OceanaGold’s Epic Fundamentals

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With the gold-mining sector’s market-dominating outperformance this year, investors are searching for the best-of-breed gold miners. The elite mid-tier OceanaGold is certainly among them. OceanaGold has truly epic fundamentals, combining super-profitable low-cost gold production with a solid balance sheet and great growth potential. Gold-stock investors really need to seriously consider this gem for their portfolios.

OceanaGold likely derives its name from Oceania, a loose geographic region comprising the islands of the southwest Pacific Ocean. And given OceanaGold’s operations in New Zealand and the Philippines, its name is quite apt. OceanaGold operates several gold mines, and recently acquired a great new gold project in South Carolina.  While not widely known yet by American investors, OceanaGold eventually will be.

OceanaGold was incorporated in 2003 as last decade’s mighty secular gold bull was gathering steam. The company started mining gold at the existing Macraes mine in southern New Zealand, which had been owned by OceanaGold’s predecessor company. Though mining started at Macraes way back in 1990, it’s still in production today thanks to a major underground expansion commissioned in 2008.

As New Zealand’s largest producing gold-mining operation, Macraes has generated great cash flows over the years. This mine along with other smaller operations in New Zealand put OceanaGold in a position to buy the Didipio project in the northern Philippines through a merger in 2006. Unfortunately the sharp gold plunge during 2008’s stock panic delayed development plans, Didipio was mothballed.

But as gold recovered strongly out of that stock panic to power to new highs in the subsequent years, OceanaGold starting building its new Philippines mine in 2011. Didipio was completed in late 2012, and this high-grade gold-copper mine has been instrumental in growing OceanaGold into the great company it is today. Didipio is one of the lowest-cost gold mines in the world thanks to its big copper byproduct!

And despite the gold-mining sector’s dark times in recent years, OceanaGold never stopped expanding. Last summer OceanaGold bought Romarco Minerals and its incredible Haile gold project in South Carolina. That mine is under construction with commercial production scheduled to start in early 2017. Also late last year, OceanaGold bought the Waihi gold mine in northern New Zealand from Newmont Mining.

Such aggressive expansion while gold and gold stocks slumped to brutal major new secular lows last year is incredibly impressive. It’s been exceedingly difficult for the gold miners to raise capital, since banks want nothing to do with this industry and share prices have been bludgeoned to decade-plus lows. OceanaGold’s ability to actively buy into those fire-sale prices resulted from its excellent operating cash flows.

This growth has given OceanaGold a well-diversified portfolio of gold-mining operations. Production from Macraes, Didipio, and Waihi runs around 150k ounces, 140k ounces, and 120k ounces annually. The company has another minor mining operation nearing the end of its life, Reefton in central New Zealand.  And of course that Haile project will really boost production when it comes online early next year.

All together all these operations made for a bang-up year for OceanaGold in 2015! And that’s high praise considering the average gold and HUI gold-stock-index levels last year were just $1159 and 146.3. In late January, OceanaGold reported producing 419.2k ounces of gold last year, along with 23.1k tonnes of copper. That kind of production puts OceanaGold squarely in the ranks of mid-tier producerdom.

But it’s not OceanaGold’s production that makes it extraordinary, but its incredibly low costs thanks to Didipio’s world-class gold-copper deposit. In 2015 OceanaGold reported cash costs of just $458 per ounce of gold sold! Cash costs include all the direct production costs of mining, including all digging, processing, and refining costs as well as mine-level administration and taxes.  Cash costs are a useful measure.

They are essentially an acid test for gold miners, showing how low the gold price could sink before cash flows from operations would be insufficient to keep mining gold. And with cash costs all the way down around $450, OceanaGold could’ve survived a full-blown gold apocalypse and been among the last companies standing. Even the most vociferous of the gold bears rarely forecast gold going much below $800.