MELBOURNE, Australia, Nov. 16 /CNW/ -
Date of lodgement: 16-Nov-2007
Record of interview:
OceanaGold Corporation ("OceanaGold" - TSX, ASX and NZX codes "OGC")
plans significant gold production growth through new projects to add to
production from its flagship Macraes Gold Mine in New Zealand. Can you
explain your corporate growth strategy?
CEO Steve Orr
Our corporate growth strategy is to use the New Zealand asset base,
currently the Macraes Gold Mine and the recently commissioned Reefton
Gold Mine, to continue growing our production profile. We have one
additional new project commissioning in early 2008; the Frasers
Underground mine, which is an underground extension to the Macraes gold
project. Frasers will increase our New Zealand production to 280,000 to
300,000 ounces per annum and we will use the cash flow from New Zealand
as a foundation for further growth through acquisition, development and
We believe that most of the gold projects within the Australasian region
are undervalued relative to projects elsewhere in the world. So our
objective is to continue to acquire assets within this region and to
consolidate and grow our position there. The first step in that strategy
was the 2006 acquisition of Climax Mining which gave us ownership of the
Didipio gold-copper project that we are now constructing. It will be
commissioned in the first half of 2009. At that point, our production
will move to 350,000 to 370,000 ounces plus 15,000 to 20,000 tonnes of
copper per annum by 2010.
What impact will Didipio, Frasers Underground and Reefton have on your
company-wide production, operating costs and operating cash flow?
CEO Steve Orr
In calendar 2007 we'll probably produce between 170,000 and
180,000 ounces of gold and in 2008, with three projects operating in
New Zealand, we expect 280,000 to 300,000 ounces. We'll start
commissioning Didipio in the first half of 2009 and in that year our
production will increase to 320,000 to 340,000 ounces. In addition, we'll
begin producing copper for the first time and by 2010 we'll be producing
350,000 to 370,000 ounces of gold per annum and 15,000 to 20,000 tonnes
of copper per annum.
Copper production will have a significant beneficial impact on our cash
costs. In 2007 our cash costs are anticipated to be about US$575/oz of
gold although this is a bit of an anomaly because this year is a
redevelopment year for Macraes and we've been processing a significant
amount of low-grade stockpile material, resulting in exceptionally high
cash costs. In 2008 when all three of our New Zealand projects have been
commissioned, we anticipate cash costs will be around US$320 to 340/oz,
and by 2009 when Didipio is ramping up, we expect that to fall
dramatically to around US$215 to 235/oz due to the copper by-product
credit and the high-grade nature of the Didipio gold deposit. By 2010,
once Didipio is operating at design capacity, we expect cash costs to
drop to US$175 to 195/oz.
By 2011, we expect to generate between US$90 and $100 million in free
cash flow based on a gold price of $500/oz and copper price of $1.90/lb.
Earlier this year, OceanaGold raised over C$100 million to complete the
financing of Didipio. What progress have you made recently on the
construction of the project? Is it on track for time and cost budget? How
important is this project for OceanaGold's growth?
CEO Steve Orr
Didipio is very important to our growth profile. When Didipio is
operating at full run rate, it's going to be making about 50% of the
gold-equivalent contribution to the Company.
We are on schedule with our development timeline for Didipio. We recently
completed an upgrade to the access road to all-weather status. This now
allows us to get in large mining equipment and large infrastructure
components to construct the plant during 2008. We also have awarded our
engineering, procurement, construction and management (EPCM) contract to
Ausenco Limited. Their EPCM team is on site now and we are starting work
on the camp construction. We will be constructing the process facility
and doing the pre-strip for the open pit in 2008 before starting the
commissioning phase in early 2009.
The capital cost is expected to be about US$155 million although we are
still to complete the final engineering at which point we'll be able to
lock down definitive bids from suppliers. We don't expect there to be a
dramatic change in that total capex number.
How successful has the corporate restructure to a Canadian corporation
with a Canadian TSX listing been? Is it meeting objectives? What change
in your share register has occurred or do you expect?
CEO Steve Orr
The restructure to a Canadian corporation allowed us to obtain a full
board listing on the TSX which was quite important to us. Although we
view our listing on the ASX as equally important, the TSX listing has
given us broader international exposure to capital markets as the Company
continues to grow. It takes some time to build our shareholder base and
it also takes time to build liquidity. However, we're very happy with
progress to date as there is about a third of our trading volume on the
TSX even though we've only been trading there since end June.
