INVESTMENT COMMENTARY — Vengold rises from ashes with stake in Lihir

Once a high-flyer with gold projects in Venezuela, Vengold (TSE) has seen its share price fall back to earth as drill results from those properties failed to live up to expectations. But the company is again attracting interest, this time related to its 5.7% equity interest in Lihir Gold, the company directing development, construction and eventual operation of the Lihir gold project in Papua New Guinea.

Early this year, when the company was trading at $1.38, analyst Michael Curran of Midland Walwyn described Vengold as “undervalued.” He gave the stock a target price of $2.05 per share over the 12-24 month period. It has since risen to $1.55.

The Lihir gold project is expected to achieve full production by 1998, and produce 600,000 oz. annually, of which Vengold’s interest will be about 34,000 oz. At the expanded rate of 1-million-plus oz., Vengold’s interest would nearly double, to 60,000 oz.

The deposit’s total minable reserves are 104 million tonnes grading 4.37 grams gold per tonne (14.6 million oz.), within the Minifie, Lienerz and Coastal deposits. However, total geologic resources are much higher and have been estimated to exceed 42 million oz., making Lihir one of the largest undeveloped gold deposits in the world. Curran says the project still has exploration potential capable of expanding resources even further.

Assuming Lihir’s annual production expands to more than 1 million oz. by the year 2000, Curran believes this would justify a valuation of US$65 million for Vengold’s 5.7% equity interest, in which case Vengold’s net asset value would be $2.12 per share, justifying a target price of $3.15 (based on the typical price/net asset value multiple for similar junior gold producers).

Curran cautions that Lihir is a technically challenging project. Infrastructure costs will include a ring road for Lihir Island, a deep-water port, an autoclave processing plant, a geothermal wellfield and accommodation for workers.

The site is in a region of moderate seismic activity and high rainfall, and there is potential for acid mine drainage. Geothermal conditions and dewatering within the Luise Caldera are other considerations. Curran points out, however, that extensive field studies have been carried out prior to the design and development of dewatering and geothermal control systems.

Capital costs at Lihir are estimated at US$680 million. Mining plans call for an open-pit operation that will supply high-grade ore for direct processing and lower-grade ore to be stockpiled for future treatment.

Curran says expansion plans can be accommodated, as the plant was designed to allow for a doubling of throughput, currently planned at 9,000 tonnes per day. “We are confident that the partners of Lihir Gold will proceed expediently to ramp up the mine to achieve the expansion case outlined in the feasibility study, which is annual production approaching one million ounces of gold.”