Tim Treadgold: Unloved OceanaGold could be the ‘worst house in the best street’
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Buying the worst house in the best street is a time-proven technique for making money in property, and it could be the same with gold for anyone prepared to take a look at OceanaGold Corporation (ASX:OGC).
While not strictly small enough to appear on the radar screens of Stockhead followers, OceanaGold has been such a miserable performer this year that it deserves an inspection, if only by applying an art-world test of something being so ugly that it could actually be beautiful.
Since January, as gold has outperformed almost every other form of investment with a rise of 17 per cent from $US1290 ($1872) an ounce to $US1510/oz, OceanaGold’s share price has dropped by 34 per cent from $5.28 to latest sales at $3.45 – very much a “bad house in gold street”.
There are reasons for OceanaGold’s share-price collapse, including the forced closure of the Didipio mine in the Philippines because of a dispute with the local government, and a major change in the way the Waihi mine in New Zealand will be worked in the future with a planned shift from an open-cut to underground operations.
But behind the bad news is a surprisingly long line of positive investment recommendations from some of the world’s leading investment banks, which share a common view that the sell-off in OceanaGold has gone too far and a rebound is expected.
With most of the more widely-followed gold stocks trading on stretched valuations, OceanaGold stands out in a test of consensus tips with the average of investment bank forecasts pointing to the potential for a 33 per cent share price increase over the next 12-months, with $4.59 the target price.
To put that collective 33 per cent share-price increase forecast from Macquarie, Citi, UBS, Credit Suisse and Ord Minnett into perspective, it’s interesting to compare what the same banks think about other leading gold stocks.
Northern Star Resources (ASX:NST), a regular favorite of the banks, is expected to rise by 17 per cent over the next 12 months.
Evolution Mining (ASX:EVN) and Saracen Mineral Holdings (ASX:SAR) could deliver 6.7 per cent price rises, while Newcrest Mining (ASX:NCM) is expected to fall by 4.4 per cent – all moves which make OceanaGold stand out as something different.
Stockbrokers and banks do not always get it right, as we all know, but when there’s a near-unanimous view that a stock has been oversold because of problems in a couple of assets it is worth testing the theory that a recovery is likely.
The starting point with OceanaGold is New Zealand, not always seen as a gold-friendly country with its big farming industry, but a look back in time shows that much of the early wealth in New Zealand was based on gold, with fields that in some cases were richer than those in Australia.
Bad mining practices, including environmentally damaging dredging gave gold a bad name in New Zealand, but that didn’t mean the gold had gone away.
Far from it, and when a small company called Macraes Mining started digging near Otago in 1990 on the South Island, interest in New Zealand’s gold was rekindled.
In 2003 Macraes changed its name to OceanaGold followed by a series of expansion moves, including a merger with Climax Mining which owned Didipio, acquisition of the Waihi mine on New Zealand’s North Island from Newmont, and the acquisition of Romarco Minerals which included the Haile gold mine in the US.
As well as acquiring assets, OceanaGold has been enjoying exploration success with the most notable recent find being near Waihi, where the Wharekirauponga project (thankfully known as WKP) has revealed an initial indicated resource of 296,000 ounces and an inferred resource of 401,000oz from just 12,000m of drilling.
Perhaps more important than the resource is the high-grade nature of the ore (18 grams a tonne in the indicated category) and the most recent drill results which include 8.7m at 24.5g/t.
OceanaGold’s third quarter report released last week revealed the impact of losing production from Didipio, with group gold output down from 138,034oz in the September quarter last year to 107,478oz this year.
Despite the decline the banks were universal in their optimism that there were better times ahead.
UBS said it based its buy tip on the stock even after assuming that Didipio did not resume production until the June quarter of next year, and after allowing for the Waihi transition to underground mining. UBS has a $4.15 price target on OceanaGold.
Macquarie said it expected a stronger fourth quarter result and maintained a buy tip on the stock with a price target of $4.85.
Credit Suisse, which sees OceanaGold’s share price rising to $5, said the stock had been “a stand-out under-performer, 100 per cent attributable to the unresolved Didipio suspension in the Philippines”.
“The stock is now at a discount to our target price reflecting investor unwillingness to attribute much value to the Didipio operation while it remains suspended,” Credit Suisse said.
But Credit Suisse went on to say that: “The balance of the company’s portfolio is showing real potential for significant value-add via operational improvement and excellent exploration results from New Zealand.”
Sometimes it can be worth taking a closer look at the worst house in the best street.