Home' Australian Resources and Investment : March 2010 Contents AUSTRALIAN RESOURCES & INVESTMENT • MARCH 2010 • 29
their company lurch from crisis to crisis
despite being the owner of one of the
world’s great gold deposits on Lihir Island
in Papua New Guinea.
Perhaps the greatest damage to Lihir’s
relationship with institutions can be traced
back to a $US325 million fund raising in
March last year, which saw new shares
issued at $3 each.
Funds raised were earmarked for
expanding operations on Lihir Island and
in West Africa, where Lihir had expanded
via the takeover of Equigold. Little mention
was made at the time of the company’s
third business unit, Ballarat Goldfields.
However, a month after the capital
raising, Lihir reported that the Ballarat
mine was being “streamlined” after failing
to perform as planned. By June, Lihir
management announced plans to
effectively write off the Ballarat
investment for between $US250 million
and $US350 million, roughly what was
raised from shareholders three months
The 2007 Ballarat investment was an
attempt by Lihir to invest in Australia, a
move that would “derisk” the company
with its heavy focus on PNG and Africa. It
failed and the jury is out on whether the
2008 Equigold investment will be any
For investors, the question with Lihir
is whether its current status as a business,
which appears to be looking for a new
owner as well as a new chief executive,
makes it—in terms of gold holdings—the
best gold stock on the market.
Among Lihir’s key rivals are:
3 Newcrest Mining, which also offers
exposure to copper as well as gold, with the potential for tungsten
production in the future. Like Lihir, Newcrest has had its
management moments but is now settling into a highly profitable
pattern, which should see earnings rise from $248 million last year
to as much as $900 million in 2012. Over the past 12 months,
Newcrest’s share price has risen from a low of $27.64 to recent
trades around $33.30.
3 Kingsgate Consolidated, a company dogged for more than a year by
slow government approvals for a major mine expansion in Thailand,
but now free to grow there and perhaps elsewhere as well.
Production at its flagship mine will double over the next two years,
and perhaps more thanks to ongoing exploration success.
Management has also started talking about expansion outside
Thailand, with Australia and South America the prime targets. Over
the past 12 months, Kingsgate’s share price has risen from a low of
$3.42 to recent trades around $9.49 .
Other gold stocks with solid production profiles and growth
prospects included Avoca Resources, Dominion Mining and Silver Lake
Resources. Each offers direct exposure to the gold price, strong
management and the potential for exploration success.
Set against these rivals, Lihir is a company sitting on a staggeringly
good gold deposit at Lihir Island with official reserves of 28 million
ounces, enough for 28 years of production at the current target rate of
one million ounces a year and total resources measured at 43 million
Production costs are running at $US454 an ounce, yielding a gross
margin of more than $US500 an ounce, with profit in the current
financial year tipped to come in at around $300 million.
The problem is that management has struggled from the day mining
started to maximise value from its namesake mine, partly because of
the difficulty working in the hot ground of an open pit mine in a
dormant volcano and partly because the ore needed expensive
As if difficulties in the pit, and in the processing plant, were not
enough to keep management fully occupied, Lihir’s board decided to
expand via acquisition, including the loss-making takeover of Ballarat
Goldfields and the far-from-convincing merger with West African
The move on Ballarat was supposed to lower the risk profile of Lihir.
The move on Equigold was supposed to diversify gold production.
Neither initiative has yet succeeded although that is not to say any, or
all, of these difficulties could not be overcome by a new owner.
Curiously, despite the layers of bad news currently washing over the
stock, Lihir is persevering with its attempts to impress mining analysts
by organising a tour of mining facilities in the coming days, a move
certain to increase attention on the assets of the company.
A sum of the parts calculation, with the treasure trove on Lihir
Island and the potential of Equigold’s Bonikro mine and exploration
tenements, could easily produce a valuation greater than Lihir’s current
market value of $7.2 billion, less than half the value of Newcrest’s $16
If ever there was mining company looking for someone to show it
how to perform as a business it is Lihir—which is perhaps why Garnaut
said the future was all about “maximising value” for shareholders.
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