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Is It Time to Buy OceanaGold?

- By Alberto Abaterusso

Gold is soaring. The bullion closed at $1,314.20 per troy ounce on the London market on Tuesday, reflecting 1.7% upside from the cumulative average of $1,291.75 per troy ounce for January and a 3.6% increase from the cumulative average of $1,268.49 an ounce for 2018.

Gold futures are also showing strong uptrends. The financial contracts through which the yellow metal is negotiated were trading around $1,319.2 per troy ounce at close on Tuesday, up 1.7% from January and up 2.3% from 2018.

Will gold continue trading higher? It depends on the Federal Reserve and their position on interest rates. After the central bank decided to leave interest rates unchanged for now at 2.25% to 2.5%, the metal soared nearly 1% to $1,323.25 an ounce on Jan. 31.

The longer the U.S. Federal Reserve holds off on any changes in the interest rate cycle, the better for bullish gold investors. Since the central bank said it will be patient in increasing the interest rate as long as the rise in nonfarm payrolls doesn't create inflation issues, the chances gold will go well beyond $1,350 per troy ounce are very high.

Therefore, investors should consider exposing their portfolios to precious metal producers. I would go for stocks that have proven to be more volatile with reference to changes in the price of gold. That is, for those stocks whose share prices increase more proportionally than the gold price.

A stock that meets these criteria is OceanaGold Corp. (OGC.TO) (OGC.AX). The stock has beaten the VanEck Vectors Gold Miners (GDX) exchange-traded fund and the VanEck Vectors Junior Gold Miners ETF (GDXJ). The two gold-backed funds are liquid vehicles to gain exposure to the precious metal and used as benchmark for the mining industry.

The chart shows OceanaGold beat the VanEck Vectors Gold Miners ETF by 37.3% and the VanEck Vectors Junior Gold Miners ETF by 35.7% for the 52 weeks through Feb. 5 and Feb. 6. The biggest reward for shareholders of OceanaGold happened last December, when the bullion increased 5%, gold futures jumped 4.5% and the stock soared nearly 30%.

The same thing occurred on the Australian exchange. The share price of OceanaGold surged almost 30% on rising commodity prices.

The market has been impressed by the profitability of this mid-tier gold producer with operations in the U.S., the Philippines and New Zealand.

The Australian company's profitability is measured by the earnings before interest, taxes, depreciation and amortization margin. OceanaGold produced an EBITDA margin of more than 50% of total revenues. The miner sold 532,700 ounces of gold in 2018 at an all-in sustaining cost of $767 per ounce.

For 2019, the stock's catalysts are the price of gold and production. OceanaGold may hit 540,000 ounces of gold in 2019, reflecting 1.3% upside from 2018's output.

Thanks to a higher volume of material to process, the Haile Gold Mine in South Carolina, the Didipio Gold-Copper Mine in the Philippines and the high-grade, large deposit Waihi Gold Mine in New Zealand will underpin the yearly production with strong performance. Not to mention the existence of 600 ounces of gold in stockpiles.

The AISC could exceed $850 an ounce in 2019, reflecting an 11% increase from 2017, because the Waihi mine in New Zealand may produce less this year and the processing of ore stockpiles is usually costly and miners should encounter lower ore grade. A higher gold margin due to rising commodity and sales volume will further improve the EBITDA margin. The reflections on the share price can be readily imagined.

OceanaGold is also surveying mineral properties in North America, Southeast Asia and Oceania. This could result in an increase in exploration costs for the next two years.

Wall Street has issued an overweight rating on OceanaGold, meaning analysts predict the stock will continue to outperform the industry. The average target price is 4.95 Canadian dollars ($3.75) per share versus the share price of CA$4.24 at close on Tuesday on the Toronto Stock Exchange. It is 4.87 Australian dollars ($3.86) versus the closing price of AU$4.46 on Wednesday on the Australian market.

The Canadian shares were trading below the 50-day simple moving average line at close on Tuesday, but above the 200 and 100-day lines. The same situation characterizes the Australian closing price on Wednesday.

The 52-week ranges are CA$2.97 to CA$5.01 and AU$3.09 to AU$5.28. The market capitalizations are CA$2.623 billion and AU$2.76 billion.

The price-book ratios are 1.67 and 1.75 versus an industry median of 1.74. The EV-to-EBITDA ratios are 6.93 and 7.24 versus an industry median of 9.3.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.