And Lihir – ERA’s Surprise Profit

By Glenn Dyer | More Articles by Glenn Dyer

Lihir Gold, now basically hedgeless and riding the ups and downs of the world gold price, says it's on its way to setting a yearly production record of more than 800,000 ounces of gold produced after a very solid first half and second quarter.

The company said it produced 182,428 ounces of gold in the second quarter, which puts it on track to achieve output in the range of 800,000 – 830,000 ounces for the full year.

First half output hit a record 375,730 ounces and the average cash gold price for the second quarter was up 23% at $664 an ounce compared to $537 an ounce in the first quarter of 2007.

That was down on what the company suggested it would do earlier in the year, but at the bottom of the range of its forecast.

And while that points to stronger earnings there was a hint in the commentary in the production report that the rising Australian dollar/falling US dollar will have an impact with the company pointing out that 60% of its costs are in $A or PNG Kina.

This had lead to "a significant increase in costs".

So, with production not as strong as previously thought, and facing a significant rise in costs, offset by higher prices, the company's earnings picture for the first half looks mixed.

CEO, Arthur Hood, said in yesterday's second quarter's production report that the company was aiming for record full year production of 800,000 to 830,000 ounces with second-half production of between 424,000 and 454,000 ounces.

He said second-half production would rise because of process plant expansion, higher gold grade and increased autoclave throughput.

In turn, this would see a fall in unit costs over the remainder of the year, helped by increased throughput rates and expanded geothermal power (which cuts energy costs for the processing plant, especially the autoclaves).

For the full-year, total cash costs are expected to average in the mid $200s per ounce, which, if price averages around $600 an ounce over the rest of the year, would give gross earnings of $380 to $400 an ounce and a higher full-year profit.

"Unit costs remained stable over the first half, compared with the second half of 2006.

Gross cash costs per ounce reduced by 2% to $383, while total cash costs were steady at $282/oz. Increased geothermal power generation capacity led to significant reductions in power costs in the half, however savings were slightly less than expected due to lower than planned geothermal power production.

"Offsetting cost increases were experienced in mining operations due to rising tyre and diesel prices, as well as higher maintenance costs. Reductions in the US dollar exchange rate also led to a significant increase in costs in the half, as approximately 60% of costs are in Australian dollars or PNG Kina."

Lihir said in its report that it moved 15.6 million tonnes of material in the second quarter up from 14.9 million in the first quarter. Autoclave throughput of 1.2 million tonnes was achieved up from 1.1 million tonnes and autoclave feed gold grade was 5.45 grams per tonne.

The company said government approvals were received in July for the Golden Point shaft development and significant gold assays were received from resource drilling.

Lihir took over Ballarat Goldfields and Mr Hood says progress was being made in underground development, with drilling continuing for resource and stope definition.

"We remain on target to commence commercial rates of production in the second half of 2008.

"The strong result follows record full year production of 651,000 ounces in 2006, and confirms that Lihir is making consistent progress in transforming its operations, improving reliability and increasing productivity," Mr Hood said.

The company's entitlement issue was completed in the quarter, raising $1.2 billion.

The proceeds have been used to undertake a comprehensive financial restructure of the company, closing out the hedge book, repaying secured debt and providing funding for expansion projects.

LGL has emerged as an unhedged gold producer, with a strong, ungeared balance sheet, world-class, long-life gold assets and an exciting growth profile

Now it's riding the world gold price, without protection.

The company says its interim result will be out on August 21. The shares finished steady on $3.13 yesterday.

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Instead of a small loss as forecast in early June, uranium miner Energy Resources of Australia (ERA) has surprised the market by revealing it in fact made a small profit of $5.67 million for the first half of 2007.

While that's 71% down on the $19.86 million net profit reported in the first half of 2006, it is very different to the small loss of "$5 million to $10 million" predicted on June 8 after the company's operations were hit by heavy rain and flooding in late February and early March.

Consequently, this turnaround took investors by surprise and it was reflected in the way the share price moved yesterday. It opened at $19.20, eased 70c to a low of $18.50 in the hour after the result was released and then rebounded $2 a share before settling back to trade around $20.

They shares subsequently closed up $1.66 at $20.92, a strong performance in a weak market yesterday.

The better than forecast result was explained as thus:

"On 8 June 2007, ERA announced that it expected to report a first half loss of between A$5 million and A$10 million.

"As part of the half year accounting close, a number of adjustments affecting profit and loss were identified.

"This resulted in a positive change to the profit and loss account of A$10 million after tax, taking ERA's 2007 half year net profit after tax to A$5.7 million compared with a profit of A$19.9 million for the same period in 2006.

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Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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