LHG

Shares analyst UBS have a look at which shares Outperform when the Australian dollar rises. The analyst: The obvious way to measure a share's currency sensitivity is to look at its EPS sensitivity. However, the shares analyst note that this ignores what else is going on when the Australian dollar (A$) is rising.

Lihir Gold (LHG) have a maintained Hold rating from Citigroup Investment Research (CIR). Post completion of the LHG/BGF merger, the analyst is incorporating the Ballarat gold mine into their LHG model. Dilution from new stock issued meant that the transaction was NPV destructive; however, their Hold recommendation remains due to the potential for greater things from Lihir Island. NPAT for FY07E and FY08E has changed by -5% and +4%,respectively. Lihir Gold's risk profile has increased; The company previously trading at a discount to its peers due to its single PNG mine status, however, the resource/reserve uncertainty at Ballarat has actually increased the risk profile. The nature of the mineralisation at Ballarat makes production forecasts unreliable thus increasing the risks of LHG missing production guidance targets. Company guidance for Ballarat suggests that the mine will produce 100koz in CY08 ramping up to +200koz in CY09 and 250koz in CY10. CIR are forecasting 65koz, 180koz and 200koz respectively. It is worth remembering that production was supposed to have commenced a year ago. To put the blue sky into context, the project currently has 1.4Moz in resource, of which 1.2Moz are in the lowest confidence inferred category, and no reserves. The LHG acquisition is based on a mining plan that produces 4.8Moz over a 20-year mine life at cash costs below US$220/oz. The company now has several fronts to focus on. The first milestone is the commissioning of the flotation plant (due to commence in April). This will be followed by commercial production at Ballarat (early 2008). Whilst in the background, progress on the Lihir Island expansion to +1Mozpa will be measured against the time frame and costs given in January.

Lihir Gold (LHG) has a Neutral 2 share recommendation and a $3.40 share price target according to a share update from analyst UBS. Their price target is based on a premium to NPV of 2.3x and they have a valuation of $1.46 for Lihir Gold. UBS as some commentary: "The upgrade to 23.6Moz reserves is largely due to an increase in gold price assumption from US$380/oz to US$475/oz and a reduction in cut-off grades. The revised estimate accounts for cost benefits expected from geothermal power, and the flotation project currently under construction, but does not account for proposed capacity expansions beyond 1Moz which should increase reserves further." As a result global multiples look attractive: "Although the upgrade is attributable to a change in assumptions, these do come into line with other gold stocks. Newcrest uses A$600/oz (US$420/oz @ 70c) and Oxiana used US$600/oz for Prominent Hill. A common comparable for gold stocks is market cap/reserve oz where the average is US$200/oz which on the old reserves 21Moz valued Lihir at $4.14 and at 23.6Moz reserves values Lihir at $4.65." Finally UBS sums up their share update: "We remain positive on the outlook for gold and expect an average of US$700/oz in 07. We also expect to hear more about the proposed capacity expansion to >1Moz and further reserve upgrades which this project should enable. Next news is the Q4 result and preliminary financials on 30 Jan and the scheme vote by BGF shareholders on Feb 12."

As another strong year for global resource stocks draws to a close, Macquarie Research Equities (MRE) analysts provide an overview of the resource sector for the year, and offer some insights into the outlook for 2007, as well as their recommendations and preferences for the year ahead.