OceanaGoldís Epic Fundamentals

Adam Hamilton     February 26, 2016     2790 Words

 

With the gold-mining sectorís market-dominating outperformance this year, investors are searching for the best-of-breed gold miners.  The elite mid-tier OceanaGold is certainly among them.  OceanaGold has truly epic fundamentals, combining super-profitable low-cost gold production with a solid balance sheet and great growth potential.  Gold-stock investors really need to seriously consider this gem for their portfolios.

 

OceanaGold likely derives its name from Oceania, a loose geographic region comprising the islands of the southwest Pacific Ocean.  And given OceanaGoldís operations in New Zealand and the Philippines, its name is quite apt.  OceanaGold operates several gold mines, and recently acquired a great new gold project in South Carolina.  While not widely known yet by American investors, OceanaGold eventually will be.

 

OceanaGold was incorporated in 2003 as last decadeís mighty secular gold bull was gathering steam.  The company started mining gold at the existing Macraes mine in southern New Zealand, which had been owned by OceanaGoldís predecessor company.  Though mining started at Macraes way back in 1990, itís still in production today thanks to a major underground expansion commissioned in 2008.

 

As New Zealandís largest producing gold-mining operation, Macraes has generated great cash flows over the years.  This mine along with other smaller operations in New Zealand put OceanaGold in a position to buy the Didipio project in the northern Philippines through a merger in 2006.  Unfortunately the sharp gold plunge during 2008ís stock panic delayed development plans, Didipio was mothballed.

 

But as gold recovered strongly out of that stock panic to power to new highs in the subsequent years, OceanaGold starting building its new Philippines mine in 2011.  Didipio was completed in late 2012, and this high-grade gold-copper mine has been instrumental in growing OceanaGold into the great company it is today.  Didipio is one of the lowest-cost gold mines in the world thanks to its big copper byproduct!

 

And despite the gold-mining sectorís dark times in recent years, OceanaGold never stopped expanding.  Last summer OceanaGold bought Romarco Minerals and its incredible Haile gold project in South Carolina.  That mine is under construction with commercial production scheduled to start in early 2017.  Also late last year, OceanaGold bought the Waihi gold mine in northern New Zealand from Newmont Mining.

 

Such aggressive expansion while gold and gold stocks slumped to brutal major new secular lows last year is incredibly impressive.  Itís been exceedingly difficult for the gold miners to raise capital, since banks want nothing to do with this industry and share prices have been bludgeoned to decade-plus lows.  OceanaGoldís ability to actively buy into those fire-sale prices resulted from its excellent operating cash flows.

 

This growth has given OceanaGold a well-diversified portfolio of gold-mining operations.  Production from Macraes, Didipio, and Waihi runs around 150k ounces, 140k ounces, and 120k ounces annually.  The company has another minor mining operation nearing the end of its life, Reefton in central New Zealand.  And of course that Haile project will really boost production when it comes online early next year.

 

All together all these operations made for a bang-up year for OceanaGold in 2015!  And thatís high praise considering the average gold and HUI gold-stock-index levels last year were just $1159 and 146.3.  In late January, OceanaGold reported producing 419.2k ounces of gold last year, along with 23.1k tonnes of copper.  That kind of production puts OceanaGold squarely in the ranks of mid-tier producerdom.

 

But itís not OceanaGoldís production that makes it extraordinary, but its incredibly low costs thanks to Didipioís world-class gold-copper deposit.  In 2015 OceanaGold reported cash costs of just $458 per ounce of gold sold!  Cash costs include all the direct production costs of mining, including all digging, processing, and refining costs as well as mine-level administration and taxes.  Cash costs are a useful measure.

 

They are essentially an acid test for gold miners, showing how low the gold price could sink before cash flows from operations would be insufficient to keep mining gold.  And with cash costs all the way down around $450, OceanaGold couldíve survived a full-blown gold apocalypse and been among the last companies standing.  Even the most vociferous of the gold bears rarely forecast gold going much below $800.

