As one might suspect, Lihir Gold's share price has been firming as the gold bullion price has done so.
Price movement
As one might suspect, Lihir Gold's share price has been firming as the gold bullion price has done so. Money reviewed Lihir Gold in April last year, when the share price was at $1.20. Since then it has fluctuated as a result of the war in Iraq and weakening US dollar, from $1.10 to $1.60. It recently broken out of this pattern and is approaching highs not seen for five years.
Profile
Lihir Gold is a Papua New Guinea company that listed on the Australian Stock Exchange in October 1995. Lihir is an island 700 kilometres north-east of Port Moresby. The current reserves of gold discovered stands at nearly 17 million ounces ($8.9 billion at current gold prices).
There is speculation that Rio Tinto may dispose of its 16 per cent holding in the company, as it has been a foundation shareholder. It may seem unlikely with a strengthening bullion price, but Rio Tinto's holding could quickly become the cornerstone of a majority takeover for Lihir.
Current details
Lihir posted a $US6.7 million loss for its first half-year ended June, which was well below market expectations. Very conservative accounting treatment of its exploration and the stockpiles being expensed, maintenance costs and lower grade production combined to deliver the poor result. Management is expecting the second half production to be at record throughput, and costs to be significantly improved.
Lihir has been optimising throughput and recovery over the past two years which is expected to see benefits in this half.
Lihir is also contemplating a major mill expansion that would see annual gold production increase from the current 650,000 to 700,000 to more than a million ounces. This could see a potential $US120 million net profit in two years. Only 12 per cent of Lihir's gold production is hedged and the company has an ungeared balance sheet, so a mine expansion is easily achievable.
Sector
It is possible that Lihir will be subject to some form of takeover considering that so many other listed Australian gold stocks have disappeared in the past four years (Acacia Resources, Goldfields, Normandy Mining). However, Lihir Islanders Trust owns nearly 7 per cent of the shares and currently the PNG Government is anxious to maintain its exporting revenues. These factors are serious impediments for a change in the company's controlling ownership.
Worth buying?
All investors should consider including some gold stock in their portfolio. Gold companies' share prices are inexorably linked to the fortunes of bullion and the US dollar, which is in a weakening phase. This is a volatile stock but Lihir is a premium gold company with excellent growth potential, suitable for a long-term portfolio. Buy.
Geoffrey Hill presents ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit www.ghill.com.au
