OceanaGoldHow is it possible that analysts can say that a company with the same reserve, same production and in a safer country should be valued at 1/4 of its peer group?
Easy, this is why.
1. They use a method called NPV (net present value) of cash flow/profits. This basically mean that getting 100 dollar profit this year is worth more than 100 dollar a year from now. If you use a discount rate of 5%, then 100 dollar 4 years from now is worth 79 dollar. If you instead choose to use 10% you only value that profit 4 year from now at 53 dollar. The logic says that safer jurisdiction should mean lower discount rate. That means that logically New Zealand should have a lower rate than say Mexico or West Africa due to lower risk, this is basic economics 101. Try telling that to the brokerage houses...
2. Once this NPV is calculated the real ugly work of the analysts begin. If the important choice of discount rate wasn´t important enough, these people then go ahead and decide to use a "FACTOR" that they multiply the calculated NPV with to derive their target price. That means that they basically decide that the same profit from New Gold should be valued at 80% higher than our OceanaGold to take the latest BMO 2010 research as an example. (But then one should keep in mind that BMO do business with NGD but not with OGC....). Another example... while Oceana gets its NPV multiplied with 1.0, Redback Mining gets 2,8 by BMO. The same profit dollar should be valued at 2,8 times as much....
3. Third and extremely interesting for our OGC is finally this:
When the brokerage houses value gold stocks they typically put a realistic goldprice for this year and next year. After that they put "a realistic long term gold price". Now that typically means something like 1150 for 2010 and 1300 for 2011 if you check reports. From 2012 and forward they typically put say 1000 usd and onwards. What this does is making future production worth even less than the discounting at "1" above has already done. It reinforces that the only years that really matter are the closest two years profits.
AHA!
Last year the analysts rigid methods were looking at only the profits of 2009 and 2010 for OceanaGold. The last two miserable years of the hedges... the years thereafter when we are unhedged got very little value....
Now this effect will disappear... and it will be powerful over the coming 0 - 18 months... We will get (still) almost zero valuation for 2010 this year, BUT suddenly we will get at least one year of full valuation with a realistic goldprice in the calculations... 2011. This will only get better 12 months from now when we start getting the full two years...
At the same time the rigid analysts will start saying that "hmm it looks better now, lets put a more realistic multiple closer to peers for them". Maybe some will even realize that a future profit dollar from NZ should have a lower discount rate than Africa...
Oceana has the reserves & M&I resources for 10 years production in NZ. It has another 10 years of inferred there. It has production costs comparable to its peer group. That is Cash cost well below 500 usd.
Still it is valued at a fifth or a quarter of the peer group. You have the reason above, take advantage of it, do not wait for the slow thinking analysts with non functioning valuation models to react. By then the chance for superior profit will be gone.
If you have access to John Doody´s Gold Stock Analyst, you can also read him explain why discounted cash flow as it is used by the analysts doesn´t do the job with these stocks.
Remember, 11 months left... then hedgefree....