Underappreciated and Unloved Gold

Anthony Kavanagh

Chester Asset Management

Why we have been buying Oceana

We have historically allocated between 4 and 8% of our portfolio to gold equities. We do so for their defensive (uncorrelated) characteristics by allocating capital where we see relative value. Our holdings over the past 18 months have included GOR, NCM, AQG and WGX when they have been underappreciated/unloved by the market. More recently we have been buying Oceana Gold (OGC) which certainly fits the bill of unloved. Since the start of November when OGC hosted a site visit to Macraes and Waihi mines it is off 18%, including a one day drop of 17% in Canada (15/11). Here-in we discuss some of the perceived rumours/ justifications of the sell-off and present our view the market is underappreciating the upside at Waihi.

Gold Price?

Most of the ASX listed gold stocks have experienced recent selling, some for company specific issues, some due to acquisition related churn, and some due to a weaker gold price. OGC however has materially underperformed peers as evident in the table below.

Source: IRESS, Chester Asset Management

Balance Sheet

Our initial inquires of the dramatic mid-month sell-off, suggested it could have been sparked by fears around the balance sheet with OGC previously requiring a USD150m bullet repayment of its revolving credit facility on 31 December 2020. With Didipio offline indefinitely, Waihi 2020 production hiatus (discussed below) and net debt of USD140m, at 30/9/2019, some investors may have been speculating on an equity raise. Potential misunderstanding around capital requirements and necessity of projects to extend Macraes (Round Hill and Golden Point Underground) apparently fanned the rumour flames. 

However, per the announcement 25/11/2019, OGC has now pushed out the bullet repayment to 31/12/2021 removing any potential balance sheet concern. Despite the announcement the stock is yet to fully recover from the drop.

Acquisition Fears

We had also heard rumour that OGC were frontrunners to acquire Red Lake and an acquisition would require an equity raise, (which apparently the shorts were betting on). 26/11/2019 EVN announced they were acquiring the Red Lake asset.

Insider Dealing

Seeing a shareprice drop after Director selling is not surprising however in November, we saw Directors buying on market, even days before the 17% TSX decline:

  • 11/11/2019 - Ian MacNevin Reid purchased 20k shares at CAD3.05/share
  • 13/11/2019 – Craig Joseph Nelsen purchased 100k shares at CAD3.09/share
  • 19/11/2019 - Ian MacNevin Reid purchased 60k shares at CAD2.63/share
  • 20/11/2010 – Mick Wilkes purchased 50k shares at AUD2.80/share

We don’t profess insight into the financial circumstances of the 3 directors but would suggest Craig Joseph Nelsen’s purchase of shares on 13/11/2019 is incongruous with the share price decline.

Further Didipio Concerns?

Our initial thought on hearing OGC was down 17% overnight (16/11) was an assumption there were further issues with Didipio. As far as we can tell this is not the case and the recent newsflow regarding Didipio has been incrementally positive (refer below).

Waihi Production Hiatus

There will be a 12-month production gap at Waihi from when Correnso Underground mine finishes (Q1 2020) to the start of production from the Martha mine. There has been some confusion around this given we thought it was reported in the Q3 report and on the Quarterly call, but some analysts missed it. Communication on this may not have been the greatest but if the Waihi production hiatus is the reason for the November weakness, we can’t reconcile the quantum of the sell-off with the average market valuation of Waihi (~AUD480m). We believe this hiatus and Didipio concerns has led the sell side to miss the upside opportunity at Waihi (refer below).

Chester Vs Market

We have reviewed the current share price and our valuation vs the (Australian) sell side and what is evident below is: a) the street has a valuation materially higher than the current share price (so we aren’t alone in assessing OGC as undervalued); and b) our valuation for Waihi is materially higher than the streets. We discuss each of OGC’s assets in more detail below, starting with Waihi.