 

But a far-more-important gold-mining cost measure is all-in sustaining costs, which were just introduced by the World Gold Council in June 2013.  They are way more realistic as they include all costs that are necessary to maintain and replenish existing production levels.  This includes direct cash costs, all the corporate-level administration, exploration, mine development and construction, remediation, and reclamation.

 

All-in sustaining costs effectively reveal how viable a gold-mining company is as a sustainable going concern.  And OceanaGold reported stunning AISC of just $709 per ounce sold in 2015!  That is again among the lowest in the world thanks to that incredible Philippines mine.  Because OceanaGold has such low costs, it can generate large operating cash flows from low gold prices that strained many of its peers.

 

OceanaGold has the honor of being included in the leading GDX Market Vectors Gold Miners ETF, which contains the worldís best gold miners.  And per the latest data from all of GDXís component gold miners as of Q4í15, OceanaGoldís cash costs and all-in sustaining costs of $458 and $709 were way under the GDX averages of $587 and $836 per ounce.  Thatís made OceanaGold very strong financially.

 

And this outperformance is expected to continue.  OceanaGold expects 2016 gold production near midpoint levels of 405k ounces, at all-in sustaining costs revolving around a $725 midpoint.  So it will continue to generate large operating cash flows this year no matter what gold does.  And as gold continues to mean revert higher in its overdue major new upleg, OceanaGoldís cash generated will swell dramatically.

 

And OceanaGold has outstanding growth potential due to its Haile gold mine under construction now to start operations early next year.  When OceanaGold bought Haile last year, that mine was expected to produce about 150k ounces of gold annually by 2017 at all-in sustaining costs near $600 per ounce!  So it fits right in with OceanaGoldís other operations.  The $856m paid will look like a steal as gold powers higher.

 

So next year or the year after if there are any unforeseen delays at Haile, OceanaGold stands to boost production by roughly 3/8ths despite older operations phasing out!  Such big boosts in the mid-tier gold-mining realm are fairly rare, and make OceanaGold look even more attractive for investment.  This truly is an extraordinary gold miner with epic fundamentals, which are readily evident in financial-market terms too.

 

Despite OceanaGoldís stock rocketing higher in early 2016, itís still trading at a reasonable trailing-twelve-month price-to-earnings ratio of 26.1x!  That almost makes it a value play in addition to being a growth play, an irresistible combination.  OceanaGold has also directly shared cash with shareholders in the past through dividends, and will almost certainly declare more in the future as operating cash flows soar.

 

On the financial-statement front, OceanaGold is rock-solid.  At the end of 2015, it reported a hefty cash balance of $185m.  Strong cash flows from operations last year of $171m helped build this impressive war chest.  While long-term liabilities of $269m are substantial, they arenít excessive relative to OceanaGoldís cash flows even at 2015ís depressed gold prices.  Last year this company earned $53m in accounting profits.

 

OceanaGoldís amazingly-profitable operations havenít been lost on investors and speculators, who have bid up this stock in recent years despite gold grinding down to major new secular lows.  This chart looks at OceanaGoldís stock price as listed on the Toronto Stock Exchange, which is the easiest place for American investors to trade it.  OGC.TOís price action in blue is superimposed over goldís in red.

 

 

The last few years have been utterly miserable in the precious-metals sector, with gold plunging in early 2013 before slumping to a 6.1-year secular low in mid-December.  Alternative investments led by gold were left for dead as extreme central-bank easing by the Federal Reserve levitated US stock markets.  That led to extreme market distortions sucking vast amounts of capital out of gold, obliterating gold stocks.

 

With gold so darned weak, that flagship HUI gold-stock index was battered down to fundamentally-absurd 13.5-year secular lows in mid-January.  Iíve never seen a sector more hated, and canít imagine how one possibly could be.  Considering that backdrop of brutal gold-stock carnage through the greatest sentiment wasteland witnessed in modern history, OceanaGoldís stock certainly shouldíve been sucked in.

