OceanaGold: What’s the dillio with Didipio?

After the financial crisis derailed the Didipio copper-gold project in 2008 and OceanaGold (OGC-T, OGC-A) was forced to put the Southeast Asian project on care and maintenance, the company says it expects to start commissioning within the next two months. 

Didipio — 270 km north of Manila on Luzon Island in the northern Philippines — is expected to produce 100,000 oz. gold and 14,000 tonnes copper per year over an estimated 16-year mine life. Didipio will operate as an open pit for the first 14 years, and then concurrently as an underground mine from 2021 to 2029.

OceanaGold’s new mining operation in the Philippines will take a big bite out of the company’s cash-cost profile from its higher-cost mines in New Zealand.

“It really is a game changer for the company, because it transforms us from being a New Zealand-based company to a multinational producer with a lower cash-cost profile,” explains Sam Pazuki, the company’s Toronto-based manager of investor relations. “Our cash costs are on the higher side of the industry, but we’re projecting zero to negative cash costs using copper as a by-product for Didipio in the first six years of operation, and over the life of the mine it’s circa US$370 per oz. gold using copper as a by-product, and at US$3 per lb. copper, which is significantly lower than what our cash costs are in New Zealand.”

OceanaGold owns New Zealand’s largest gold-mining operation at the Macraes goldfield in Otago, which consists of the Macraes open pit and the Frasers underground mines. It also runs the Reefton open-pit mine on the west coast of New Zealand’s South Island. In total, the company produces 230,000 oz. to 250,000 oz. gold a year from its New Zealand operations at cash costs, driven up in part by the strong New Zealand dollar, of between US$900 and US$1,000 per oz.

Adding Didipio’s output from next year, management believes it can bring down its cash-operating costs for the company as a whole to about US$600 per oz.

The company brought in new management in January 2011 when it appointed Mick Wilkes, a mining engineer with 26 years of experience in the industry. Under Wilkes, a former executive general manager of operations at Oz Minerals (OZL-A, OZMLF-O), work got underway in June of that year with construction at Didipio.   

Mining within the Didipio orebody started in July 2012. The company began commissioning the power station in September, and expects to dry commission the processing plant in October. Ore will start moving through the mill in November.

OceanaGold expects to process 2.5 million tonnes of ore at Didipio next year for 50,000 to 70,000 oz. gold, and 10,000 to 15,000 tonnes copper.

The operation employs 1,700 people, 98% of whom are Filipino. The contractors are also based in the Philippines.

Capital costs have been revised from US$185 million to US$220 million due to higher engineering and procurement costs, as well as higher costs for building the tailings dam.

The copper-gold porphyry deposit, which outcrops at surface, contains proven and probable reserves of 1.7 million oz. gold and just under 230,000 tonnes copper (50.65 million tonnes grading 1.03 grams gold for 1.68 million oz. gold, and 0.45% copper for 230,000 tonnes of copper).

One hundred percent of the concentrate will be sold to commodities trader Trafigura for at least the first five years, and Trafigura will be responsible for transporting the concentrate from the mine site to smelters.

Under its current Financial or Technical Assistance Agreement, OceanaGold will pay corporate taxes of 30%, plus 20% of net revenues made up of royalties, excise and customs taxes, value-added taxes and expenditures on social development programs. Under the Social Development Plan, OceanaGold pays about US$1.5 million a year, or 1.5% of its operating costs, to local communities.

Under the agreement, OceanaGold has up to five years to recover its sunk costs (capital costs that include exploration and development) before it pays the full amount of taxes and royalties, and in that period will continue to pay the US$1.5 million for the Social Development Plan.

OceanaGold acquired Didipio when it merged with Climax Mining in November 2006.

OceanaGold hopes to reach company-wide production levels of 500,000 oz. to 600,000 oz. gold a year by 2016. The company says that in a few years it may build the Blackwater project, which is a narrow-vein, high-grade quartz deposit, 20 km south of its Reefton mine in New Zealand. The ounces from Blackwater would replace ounces from Reefton, which has a current mine life that expires around 2015.  

It also has prospective tenements in the Philippines, and expects to spend US$10 million on exploration there next year.

In August it signed a term and revolving credit facility for US$225 million to refinance its debt. It has convertible notes of A$53 million, or $59 million, maturing in December 2012, and another A$110 million due in December 2013.

According to Pazuki, foreign mining companies are increasingly looking at the Philippines as an attractive jurisdiction in which to operate. “It’s in the Ring of Fire and it’s a highly mineralized country, and for the most part, it’s untapped,” he argues. “The other thing about it is that the people are highly educated and highly skilled, and the literacy rate is about ninety-three percent.”

In a corporate presentation in September, OceanaGold noted that the International Monetary Fund expects growth in the Philippines of 6.5% on average over the next five years. The presentation also cited a January 2012 study by HSBC Global Research that estimates the Philippines will be the sixteenth largest economy by 2050, and the third-fastest growing economy behind China and India.

In 2003 the government announced a national policy to promote and revitalize mining, and in 2005 the country’s Supreme Court lifted bans on foreign ownership.

Other mining companies operating in the Philippines include Medusa Mining (MML-L, MML-A), Mindoro Resources (MIO-V, MDO-A), Xstrata (XTA-L, XSRAF-O), St. Augustine Gold & Copper (SAU-T) and CGA Mining (CGA-T, CGX-A). In September, CGA Mining and B2Gold (BTO-T) announced their plan to merge.   

At press time, OceanaGold was trading in Toronto at $3.25 within a 52-week range of $1.70 to $3.18. The company has about 263 million shares outstanding.