Underappreciated and Unloved Gold

Sources: OGC 31 December 2018 Reserves and Resources Statement, OGC announcement 24/9/2019 and Chester Asset Management

We have used the potential resources to model out valuation scenarios summarised in the table below.

Source: Chester Asset Management

We have relied on the technical report dated 29/3/2019 (and history) to derive assumptions for throughput, recovery, costs, capex, etc but note the following risks/uncertainties with our modelling:

• Opex. Opex we have increased the current mining and processing costs but note uncertainty here:

- NZD90/t mining costs, vs ~NZD80/t in the past 12 months at Correnso;

- And NZD45/t processing costs vs ~NZD40/t in the past 12 months on a lower level of throughput, i.e. we would expect reduced processing costs on higher throughput but have modelled NZD45/t to be conservative (Mid and low case). We have modelled NZD40/t on the high case.

• Mining Licence. We assume that all permits and consents are received for WKP and remain until mining ceases.

• Capex. We have the least conviction in capex but note previous development at Waihi of ~USD100m (including Correnso underground mine).

• Resource. Note that assuming the full resource (including inferred) forms part of the Life of Mine plan may seem bullish but OGC drilling should see inferred to M&I conversion, and we have seen OGC’s ASX peers present 10+ year outlooks on potential inferred resources (and we note we use this to test the upper limits of valuation potential in our high case).

• Throughput. In our upside case we have assumed OGC can move the currently unused Reefton Mill (Capacity ~1.8Mtpa) refurbish it and achieve development rates to feed the mill. Our Mid and Low case assume the existing mill can be fed to capacity ~1.1Mtpa.

Haile – Issues in the past?

Haile gold mine is in South Carolina and came into production in January 2017. It took a while to ramp up during 2017 before seemingly delivering in Q4 2017. 2018 however saw initially lower grades in 1H before heavy rains and hurricanes in September/October delivered 20 inches of rain in 2 weeks to flood the mine. OGC had to pump water from the mine into a pit. The company felt the pain of this in Q4 2018 and Q1 2019 and had to bring in a mining contractor to move muddy material as well as congruently ramping up mining operations, effectively incurring almost double mining costs (~USD5/t vs USD2.50/t Q1 2018)

Haile has had its issues but is on the improve with mining and processing costs decreasing in Q3 and the plant achieving peak throughput levels of above 3.5Mtpa. Following further optimisation of the regrinding circuit OGC is targeting steady state recoveries in the mid 80% at higher throughput rates, we assume from 1H 2020 onwards.

Our Haile valuation isn’t too dissimilar from the street. We mark this down to the detail provided by the company in the 43-101 Technical Report released to the market 11/8/2017.

Didipio – Not being paid for

Didipio is located on the island of Luzon in the Philippines and we believe remains the biggest area of concern for the market regarding OGC. The asset was initially expected to produce 120koz-130koz of gold and ~15kt of copper in 2019 but is currently not operating due to restraining measures by the local government. We don’t possess any insights into Philippine politics but would note average sell-side NAV (risked) of the asset is ~AUD580m, ~AUD0.95/share. This appears to have been 100% discounted in the stock price.

OGC lodged a notice to renew the Financial or Technical Assistance Agreement (FTAA) in March 2018 and has been working collaboratively with the Government of the Philippines on the renewal process. The initial term of the FTAA ended 20/6/2019. The FTAA is renewable for another 25 years and OGC lodged the application for renewal in March 2018. As per Q3 commentary OGC is currently continuing the renewal process with the regulatory stakeholders including:

• Department of Environmental Natural Resources (DENR)
• Mines and Geosciences Bureau (the MGB). The MGB has confirmed in writing that Didipio mine is permitted to continue its mining operations pending the completion of the renewal process
• The company remains proactively engaged with regulatory stakeholders including the DENR and MGB

Recent timeline:

• 25/7/2019 - Regional Trial Court of Nueva Vizcaya (‘NV’) denied OGC’s petition for an injunction against the Provincial Government and local government from interfering with operations
• 18/9/2019 – OGC appealed the regional court decision in the appeals Court in Manila and is awaiting the decision
• 15/10/2019 – OGC revised 2019 outlook to include no further production from Didipio
• 25/11/2019 – OGC noted good engagement and support from the Government of the Philippines and continued progress. Regulators have endorsed renewal back to the Office of the President based on full compliance with the FTAA terms and conditions.

We feel FTAA renewal would likely lead to government restraints being removed and a staged resumption of operations. If this issue is resolved, we would expect a material re-rate of the share price but continue to highlight the risk that it isn’t.

Conclusion

OGC remains unloved and underappreciated. Resolution of Didipio issues would certainly change this but remains uncertain. Newsflow/derisking of Waihi in the meantime could provide material upside to the market’s view of value.

DISCLAIMER

Past performance is not a reliable indicator of future performance. Positive returns, which the Chester High Conviction Fund (the Fund) is designed to provide, are different regarding risk and investment profile to index returns. This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific individual. As such, before acting on any information contained in this document, individuals should consider whether the information is suitable for their needs. This may involve seeking advice from a qualified financial adviser. Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) is the issuer of the Chester High Conviction Fund. A current PDS is available from Copia located at Level 25, 360 Collins Street, Melbourne Vic 3000, by visiting chesteram.com.au or by calling 1800 442 129 (free call). A person should consider the PDS before deciding whether to acquire or continue to hold an interest in the Fund. Any opinions or recommendations contained in this document are subject to change without notice and Copia is under no obligation to update or keep any information contained in this document current

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