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Posts from the ‘OceanaGold (OGC)’ Category

Week 91: Consolidating

Portfolio Performance

week-91-Performance

Consolidation

Patience is a difficult virtue. I’ve had 3 weeks of pretty so-so performance, some stocks going up and some stocks going down and overall not much of anything happening. With the market going up seemingly every day its hard to not let that play on your mind.

But you have to have a balance of patience and impatience to do well in stocks. You need to have a healthy level of impatience so that you don’t hold onto positions for too long, but tempered with an equal dose of patience because, as I read some time ago from a cagey market veteran, you will make 80% of your gains for a year in 2-3 weeks, and figuring out which weeks those are is nearly impossible.

In the last few weeks I think I demonstrated a little bit both; witness impatience in my selling of gold stocks and of my position in Tricon Capital and patience as I held on to falling positions in MBIA, Impac Mortgage and watched YRC Worldwide and Yellow Media correct substantially from their highs. Read more

Week 88: Take-off (MTG, RDN, MBI, PKI, NTI, IMH, WD)

Portfolio Performance

week-88-Performance

See the end of the post for Portfolio Composition and weekly trades.

A week of Significant Gains from RDN, MTG, MBIA

The last seven days have been extremely good ones for my portfolio.  This has been primarily due to the price appreciation of MGIC, Radian Group and MBIA.  As regards MGIC and Radian, I have written so much about these two names, done so much work trying to understand the business (and trying to understand how other people were trying to understand the business), that it is quite rewarding to see it play out the way that it has.

It is amazing to me that MGIC has more than doubled (from a $2.40 low to a $6.10 high) during 5 days when the only notable disclosure was that the company had the ability to raise capital.  Someone with an interest in market psychology should really write a piece on MGIC – you could call it the Existential Security.

I reduced my position in both Radian and MGIC by a little more than half during the early part of this week.  My sales of MGIC occurred around $5.20 while those with Radian were at a little over $10. I don’t have plans on selling any more of either.

I sold the positions down because they were getting very large (particularly in the case of MGIC) and because my thesis, that these companies would be able to survive, has now played out.  What is going to drive the stocks going forward is the long-term potential of the mortgage insurance business and how well each company can capitalize on it. Read more

Yesterday’s David Tepper Moment

David Tepper is a very successful hedge fund manager who, in the fall of 2010, went on CNBC and explained, with a simplicity that the market loves, why you had to own stocks.

“Either the economy is going to get better by itself in the next three months…What assets are going to do well? Stocks are going to do well, bonds won’t do so well, gold won’t do as well,” he said. “Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.

“Then what’s going to do well? Everything, in the near term (though) not bonds…So let’s see what I got—I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the fed comes in with money.”

I am coining the phrase “David Tepper moment” to refer to a time when what appears to be the obvious thing to do is the right thing to do.  A moment when the correct action is “just that simple”.

I believe that yesterday was a David Tepper moment for gold stocks.

Read more

The OceanaGold Gamble

I first bought OceanaGold at $1.80 at the end of May.  I originally bought it strictly as a trade.

The price subsequently moved up and I added to the position twice, first at $1.98, and later at $2.14.  You’ve heard me say it before – do more of what’s working and less of what doesn’t.

Well sometimes that backfires.   When gold got pummeled in mid-June, my position in OceanaGold got hammered back below $2.   It happened so quickly that I did not have time to react, and I ended up losing all of my profits and a little more on top of that.

Such is the difficulty of owning a trading stock with a secular thesis.

From that time until this week OceanaGold didn’t do much of anything.  It sat in the 1.80’s, would briefly rise into the 1.90’s but never for more than a few days.  I held, not wanting to sell near the low without justification and not having the time to do the work I needed to do to get that conviction.   But over the weekend (last weekend), I stepped through their recent reports and presentations, made a few runs at their numbers, and I decided I might just stick this one out.

Two reasons to stick it out

OceanaGold had a terrible first quarter.  Costs were up and above $1000 per ounce.  Production was down over 20%.  The mines that it is currently operating in New Zealand have been struggling with costs pressures for some time now.  But the first quarter was particularly bad.

