Investors: More Gold Companies Are Showing Up on My Value Screen

With strong production growth and a clean balance sheet, OceanaGold Corporation (TSX:OGC) is looking golden.

Karen Thomas, MSc, CFA

Author Bio

Karen Thomas began her investment career in 1998 and spent more than a decade working as an equity analyst and portfolio manager at investment management firms, including a major mutual fund company and a major pension plan. After gaining extensive experience in the investment industry, she decided that individual investors deserved access to the same knowledge and insights to help them take greater control of their financial futures. After the birth of her second daughter, Karen left her investment management career to write for The Motley Fool, where she has been helping investors make sense of stocks and the stock market for more than 10 years. Her work focuses on identifying undervalued opportunities and helping investors take a long-term approach to building wealth. Outside of investing, Karen enjoys spending time with her family and staying active outdoors.

Education

Master of Science (MSc) in Finance
Bachelor of Commerce, major in Finance and minor in International Business
Chartered Financial Analyst (CFA) designation, earned in 2000

Areas of Expertise

Energy stocks, long-term investing, value investing, and contrarian investing.

Social Media Profiles

Favorite Investment Quote

"Be fearful when others are greedy, and greedy when others are fearful." — Warren Buffett

Published May 18, 2017 11:02 am EDT

I screen for companies that are attractively valued, generating strong cash flow growth and maintaining clean balance sheets. Many times, the companies that show up are out of favour and are very small companies that really don’t have enough liquidity for most big institutional investors to take on. But they are sometimes perfect for the smaller investor.

So, for the first time in a while, I am seeing gold companies make the list. One gold company that shows up in the results is OceanaGold Corporation (TSX: OGC).

This seems to be perfect timing, as a declining U.S. dollar and increasing geopolitical tensions make gold’s safe-haven quality increasingly attractive.

OceanaGold is delivering stellar results on the production side of things as well as on the cost side. The issue with the company, though, is the fact that there is heightened geopolitical risk in the Philippines, which is where OceanaGold’s Didipio mine is located. This is mitigated by the company’s operations in New Zealand and the U.S., but it does represent 42% of the company’s production in the first quarter of 2017, so it is still significant.

Production and costs for the quarter were better than expectations with production rising to record levels and all-in-sustaining costs coming in at a very strong $521 per ounce. The balance sheet is strong with $70.6 million in cash and $85.8 million in liquidity, and a reasonable amount of debt.

Two catalysts going forward are the fact that the Philippines’s new environment minister is saying that it’s possible to balance mining and nature, and he is all for responsible mining, so we can expect an improved environment there. This is very good news and lowers the geopolitical risk associated with OceanaGold, because the other candidate, Gina Lopez, had threatened mine suspensions. And just as positive is the fact that she cannot be reappointed by the president. So, this is very good for the company.

Also, the company’s new mine in South Carolina, U.S., the Haile mine, will be ramping up production during the year. It is currently producing 21,000 ounces in the first quarter, and the ramp-up is progressing as expected. The future production profile will be increasingly clear as the year progresses.

The valuation on the stock is quite cheap, trading at 1.5 times book value with an ROE of over 11% and a price-to-cash flow ratio of under seven times. I expect this stock to do well, and I think that the risk/reward on it is very favourable.