Lihir Raises Capital, Brokers Retain Rankings

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

By Chris Shaw

The financial crisis has caused many companies to try and strengthen their balance sheet and gold miner Lihir ((LGL)) has joined the list, yesterday announcing a capital raising of US$325 million via an institutional placement with scope for a further US$50 million to be raised via a share purchase plan.

While the company didn’t necessarily need the funds, ABN Amro notes the raising will allow it to fast track the plant upgrade on Lihir Island, with the aim being to complete some elements of the upgrade sooner than previously planned. This will also increase the reliability of operations.

The broker also notes the strengthening the company’s cash position, especially given internal cash flows are enough to fund the expansion project. This leads ABN Amro to suggest an acquisition may be on the cards, with assets in West Africa appearing the most likely in its view.

Citi agrees acquisitions are possible with the additional proceeds. On its numbers the raising should add US$100-$150 million to Lihir’s unused credit lines of US$250 million but as with ABN Amro, Citi notes there are physical constraints preventing a wholesale acceleration of the expansion project. On the plus side it sees the move as allowing a marginal increase in gold production in both 2010 and 2011.

Bank of America-Merrill Lynch sees the raising as a solid one by management in that the excess capital it will provide gives the company greater breathing room in terms of financing its expansion – just in case there is a fall in the gold price. The move is dilutive to earnings though and the broker has cut its earnings per share (EPS) estimates by 7% to factor in the impact of the raising.

Other brokers have similarly adjusted their EPS numbers lower but, as UBS points out, while the raising is dilutive in an earnings sense it should prove to be accretive in net present value terms. ABN Amro makes similar adjustments, cutting its EPS numbers by 7.5% but lifting its valuation by 2%.

The changes flowing from the proposed issue don’t impact on broker ratings or price targets, the FNArena database showing he company is rated as Buy four times and Hold six times, with an average price target of $3.66, unchanged from before the announcement.

Deutsche Bank has the highest target at $4.20 while ABN Amro has a target of $3.50 but sees scope for the stock to trade at a historical price to net present value ratio of as much as two times given the current favourable environment for gold. This suggests a share price of $4.00 over the near-term but the broker retains its Hold rating on a 12-month timeframe.

Shares in Lihir today are weaker on the news and as at 10.50am the stock was down 22c or 6.7% at $3.09. This compares to a trading range over the past 12 months of $1.52 to $4.39.

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