Analysts heap kudos on Lihir move

INDUSTRY analysts have given the thumbs up to Australian producer Lihir Gold's plans to close out its hedge book, repay debt and fund future developments through a massive $A1.2 billion ($US1 billion) capital raising announced on Tuesday.
Analysts heap kudos on Lihir move Analysts heap kudos on Lihir move Analysts heap kudos on Lihir move Analysts heap kudos on Lihir move Analysts heap kudos on Lihir move

Analysts told that the decision to become an unhedged company gave it increased exposure to current high gold prices, a move that Intersuisse's Peter Arden said "sets the company for further growth performance".

Arden said Lihir had experienced massive resource growth but had previously been saddled with hedging at the wrong prices. The company had 31% of its 2007 gold production hedged at $US363 per ounce compared with current gold prices of about $US650/oz.

He added that gold prices were likely to remain strong, citing as the primary reasons the overvalued greenback, limited gold supply, strong wealth generation in India and China as well as the possibility that central banks might return to buying gold.

Arden also said that the company's earlier takeover of Ballarat Goldfields was a "good move as a mid-to-long term investment".

Fat Prophets analyst Gavin Wendt told that Lihir's move was part of a trend by gold producers to get rid of hedges and increase their exposure to spot markets.

UBS Investment Research cautioned that while de-hedging had been a favourable trend, Lihir has been a late mover compared to other companies.

However, UBS did agree that the elimination of hedging would create incremental cash flow for Lihir in later years.

The PNG-focused gold miner plans to raise up to $1.07 billion through the issue of shares at $2.30 each (5.40 kina for PNG resident shareholders), a 32% discount on yesterday's closing price, and another $120 million from a placement at a price to be determined by an institutional bookbuild process.

Lihir chief executive Arthur Hood said Lihir's full exposure to the gold price would make it more attractive to investors but shot down suggestions it could make Lihir an attractive takeover target.

Wendt supported this view, saying share dilution would only arise if existing shareholders refused their entitlements.

The world's largest gold producer Barrick Gold has the cash to mount such a takeover bid and is already familiar with the operating environment in PNG through its massive Porgera gold project.

The company had also announced in mid-February its intention to increase its presence in the Pacific Rim through acquisitions.

Barrick refused to comment if it was considering Lihir as a potential target for acquisition, with a spokeswoman telling that the company "did not comment on speculation".

Lihir will use the bulk of the funds to close out its hedge book; repay the company's gold loan early; repay all secured debt; and provide the capital needed to develop the recently acquired Ballarat East project in Victoria.

The balance will help fund the proposed expansion at its namesake project in PNG, which Lihir had previously slapped a "conservative" $US500-550 million price tag on the expansion.

Chairman Ross Garnaut said the company's shareholders had expressed a preference for greater leverage on the gold price into the future.

Hood said the restructure marks a major step in the Lihir's continued transformation, building on the significant operational improvements achieved by the company over the past 18 months.

Lihir last traded at $3.36 before the company entered a trading halt on Monday.


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