Australia | Oct 18 2006
By Greg Peel
“Ballarat – The company recently announced production problems from the initial stoping blocks. This has lead to a complete review of the mine plan and schedule. First gold has now been delayed until 2008, with the company requiring an additional $100m in financing.”
Well they got it.
This is an extract from the SB Citigroup gold market report of last week. In that report the analysts advised investors to stick to Australia’s gold majors – Newcrest (NCM) and Lihir (LHG) – and steer clear of the juniors, particularly those in Victoria. (“Buy Gold Majors, Says Citigroup”, 13/10/06)
This morning brokers across the board have expressed disbelief in the proposed Lihir – Ballarat Goldfields (BGF) merger. As one broker put it: “This is a great deal for BGF”.
All brokers acknowledged the obvious attempt by Lihir to alleviate its single biggest risk, being the fact it only has one mine. It might be a nice mine, but it’s all they’ve got, and it is also located in politically unstable Papua New Guinea in a geographically unstable area. (The mine shut down for sometime last year due to a landslide).
So diversification is a good move, but together brokers have asked the question: why on earth Ballarat? SB Citigroup, for one, suggested “we believe LHG has better propositions available”. As the Citi extract above suggests, Ballarat will likely not see production until 2008. Its reserves can be considered non-existent at this point, and to suggest the mine life can be extended to five years is what Merrill Lynch describes as “a leap of faith”.
Only one broker disagreed with the crowd – GSJB Were. Weres sees this as a bolt-on acquisition only that will diversify the asset base. Says Weres: “Reserves are not an issue for LHG (it has 21moz already) – thus the nuggetty gold of BGF is not an issue. Additional production is the issue – arguably BGF can assist in this regard.”
In selling the deal, Lihir management pushed the growth in exploration opportunities Ballarat provides. The majority of brokers feel Lihir has overpaid for those opportunities. The market obviously agrees, given it trashed the stock by 4% yesterday.
Before this morning, Lihir boasted a 7/3/0 ratio in the FNA database, meaning seven Buys and three Holds. That has now reduced to 6/3/1, as Merrill Lynch has downgraded from Buy to Neutral, Credit Suisse has downgraded from Outperform to Neutral and ABN Amro has downgraded from Hold to Sell.
The dissenter – Weres – has upgraded from Marketperform to Outperform.
Those who retained their Buy recommendations did so because they still see the upside in the gold price and hence Lihir’s prospects. Macquarie is concerned about the Ballarat deal but is “looking to the bigger picture”. One broker – Deutsche Bank – even increased its target price (from $3.44 to $3.70) while denouncing the Ballarat merger.
The average target in the FNA database now stands at $3.48 compared to the stock close yesterday at $2.98. With the gold price down overnight, chances are Lihir will suffer more pain today, although investors will need to assess their longer term views and horizons before deciding how much might be too much.