Expansion Plans Are Key For Lihir FNArena News - September 08 2009
By Chris Shaw
Gold producer Lihir (LGL) held its Analyst Day last Friday, delivering a relatively detailed update that allowed brokers to fine tune their models for the company while also providing enough information for them to assess the strategic potential of the company's plans.
With respect to the former, GSJB Were notes the numbers provided have caused some adjustments to its depreciation assumptions, which flow through to modest reductions in its earnings forecasts. RBS Australia made similar downward adjustments to reflect updated production guidance for 2010, which it notes will be around 4% lower than in 2009 thanks to lower output at Mt Rawdon and Bonikro.
The revisions to estimates sees RBS Australia forecasting earnings per share (EPS) of US11c this year, US13c in FY10 and US11c in FY11, which compares to GSJB Were's forecasts of US10.8c this year, US9.4c in FY10 and US12.2c in FY11. Deutsche Bank is slightly more aggressive this year with its forecast of US12c, while in FY10 it expects EPS of US13c.
But more important than earnings forecasts were the strategy outlines offered by management, which GSJB Were summed up as three keys for the company going forward - delivering on the planned expansion at Lihir Island to one million ounces annually, delivering on its West African exploration potential and delivering on merger and acquisition opportunities in that market without overpaying.
With regard to the Lihir Island expansion, RBS Australia notes the company has a cost reduction target of US$80 per ounce, though on the broker's numbers cash costs should still be around US$400 per ounce on a like-for-like basis. While there will be some additional costs incurred as part of the expansion GSJB Were notes some of these would have been incurred even if there was no expansion but as Deutsche Bank notes the expansion can be funded internally, which it regards as a positive.
On the plus side the company is consistently meeting its production targets at the project ,but in the view of Credit Suisse costs are higher than it had expected, while likely cash operating costs are also a bit above what the broker had previously factored into its model.
With respect to Africa, management has indicated its desire to grow output to the one million ounce per year level in coming years, partly through successful exploration and partly via merger and acquisition opportunities that present themselves. In terms of potential acquisitions, GSJB Were notes management is looking at buys in the US$200-$700 million range, RBS Australia noting the targets being considered are those where production of 200,000 ounces or more are achievable.
One issue RBS Australia has is such assets typically require a large premium given their quality, so it is cautious given the potential for the group's African expansion to be a costly process. This is why exploration will remain a focus as well, something GSJB Were suggests is necessary given the move into Africa via the Equigold acquisition was a good strategic move but a fully priced one.
The broker suggests for the African move to work out the company needs to double its reserves at a finding cost of around US$15 per ounce, so it will continue to monitor exploration results to see how this proess is panning out.
In terms of the value on offer in the stock at present, GSJB Were sees the company as attractive relative to its peers, suggesting it is less expensive than Newcrest ((NCM)) on the Australian market and also good value compared to similar gold companies globally. This means the broker retains its Buy rating on the stock post the Analyst Day.
But RBS Australia disagrees to some extent, suggesting the stock is fair value longer-term at current levels even if the positive short-term momentum play in gold sees the stock trade above its estimate of fair value in the shorter-term. To reflect this the broker has downgraded to Hold fom Buy on the shares, while the FNArena database shows a total of six Buys, three Holds and one Reduce rating.
The average price target for Lihir is $3.28, with a wide range of targets from GSJB Were's $3.80 to Credit Suisse at $2.81. Shares in Lihir today are stronger and as at 11.15am the stock was up 8c at $3.08. Over the past year the shares have traded between $1.52 to $3.64.
LGL Price at posting:
$3.09 Sentiment: None Disclosure: Held
