We're now heading into the final two weeks of the gold miners (GDX) earnings season, and we've seen a significant improvement in results from Q3 2019. As the chart below shows, the percent of miners beating earnings estimates has nearly doubled, from 32% to 60%, and the percent of companies beating sales estimates is up over 70%, from just below 24% to 45%.
Unfortunately, OceanaGold (OTCPK:OCANF) is not one of the names that have beat analyst expectations, after we saw yet another disappointing year operationally for the company. Not only did OceanaGold miss production guidance by a country mile, but they also came in well above all-in sustaining cost guidance, at $1,061/oz for the year. The shutdown at the company's lowest-cost mine Didipio certainly did not help matters, but missing guidance at the company's newest Haile mine didn't help matters either.
While a turnaround is certainly a possibility given that the bar is set low, I continue to see higher-margin producers that are over-delivering as more attractive ways to play the gold (GLD) price.
OceanaGold reported its Q4 and FY-2019 results in late February, and it was a mixed year, to say the least. The company came into the year guiding for 525,000 ounces of annual gold production at the mid-point, at all-in sustaining costs of $875/oz. The actual results differed materially, with annual gold production of only 470,600 ounces, more than 10% below guidance. Meanwhile, on the cost side of things, the miss was much worse, with all-in sustaining costs of $1,061/oz, more than 20% above guidance.
These underwhelming results led to OceanaGold reporting just $0.02 in annual earnings per share for FY-2019, down more than 50% year-over-year. Based on a current share price of US$1.72, this translates to a trailing P/E ratio of above 80, souring the valuation argument a little for the time being. Let's dig into the company's primary operations a little closer:
Beginning with the company's newest Haile Mine, which reached commercial production in late 2017, it was a relatively disappointing year compared to guidance provided in February 2019. The Haile mine produced 146,100 ounces of gold, more than 4% below the guidance mid-point of 152,500 ounces, and well below projections in the 2017 Feasibility Study of 165,000 ounces. From a cost standpoint, all-in sustaining costs weren't even remotely close to expectations, with FY-2019 costs of $1,262/oz, more than 40% above guidance of $875/oz for the mine.
It's worth noting that these costs are also 80% above the projections for $669/oz for the first three years based on the starter open-pit in the Feasibility Study. Therefore, the massive guidance miss is even more dispiriting, given that the guidance figures were already 15% above prior projections in the mine plan.
If we dig into the results at Haile a little further, there is a minor silver lining, as costs are finally trending lower, as gold recoveries also pick up. While gold recovery for FY-2019 was down 240 basis points to 78.6%, we did see an improvement to 80% in Q4. In addition, mined grades jumped 400 basis points from 1.74 grams per tonne gold to 1.78 grams per tonne gold, and production also increased by over 10% year-over-year from 131,800 ounces in FY-2018.
The company's FY-2020 guidance at Haile of 185,000 ounces at all-in sustaining costs of $1,105/oz suggests that things are moving in the right direction, with a forecast for a 20% jump in production and a more than 10% decrease in costs. However, the key will be the company delivering on this forecast, as following 2019's guidance was certainly not a fruitful endeavor for investors.
The uptick in performance at Haile in the back half of 2019 was due to the commissioning of a new larger mining fleet, and the company plans to add five more Komatsu 730E haul trucks to its fleet in the first half of this year. Also, the company is working on optimization of fine grinding circuit performance in an aim to deliver gold steady gold recoveries in the mid 80% range, reflecting a 500 basis point improvement from Q4 2019 levels. If they are successful in the latter initiative, this would undoubtedly be a massive benefit to all-in sustaining costs, as gold recoveries are currently tracking below the 2017 Feasibility Study as well.
However, if we look at the chart above of all-in sustaining costs at the Haile mine, we can see that while this trend lower in quarterly costs is a massive improvement, we are still well above the industry average costs of $950/oz. Therefore, an improvement in costs is the bare minimum we would expect from the project as it's already running way above projections. Investors should be hoping that the company easily beats all-in sustaining cost projections at Haile of $1,105/oz in FY-2020, and can get costs below $950/oz for FY-2021. Until we see below industry average costs at Haile, which is the most significant contributor to OceanaGold's production next to Macraes, this mine will continue to be a drag on consolidated costs for the company, and be a weight on all-in cost margins.
