First Reviews Positive on Lihir-Equigold Deal

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This story features LYNCH GROUP HOLDING LIMITED.
For more info SHARE ANALYSIS: LGL

By Chris Shaw

While the market volatility of recent months has reduced share prices corporations are taking advantage of the opportunities being presented and proposing deals that previously would have been unlikely to proceed, the latest example being Lihir Gold’s ((LGL)) proposed scrip offer for emerging producer Equigold ((EQI)).

The offer is 33 Lihir shares for every 25 shares in Equigold and brokers are broadly in favour of the proposal, Austock Securities suggesting the positives appear to outweigh the negatives on its first analysis of the proposal. This is despite the offer being slightly dilutive for Lihir shareholders, though it notes in cash flow terms the company will receive a boost of around 8% in both 2009 and 2010.

Citi sees definite plusses in the deal for Lihir shareholders and has upgraded its rating on the stock to Buy from Hold, suggesting the biggest boost comes from the geographical diversification and exploration upside the Equigold assets would provide given the group has commenced production from the Bonikro project in the Ivory Coast in West Africa and has around 15,000 square kilometres of tenements offering potential exploration success.

Austock agrees this is the major attraction, noting on current market prices the Lihir offer implies US$460 per ounce of reserves and US$306 per ounce of resources compared to Lihir itself being valued at US$266 per ounce and US$150 per ounce respectively. Another way of putting it would be by stating the deal is fully priced. This shows the company is buying the potential for exploration success rather than the value of Equigold’s current assets.

This is even clearer when total reserves and resources are considered, as Lihir currently has around 39.1 million ounces of resources and 23 million ounces of reserves and the integrating of Equigold into the fold would only increase these numbers by three million ounces and two milion ounces respectively though it would be enough to put the stock in the top ten among global gold miners in terms of total reserves.

Merrill Lynch suggests the scrip nature of the bid means there is a chance for a competing offer to emerge, though it suggests Lihir would benefit if the deal went through as the stock is trading at around 1.3 times its net asset value compared to its North American peers at around two times.

Macquarie is also positive on the deal from the Lihir side of the equation as expanding into Africa would take some pressure off the company’s main Papua New Guinea asset, though Deutsche Bank points out the Ivory Coast is not the most politically stable of regions and so some increased sovereign risk would need to be factored into the equation.

The positives for Equigold shareholders according to Citi are that the offer is at a premium to the share price and the combined group would have a stronger balance sheet and increased leverage to spot gold prices, though it retains its Hold rating on the stock given it is early in the deal process.

Following the announcement of the deal the FNArena database shows Lihir scoring seven Buy ratings and three Hold recommendations, up from six and four previously, while Equigold is rated as Hold three times and Reduce once, though this is Aspect Huntley’s recommendation and this has not been updated to account for the offer.

The average price target for Lihir is $4.64 with Macquarie the high marker at $5.30 while for Equigold it is $4.40, up from $4.04 prior to the announcement. On last Thursday’s closing prices the deal valued Equigold at around $4.75.

Shares in both stocks are slightly weaker today despite a stronger overall market and as at 12.15pm Lihir was down 5c at $3.55 while Equigold was 7c lower at $4.56.

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