High Grade Ore And Reserve Expansion Will Drive Strong Long Term Upside Potential

Catalysts

About OceanaGold

OceanaGold is an unhedged gold and copper producer operating a portfolio of long-life mines and growth projects across multiple jurisdictions.

What are the underlying business or industry changes driving this perspective?

• Acceleration of higher grade ore feed at Haile and Macraes, including Ledbetter 3 and Innes Mills 8, is expected to lift production volumes while lowering unit costs, supporting stronger revenue growth and expanding net margins.
• Advancing Waihi North and Wharekirauponga, with fast track permitting and expanded drilling capacity, positions the company to bring on a large, high grade underground ore body that can materially extend reserve life and underpin higher long term earnings.
• Optimization and expansion at Didipio, including restoration of normal underground rates and a targeted 2.5 million tonne annual mining rate by 2026, should increase copper and gold output from an already low cost asset, enhancing consolidated cash flow and margins.
• Updating technical reports at Haile and Macraes using higher long term gold price assumptions is expected to convert additional resources to reserves, extend mine lives and improve project economics, driving more durable free cash flow and higher returns on capital.
• Maintaining a debt free balance sheet and robust free cash flow generation in a strong gold price environment allows continued investment in organic growth while returning capital through buybacks and dividends, which may lift earnings per share and support a valuation re rating.

Assumptions

This narrative explores a more optimistic perspective on OceanaGold compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming OceanaGold's revenue will grow by 29.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 24.2% today to 47.8% in 3 years time.
• The bullish analysts expect earnings to reach $1.7 billion (and earnings per share of $5.18) by about December 2028, up from $403.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, down from 15.6x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 21.5x.
• The bullish analysts expect the number of shares outstanding to decline by 2.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• As a fully unhedged gold producer, OceanaGold is highly exposed to long term volatility or structural weakness in the gold price. A sustained pullback from the current record pricing environment would likely compress revenue growth and reduce earnings leverage to each ounce produced, weakening free cash flow generation over time.
• The business is leaning on a period of unusually high grades at Haile and Macraes and on bringing additional higher grade ore bodies like Waihi North and Wharekirauponga into the mine plan. Any disappointment in exploration results, reserve conversion, permitting timelines or mine life extension studies could cap long term production volumes and constrain revenue and earnings growth.
• Management is signaling higher sustaining and growth capital in the near term, including stepped up investment at Waihi North, Didipio and other sites. If inflation in input costs, labor or energy persists or intensifies, the combination of elevated capital spending and operating cost pressure could keep all in sustaining costs at the top end of guidance and erode net margins and free cash flow.
• The strategy emphasizes aggressive capital returns through a substantially upsized buyback and higher dividends at the same time as multiple growth projects require funding. If gold prices soften or project capital needs or operating challenges are greater than expected, the company may be forced to scale back shareholder returns or increase leverage, which would pressure earnings per share, constrain cash flow and potentially weaken the balance sheet.
• Several key assets, notably Didipio and Waihi North, are dependent on ongoing social license, environmental approvals and technical dewatering and underground optimization work. Any regulatory delays, community opposition, water management setbacks or technical execution issues could drive higher all in sustaining costs, interrupt production and negatively impact both revenue and net margins on a multi year basis.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for OceanaGold is CA$52.86, which represents up to two standard deviations above the consensus price target of CA$43.91. This valuation is based on what can be assumed as the expectations of OceanaGold's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$52.86, and the most bearish reporting a price target of just CA$34.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$38.13, the analyst price target of CA$52.86 is 27.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.