Lihir Gold Ltd (LGL)
Lihir Gold (LGL Sydney) and West African interests
Greg Canavan Greg Canavan is head of Australasian research at Fat Prophets. | April 2 2008 | The Sydney Morning Herald & The Age (subscribe)
What's new?
On Easter Thursday, Lihir Gold announced a merger with mid-tier gold producer Equigold. The timing was less than perfect. In New York trade the previous evening, the US dollar gold price had plunged $60 an ounce. Needless to say, investors were left wondering about the prescience of the deal. Lihir's share price dropped more than 10 per cent on the day.
Looking at the deal from the perspective of a gold price bull, the strategic rationale makes sense. Lihir mines a world-class ore body at Lihir Island off the coast of PNG but is not held in the same esteem as other "world class" gold majors in terms of valuation.
This is because one-mine operations are inherently risky, as is gold mining in general.
Following the late 2006 merger with Ballarat Gold, the Equigold acquisition provides Lihir with further geographic and production diversification. Equigold has one producing mine at Mt Rawdon in Queensland and an emerging mine in West Africa, in the Ivory Coast. This low-cost mine is due to contribute about 120,000 ounces of production from June this year.
The Ivory Coast isn't exactly a bastion of political stability, so no doubt many investors are perplexed that Lihir is trading geographical diversification for higher political risk. It's a fair point.
On the positive side Equigold has been operating successfully in the country since 1996, the first Western company to do so.
Lihir's rationale is that West Africa is where the big gold deposits are and all the majors are starting to move into the region. Which brings us to the main reason for Lihir's interest in Equigold.
The outlook
Factoring in the production from Equigold's Queensland and West African operations doesn't really justify the high price Lihir has paid for the company. The real upside will come from exploration potential.
Equigold has secured considerable exploration licences from its time on the ground in the Ivory Coast.
So the initial project has the capacity for rapid expansion and, in the longer term, the establishment of more mines is possible.
Elsewhere, Lihir's Ballarat mine is due to begin production at the end of the year at 200,000 ounces a year, with production at the PNG namesake mine also picking up from next year. Of course, the gold price is a major factor in the company's outlook and on this front we remain firmly bullish. Gold's correction after reaching the symbolic $US1000 an ounce was just that, a correction, and we expect new highs to be reached again this year.
Price
In line with the rising gold price, Lihir's stock has trended higher over the past four years. Volatility has increased recently as the investment climate has become increasingly uncertain. Following the Equigold acquisition Lihir should consolidate between $3.50 and $4.20 before eventually moving higher.
Worth buying?
We believe the "new" Lihir will increasingly show up on the radars of international investors looking to take part in the ongoing gold bull market. By the end of the year the company will have four operating mines, an expanding production profile and exploration upside.
If management can deliver on the growth strategy, much higher prices can be anticipated in the years ahead. As a part of a diversified gold portfolio, Lihir is a worthy inclusion.
