Gold - Lihir and Equigold

Submitted by Share Trading on 25 March, 2008 - 13:01

An update from Australian equity markets analyst Macquarie Research Equities. They maintain a $960 per ounce target for the gold commodity price with an increase to $1050 in 2009.

African Gold Rush – Lihir Gold/Equigold Merger

Lihir Gold, the second biggest gold miner listed on the ASX, and Equigold have agreed to merger terms which give Lihir Gold a foothold for expansion in Africa with a combined market capitalisation of approximately $9 Billion. The pure gold producers have benefited from record gold prices – which briefly broke the US$1,000 an ounce mark this month and have surged 40% over the past year. Lihir Gold Chairman, Ross Garnaut, said, “This entity is in an excellent place to take advantage of the gold price environment that has emerged."

The Deal

Equigold shareholders will receive 33 LGL shares for every 25 EQI shares – a 24% premium to EQI’s closing price prior to the bid which values Equigold at $1.1 Billion.

A Strategic Investment

Lihir Gold’s current major source of revenue is situated on top of a volcano in Papua New Guinea. "By increasing the number of revenue streams, you diversify risk," Lihir Gold’s Chief Executive, Arthur Hood, told reporters on Thursday. The merger gives LGL a strategic land holding in West Africa - a big slice of exploration ground in the Ivory Coast, where global majors such as Newmont Mining Corporation, Randgold and Anglogold are also buying up ground.

Lihir Gold stock lost a further 2% during this morning’s trade after losing over 10% on Thursday when the broader market experienced a sell-off following a commodities correction on the London Metals Exchange. Macquarie Research maintain their outperform recommendation and 12 month price target of $5.30 for Lihir Gold based on the positive impact of the merger. The merger is earnings accretive from the outset as well as giving LGL geographical and asset diversity while supporting additional exploration potential.

The biggest prize for LGL in the merger is Equigold's 84% stake in the Bonikro project in Ivory Coast. The project is expected to have output of up to 150,000 ounces of gold in its first year of production and commences in July. Equigold also owns the Mount Rawdon mine in Queensland, which is forecast to produce about 100,000 ounces of gold a year and adds to Lihir’s expected Australian production of 200,000 ounces a year from the Ballarat mine in Victoria.

Lihir Gold was trading at circa $3.50 at midday after gold closed slightly down at $918.70 overnight due to a stronger US dollar. Macquarie Research maintain a $960 per ounce target for gold with an increase to $1050 in 2009. With negative real interest rates and higher inflation, gold’s natural hedging characteristics will continue to make gold stocks an attractive proposition in today’s volatile markets.