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
❛ 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.