OceanaGold: "Enormous Upside Leverage"

02/06/2018 5:00 am EST

Focus: COMMODITIES

Stephen Leeb

Founder and Research Chairman, Leeb Group

A new pick for our portfolio is Canada-based OceanaGold (OCANF); this relatively small gold miner (market cap aroun $2 billion) has stunning fundamentals and enormous upside leverage, notes Stephen Leeb, growth stock expert and editor of Real World Investing.

With rising production likely to complement rising gold prices, the stock is a potential multi-bagger. The company has two producing mines in the U.S., one in Argentina, two in New Zealand, and one in the Philippines. Since 2013 its gold production has nearly doubled while margins have increased.

While global gold reserves have declined since 2013, OceanaGold’s reserves have grown by nearly 40%, pointing to further production increases in coming years.

The miner has 12 projects in advanced drilling, the step before reserves and resources are defined. An additional 11 projects are in the initial drilling phase. Five projects are in the reserve-defining stage and two more are close to production.

Among Canadian gold producers, OceanaGold spends the greatest proportion of its revenues on exploration. It is one of the few miners whose earnings have risen since 2011, the year gold made its all-time high – testimony to the company’s skill in deploying its funds profitably.

If gold merely stays around its current price, and the company meets its production and cost projections – and it has an outstanding record of doing so — we’d look for free cash flow of more than $200 million in 2018.

That translates into a free cash flow yield of about 12 percent, far greater than for any other gold miner. OceanaGold’s hefty free cash flow is one more reason to forecast production growth extending well into the next decade.

Growing production, rising gold prices, and a stock that is deeply undervalued relative to other gold producers point to a potential four- to fivefold gain over the next three years. Our first target is $10-$12. The time frame is early next decade if not before.

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