Australia | May 01 2008
This story features LYNCH GROUP HOLDING LIMITED.
For more info SHARE ANALYSIS: LGL
By Chris Shaw
In what should be a surprise to no one who has followed the stock in recent years Lihir Gold ((LGL)) yesterday reported disappointing numbers for the March quarter, with production lower and costs higher than brokers had been forecasting.
While Merrill Lynch notes much of the shortfall in production was due to an unplanned shutdown during the period, and management remains of the view it can make up the shortfall across the rest of 2008 and so still achieve its original production forecasts, the fact is production of a little less than 140,000 ounces was well below market estimates of closer to 150,000 ounces.
The shortfall, along with the fact cash costs of US$722 per ounce were significantly higher than market estimates, means brokers have pulled back earnings estimates following the result, UBS taking between 13-16% from its numbers for 2008-2010, ABN Amro lowering its estimates by 4-11% and Macquarie cutting 2-8% from its forecasts.
Whether guidance is achievable will depend on production in coming quarters, as while management continues to guide to output of 700,000-775,000 ounces for the full year Credit Suisse has taken 25,000 ounces from its forecast and is now at the midpoint of this range, while UBS is at the lower end.
Assuming production does meet expectations the company must still deal with foreign exchange headwinds as well as the cost increases, so earnings will be subject to gold prices and how well the planned increase in production goes. On the former Macquarie remains optimistic as it still sees a good market for gold going forward and with the company highly leveraged to the gold price the broker points out it should benefit if the metal’s price stays strong.
With respect to the latter it suggests the company’s history of disappointment means there is a significant amount of pressure on management to be able to deliver on expectations, with the market likely to want to see evidence of results before getting too excited.
Despite this the broker retains its Outperform rating, with UBS similarly positive on valuation grounds as it points out the shares are now trading at only a 50% premium to net present value (NPV), when their historical multiple is something above twice NPV.
ABN Amro suggests the ongoing issues at the Lihir project are putting additional pressure on management to diversify the company’s production base and the proposed merger with Equigold ((EQI)) is an attempt to address this, the broker estimating if the deal goes ahead it will be earnings accretive for the enlarged group as well as adding to total output.
The broker does make the point though the increased output won’t be enough to truly diversify operations and so the key remains the Lihir mine and with no sign the issues there are fully out of the way the broker retains its Hold rating. This is certainly a minority view however as the FNArena database shows seven Buy ratings compared to three Holds for the stock.
JP Morgan retained its Overweight rating post the result, noting the company did at least deliver some better news on the exploration front during the period. In its view this leaves it well placed to deliver a resource upgrade going forward, though it would prefer management concentrated on delivering solid production results in the short-term before focusing on the future.
The average price target according to the database is $4.43, down from $4.68 prior to the quarterly result, largely as UBS has dropped its target to $4.50 from $5.00 and Macquarie to $4.70 from $5.30 previously. Thomson One Analytics shows a median price target of $4.30.
Shares in Lihir today are stronger despite a weaker overall market and as at 11.55am were up 11c at $3.05, which compares to a trading range over the past 12 months of $2.71 to $4.45.
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