 

And it was from time to time, with OGC.TO plummeting 69.9% between October 2012 and June 2013 as the Fedís wildly-unprecedented open-ended QE3 campaign ramped up to full steam.  Fed officials used QE3ís ambiguity to jawbone stock markets higher, draining capital from gold as prudent portfolio diversification was summarily abandoned.  So gold plummeted 29.1% over this span, a record drop on some fronts.

 

But despite gold continuing to grind sideways to lower on balance out of its extreme mid-2013 lows courtesy of the Fed, OceanaGoldís stock bottomed then and has been climbing higher on balance ever since!  While the great majority of gold-mining stocks slumped to horrific new secular lows in wretched downtrends that amplified goldís, OGC.TO bucked that trend to rather remarkably power higher in recent years.

 

Such an uptrend in gold stocks given goldís terribly-ugly technicals and hyper-bearish sentiment is almost unthinkable, yet itís crystal-clear on OceanaGoldís chart.  This uptrend began with a gargantuan 234.9% upleg in OGC.TO between June 2013 and July 2014.  While this stock generally mirrored goldís price action technically, gold only climbed 6.4% over that span.  That made for truly staggering upside leverage.

 

Investors own gold stocks for one overwhelmingly-dominant reason, because they amplify underlying moves in gold.  As a sector, the gold stocks generally leverage gold on the order of 2x to 3x.  For a 10% move in gold, the HUI index or GDX gold-stock ETF will usually move 20% to 30%.  So seeing OGC.TO achieve huge upside leverage during that initial post-gold-collapse upleg of 36.5x is utterly mind-boggling!

 

And subsequent uplegs proved such great leverage wasnít an anomaly.  As the entire gold-mining sector sold off hard in late 2014, OceanaGoldís stock plummeted 51.8%.  This represented 5.2x downside leverage to goldís 10.0% drop over that same span.  But unlike most gold stocks which plunged to new lows, OGC.TO bottomed far higher than in mid-2013 at its new secular uptrendís support in an amazing show of strength.

 

OceanaGold worked its magic again in its next mighty upleg between December 2014 and June 2015.  OGC.TO rocketed 76.7% higher over that 6.1-month span while gold actually slipped 0.1%!  Thatís a big testament to how impressed investors were with OceanaGold, as capital was hardly flowing into any of the gold stocks for much of that span.  But OceanaGoldís stock did get sucked into the sharp summer-2015 selloff.

 

Thanks to last Julyís record gold-futures shorting attack hammering gold through support, the gold-stock sector plunged to deep new lows in late 2015.  OGC.TO fell with its peers for a 40.8% loss compared to goldís 5.1% loss over that span.  OceanaGoldís amazing upside leverage to gold also made it vulnerable to serious downside leverage.  While uptrend support didnít hold that time, OGC.TO did still carve a higher low.

 

And OceanaGoldís current massive upleg was born out of those very early-October lows.  The support failure was short-lived as OGC.TO rocketed back up into its strong counter-sector uptrend within days.  As of OGC.TOís latest high last week, it has blasted 112.5% higher in 4.6 months compared to a 10.2% gold rally.  That makes for more extraordinary upside leverage to gold of 11.0x, again almost unheard of.

 

The fact that OceanaGoldís stock just regained levels seen in October 2012 before QE3 powerfully attests to this companyís epic fundamentals.  Back at that original late-2012 peak, gold was trading at $1728 while the HUI was way up at 502.5!  Yet in early February when OGC.TO regained those very levels, gold was way down at $1188 while the HUI languished at 145.6.  OceanaGoldís relative strength is astounding!

 

The only reason this companyís stock was bid higher so consistently in recent years while the rest of this sector burned was OceanaGoldís epic fundamentals.  Investors and speculators generally didnít want to touch gold stocks with a ten-foot pole, but they wisely made a rare exception for OceanaGold.  Their buying resulted in one of the strongest recent-years gold-stock price charts youíll ever witness.