Part of the bet I was making when I bought OceanaGold at $1.80 was that the first quarter was an aberration.  And, having stepped through that first quarter in some detail now, while I don’t expect costs to drop back to pre-2011 levels, I do find it plausible they they fall back into the low $900’s an ounce.  Similarly, production could easily return to 60,000 ounces plus per quarter.  The progress made in its second quarter earnings release on Thursday suggests this just may be in the process of playing out (note that I wrote most of this post before the Q2 earnings were released so I won’t be talking in detail about them).

The other part of the bet on OceanaGold is the expectation that the company will be reevaluated for the better once the Didipio project begins to produce substantial ounces.  Because of the by-product credits from copper production, Didipio will produce gold at negative cash costs for the first couple of years.

Let”s step through this two-pronged thesis in more detail.

Production Costs should come down

Productions costs on a per ounce basis were bad in the first quarter and they have been rising for some time now.

When you look closely at the rise in production costs over the last number of quarters you can attribute the rise to essentially 3 factors:

  1. Rise of the New Zealand Dollar
  2. Fewer Ounces produced
  3. Changes in the amount of the total costs that can be amortized as pre-stripping

I was quite astonished by just how much of the company’s costs increases could be attributed to these 3 factors.  In fact all of it.  If you look at the total operating costs in New Zealand dollars over the last few years, including costs that were amortized as pre-stripping, they are remarkably flat.

Note that I did this work before the Q2 earnings release so it is not included in the chart.

What the chart illustrates is that this a story of a company dealing with cost pressures due to their local currency appreciating and the natural evolution of the mine plan with changing grades and changing strip ratio.

Looking ahead, I don’t expect much further appreciation of the New Zealand dollar.  With a global slowdown at hand, it seems reasonable to expect the NZD to weaken against the US dollar.  The fewer ounces produced has been a function of various issues that occurred in Q1.  There were issues at the Macraes open pit, at Fraser underground and at Reefton.  The good news is that it appears the company made progress on all fronts in Q2 (production in Q2 was 55,000 ounces versus a little over 50,000 ounces in Q1) and expects production back to normal (which would be around 60,000 ounces per quarter) by Q3.  As the above chart of total costs  indicates, costs per ounce are primarily a function of ounces produced.  A return to 60,000 ounces per quarter would show a drop in costs to about $900 per ounce.

Didipio

The other part of the bet on OceanaGold is the expectation that the company will be re-evaluated once the Didipio project begins to produce ounces. Because of the by-product credits from copper production, Didipio will produce gold at negative cash costs for the first few years and over the life of the mine cash costs will be substantially lower than the existing New Zealand operations.  This is going to dramatically bring down corporate cash costs.  I expect that analysts will be more inclined to give OceanaGold an average mid-tier multiple once their cash costs settle in-line with other mid-tier producers.

In the table below I have estimated the impact of Didipio on corporate cash costs in 2013 and 2014.

By way of analogy, consider Agnico Eagle.  In the first quarter (again I wrote most of this post before second quarter numbers were out) Agnico recorded cash costs of $594/oz.  Agnico’s largest mine in terms of gold production for the quarter was Meadowbank, which produced 79,000 ounces for the quarter.   Meadowbank produced those ounces at costs of $1,020 per ounce.  Taken alone, Meadowbank would be a high cost producer and receive a low multiple.  But Agnico offsets the high costs at Meadowbank with costs of $278/oz at Pinos Altos and $216/oz at LaRonde.

Looking at the latest BMO report on Agnico Eagle, I note that the company gets a cash flow multiple of 10x.  This compares to OceanaGold at 4x cash flow excluding Didipio and 2x cash flow including it.

Clearly, there is room for an upside re-evaluation.

Gold Price

The last factor that is going to determine the future direction of the share price is the price of gold.  I have some thoughts there, but I am not going to go into them in detail here.  Suffice it to say that this is the piece of the puzzle that I am least confident about.  Its unfortunate that I am so uncertain about whether gold will continue to rise or whether it will stall out and potentially fall.  Because given the other factors at hand, OceanaGold would seem to be a good place to build a large position at today’s prices.