they don't lose thing from lack of activity after all the money invested. Personally, I think the delay to this point is that OGC is not getting the deal they want, and in the current economic climate, they are not in the position of bargaining power, so hopefully something favorable is worked out.

All in all, let's call a spade a spade - this is one of the "riskier" junior to mid tier producers. However, it poses one of the greatest rewards. I feel that the market has priced OGC to the point where they feel management cannot not handle the corporate and macroeconomic risks it faces. I look at it this way, if OGC can travel the rougher waters of 2009 and 2010, and gold can at least hold 750-800 USD, then OGC, if you even use a modest metric of three times cash flow, could be a $240 million USD market cap company. Of course, with such volatiltiy and uncertainty this is a gamble, but they have producing assets and a nice reserve and resource base that presents downside protection. You may laugh, as how could it get worse - well, I believe that bottom has been tapped, and now it will be corporate developments and gold market sentiment that decide where OGC goes.

As a disclosure, I bought recently, after I came across OGC on a TSX screener I used. To be blunt, I was very suprised to see a projected 2009 300,000 ounce producer with a market cap of under $30 million, so I accumulated as much as I could. So yes, I am biased, perhaps very, but I do like to try take a step back and be objective. The risks of this company are significant, but the rewards could be a 10 bagger - so using math, I figure even if there is a 15% chance of a ten bagger, I should take this bet.