The price of gold has been jumping in recent months, to more than $US90 ($A150) an ounce in the past six months, closing at a high of $US382.10 on February 5. The price has eased back since then but the yellow metal - and goldmining stocks - have been among the few bright spots on the sharemarket this year.
On August 3 last year, when gold hit its year low of $US289.15, Lihir's share price was barely above its lowest point for the year at $1.13. (It bottomed out at $1.06 on July 29.) Since then it has rallied strongly, especially in December and January, peaking at $1.57 on February 5 - the day, incidentally, that the gold price hit its one-year high.
Smart investors who took a punt on geo-political instability sparking a gold rally have enjoyed solid capital gain with gold stock.
But can Lihir build on such gains? This column believes not, for three reasons. First, the rally is showing signs of petering out. While the political and military uncertainty surrounding Iraq is underpinning the price and any hint of this situation being resolved, either diplomatically or by a quick military strike, is likely to put selling pressure on gold.
Indeed, gold prices could feel the effect of a double whammy. A quick resolution of the Iraq situation could spark a rally on Wall Street and other equity markets. Investor dollars, so enamoured of gold in recent months, could flood back into shares.
Second, Lihir is one of the world's biggest gold mines, but it is in a troubled part of the world - PNG. Mining giants such as Rio Tinto are signalling that politically unstable countries are not worth the investment risk. Rio Tinto, which was badly burnt in PNG when it had to shut its highly profitable Bougainville copper mine in the late 1980s, is believed to planning to give up its 16.3 per cent stake in Lihir. (It also has management control.)
A higher price for gold and the announcement of a 15 per cent increase in the mine's gold reserves could be the catalyst it needs to get the right selling price. That Rio Tinto could walk away from this mine says much about PNG's political problems - and it will hurt the share price.
Third, the full-year result to December 31, 2002, was down 10 per cent, with mine maintenance costs blamed. In addition, the remote location will be affected by high oil prices, which lead to higher power costs.
Measured against such factors is management's capacity to increase mine production to take advantage of the mine's enormous reserves. It is on this basis that many analysts still have a buy recommendation next to its name. But this column is not so sanguine.
There are many negatives against Lihir's name. For a company still paying no income, taking a profit now seems a smart move. Sell.
LHG: $1.42
Sector: Gold
Business: Explores for and produces gold on Lihir Island, PNG
Market cap: $1622 million
Final dividend (Dec 31, 2002): Nil
Yield: Not Applicable
Price-earnings multiple (Dec 31, 2002): 63 times
At March 7
Bulls
Ausdrill (ASL, $0.54) SPECULATIVE BUY
Paul Pekish, a senior private client adviser with Paterson Ord Minnett, says the positive earnings momentum Ausdrill established last financial year should continue this year with higher earnings and increased dividends. "Ausdrill is likely to be a major beneficiary of the rising gold price as this flows through to new mine developments and increased exploration expenditure," he says.
Funtastic Limited (FUN, $1.06) BUY
Ashley Seller, a senior private client adviser with Tolhurst Noall, says children's product company Funtastic released a better than expected result for the year to December 31, 2002. "With net sales up 179.6 per cent and net profit after tax up 186.3 per cent (it) exceeded our expectations," he says. Mr Seller says Tolhurst tips Funtastic to produce double-digit earnings growth following on from double-digit revenue growth this financial year.
ANZ (ANZ, $16.31) OUTPERFORM
Geoff Lockwood, a financial consultant with Smith Barney, says ANZ's recently identified problems of tax office disputes, credit-card business difficulties and exposures to utility and telecom companies are modest compared with the slide in the share price. "ANZ has reaffirmed it expects to report an 8 per cent growth in earnings per share this year despite revealing $27 million under provision (for bad debt) in its card division," he says. Rating ANZ as a low-risk investment, he says lending growth will exceed 10 per cent this year.
See disclosures about this company at www.smithbarney.com.au
Bears
Bank of Western Australia (BWA, $3.32) SELL
Paul Pekish, a senior private client adviser with Paterson Ord Minnett, says last year's result of $155.9 million was slightly below Paterson's forecast. Paterson downgraded its forecast because of BankWest's possible exposure to a $10 million bad debt. "Notwithstanding this recent downgrade, the quality of the last financial year's result was disappointing," he says, adding that the bank continues to carry a potentially higher loan portfolio risk profile.
Adsteam Marine (ADZ, $1.10) SELL
Ashley Seller, a senior private client adviser with Tolhurst Noall, says Adsteam had been a high-yielding stock - until it confirmed a previously announced profit downgrade but did not declare an interim dividend. "A dividend had been expected, but with the shipping industry currently experiencing a downturn, the future of their dividend policy is clouded," he says.
Suncorp-Metway (SUN, $9.20) UNDERPERFORM
Geoff Lockwood, a financial consultant with Smith Barney, says Suncorp-Metway's interim net profit result of $155 million was 5 per cent below Smith Barney's forecast. "We have dropped our recommendation to underperform given a series of disappointing results, a strategy somewhat in limbo, (and) better-performing competitors," he says. Smith Barney rates Suncorp-Metway a medium-risk investment.
See disclosures about this company at www.smithbarney.com.au
WILDCARD
SMS Management (SMX, $0.215) BUY
There must have been the odd investor who bought SMS Management & Technology in recent months thinking it had reached its market low. How wrong they were. The shares have been in virtual free-fall since September last year, especially after its warning that the half-year results to December 31, 2002, would not be pretty. Revenue was down 37 per cent with red ink to the tune of $7.7 million - good reasons to sell. A write-off costing $4.4 million and falling demand for management consulting and IT services were the reasons cited for the loss. But SMS has one thing many of its IT competitors lack - a healthy balance sheet with cash reserves of $36 million. In a tough market it just might allow this IT group to trade its way out of difficulty. There's also talk of a capital return to shareholders, perhaps making the current share price an acceptable risk. Buy.
