Australia | Aug 01 2006
By Greg Peel
Lihir Gold’s (LHG) June quarter production report showed production of 113k oz of gold at a cash cost of US$372/oz and a total cost of $422/oz. Net earnings for the first half were $23.1m.
This result disappointed all analysts, who were expecting a bit more on the production front. Lihir actually reduced its cash costs by 17% from the last quarter due to reduced processing and administration costs, but lower production meant total operating costs actually rose – consistent with every other miner in town.
Despite the fall in production, the company is expecting to make up the difference in the second half and has maintained guidance of 670oz. Some analysts have taken this as positive news, while others have become sceptical that guidance can be achieved.
SB Citigroup, in particular, has upgraded to Buy on the back of its positive outlook while Aspect Huntley has moved from Reduce to Hold because grades are expected to improve in the second half.
Both Merrill Lynch (Buy) and UBS (Buy) believe Lihir is cheap compared to offshore peers and expect that the valuation can catch up.
The Hold camp is concerned about increasing costs (ABN Amro) and whether management’s positive guidance is in fact now at risk (JP Morgan).
While costs are an issue, Lihir continues to benefit from a higher gold price. However, as the Aussie rises this is being undermined. One feature of Lihir is its leverage to a higher gold price, having comparatively little hedging in place (around 30% of 2006-07 production).
The FN Arena database currently shows six Buys and four Holds. Reduced production and increased costs have led most brokers to reduce their target prices, resulting in an average of $3.26. Lihir closed yesterday at $2.76.