Oceana's FundamentalsI was recently tipped about this stock and did some DD before buying and would like to share it here. I apologize in advance if I seem to be “intruding” on the board as someone new.
I want to identify each negative point on the company that has kept the stock price low but then show how each will soon turn around or is actually a positive in disguise.
1 Hedging: 2009: 106,000 oz @ ~ $565.00 U.S. and 2010: 99,800 oz @ ~ $546.00 US and 2011: 0 oz.
With FY2009 guidance at ~300,000 oz that leaves almost 2/3 of production unhedged hence the strong cash flow.
For 2010 guidance is 280,000 oz with 99,800 oz hedged - but once again, with almost 2/3 unhedged, it will be another year of strong cash flow.
For 2011, all the hedges are gone which could increase cash flow almost 50%.
2 Currency: Operating costs were US$473.00/oz last quarter vs. $388.00/oz average for the previous 3 quarters due to the appreciating New Zealand dollar.
That’s a scary increase for investors, however, you may have noticed how the price of gold, although still tied largely to the inverse of the US$, has begun to break away and appreciate relative to all currencies. As a result, operating costs should soon start coming back down again.
3 Resource: Older documentation on the website identified the Macraes Mine resource good
for mining until 2013.
The new NI 43-101 Report (Nov. 10/09) increasing the Macraes Mine resource 42% to 4.85 million oz instills confidence of the increased mine life - 2-3 yrs. according to the company.
4 Grade: Typically you want grades of 1.5 – 2.0+ g/t for open pit and 5.0 – 8.0+ g/t for
underground mining operations to be profitable in “first world nations”. You have the Macraes (Fraser) open pit @ 1.03 g/t (Measured & Indicated) and even less for the Inferred @ 0.7 g/t. The underground is running @ 2.31 g/t.
But the bottom line is that they are running these grades profitably. But even more importantly, low grade operations like this can significantly increase their profitability as the price of gold moves higher. Further, from the Macraes technical report, they report the cut-off grades and then make reference below the relevant table to this being based on a gold price of NZ$877.00/oz (US$655.00/oz). With gold running over US$1100.00/oz, there may be opportunity to reduce the cut-off grade and thus increase the total resource.
5 Debt: The approx. $145 million US of debt of this company is high relative to the mkt. cap.
and will take some time to pay down.
Fortunately, the interest payments on the convertible bonds averages about 6.5% and not like some financings I have seen go through recently around 10 – 12%.
6 Long Term Prospects: Some may argue that the Macraes mine complex is a mature
mine and has a limited life left.
Well, it does, but that has just been extended with new NI 43-101 report of the resource increase. Further, the Reefton mine appears to be in its infancy with good potential from satellite pits and perhaps an underground operation. Finally, further down the road is the prospects of the Didipio project in the Philippines. So, you can’t argue this is a one mine story.
There are a few relatively minor issues of concern. One, officers of the company own essentially no shares of their own company (but lots of options) which makes it difficult to instill confidence in the shareholders. The directors cumulatively own about 4.5 million shares. Two, I understand the Filipino Human Rights Commission is investigating the alleged forced evictions of people living at the Didipio site according to a Nov. 16/09 report of the organization, Cultural Survival. And, three, does anyone know why the CEO left?
Lastly, I would like to do a relative comparison to another company, Alamos Gold. (I think someone already did this but it’s interesting to look at again.)
Alamos: Oceana:
Mkt Cap: $1.3 billion $280 million
Production: 150,000oz* 300,000oz
Cash Cost: $330/oz $420/oz
Debt:
$145 million
*- Alamos to ramp up to 300,000oz/yr by 2012
Do these metrics justify Alamos having 4x’s the mkt cap with ½ the production?
I believe the long term potential of this company is tremendous and the short term is good with a continued elevated price of gold.
FYI – I did not own any of this stock before last month but have since made it my second largest holding of junior precious metal mining stocks.
I welcome your comments of my assessment.
Greg