Stockbrokers Remain Broadly Positive On Lihir

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

By Chris Shaw

Lihir Gold ((LGL)) recorded production in the September quarter of 233,000 ounces in a result better than most in the market had anticipated, Deutsche Bank noting it was 9% above its number as maintenance work done in the period was completed faster than expected.

The other good point about the production numbers, in Deutsche’s view, was it showed all mines were performing to expectations, keeping Lihir on track to meet re-affirmed full year production guidance of between 1.0-1.2 million ounces. Costs also look to be reasonable as it expects a full year number of US$394 per ounce, as while September quarter costs were US$487 per ounce this reflected lower output compared to the June quarter.

Post the production report, brokers have adjusted earnings estimates, Citi lowering its earnings per share (EPS) numbers by 9-22% to account for a stronger Australian dollar and some changes to its production and cost estimates. Citi now expects EPS of US10.6c this year, US10.4c in 2010 and US9.9c in 2011 (note the absence of any progress in these projections).

Credit Suisse’s numbers seem to reflect a more positive view, with CS forecasting EPS of US10.5c in 2009, US11.4c in 2010 and US12c in 2011. Far more optimistic is Deutsche Bank given its forecasts stand at US13c US19c and US24c. Part of the difference can be explained by different estimates for the Australian dollar and the gold price. As Citi notes, there is between 5-28% upside to its estimates in coming years using current spot gold and Australian dollar rates against the estimates built into its model.

Accompanying the quarterly production report was the announcement of a US1.5c dividend to be paid in November, which JP Morgan suggests was not a great surprise as it reflects strong operating cash flows and had been previously flagged by company management. Citi notes Lihir aims to be a consistent dividend payer, while Deutsche Bank suggests there is scope for additional capital management initiatives such as a share buyback in the future.

Lihir also presented an upgrade on reserves, announcing an increase of 7.5 million ounces to a total reserve of 28.8 million ounces at Lihir Island. This was better than expected as Deutsche Bank notes it represents a 75% conversion of the resource increase announced in August, which compares to the 50-60% conversion it had expected.

In the view of Credit Suisse, the reserve increase makes the stock look even cheaper than was already the case as it should flow through to lower depreciation charges and so provide a boost to earnings in the future. With strong leverage to a growing production and reserve base, earnings growth looks certain but Credit Suisse sees potential for the translation in EPS terms to disappoint if Lihir pursues further higher priced growth via acquisitions as had been rumoured in the market for some time.

Given this and some valuation issues given its price target of $3.00 is broadly in line with the share price, Credit Suisse has downgraded to a Neutral rating post the quarterly report, which is in contrast to Deutsche Bank’s valuation based Buy rating given on its numbers it estimates Lihir is trading on only 14 times earnings in 2011, a level seen as good value given a favourable view on the gold price.

JP Morgan also retains its Overweight rating as it too sees the stock as solid value given it is trading in line with the trading ranges of other large Australian gold plays. Citi however remains at Hold. Analysts at Macquarie have retained their Outperform rating, while suggesting Lihir is gearing up for another acquisition. The payment of the interm dividend certainly took them by surprise.

GSJB Were analysts equally kept their rating at Buy, with lowered EPS estimates due to higher cost assumptions. Overall, the FNArena database shows Lihir is rated Buy five times, Hold four times and Reduce once.

The average price target on Lihir according to the database stands at $3.44, little changed from prior to the quarterly production report. Deutsche’s $4.10 target leads the way, while Credit Suisse is the low marker at $3.00. Shares in Lihir today are stronger and as at 10.55am the stock was up 6 at $3.04. This compares to a range over the past year of $1.565 to $3.64.

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