Moving over to the Macraes mine in New Zealand, we didn't see a tremendous year here either, as the company saw gold production of 172,500 ounces, finishing 2019 roughly 5% below the production guidance mid-point of 182,500 ounces. From a cost standpoint, the company wasn't able to meet guidance either, as all-in sustaining costs finished the year at $1,116/oz, more than 5% above the cost guidance mid-point of $1,025/oz.
The one silver lining to the underwhelming year was the continued advancement of the Golden Point underground study, which is expected to be completed later this year. The company reported exceptional drill results from Golden Hill in Q4 of last year, with two highlight intercepts being 29 meters of 6.38 grams per tonne gold and 13 meters of 7.11 grams per tonne gold. Assuming a positive economic study, this could be an opportunity for a new underground operation going forward.
It's worth noting that production was expected to be lower in FY-2019 due to mine sequencing, as OceanaGold was operating in lower-grade areas of the mine. However, the company was not conservative enough in its guidance, as production still came in lower than planned, with costs substantially higher as well. Looking ahead to FY-2020, the company expects annual gold production of 165,000 ounces at $1,025/oz. This would translate to slightly lower production year-over-year, but at costs about 7% lower than the $1,116/oz reported in FY-2019. Therefore, these should offset each other, for a similar year of performance at the mine. The positive is that Macraes should benefit from higher margins due to the strength in the gold price.
Finally, the company's lowest-cost Didipio mine in the Philippines has had a tough couple of years due to disputes, and this is very unfortunate for OceanaGold. The mine has pulled down consolidated margins for OceanaGold but is unable to provide that benefit while it is shut down. The company is currently keeping the mine in an operational readiness state while it awaits the renewal of its operating license. Unfortunately, this is now costing the company nearly $10 million per quarter, so the company has had to assess the worst-case possibility of placing the mine on care and maintenance. This has flipped Didipio from a tailwind for margins across the company based on all-in sustaining costs of $694/oz to a headwind due to the fixed costs with no cash flow to show for it.
It's important to note that the company has done nothing wrong to prompt this dispute, as it received awards previously for best workplace practices, environmental excellence, and best community programs. However, mining remains a contentious issue in the Philippines due to prior environmental matters, and Philippines President Rodrigo Duterte is adamant about ending mining operations in the country. Based on this, it's hard to assign a ton of value to the mine going forward, and it's difficult to make any predictions on when this dispute might finally end. This has led OceanaGold to forecast another drop in annual production next year, given that the Didipio mine is absent from their FY-2020 production expectations.
While OceanaGold has undoubtedly got the short end of the stick in the Philippines, and it's unfortunately involved their most attractive mine, the company has not made up for this with blow-out performance at its other mines either. The company's Waihi mine, which contributes the least to consolidated production, was the only mine to beat guidance in FY-2019. Meanwhile, OceanaGold missed at Haile and Macraes, which are the two cornerstone assets with Didipio surrounded by uncertainty. Therefore, while this disappointing share price performance in the face of a robust gold price is certainly not wholly management's result, it's not entirely Didipio's fault either.
As it stands currently, OceanaGold is a high-cost mid-tier producer, and there's no real path to returning costs to below the industry average without Didipio in FY-2020. This makes the stock a tricky investment here, as there are several gold miners with industry-leading margins that are paying dividends and firing on all cylinders.
While a share-price recovery following a 60% slide in the stock in 12 months is certainly a possibility, I continue to see OceanaGold as an Avoid for the time being. This does not mean that the stock cannot bottom out and put up reasonable returns going forward, it merely means that there are better alternatives elsewhere in higher-margin producers that should outperform OceanaGold over the medium-term. Therefore, I remain on the sidelines for now and have no plans to purchase the stock above US$1.80.
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