When in July 2006 Oceana Gold announced a scriptless merger with an Australian company to take over and develop a gold and copper deposit in the northern Philippines, concerns were immediately raised about whether it could pull off this feat.
These concerns included the Philippines' political climate, the cost to develop, the regulatory regime, the quality of target, and typhoon season.
Some of these concerns have come home to roost.
On paper, the merger of triple-listed Oceana meant its market capitalisation leapt from $A302 million to $A668 million - putting it into the lower tier of the major, multinational mining companies.
But in the interim, that market capitalisation has slumped more than 85% to $A97 million.
Restructured Oceana shares which listed on the mining-friendly Toronto stock exchange 14 months ago at $A4.15, have slumped.
During the past fortnight, they have lost 30% to trade around A66c this week.
The questions posed are many, including whether the Philippines project was too ambitious, where the much-needed development funding will come from and whether Oceana has left itself wide open to a hostile takeover bid.
Chief executive Steve Orr in Dunedin this week rejected the suggestion Oceana was being too ambitious going to the Philippines to develop the Didipio mine.
"No, it was not too ambitious. Technically, it [Didipio] is not difficult to mine and we have maintained development. The area still has great potential," he said, reiterating an earlier appraisal that a fully operational Didipio still had a potential rate of return on capital of 22%.
However, in the face of rising costs, where capital expenditure in May went from $US160 million to $US320 million, Oceana had taken the right course of action by suspending its Didipio development, Mr Orr said.
"Those who have weathered this the best are the large multinational companies. Some of the smaller companies have suspended work; others aren't operating at all now," Mr Orr said.
In suspending Didipio, he cited as reasons the highest inflation rate in the sector for the past decade; project feasibility in US dollars at a time the currency was slumping; a 70% increase in construction steel prices; and the Philippines peso having risen the most of all currencies against the faltering greenback.
Mr Orr estimated about 85% of Didipio work has ceased, but installation of mills purchased in September 2006 was still under way and was using all the Philippine labour it had initially hired.
While the pre-stripping contractor and civil earthworks had ceased, work in progress was worth $US25-30 million, he said.
Brokers ABN Amro Craigs are recommending investors reduce holdings in Oceana, in preference for other mining industries such as Australia's Newcrest Mining, or Lihir Gold, which have larger market capitilisations and less political risk.
ABN broker Peter McIntyre said there was "no catalyst" at present to prompt a rerating of Oceana's prospects in the short term, and its share price was "highly likely" to remain suppressed until a new strategic partner is on board with the $US185 million Oceana needs.
"Even then, that will come at a price," Mr McIntyre said, of the present tightening of finance options for the mining sector.
Based largely on Chinese and Indian demand, the entire mining sector has gone from strength to strength during the past three to five years.
Record prices on metals from scrap to coking coal, copper, iron ore and gold have breached breathtaking highs.
These are now beginning to ease to the point of affecting profit margins.
However, the global credit crunch, and risk-averse investors, together with a fleeing from commodity stocks back to the settling equities markets, have brought many mining stocks back to earth.
They have suddenly found themselves grappling with slumping share prices, investment money drying up, and skyrocketing transport, labour and energy costs against a backdrop of softening metals prices.
In late June, Oceana announced the Didipio blowout and suspension of the project, saying it was seeking a joint venture, merger or possible issue of stock to resume the development.
Mr Orr was aware of analysts' speculation on where funding could come from for Didipio, saying he was hoping "for a resolution by year-end" to find the $US185 million to restart the project, a figure which has remained unchanged since May.
"Analysts will continue to take value out of the share price because they don't know when it [Didipio] will be built.
And we can't go to market [with information] yet," Mr Orr said.
Mr McIntyre said the key issue, regardless of Mr Orr forecasting a return rate on Didipio investment of 22%, was to secure the Didipio funding "as soon as possible".
Oceana needed another funding stream aside from its New Zealand operations, which are secure to 2013 but otherwise "finite", Mr McIntyre said.
