For all the gold mined in Australia and surrounds, only two companies can lay claim to being both Australian and "world class" gold miners. They are Newcrest Mining (NCM) and Lihir Gold ((LGL)). Both have proven to be perennial disappointments.
For Newcrest, disappointment has mostly centred on the Telfer project, which promised so much and has delivered so little. Once touted as being a mine that would one day out-produce Kalgoorlie's world famous Super Pit, Telfer has done nothing but produce downgrade after downgrade and investor heartache ever since. At least Telfer is only one of many gold projects in Newcrest's stable, and the company is also a major producer of copper.
Lihir, on the other hand, was for a long time just a one-trick pony. The company's only mine was on Lihir Island off the mainland of PNG, and production setbacks for one reason or another have been the story for many a year. To this day analysts are still hesitant whenever Lihir's management offers production guidance.
But none of this matters much when the gold price is going to the moon.
Or at least when just about all resource analysts agree that the long term direction for gold is up, and that US$1000/oz will again be passed relatively soon. Both companies have, in the last few years, bitten the bullet and reversed their gold hedge books. Although a costly move, it means both now have uninhibited exposure to a strong gold price, and also implies managements expect the gold price to keep rising too. It will have to, because both are now effectively working without a safety net.
Newcrest produced the most disappointing result (full year) of the two, coming in under most analyst expectations. Capital expenditure was higher than expected, costs were higher than expected, and guidance for ongoing production was for flat to negative growth in FY09. This is hardly sterling stuff, yet Newcrest rates a 7/3/0 B/H/S ratio from the FNArena database brokers. Only UBS downgraded from Buy to Hold on the result, citing the poor production guidance and the inevitable risks involved in any mining operation's planned expansion.
For aside from gold price bullishness, many analysts agree that Newcrest was "saved" to some extent by choosing to include significant upgrades to reserves and resources along with a weak result. These increased reserves, along with the higher gold price analysts assume will be paid for them down the track, are what makes Newcrest a "quality" company, and a must-have in any portfolio.
Never mind that forecast earnings downgrades of double digits followed in many cases, sending the average target down from $37.84 to $36.38. Another string to Newcrest's bow is that it has the capacity to make acquisitions (and should, says Deutsche Bank).
The Lihir result (half year) also disappointed, with Merrill Lynch in particular citing lower than expected production, lower than expected grades, and higher than expected costs. There was also a scramble from analysts to downgrade earnings per share numbers given the unforeseen inclusion of amortisation charges arising from the Equigold acquisition.
Nevertheless, Lihir's star has been in the ascendancy since it seemed the Lihir Island project might finally be stabilising and since the company made some acquisitions. Forget Ballarat - nothing much will happen there for a while. But the recent acquisition of Equigold and its Bonikro project in the Ivory Coast has offered Lihir the sort of project and geographical diversification it so long required.
Production guidance in Lihir's case was a bit more promising, in that it was retained for the balance of FY08. Given Lihir's history, this is a positive. Lihir now scores an 8/1/1 B/H/S ratio, with JP Morgan today upgrading to Buy given recent share price weakness, itself a function of recent gold price weakness. Merrill Lynch is the stick in the mud, given the analysts still don't believe the guidance, noting the Bonikro project is delayed and Ballarat's production likely negligible this year.
Lihir's average target also fell, from $3.89 to $3.56. In making the target downgrades for the two, more than one broker cited comparisons to the now reduced PE multiples afforded the North American gold miners, given the recent fall in the price of gold. As gold is pretty much homogeneous, such comparisons mean all global gold companies tend to trade within the same value range.
So for those investors looking to invest in gold via the stock market, Newcrest and Lihir are the premium choices. Small gold miners offer much higher risk/reward ratios, but it must be remembered that every mining operation is a complicated process, beset with problems. With both now running unhedged, exposure to the gold price is at a maximum, albeit not a perfect correlation given those risks and the simple cost of mining.
It must also be remembered that with these two you get exposure to Aussie dollar gold, not US dollar gold. For the last few months any gains in the US gold price had to overcome an Aussie on its way to 98 US cents. However, the recent fall in the Aussie has actually negated the fall in the gold price, while the share prices of both Newcrest and Lihir have fallen.
