Cost control essential for Oceana

East Otago-based Oceana Gold says its Philippines gold and copper mine will make it one of the lowest-cost gold mines in the world.

Containing the cash cost per-ounce of gold production is crucial to underpinning profitability.

Oceana this week delivered its calendar year result, in line with announcements from its fourth quarter results last month, delivering 232,909 ounces from its South Island mines, at an annual average cash cost of $US940 (NZ1101).

Following consecutive after-tax profits of $44 million in each of the previous two calendar years, for 2012 Oceana booked a 55% decline in profitability at $US20.6 million, on the back of a 7.6%, or 19,142oz, decline in gold sales and costs of its development gold-copper Didipio mine in the northern Philippines.

Oceana's cash in hand declined from $169.8 million to $US96.5 million at the end of 2012, but with Didipio mine now moving towards full production, the mining asset values have increased from $US379.8 million to $US607.5 million.

However, with its share price hitting a $4.50 high and $2.78 low during the past six months - and yesterday trading slightly down at $3.09 - Craigs Investment Partners broker Peter McIntyre said shareholders may not fully understand the importance of containing cash costs.

''Cash costs are integral to operations, something the market has got to come to come to terms with,'' he said.

Mr McIntyre highlighted capital raising by Oceana was having a diluting effect on the share price and there had been heavy institutional trading in Oceana stakes as those portfolios switched strategies to market changes.

''[However] Oceana is taking steps forward to deliver a better, free cashflow outcome for shareholders. They need to deliver several good quarters to get a a share price performance boost,'' Mr McIntyre said.

Forsyth Barr broker Peter Young said Oceana's result was in line with expectations, noting its fourth quarter of ''outstanding production ''saved'' Oceana's full-year result.

He said Forsyth Barr's 12-month target price target was ''likely'' to fall from $4.50 to about $4.25, as the gold price during recent weeks had been falling.

''That said, further falls in the gold price will make it difficult for Oceana to achieve share price performance, but it should still outperform its gold peers,'' Mr Young said.

A recent $A90 million ($NZ109.3 million) capital raising was used to pay off debt and Oceana's debt to equity ratio is down from 32% to 22%.

Alongside its annual result, Oceana also released mid-January research by brokerage Citi of Australia, which predicted a ''cash cost step-change'', where copper production will offset Philippine gold production to the tune of being negative $US70-$US50 per ounce.

When applied across all Oceana operations, the cash cost per ounce is expected to fall from last year's $US940 average to a range of $US650-$US800 per ounce.

''[That] represents a 20%-35% reduction on 2012 and a substantially improved competitive position relative to other global gold miners,'' Citi's research said.

Oceana said in a statement the Citi analysis of the global cash cost curve found Didipio was on track to be one of the top two lowest cash cost gold mines globally during 2013.

''Oceana Gold's Didipio operation is potentially the lowest-cost gold mine in the world,'' Oceana said.

Citi said, based on copper price estimates, there was ''potential'' for Didipio to maintain negative cash costs per ounce of gold on site of negative $US300, for up to six years.

Mr Young said exploration results at Blackwater, near Reefton on the West Coast, were still ''encouraging'', as were results at the Macraes' Fraser's underground mine However, he also noted other results around Reefton were ''less encouraging'' and it appeared the Globe open pit was ''coming towards its end''.

- simon.hartley@odt.co.nz

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