 

But despite OceanaGoldís amazing stock performance, its rally is far from over.  The entire gold-stock sector is destined to mean revert radically higher from current levels, and OceanaGold will certainly amplify these coming massive gains.  And fundamentally itís really easy to understand why.  With its super-low $709 all-in sustaining costs, this company can earn profits of $491 per ounce at $1200 gold.

 

As gold itself continues mean reverting higher out of recent yearsí extreme central-bank distortions, OceanaGoldís profits will leverage those gains.  This is easy to illustrate.  Back in 2012 before the Fedís gross QE3 distortions devastated gold, this metal averaged $1669 that year.  With QEís new buying and now the Fedís zero-interest-rate policy gone, gold should have no problem mean reverting to pre-QE3 levels.

 

At $1669 gold, OceanaGoldís current operations would earn a staggering $960 per ounce!  Thatís a 95.5% increase in profitability from a 39.1% gold upleg from $1200.  And as Haile comes on line next year and really ramps OceanaGoldís production, its profits will soar proportionally.  This companyís fundamental prospects remain dazzling, so investors are going to continue buying on balance for a long time to come.

 

My interest in writing this essay on OceanaGold is to spread awareness of this incredible opportunity.  Iíve never had any contact with anyone from OceanaGold, and certainly wasnít paid in any way to do this research.  But I did establish a new long-term investment in OGC.TO back in early October at a $1.95 entry price for our subscribers in our monthly newsletter.  Itís already seen unrealized gains as high as 100.5%!

 

We also have additional open short-term trades in OceanaGold in both our weekly and monthly subscription newsletters at entries of $2.00 in late September and $2.50 in early November respectively.  So with us and our subscribers already positioned in this amazing company, Iíd love to see lots more investors and speculators join us.  OceanaGoldís new upleg has a long ways to run yet before buying exhaustion hits.

 

If you are an American trader and you want to trade gold stocks, you absolutely need a brokerage account that enables you to trade on the Canadian stock exchanges.  Canada has been the worldís resource-stock capital for decades, and the USís disastrous Sarbanes-Oxley law rammed through in 2002 has unfortunately made listing in the US way too expensive and burdensome for most resource companies.

 

So the great majority of the worldís best gold miners and explorers list their stocks in Canada.  OceanaGold is also listed in Australia and New Zealand, under that same OGC symbol.  GDXís holdings of OceanaGold are actually purchased under its primary Australian listing.  But for most American investors and speculators, trading in Canada is far easier and cheaper than trading in Australia.  So Iíd stick with OGC.TO.

 

Building expertly-crafted portfolios of the worldís elite gold and silver miners with the best fundamentals is something weíve long specialized in at Zeal.  Iíve spent over 16 years now as a full-time contrarian student of the markets and speculator.  And after all those tens of thousands of hours of research and hundreds and hundreds of gold-stock and silver-stock trades, our expertise in this high-potential realm is unparalleled.

 

Weíve long published acclaimed weekly and monthly newsletters offering our unique studied contrarian perspective on the markets.  They draw on our vast experience, knowledge, wisdom, and ongoing research to explain whatís going on in the markets, why, and how to trade them with specific stocks.  Just in recent months alone, most of our new trades already have unrealized gains ranging from 40% to 80%+!  At just $10 an issue, you canít afford not to subscribe.  Join us today before we end our 20%-off sale!

 

The bottom line is OceanaGold is a gem among gold miners with truly epic fundamentals.  Thanks to its amazing young mine in the Philippines, OceanaGoldís all-in sustaining costs are among the lowest in the industry.  They enable it to generate large operating cash flows which have been prudently used to expand operations.  Thus OceanaGold has been able to grow recently while few other gold miners could.

 

Its major new mine purchased last year is coming online next year and should really boost production.  Combine all this with a reasonable valuation, incredible stock performance in recent years totally defying sector weakness, and truly extreme upside leverage to gold, and itís hard to beat OceanaGold.  This amazing mid-tier gold miner is destined to eventually become a market darling among American investors.

 

Adam Hamilton, CPA     February 26, 2016     Subscribe at www.zealllc.com/subscribe.htm