Another Solid Quarter A Good Sign For Lihir

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

By Chris Shaw

A lack of consistent operating performance has long been the knock on Lihir Gold ((LGL)), but according to Macquarie the group’s December quarter production report, marking the third good quarterly performance in a row, is enough of a trend to suggest the company has at last turned the corner.

According to Macquarie, the transformation is due to the group’s new management team, one that is doing a good enough job for the broker to make the stock its preferred gold exposure on the Australian market, lifting Lihir above previous top pick Newcrest Mining ((NCM)).

UBS is equally as positive, noting production was better than expected for the quarter at the same time as exploration results continue to suggest an increase in reserves in coming months. Joining UBS and Macquarie in rating the stock as a Buy is Credit Suisse, the broker making the point not only was production in the period solid but cost pressures for the group appear to be easing.

Not so bullish is ABN Amro as it disagrees with Credit Suisse and argues costs will need to increase if the company is to deliver on its target of lifting production to one million ounces annually. As well, ABN Amro expects higher capex costs to flow through in coming months.

While the broker remains bullish on gold generally, it points out Lihir shares have risen solidly in recent weeks and so despite lifting its price target to $2.89 from $2.02 it has downgraded the stock to Neutral from Buy. While Citi has a similar rating it is less concerned about the capex outlook and expects the company will be able to meet its requirements of US$350-$400 million in the year ahead while still being in a position to consider some merger and acquisition opportunities.

In the view of Bank of America-Merrill Lynch there remain risks associated with the company’s expansion of the Lihir Island operation and this is seen as enough reason for some caution. Nevertheless, the broker has upgraded the stock to Neutral from Underperform as it points out the stock is trading in line with its valuation at current levels.

Overall the FNArena database shows the stock is rated as Buy four times and Hold six times, with an average price target of $3.13, up from $2.88 prior to the release of the quarterly production report. Macquarie is the most aggressive with its target of $3.50, while JP Morgan and GSJB Were are the low markers at $2.85.

Shares in Lihir today are weaker on the back of a weaker gold price overnight and as at 1.05pm the stock was down 12c or 3.9% at $2.96. This compares to a trading range over the past year of $1.52 to $4.39.

(See also “Positive Momentum Sticks For Lihir Gold”, FNArena Technicals, earlier today).

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