We think we have a great growth story, and we think the Company is
immensely undervalued and, at this point, we are not that well known
internationally. However, as we continue delivering quality development
projects and growing the Company, we think we'll be recognised as one of
the best international growth stories in the gold sector. The TSX listing
has been successful because it's starting to give us that exposure.
As you would imagine, our share register has diversified internationally.
We have about 30%-35% of our shares in Australia, 12%-15% in Asia,
12%-15% in Europe and 30%-35% in North America.
OceanaGold released its report for the quarter ended 30 September 2007.
Despite an increase in average gold price received, why did EBITDA
decrease on the pcp?
CEO Steve Orr
This was essentially due to the Macraes redevelopment this year. Our
guidance to the market was that it was going to be a high-cost, low
production year for our core Macraes operation. This was because we were
conducting significant overburden removal to access the last remaining
deep ore block within the mine.
With our mining equipment deployed in the waste overburden removal, we
processed a significant quantity of low grade stockpile running 0.6 to
0.7g/t compared with the normal ore we would feed the plant of 1.1 to
1.2g/t. The net result was that our cash cost per ounce has been much
higher in 2007. The slower ramp up than anticipated for Reefton project
contributed to this as well. Reefton, however, has now reached planned
The other contributor was the unrealized loss from the out-of-money
position on the hedge book. This is effectively a function of the
movements in the spot gold price and has no effect on cash revenue that
we generated in the period.
Can you also comment in more detail on the rise in cash operating cost
and non-cash cost and the lower recoveries?
CEO Steve Orr
The cash cost increase this year, which we now anticipate will be in the
range of about US$575/oz, is due to the low production and will decrease
dramatically next year. In fact, we've completed the overburden removal
campaign and in the December 2007 quarter we're expecting to see lower
cash costs as a result of producing reserve grade ore out of the mine. We
have returned to normal rates of gold production.
The non-cash costs were a result of our compliance with Canadian GAAP.
The methodology that's accepted for dealing with waste overburden removal
is different than IFRS methodology, under which we previously reported.
Under Canadian GAAP, we are required to expense all waste stripping
associated with the ongoing ore removal, in particular blocks of ore.
However, the waste overburden removal associated with future production
is capitalised. As a result, our non-cash cost has increased.
What are the individual project parameters for the new projects such as
gold production, operating costs and capital expenditure? What is the
outlook for the Macraes operation including Frasers Underground?
CEO Steve Orr
The Macraes Project including Frasers will be producing about 200,000 to
225,000 ounces per annum starting next year. Then, the residual 60,000 to
100,000 ounces will be coming from our Reefton operation.
Any further production increases out of New Zealand are constrained by
the capacity of our pressure oxidation facility. We would only expand the
Macraes pressure oxidation facility if we find a new significant
We will probably maintain New Zealand production at or about
300,000 ounces per annum. This goes back to the strategy of using
New Zealand as a production foundation so that we can develop or acquire
additional projects in other parts of Australasia.
The remaining capital expenditure will be for the construction of the
Didipio project. We have spent US$14 million at Didipio so far. We will
have spent more than US$225 million at Didipio, Reefton, and at Frasers
by the end of 2009. We will then start generating positive cash flow, and
by 2011, we expect to generate between US$90 and $100 million in free
cash flow per annum.
What are the main technical challenges at each project? Are there any
particular mining or metallurgical issues of note? Is water, power or
labour an issue at any project?
CEO Steve Orr
The metallurgy of our ore bodies in New Zealand is quite complicated. The
Macraes, Frasers ore bodies are refractory and contain carbonaceous
material. We have an autoclave, or pressure oxidation facility, at
Macraes which effectively processes these ores and allows us to maximise
It turns out that our Reefton deposit is refractory as well and it's one
of the reasons we float a gold concentrate at Reefton and then rail it to
Macraes to process it through the autoclave. Our autoclave facility deals
very effectively with that degree of metallurgical complexity, and we
have one of only three such facilities in Australasia. So, it's a very
valuable asset and it will allow us to economically process additional
ore bodies we might discover or acquire in the region.
In the Philippines, the Didipio ore body is relatively uncomplicated.
It's a simple, free milling deposit requiring conventional crushing,
grinding and flotation to produce a gold and copper concentrate for third
New Zealand's power is generated by hydro projects in the South Island
and the power costs are very reasonable, and the average power cost is
only about NZ$6.7c per kilowatt hour. To further de-risk Didipio, we are
examining options for a heavy fuel oil power facility at the site to give
us secure supply. The additional capital required to build this would
likely come by way of a finance lease from the equipment manufacturer.
