Hi,I believe LHG's hedging is a big problem for its (stock)...

Hi,

I believe LHG's hedging is a big problem for its (stock) owners, and I choose not to hold Lihir.

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>Profit dive overshadows Lihir’s reserves upgrade

By: Peter Gonnella


Posted: 2004/02/24 Tue 17:10 ZE8 | © Mineweb 1997-2004


PERTH (minewebaustralia.com) – A significant increase in gold reserves would usually be warmly greeted by the market, but Lihir Gold [ASX:LHG] was instead marked down for a big slump in earnings announced on the same day.
The Aussie-listed Papua New Guinean gold producer today (Tuesday) unveiled a better than anticipated expansion in proved and probable gold reserves for the Lihir operation of 4.4 million ounces or 27.5 percent to 20.4Moz (based on an assumed gold price of US$340 per ounce). Most of the reserve upgrade to 163.5 million tonnes grading 3.88g/t was generated by the inclusion for the first time of the higher-grade Kapit deposit, which contains 25Mt at 5.3g/t.

In addition, Lihir’s managing director Neil Swan predicted annual gold production (currently 550,000-600,000oz) would rise to an average of around 700,000oz between calendar year (CY) 2005 and 2008 as the high-grade Lienetz orebody was accessed. The opportunistic share placement that raised US$151 million at the height of the 2003 global commodities boom late last year, which gives Lihir net cash of US$119 million, would also help facilitate the early development of Kapit.

However, this positive news failed to stir investors, who were more concerned with the disappointing 34.7 percent drop in net profit for CY 2003 to US$34.7 million. As many analysts had flagged, Lihir suffered a blowout in CY-on-CY cash operating costs – of just under 31 percent, from an average US$244/oz to US$319/oz, with the group’s received gold price on sales actually falling (to US$352/oz) and belying its gold price leverage status (because of a 136,500oz component of sales delivered into lower-than-spot price hedging contracts), revenue remaining virtually steady at US$214.5 million and net operating cash flows plunging almost 27 percent to US$16.7 million. Credit Suisse First Boston analyst Michael Slifirski described the Lihir operating costs as “unacceptably high from what is a high grade orebody being mined at significant scale”.

The gold miner blamed the 2003 financial results on the decline in gold output, exorbitant energy costs, unplanned shutdowns and the adverse impact on costs of a weak US dollar. Power costs were expected to start improving, but not until the first half of next CY, when the US$50 million geothermal plant currently under construction is planned to be brought on stream.

During the CY, Lihir elected to defer about 161,000oz of out-of-the-money hedge commitments in order to lift the volume of sales delivered into the higher spot price market. Its hedge book, which consists of about 2Moz of predominantly forwards averaging about US$330/oz, had a mark-to-market value as at 31 December of negative US$205 million. Although today’s reserves boost certainly materially reduces the percentage of cover (to about 10 percent of updated reserves), the upshot of rolling over hedges, which incurs charges, seems to be stacking up in the near-to-medium-term. “We estimate that Lihir has an average of 46 percent of annual production from 2004 to 2009 committed through hedging,” forecast JP Morgan analyst Geoff Breen.

While several Aussie-listed gold stocks dipped for the second day running as the gold price struggled to get back above US$400/oz, a lot of them have been coming off 52-week peaks or all-time record highs, yet Lihir shares continue to languish at their 52-week closing low of A$1.20 (after shedding another 1.6 percent today).

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" ... Similarly, Lihir Gold rolled out hedge
positions with forward contracts scheduled to
mature for delivery in September 2003 and
December 2003 into late 2004, 2005 and 2006. ... "

This is taken from GFMS's site GLOBAL GOLD HEDGE BOOK ANALYSIS (Q3 2003) . This covers hedging by gold producers in the broad sense, and may be interesting for some. You'll find it at http://www.gfms.co.uk/Market%20Commentary/Global%20Hedge%20Book%20Analysis%20Q303.pdf .

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JFWIW

bye.dub