Update: Oceanagold Earnings - Higher Costs And Lower Production

Aug. 5.14 | About: Oceanagold Corp. (OCANF)

Summary

OceanaGold announced a small Q2 loss on higher costs and lower production.

As I predicted the company's production would fall off after an unusually strong Q1 that sent shares higher; production costs exceeded expectations by 11%.

The stock is risky at the current valuation and investors should be cautious.

OceanaGold (OTCPK:OCANF) recently reported its second quarter earnings results that were largely mixed. Since investors had been aggressively bidding up shares earlier in the year--thanks to an incredibly strong first quarter--it should come as no surprise that the stock is pulling back. The company reported a quarterly loss of $2 million on 61,000 ounces of production at $780/oz. Investors should note that this was an unusual quarter for the company's flagship Didipio project, which produced lower grade ore and temporarily shut down, although this was to be expected. Going forward the mine will be a cash-flow generating machine. Operating cash-flow came in at $22 million. The company paid off $10 million of its debt load (now $160 million). It also successfully renewed its $200 million revolving credit facility solidifying its liquidity position.

OceanaGold has had an incredible year thus far given the incredible Q1 output of its flagship Didipio Mine. Shares are up 80%, which is far better than the gold price or the gold mining shares. However as I pointed out in my May article I think the Q1 production figures were an aberration and that investors should be taking profits. This came after I initially recommended the company last July at around $1.50/share (the stock trades at $2.80/share now). Investors should note that the company's production is set to decline as its New Zealand assets will no longer be in operation next year. On the plus side, the company's production costs will decline, and the Didipio Mine is expected to be a low-cost producer, and its production will approach 190,000 ounces next year as the mine is back to normal production.

As a low-cost producer that had shown signs of outperformance the stock has been performing well but investors need to keep in mind a few things. First, the company does have a $160 million debt position vs. a $43 million cash position. Second, while the Didipio mine is a low cost producer it is in one of the riskiest mining jurisdictions in the world--the Philippines--meaning that investors need to be more conservative when valuing the mine's cash-flow than they would when valuing the cash-flow from a mine in a safer jurisdiction. Third, the company has an $875 million valuation, which doesn't support the Didipio Mine's valuation. With this in mind I remain convinced that the stock needs to pull back before investors consider taking a position.

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