In comparison to places like Western Australia labour has not been as
much of an issue for us in New Zealand or the Philippines. In New
Zealand, we seem to be able to attract quality labour because it's a
great place to live. In the Philippines we are creating an economy in a
very remote area, but we've already been successful in attracting a large
number of Filipinos back to the country. There's a great mining culture
in the Philippines with thousands of skilled Filipino miners working
throughout the world.
The 2 millionth ounce of gold was recently poured at Macraes. What near
mine site exploration programs do you plan there, or at your other
projects? What are the most prospective areas? What is the quality of
additional ounces typically found near existing projects?
CEO Steve Orr
We're focusing our exploration in New Zealand in two areas. We
essentially control the entire Macraes gold fields and so far it has
produced 2.5 million ounces and still has another 3.5 million in
resource. Therefore, we believe there's significant upside potential.
However, that upside potential mostly exists in deep extensions of the
Macraes deposit. We have been successful in discovering the deep
extensions of the current open pit and also the deep extensions of one of
the early pits developed around 1990. So, we're quite optimistic about
our ability to continue discovering more reserves at depth.
Our second area of exploration focus is the Reefton district. Through our
new Reefton mine we have essentially reactivated that gold district and
we control the entire 32 kilometre mineralised trend there. We're now
conducting exploration both to the north and south and it's an immensely
prospective area. We aim to discover more open cut reserves for
processing in the one million tonne per annum crushing, grinding and
flotation plant and ship it back to Macraes for pressure oxidation and
gold recovery. We believe we will be quite successful adding reserves at
Reefton and will be able to mine in the district for many years.
What about regional or greenfield exploration programs, particularly in
the Philippines? Do you plan new tenement acquisitions, particularly in
the future with the cash flow generated from the growth projects? Do you
expect to broaden your operating focus beyond New Zealand and
CEO Steve Orr
One of the benefits of the merger with Climax Mining - other than the
Didipio Project - was it gave us control over six very prospective
exploration projects throughout the Philippines extending from the
northern end of Luzon Island to the northern end of the Surigao Peninsula
in the southern part of the Philippines. These projects are all
large-scale copper and gold prospects with the ability to generate a
We're budgeting US$5 million in 2008 to begin exploration on these
projects. The first two we'll be testing are Manhulayan in the northern
Surigao Peninsula and Papaya within our mining permit area close to
Didipio. We expect to start drilling Papaya by the end of next year and
Manhulayan in early 2008.
We are very keen to grow the Company beyond New Zealand and the
Philippines with a focus within Australasia and we continue to assess a
number of opportunities within that part of the world.
Why has the Philippines become a major area of focus for the Company?
What are the major fiscal terms for Didipio? Can you describe the
political and social climate there?
CEO Steve Orr
The Philippines is a major area of focus for us because of its
prospectivity, and it's been significantly underdeveloped in terms of
mining. In addition, the Philippine Government has made significant
improvements to attract foreign investment in the mining industry over
the past 10 years.
Importantly, we are the first project that will be constructed under the
current mining legislation, so it is an opportunity to generate
significant value for our shareholders. From what we've seen, we are
immensely confident in our ability to get this project constructed and
The major fiscal terms for Didipio are embedded in a fiscal stability
agreement called a Financial and Technical Assistance Agreement (FTAA).
Basically, the FTAA provides a five year tax holiday, and the ability to
fully depreciate all accumulated capital expenditures up to the first
We have an excellent relationship with the federal, regional and local
government in the Philippines and there is strong support for the Didipio
project. The federal government has made responsible development of a
sustainable mineral industry a key objective. The fiscal stability
provisions under the FTAA have made foreign investment quite attractive.
What is your current funding situation? In addition to Didipio, where
broadly will you spend the cash?
CEO Steve Orr
We hold US$140 million in cash, and we'll be spending all of that on
constructing and commissioning Didipio. By the end of 2008 or early 2009,
we will have spent more than US$200 million constructing and
commissioning our projects.
Beyond that, we're continuing to look at growth opportunities. If we can
find a value accretive transaction, we will probably be using our equity
to do that.
Thank you Steve.
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For further information:
For further information: about OceanaGold, please visit
www.oceanagold.com or contact Darren Klinck, Vice President, Corporate &
Investor Relations, OceanaGold Corporation, telephone + 61 3 9656 5300