There aren’t many companies in the mining sector these days that can pay off large chunks of debt from operating cash flow and embark on sizable acquisitions at the same time. But OceanaGold (TSX: OGC) is one of them.
Despite the drop in commodity prices in recent years, the company has repaid US$162 million of debt, deleveraging from US$267 million in 2012 to US$105 million by March 2015.
OceanaGold generated US$19.4 million in free cash flow during the first quarter from its three operating gold mines: Didipio in the northern Philippines, and Macraes and Reefton in New Zealand’s South Island.
The second quarter has been all about acquisitions. OceanaGold signed a definitive agreement with Newmont Mining (NYSE: NEM) to buy 100% of its Waihi gold mine on the North Island of New Zealand. The sticker price: US$101 million in cash. Under the deal, Newmont also gets a 1% net smelter return royalty on gold ounces from one exploration tenement north of Waihi’s current operations that is capped at 300,000 oz. production.
In May OceanaGold made a strategic, $16.2-million purchase of a 14.9% stake in Gold Standard Ventures (TSXV: GSV; NYSE-MKT: GSV), a company that holds the second-largest land package in Nevada’s Carlin belt, just south of Newmont’s Emigrant mine.
Waihi, 150 km southeast of Auckland, will produce an average 100,000 oz. gold a year until 2018 from its Correnso underground mine, which was commissioned in the first quarter of 2015. Last year, Waihi produced 132,000 oz. gold.
Gold was first discovered and mined in the area in 1878. The Martha open-pit mine began operations in 1987 and was acquired by Newmont in 2002, during the merger with Normandy.
“We’ve always felt Waihi would fit nicely with our portfolio,” Sam Pazuki, OceanaGold’s Toronto-based head of investor relations, says in an interview. “The feedback from investors, analysts and the investment community in general has been overwhelmingly positive.”
The acquisition will be financed with existing cash and a revolving credit facility. On June 6, OceanaGold announced that it had received final credit-approved commitments to increase its corporate revolving credit facility to a total of US$225 million.
The company says that based on Newmont’s track record of replenishing reserves at Waihi, there is a lot of exploration upside on the property, which hosts a low sulphidation epithermal gold system that since 1988 has supported an open-pit mine, as well as various underground mines. The acquisition also gives OceanaGold interests in three groups of highly prospective tenement packages within a 5 to 75 km radius of Correnso.
“In the same way that we’ve replenished reserves at Macraes, Newmont has done the same at Waihi,” Pazuki says, noting that Newmont has operated Waihi for the last 27 years, with OceanaGold operating Macraes for the last 24 years.
“It’s a prolific region for gold, and Newmont has found new veins,” he says. “We obviously feel optimistic that we can continue replenishing reserves there through further exploration.” Oceanagold will spend US$3–5 million this year on exploration at Waihi.
OceanaGold has looked at potential acquisitions for the last year-and-a-half to two years, Pazuki says, and while he isn’t absolutely certain, he thinks there might have been as many as three or four other parties interested in Waihi.
The company expects to close the Waihi transaction before the end of July, and wants to start an optimization program which will include reviewing currently suspended open-pit operations.
“We’re going to look at how we can safely restart that, as well as potential pushback on the open pit,” Pazuki explains. “We believe there are still additional resources there in terms of making the pit larger and adding those resources into reserves, so we’ll be looking at the economic and technical viability of doing that.”
Paul Hissey — a mining analyst at RBC Capital Markets in Sydney, Australia — says the two investments will add value, providing both production growth through Waihi and exploration upside through the company’s interest in Gold Standard Ventures.
“We believe significant exploration upside remains in Gold Standard Venture’s tenement holdings, with OceanaGold also in a position to add expertise in treating refractory ore given its history in New Zealand,” he writes in a research note to clients, adding that he believes “it’s highly unlikely that Waihi will only be in production for three years, outlined by current reserves.”
He says that “like most underground operations it will yield more reserves, as what we believe to be a lack of near-mine drilling in recent years.”
This year, on a consolidated basis, OceanaGold expects to produce between 295,000 and 335,000 oz. gold and 21,000 to 23,000 tonnes copper, at cash costs net of by-product credits of US$450 to US$530 per oz., and all-in sustaining costs (net of by-product credits) of US$770 to US$840 per oz.
In New Zealand, lower fuel costs and a weaker currency are lowering costs and driving profit margins. Of the US$19.4 million of free cash flow generated during the first quarter, for instance, US$13 million of it came from New Zealand.
Over the next two years, Oceanagold plans to spend NZ$8 million (US$5.8 million) on brownfield exploration at Macraes, drilling between old pits along strike to look for stockwork ore that would have a low strip ratio and similar grades to what it is mining today, but would offer good margins and extend the mine life.
“Every year since 2008 we’ve increased the mine life at Frasers underground — a downdip extension of the same orebody we’ve been mining at Macraes,” Pazuki says. “We mine a year, we add a year.”
The company is also undertaking a scoping study to evaluate whether it should build a plant at Macraes that would have two circuits to produce gold and tungsten.
“The concept here is that the orebody at Macraes is a sheelite, and 100 years or so ago they used to mine tungsten from the Macraes gold field,” Pazuki explains. “So what we’re looking at is the concept of producing both gold and tungsten, and the tungsten would be used as an offtake or by-product to offset the cost of producing gold.”
In the Philippines, meanwhile, OceanaGold has made progress on optimization. Last year, the project development team decided the best approach was to start underground development work one year earlier than planned, and access high-grade material two years earlier than planned. Underground development work began in March, and it’s on track to produce the first ore from underground by the end of 2017.
“In the original mine plan it was always an open pit that would go out until 2020, and that we’d start producing from underground in 2020, until 2028,” Pazuki says. “With the optimization study, we’re accelerating the completion of the open pit, which will now go to the end of 2017. We’ve brought forward the development of the underground by one year and production from underground by two years. We’ve made the open pit smaller and we’ve made the underground larger so we can access high-grade material from underground, because it’s super high grade that we can access earlier in the mine plan.”
Pazuki points out that when the open pit is finished at the end of 2017, the company
will have 20 million tonnes of stockpile on the surface. “That’s a US$200-million asset,” he says. “From a technical risk perspective, it’s a strong mitigator … because there won’t be any downtime in the mill.”
The company is also building a power line to connect Didipio to the power grid. (It has been running on diesel power generation since the operation began.) By connecting to the grid, the company will see significant savings in operating costs, given that 30% of its operational costs are associated with diesel fuel consumption. The company is on track to be on the power grid by this year’s fourth quarter.
Management will also look for other opportunities that could enhance shareholder wealth, Pazuki says.
“We want to be in the traffic,” Pazuki says, “to make sure we won’t miss any opportunities.”