Source: Chester Asset Management with reports from sell side analysts (intentionally left anonymous)

Waihi – Market focus on near-term negatives, potentially missing long-term positives

Acquired from Newmont in May 2015 for USD101m, Waihi is located on New Zealand’s north island. As is evident in the divergence of the street’s Waihi valuation and the November sell-off, we believe the near-term production hiatus has been overplayed, and the Waihi upside underappreciated by the market, a point not lost on OGC Management (refer slide 37 of the 8/3/2019 Investor Day presentation).

Recent commentary by Management being “excited about growth opportunities” at the “bountiful” Waihi operation don’t seem to be reflected in market valuations where the average Australian sell-side NAV is ~AUD480m (+ exploration (1)). We suspect the analysts are waiting for: The new expanded WKP resource in the next few months; and the Waihi district study to be released in 1H 2020, to refine their valuations.

We thought we would try our hand at what the different scenarios may look like prior to these releases.

Potential Resources

Sources: OGC 31 December 2018 Reserves and Resources Statement, OGC announcement 24/9/2019 and Chester Asset Management

We have used the potential resources to model out valuation scenarios summarised in the table below.

Source: Chester Asset Management

We have relied on the technical report dated 29/3/2019 (and history) to derive assumptions for throughput, recovery, costs, capex, etc but note the following risks/uncertainties with our modelling:

  • Opex. Opex we have increased the current mining and processing costs but note uncertainty here:

- NZD90/t mining costs, vs ~NZD80/t in the past 12 months at Correnso;

- And NZD45/t processing costs vs ~NZD40/t in the past 12 months on a lower level of throughput, i.e. we would expect reduced processing costs on higher throughput but have modelled NZD45/t to be conservative (Mid and low case). We have modelled NZD40/t on the high case.

  • Mining Licence. We assume that all permits and consents are received for WKP and remain until mining ceases.
  • Capex. We have the least conviction in capex but note previous development at Waihi of ~USD100m (including Correnso underground mine).
  • Resource. Note that assuming the full resource (including inferred) forms part of the Life of Mine plan may seem bullish but OGC drilling should see inferred to M&I conversion, and we have seen OGC’s ASX peers present 10+ year outlooks on potential inferred resources (and we note we use this to test the upper limits of valuation potential in our high case).
  • Throughput. In our upside case we have assumed OGC can move the currently unused Reefton Mill (Capacity ~1.8Mtpa) refurbish it and achieve development rates to feed the mill. Our Mid and Low case assume the existing mill can be fed to capacity ~1.1Mtpa.

While acknowledging the risks we still see material upside potential from the average sell-side valuation. Although it can be argued some of the difference between our mid case and the street’s is captured within their exploration and other resources value, we feel if this were the case it could be understating the resource upside around Macraes (Golden Point Underground and Round Hill) and Haile. With such material value opportunity in our high case we are somewhat surprised the market has chosen to heavily focus on the production hiatus and ignore the upside.

Macraes – Short Mine life is consensus

Macraes, located on the South Island of New Zealand has been in operation since 1990 and during that time has produced over 5 Moz. In 2019 guidance is for Macraes to produce between 175,000oz to 190,000oz. Reserves at 31 December 2018 were 1.16Moz giving Macraes a reserve life to 2024.

One employee at Chester can remember back in the early 2000s when Macraes had a 4-year mine life. 15+ years later it has an ~4-year mine life. Several opportunities exist for mine life extensions: Innes / Fraser / Gaytan, Coronation North, Deepdell, Golden Point, Round Hill. Round Hill would only be considered as an end of life extension. 3/10/2019 OGC announced significant drill results at Golden Point including: 29m at 6.4g/t, 13m at 7.1g/t, 12m at 6.7g/t. A PFS is due on Golden Point Underground in 2H 2020. We note our valuation for Macraes isn’t too dissimilar to the street.

Haile – Issues in the past?

