Lihir Gold Limited 12 May 10

The wedding bells are ringing

The Lihir/Newcrest merger makes such excellent sense that we would have been surprised if the companies’ respective management teams did not make it happen. The sticking point as always was price, but that has since been removed. Newcrest sweetened its offer slightly to win Lihir’s approval and the merger looks to be well on its way to fruition.

Under the revised offer terms, Newcrest will issue 1 share and $0.225 in cash for every 8.43 Lihir shares. The cash component remains unchanged, with Newcrest simply improving the scrip terms from its original offer of 1 share for every 9 Lihir shares.


SHARE PRICE CHARTS AND COMMENTS:

Fat Prophets initially recommended buying Lihir Gold in the Fat Mining and Resources report in November 2005 (Fat Mining 1) at $2.09. Our last review of this stock was in April (FAT-MIN-218).

Turning to the charts, Lihir Gold is currently consolidating between support at $3.65 and resistance at $4.05. As the price action is treading towards the upper boundary of the range, our anticipation is for a likely breakout towards the upside.





From a longer-term perspective, a move above the April 9 high of $4.05 is likely to trigger additional gains and generate a medium term target towards the November 2007, all time high of $4.45. On both the daily and weekly charts, a bullish moving average cross is present which will provide upside momentum in both the short and longer term timeframes, which will bode well for additional gains over the longer term.







STATE OF PLAY

Lihir is in contact with other parties and Newcrest has allowed this to continue until June 8. Lihir is however currently trading marginally below the $3.98 value of the revised offer, which suggests that the market views the prospect of a higher bid as unlikely. The fact that Newcrest did not attempt to sew up exclusivity immediately certainly suggests that it is confident that a higher offer is not going to come in over the top.

The merger will create a gold mining behemoth, ranked number four in the world with gold reserves of 100 million ounces. There is ample scope for further reserve growth, with combined gold resources of 212 million ounces.






Both miners already have strong growth profiles, which will combine to lift their merged production to around 3.75 million ounces in 2014. Ridgeway Deeps, the Gosowong expansion, Hidden Valley and Cadia East will provide the foundation this growth from the Newcrest camp. Newcrest expects to lift its production to 2.3 million ounces by 2014.

The key Lihir Island development is of course the driving force for Lihir’s contribution to future production growth. The project’s expansion project remains on track to lift production through 1 million ounces of gold from 2012 onwards. The project is past the halfway mark and remains on schedule and within its budget.

Lihir isn’t all about Lihir Island though. The company’s Ivory Coast assets (gained through the 2008 Equigold acquisition) offer significant exploration potential beyond the existing Bonikro project. Indeed, an expanded development encompassing both the nearby Hire deposit and Bonikro has the potential to lift annual production to 250,000 ounces from 2012. Further exploration is likely to identify additional projects on the highly prospective tenement package.

Newcrest also has plenty of longer term development potential. The miner’s options on this front include O’Callaghans in the vicinity of the Telfer project, Wafi-Golpu and Namosi, which are all progressing towards pre-feasibility.

The merger also makes sense from a cost perspective. Newcrest’s copper production provides by-product credits that serve to reduce gold’s cash costs of production. The rising balance of copper in Newcrest’s portfolio was beginning to threaten its position as a gold miner. The merger removes any such concerns in one fell swoop, but that copper hasn’t gone away and will serve to keep costs low for the merged business.

The revised offer has received the approval of Lihir’s directors and now must receive shareholder approval through a vote that is to be held in July. Lihir shareholders will receive the merger documentation prior to the vote in late June. Assuming that no higher offer is forthcoming and that Lihir’s shareholders approve the deal, both of which we expect to be the case, the merger will complete in August 2010.

We now expect Lihir’s stock price to track Newcrest’s and to remain at or slightly below the offer value until the merger is complete. Given our bullish view on gold and Lihir/Newcrest’s low cost growth profile, we certainly expect further upside from the combined business.

Lihir will remain firmly held in the Fat Prophets Portfolio.


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