Broker says OceanaGold shares still undervalued

JAMES WEIR
Last updated 05:00 04/10/2012

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OceanaGold's shares have rallied more than 70 per cent in the past two months, but a broker's report says they are still trading about 35 per cent below other miners, based on earnings and reserves.

The South Island gold miner is just weeks away from commissioning a new gold and copper mine in the Philippines, which a Forsyth Barr report says is a “game changer for OGC”. The report rates OGC as a buy.

However, Forsyth Barr has reduced its OGC profit forecasts for this year and next, due to gold prices not quite reaching forecast levels, despite a recent rally.

More conservative gold production forecasts were also a factor in trimming back earnings forecasts by 12 per cent this year and 9 per cent next year.

OceanaGold has two big gold mines in the South Island, in central Otago and Reefton on the West Coast.

Two months ago, OGC said its growth outlook was “golden” with its new gold and copper mine in the Philippines expected to give the company high growth at lower cash mining costs.

OGC shares were as low as $2.20 a share in mid-May but yesterday closed at $4.06, a gain of almost 85 per cent from the recent trough, making it one of the market's top performers.

In the past two months alone it has risen more than 70 per cent, compared with a 26 per cent lift in the ASX gold index.

In the same period, the price of gold has risen only 8 per cent. It was trading at US$1773 an ounce yesterday (NZ$2158), holding near an 11-month high.

The Didipio mine will add significantly to gold production, and the copper byproducts would also push OGC down the cost curve, Forsyth Barr's report says.

It would transform OceanaGold from a high-cost producer at about US$970 an ounce to one of the lowest-cost producers, below US$600 an ounce eventually, in 2014.

Ore is being mined at Didipio and processing is expected to start in November.

“That transformation is now only a few weeks away from commencing,” Forsyth Barr mining sector analyst Andrew Harvey-Green says in a report.

Despite the recent lift in OceanGold's share price, the report gave a 12-month target price of $5.18 a share, up from a recent price of $3.88 a share.

“We are retaining the view that there is a further rerating of OGC to go over the next 12 months as Didipio comes into production” he says.

Didipio is expected to yield 100,000 ounces (3.1 tonnes) of gold a year and 14,000 tonnes of copper. OGC has said it expected to produce between 230,000 and 250,000 ounces in New Zealand this financial year.

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But it had only produced 106,500 ounces in the first half of the year and third quarter production appears not to have risen significantly.

However, OGC is starting to mine higher grade ore at Macraes in Otago and is confident that a bumper fourth quarter will see annual production reach the 230,000-ounce level.

Forsyth Barr is forecasting full year OGC earnings before interest, tax, depreciation and amortisation to be down 12 per cent on previous forecasts, to US$146.5m.

- BusinessDay.co.nz

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