Re­cent gold rally lifts Oceana’s stocks

Geopo­lit­i­cal ten­sions be­tween North Korea and the United States have contributed to gold’s re­turn to be­ing a ‘‘safe haven’’ in­vest­ment in times of trou­ble. Simon Hart­ley talks to Craigs In­vest­ment Part­ners bro­ker Peter McIn­tyre about the rally in Aus­trala

Otago Daily Times - - Business & Money - simon.hart­

❛ ASX gold com­pa­nies gen­er­ally had strong fi­nan­cial re­sults dur­ing the full year 2017 re­port­ing sea­son Craigs In­vest­ment Part­ners bro­ker Peter McIn­tyre

OCEANA GOLD is among the top four gold pro­ducer picks on the Aus­tralian stock ex­change, fol­low­ing a strong rally in re­cent weeks be­hind the pre­cious metal stocks.

Gold has re­sumed its safe haven sta­tus, hav­ing risen 15% so far this year, most re­cently fu­elled by ris­ing po­lit­i­cal ten­sions dur­ing Au­gust and Septem­ber be­tween the lead­ers of the United States and North Korea.

Craigs In­vest­ment Part­ners bro­ker­age re­search is main­tain­ing a ‘‘buy’’ rec­om­men­da­tion on the stocks of Oceana Gold, St Bar­bara, Alacer Gold and Da­cian Gold, while three other stocks have been down­graded to ‘‘sell’’; Newcrest Min­ing, North­ern Star Re­sources and Regis Re­sources and Evo­lu­tion Min­ing stock is on a ‘‘hold’’.

Craigs bro­ker in Dunedin, Peter McIn­tyre said said the ASX gold index had risen 15% since the start of the re­port­ing sea­son, the rally aided by the Aus­tralian dol­lar gold price ris­ing 4% dur­ing the same pe­riod.

‘‘Fi­nan­cial re­sults were gen­er­ally in line with our ex­pec­ta­tions, with few sur­prises look­ing out to full year 2018,’’ Mr McIn­tyre said.

De­spite the rally, Mr McIn­tyre said there was still some value to be found in some stocks.

‘‘ASX gold com­pa­nies gen­er­ally had strong fi­nan­cial re­sults dur­ing the full year 2017 re­port­ing sea­son,’’ he said.

A ‘‘mostly sta­ble’’ gold price dur­ing the year and ‘‘steady’’ op­er­a­tional per­for­mances re­sulted in prof­its in line with ex­pec­ta­tions, strong cash flows and strength­ened bal­ance sheets.

‘‘A key theme over the re­port­ing sea­son was com­pa­nies re­view­ing their div­i­dend poli­cies and re­turn­ing cash to share­hold­ers,’’ he said, cit­ing the up­dated div­i­dend poli­cies of Newcrest, Evo­lu­tion, North­ern Star and St Bar­bara.

Mr McIn­tyre also noted the strength­en­ing cop­per price had also contributed to the ‘‘out­per­for­mance’’ of Evo­lu­tion. Its stock was up 12% and Oceana’s up 8%, the lat­ter pro­duc­ing cop­per as a byprod­uct in the Philippines which hugely off­sets gold pro­duc­tion costs.

Mr McIn­tyre said the ASX gold index had risen 11% since Au­gust, from the gen­er­ally strong re­port­ing re­sults, a trend of com­pa­nies in­creas­ing re­turns to share­hold­ers, and a 4%, or $US60 per ounce move in the gold price, all amid the geopo­lit­i­cal risks and dovish po­si­tion­ing by the US cen­tral bank, the Fed­eral Re­serve.

The cru­cial all­in sus­tain­ing costs (AISC) across the gold sec­tor had been broadly fall­ing since 2016, Mr McIn­tyre said.

De­spite the gold price ris­ing dur­ing this time, pro­duc­ers had gen­er­ally re­mained dis­ci­plined and not sought to bring on mar­ginal ore, with high costs of pro­duc­tion.

‘‘They’ve [in­stead] cut costs from their busi­ness and de­vel­oped low­cost as­sets within their port­fo­lios. Mar­gins, there­fore, re­main strong in the sec­tor,’’ Mr McIn­tyre said.

Mr McIn­tyre said Oceana Gold had come in be­low some es­ti­mates in sec­ond­quar­ter trad­ing. Af­ter­tax profit at Didi­pio, in the north­ern Philippines, was $US25 mil­lion be­low a $US49 mil­lion ex­pec­ta­tion.

Didi­pio’s cash flow was im­pacted by lower gold out­put and as a re­sult, net debt of $US248 mil­lion was

$US40 mil­lion higher than Craigs ex­pected, Mr McIn­tyre said.

‘‘How­ever, debt gear­ing was only at 15% so there’s no bal­ance sheet stress,’’ he said.

While there have been com­mis­sion­ing is­sues at Oceana’s de­vel­op­ment Haile mine South Carolina, Mr McIn­tyre ex­pected that to have only a short­term im­pact and fore­cast pro­duc­tion of 90,000oz dur­ing cal­en­dar 2017. That was still down on Oceana’s 110,000­130,000oz guid­ance.

St Bar­bara de­liv­ered full year un­der­ly­ing earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion, 5% be­low Craigs’ es­ti­mate at $A321 mil­lion and its record un­der­ly­ing $A160 mil­lion af­ter­tax profit was lower than Craigs’ $A172 mil­lion es­ti­mate.

Mr McIn­tyre said that was due to higher costs, up $A18 mil­lion, de­pre­ci­a­tion and amor­ti­sa­tion up $A4 mil­lion and reversal of for­eign ex­change gains, up

$A5 mil­lion, but par­tially off­set by lower tax, down $A10 mil­lion.

‘‘Free cash flow of

$A250 mil­lion was in line with our ex­pec­ta­tions,’’ Mr McIn­tyre said.

Mr McIn­tyre said weaker out­put by Alacer Gold led to a rev­enue miss of $US13 mil­lion in the quar­ter to June which, along with fewer tax gains, led to June af­ter­tax profit of $US30 mil­lion — be­low Craigs’ $US54 mil­lion es­ti­mate.

Alacer had in­curred

$US321 mil­lion in cap­i­tal costs to date, and ended the quar­ter with $US202 mil­lion cash in hand and $US130 mil­lion drawn down from its $US350 mil­lion debt fa­cil­ity.

How­ever, Mr McIn­tyre ex­pected Alacer’s debt to peak about $US310 mil­lion, a 23% debt gear­ing, leav­ing a

$US70 mil­lion liq­uid­ity buf­fer, and that was with­out fac­tor­ing in the likely $US50 mil­lion in cap­i­tal sav­ings re­lated to Turk­ish lira hedg­ing.

Mr McIn­tyre said pro­ducer Da­cian Gold re­ported a

$19 mil­lion loss, broadly in line with ex­pec­ta­tions.

Free cash flow of $A49 mil­lion came in as ex­pected and the com­pany spent $A33 mil­lion at its Mount Mor­gan mine dur­ing the year.

Af­ter ad­just­ing for a new West Aus­tralian roy­alty rate, Da­cian shares were still trad­ing at a dis­count, with a ‘‘buy’’ rec­om­men­da­tion on that valu­a­tion Mr McIn­tyre said.


Safe haven . . . A rough ‘‘dore’’ gold bar be­ing poured; the ASX gold index has risen 11% since early Au­gust.


Didi­pio . . . Oceana Gold’s north­ern Philip­pine mine posted a lower profit, but oth­er­wise has a stress­free bal­ance sheet.

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