Did Not Expect to Get Back InPrior to Sept 9 2010, OceanaGold had been one my best performers before deciding to liquidate my shares and diversify into other undervalued mining companies. So many posters here were very optimistic on OGC given the rising price of gold, closed hedgebook, and increasing free cash flow. There was a lot of speculation that Didipio would come back into the picture adding back more value to the company. Fast forward 5 months later and I see a lot of pessimistic outlooks. What has changed in such a relatively short time period to have caused the sudden panic and lack of shareholder confidence?
Positive developments in the last 5 months:
- OGC added to the S&P TSX Composite
- Feasibility study on Didipio showing very robust economics for the project at very modest capex
- Completed financing to put Didipio into production
- Excellent drill results at Reefton which should extend its life of mine
- Recomencement of construction for Didipio which is scheduled to produce in Q1 2013
- Higher price of gold
Neutral developments in the last 5 months:
- Management changes
Negative developments in the last 5 months:
- Loretta Rosales attempting to boycott Didipio project on grounds of human rights violations
- Rumors that Didipio will be a no go based on previous allegations
- Stronger NZD and AUD vs USD inflating cash costs
From what I understand, the market seems to think that Didipio will be written off again and hurt the company's growth profile. This scenario appears already priced into the stock so the question now becomes how can investors find value in OGC today?
Last I checked, the company has 3 producing mines for 260koz or more production per annum. Free cash flow of about $169M per year based on $1350 gold, $700 cash cost, and 260koz and POG should remain strong. The company is flush with over $100M in new cash from its last equity placement that it could commit elsewhere if Didipio is written off. Market cap of about $670M suggests that OGC is trading close to 4 times FCF when comparables are trading at upwards of 8x. With no official decision made in the Philippines yet, those investing today could be getting a free option on Didipio since the market seems has it priced out.
The valuation and risk-reward were attractive enough for me to nibble back in yesterday. Selling based on fear usually causes short term pain, but it also provides opportunity going forward if one is patient. I think a lot of bad potential bad news has been priced in so the risk to me seems limited. The reward of course could be new all time highs in the next 12-24 months should Didipio remain on track and get into production.
PS: Here's one person's (bias) view on Ms. Rosales
https://asiancorrespondent.com/37286/etta-rosales-as-chr-head-aquino%E2%80%99s-single-worst-act-of-political-madness/