"The longer this goes on, [the longer] it will erode profitability and investor confidence. They are under pressure with this," he said.
Mr Orr ruled out going back to shareholders, because of the effect on shares, but said talks had been held with (unnamed) major international mining companies on Didipio's development.
"Ideally, we want to look at a joint venture. It's sensible in this [economic] environment to have someone else on board," he said.
He said talks on other financing avenues "had been discarded", as they did not cover the entire project need; and he hinted that contract options and interest rates were far from being in Oceana's favour.
When asked about Oceana's relationship with its banker, Mr Orr said Oceana's only bank facility at present was for development of the $NZ70 million Frasers tunnel at Macraes, of which 50% was on target to be repaid by the end of the year.
Mr Orr conceded that with shares at an all-time low, there was potential for a takeover bid.
"A hostile takeover is always a niggling concern, but we are feeling no great risk," Mr Orr said.
He noted the 10 largest shareholders, who had purchased their stakes for substantially more than the present price, had collectively more than 50% of the company and doubted they would sell.
Oceana could be enticing as a takeover target, capable of producing almost 300,000oz of gold per annum, and has been aided greatly during the past two years with appreciating global spot gold prices.
It rolled over its forward contract hedge book of 313,000oz to concentrate on selling in the spot market - a ploy adopted by most gold producers to maximise returns.
Mr Orr said that despite the gold price drawing back, and being down from the record high of almost $US1034 in mid-March to $US808 this week, he still wanted to eliminate the hedge book entirely.
Having some hedging in place could be beneficial if the price continued to fall, but Oceana was "generally better off being unhedged", he said.
When asked if Oceana's outlook would be revised, given its circumstances and falling price of spot gold, Mr Orr reverted to what comes across to analysts as a complicated explanation of foreign exchange comings and goings affecting margins.
Mr Orr said while selling gold in US denomination, which until recently had been very weak, he was now watching the weakness of the New Zealand dollar.
Because 80% of Oceana's New Zealand costs were using the New Zealand dollar, it helped to boost margins being squeezed elsewhere, such as US dollar gold sales, he said.
Mr Orr was unable to confirm if proposed changes to workers' rosters at Macraes would be implemented by September 1 as planned, as Oceana was still negotiating with the union.
He said New Zealand faced the same problems as Australia in that skilled staff were difficult to find and retain.
The proposed changes are to align the three work sector starting times of each eight-hour shift and to include more paid rostered days off and buses to the mine site from Dunedin and Oamaru.
When asked, he confirmed there had been "chemical difference" problems within the gold separation plant at Macraes, as Reefton concentrate was high in carbon and low in sulphur while Frasers ore was the opposite.
The respective ores are now processed on different days.
There had been an "impediment" to gold recovery, but that had now "improved markedly" since separate ore concentrate tanks were being used, he said.
He noted that Oceana had not managed Macraes during its entire mine life, but said the most crucial time for him as chief executive was a year after listing, when the first Frasers underground attempt was aborted and other prospects on the West Coast fell through.
"That was a period when there was nothing new to put forward," he said.
He conceded getting the Reefton open pit mine fully operational and producing consistent results had been "a difficult time", as had several problems with the Frasers underground tunnelling development.
"No, this is not the most crucial period. But we do have to be extremely attentive to business and how we manage growth," Mr Orr said.
Reefton was now exceeding expectations and similarly Frasers was delivering higher grades by having targeted a 5m mineralisation seam.
Underground ore output was likely be increased from the forecast 800,000 tonnes per annum to about one million tonnes, Mr Orr said.
"Without [new developments] Reefton and Frasers, which deliver two times the open pit gold [per tonne of ore], we would be a lot worse off," he said.
This was in reference to the Macraes pits, which deliver more than 50% of the gold, but require massive ore movement.
It appears that while Oceana remains on track to deliver its forecast 275,000oz of gold this year, until further financing for the Didipio project is nailed, the analysts' pencils will be kept sharp; and the share price is likely to remain suppressed.
Peter McIntyre's financial disclosure document is available on request.
