Rio relinquishes Lihir management agreement (ASX announcement 16th Sept 2005).
Looks like Rio management isn’t going to take the fall for LHG’s hedge book losses! (Gold loan Announced to ASX 14th Sept 2005).
The appointment of an outsider won’t hide the fact that a 6 year loan of US $216 million repayable entirely in gold (480,000 oz of it) is mostly to fund previous hedge contracts (read losses). The result is that the strike price achieved goes from the previous deal of US $330 per oz down to $321 until 2007 and then all the way up to $375 in 8 years. A case of borrowing short and lending long? The current spot price is $450. Brilliant! I hope the Rio operative, or the collective genii who arranged this got a pay rise.
Take a look at an 8 year market contango. Comex Gold futures trade out only to March 2008 (3 years) and the price for that contract was struck at $543.30 on Friday. The Rio dudes finally got $375 for 2013 delivery! Fully another 5 years further out. I’d like to be on the other side of this deal!
We’ll have a closer look at the cash & carry trade later. Suffice to say that if rates go up, so will the carry and I expect a fall in either bonds or the USD sooner or later. Both probably, but one will go harder than t’other (bonds so far). If it’s the later, all the better for gold. Either way, this so called hedge is going to look stupid big time!
Total hedge book is now 1.22 million oz put on by Rio at ludicrous prices and ill founded decisions funded by LHG and therefore its shareholders. The question begs. Why would you borrow this kind of money for at best a loss of at least a hundred dollars per ounce, if after all you produce plenty of the stuff and could sell it at current prices? They could have delivered into old contracts and no one would be the wiser, yet they call this foolishness an achievement!
Gold isn’t going into backwardation anytime soon. It simply can’t.
I digress.
What’s a bit interesting about this independent appointment is a signal that Rio appears to be interested in divesting its 2nd major blunder in PNG (the last was having given away its residual stake in Aurora Gold to Abelle for 10 cents a throw). If so LHG is a buy!
Going from past performance, if the market takes any notice of the hedge stuff up and falls, LHG is a buy. If the market ignores this and follows gold up, then LHG is also probably a buy! Such foolishness often gives a leg to the divestee.
This episode should not be forgotten but given Rio’s probable exit and the given the balance of non-committed production, LHG still has good leverage to the gold price.
Aurora’s minority shareholders did extremely well by hanging on, having taken a generous scrip and option offer by Abelle worth about $1 six months later. Abelle was shortly thereafter taken out by Harmony with an even more handsome cash bid, worth roughly $1.50.
Another twist of course is Rio’s other PNG disaster – Bougainville Copper (which also has a very large gold reserve). Here are the current numbers:
LGH Mkt cap $2,093 mil. Rio’s 185.8 mil or 14.5% @ $1.63 is worth $302.8 million.
BOC Mkt cap $ 301 mil. Rio’s 76.4 mil or 53.6% @ $0.75 is worth $ 57.3 million.
(PNG Govt has 19.06%)
The gold taken by Bougainvillean rebel leader Francis Ona to fund the war prior to autonomy was alluvial, so there must be plenty around! Very little was from the Panguna pit as they had destroyed the means of extraction. Smart eh?
Mr Ona passed away shortly after losing his independence struggle a few months ago, so that too is out of the way; and the court case against Rio in the US has been dropped.
People forget that prior to the civil war, Panguna was the worlds largest copper mine. It’s still there. And don’t the market figures look like a ‘wonderful set of numbers’? But wait, there’s more! Look at the copper price. And the proximity to Asian markets. BOC traded at AUD $8 pre and post rebellion. Oh goodness, give me a Bex, a cup of tea and a good lie down!
It’s worth noting that Abelle’s major shareholder was Tomorrow Limited, a company backed by Sir Ron Brierley's Guinness Peat Group Plc. Since then there’ been a lot of interest and some acquisitions in PNG resources by Chinese companies. Serious interest and not just by vultures like me and Ron., and you?!
Extract from SMH article 16th Sept 2005.
‘With gold closing at a 17-year high of $US458.40 an ounce in New York on Thursday, one of Mr Hood's first duties will be working out how to expand Lihir's business. This will include spotting takeover targets, which could help reduce the political risk associated with being a one-mine company in PNG.
"Arthur will be on the lookout for opportunities away from Lihir that generally add value," Chairman, Mr Garnaut said.
Mr Hood will also probably have to deal with Rio's exit from the share register.
"Everyone knows [the Lihir stake] is not a core Rio asset and at some time they will want to divest themselves," Mr Garnaut said.
"They will have some sort of price target in mind”.
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