Haile gold mine is in South Carolina and came into production in January 2017. It took a while to ramp up during 2017 before seemingly delivering in Q4 2017. 2018 however saw initially lower grades in 1H before heavy rains and hurricanes in September/October delivered 20 inches of rain in 2 weeks to flood the mine. OGC had to pump water from the mine into a pit. The company felt the pain of this in Q4 2018 and Q1 2019 and had to bring in a mining contractor to move muddy material as well as congruently ramping up mining operations, effectively incurring almost double mining costs (~USD5/t vs USD2.50/t Q1 2018)

Haile has had its issues but is on the improve with mining and processing costs decreasing in Q3 and the plant achieving peak throughput levels of above 3.5Mtpa. Following further optimisation of the regrinding circuit OGC is targeting steady state recoveries in the mid 80% at higher throughput rates, we assume from 1H 2020 onwards.

Our Haile valuation isn’t too dissimilar from the street. We mark this down to the detail provided by the company in the 43-101 Technical Report released to the market 11/8/2017.

Didipio – Not being paid for

Didipio is located on the island of Luzon in the Philippines and we believe remains the biggest area of concern for the market regarding OGC. The asset was initially expected to produce 120koz-130koz of gold and ~15kt of copper in 2019 but is currently not operating due to restraining measures by the local government. We don’t possess any insights into Philippine politics but would note average sell-side NAV (risked) of the asset is ~AUD580m, ~AUD0.95/share. This appears to have been 100% discounted in the stock price.

OGC lodged a notice to renew the Financial or Technical Assistance Agreement (FTAA) in March 2018 and has been working collaboratively with the Government of the Philippines on the renewal process. The initial term of the FTAA ended 20/6/2019. The FTAA is renewable for another 25 years and OGC lodged the application for renewal in March 2018. As per Q3 commentary OGC is currently continuing the renewal process with the regulatory stakeholders including:

  • Department of Environmental Natural Resources (DENR)
  • Mines and Geosciences Bureau (the MGB). The MGB has confirmed in writing that Didipio mine is permitted to continue its mining operations pending the completion of the renewal process
  • The company remains proactively engaged with regulatory stakeholders including the DENR and MGB

Recent timeline:

  • 25/7/2019 - Regional Trial Court of Nueva Vizcaya (‘NV’) denied OGC’s petition for an injunction against the Provincial Government and local government from interfering with operations
  • 18/9/2019 – OGC appealed the regional court decision in the appeals Court in Manila and is awaiting the decision
  • 15/10/2019 – OGC revised 2019 outlook to include no further production from Didipio
  • 25/11/2019 – OGC noted good engagement and support from the Government of the Philippines and continued progress. Regulators have endorsed renewal back to the Office of the President based on full compliance with the FTAA terms and conditions.
We feel FTAA renewal would likely lead to government restraints being removed and a staged resumption of operations. If this issue is resolved, we would expect a material re-rate of the share price but continue to highlight the risk that it isn’t.


OGC remains unloved and underappreciated. Resolution of Didipio issues would certainly change this but remains uncertain. Newsflow/derisking of Waihi in the meantime could provide material upside to the market’s view of value.


Past performance is not a reliable indicator of future performance. Positive returns, which the Chester High Conviction Fund (the Fund) is designed to provide, are different regarding risk and investment profile to index returns. This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific individual. As such, before acting on any information contained in this document, individuals should consider whether the information is suitable for their needs. This may involve seeking advice from a qualified financial adviser. Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) is the issuer of the Chester High Conviction Fund. A current PDS is available from Copia located at Level 25, 360 Collins Street, Melbourne Vic 3000, by visiting chesteram.com.au or by calling 1800 442 129 (free call). A person should consider the PDS before deciding whether to acquire or continue to hold an interest in the Fund. Any opinions or recommendations contained in this document are subject to change without notice and Copia is under no obligation to update or keep any information contained in this document current

(1) Noting that some analysts may include the upside in Exploration and other resources which we refer to below

Anthony Kavanagh
Portfolio Manager
Chester Asset Management

Chester Asset Management is a high conviction equities fund manager co-founded in 2017 by Rob Tucker and Anthony Kavanagh, with a 25-40 stock benchmark unaware strategy comprised of predominantly broadcap (ASX300) stocks.

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