Oceana Gold is among the top four gold producer picks on the Australian stock exchange, following a strong rally in recent weeks behind the precious metal stocks.
Gold has resumed its safe haven status, having risen 15% so far this year, most recently fuelled by rising political tensions during August and September between the leaders of the United States and North Korea.
Craigs Investment Partners brokerage research is maintaining a "buy" recommendation on the stocks of Oceana Gold, St Barbara, Alacer Gold and Dacian Gold, while three other stocks have been downgraded to "sell"; Newcrest Mining, Northern Star Resources and Regis Resources and Evolution Mining stock is on a "hold".
Craigs broker in Dunedin, Peter McIntyre said said the ASX gold index had risen 15% since the start of the reporting season, the rally aided by the Australian dollar gold price rising 4% during the same period.‘‘Financial results were generally in line with our expectations, with few surprises looking out to full year 2018,’’ Mr McIntyre said.
"ASX gold companies generally had strong financial results during the full year 2017 reporting season," he said.
A "mostly stable" gold price during the year and "steady" operational performances resulted in profits in line with expectations, strong cash flows and strengthened balance sheets.
"A key theme over the reporting season was companies reviewing their dividend policies and returning cash to shareholders," he said, citing the updated dividend policies of Newcrest, Evolution, Northern Star and St Barbara.
Mr McIntyre also noted the strengthening copper price had also contributed to the "outperformance" of Evolution. Its stock was up 12% and Oceana’s up 8%, the latter producing copper as a by-product in the Philippines which hugely offsets gold production costs.
Mr McIntyre said the ASX gold index had risen 11% since August, from the generally strong reporting results, a trend of companies increasing returns to shareholders, and a 4%, or $US60 per ounce move in the gold price, all amid the geopolitical risks and dovish positioning by the US central bank, the Federal Reserve.
The crucial all-in sustaining costs (AISC) across the gold sector had been broadly falling since 2016, Mr McIntyre said. Despite the gold price rising during this time, producers had generally remained disciplined and not sought to bring on marginal ore, with high costs of production.
"They’ve [instead] cut costs from their business and developed low-cost assets within their portfolios. Margins, therefore, remain strong in the sector," Mr McIntyre said.
Mr McIntyre said Oceana Gold had come in below some estimates in second-quarter trading. After-tax profit at Didipio, in the northern Philippines, was $US25million below a $US49million expectation.
Didipio’s cash flow was impacted by lower gold output and as a result, net debt of $US248million was $US40million higher than Craigs expected, Mr McIntyre said.
"However, debt gearing was only at 15% so there’s no balance sheet stress," he said.
While there have been commissioning issues at Oceana’s development Haile mine South Carolina, Mr McIntyre expected that to have only a short-term impact and forecast production of 90,000oz during calendar 2017. That was still down on Oceana’s 110,000-130,000oz guidance.
St Barbara delivered full year underlying earnings before interest, tax, depreciation and amortisation, 5% below Craigs’ estimate at $A321million and its record underlying $A160million after-tax profit was lower than Craigs’ $A172million estimate.
Mr McIntyre said that was due to higher costs, up $A18million, depreciation and amortisation up $A4million and reversal of foreign exchange gains, up $A5million, but partially offset by lower tax, down $A10million.
"Free cash flow of $A250million was in line with our expectations," Mr McIntyre said.
Mr McIntyre said weaker output by Alacer Gold led to a revenue miss of $US13million in the quarter to June which, along with fewer tax gains, led to June after-tax profit of $US30million — below Craigs’ $US54million estimate.
Alacer had incurred $US321million in capital costs to date, and ended the quarter with $US202million cash in hand and $US130million drawn down from its $US350million debt facility. However, Mr McIntyre expected Alacer’s debt to peak about $US310million, a 23% debt gearing, leaving a $US70million liquidity buffer, and that was without factoring in the likely $US50million in capital savings related to Turkish lira hedging.
Mr McIntyre said producer Dacian Gold reported a $19million loss, broadly in line with expectations. Free cash flow of $A49million came in as expected and the company spent $A33million at its Mount Morgan mine during the year.
After adjusting for a new West Australian royalty rate, Dacian shares were still trading at a discount, with a "buy" recommendation on that valuation Mr McIntyre said.
