Oceana Gold is a two-mine New Zealand gold miner with a half-built, now needs financing, world-class gold-copper project in the Phillipines. The company has a stock price of $C.41 and is levered up with $1.75 / share of debt. This leaves it pretty darn leveraged to the price of gold. The things that made me buy into are:
- Great Project Needing Financing - at 1.5 g/tonne gold and .5% copper the Phillipines project is truly one of the great gold projects in the world. It has 1.7 million oz of proven and probable gold and 380 million lbs of proven and probable copper. Even with today's copper prices it should have a negative cash cost. Its half built and, economically, completing the project is a no-brainer. Gold stocks with these kind of projects have been jumping lately as financing has become available. Examples include Orezone (takeover with 50% premium), Central Sun Mining (a 4-bagger after takeover battle), Nova Gold (four-bagger) and Apollo Gold (two-bagger) and others.
- Existing, cash-flow positive mid-tier level (280K oz/year) New Zealand gold mines with falling cash-cost (due primarily to reduced electricity costs from reduced oil prices).
- Incredible metrics due to the debt/based leverage.
The things that I don't like are:
- All that debt - means there is a possibility of the stock going to zero if the price of gold falls far enough.
- Hedges - about half of 2009 and 2010's gold is hedged at NZ$ 774. This limits the short-term upside for OGC.TO.
Here's the table that shows that Oceana Gold is undervalued, by a factor of ten at least, relative to Alamos Gold when the ratios are based market cap. If you use enterprise value (market cap plus debt) in the ratios, Oceana Gold is valued roughly at the level of Western Goldfields. This shows that Oceana Gold has margin for an explosive revaluation upwards if the Phillipines gold-copper project financing can be worked out well. The odds of this are high, in my view, given the way that gold producers have been able to get financing lately.
The two lessons I get from the the chart below are:
- The stock has bottomed and has turned up as the fear of it going to zero dissipates.
- The stock has quite a long way to rise (7-bagger) to get back to its former highs.
I'm holding a reasonably small position this stock until news of a financing or JV occurs for the Phillipines project. I will stop-out if the price of gold tumbles. I'm expecting a pop of 50% to 100% when that occurs. For me it is a speculation, not a long-term investment.
The next planned catalyst for this stock is the quarterly financials (and conference call) which are due 19-Feb-2009. There should be an update on financing options for the Phillipines project at that time. The production numbers have already been announced, but the cash-cost for those numbers and the status of the balance sheet will also be of interest.
Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents. As you know, I am a software engineer, not a financial advisor.