Lihir to dilute by US$535 million to close gold hedges


A quick calculation suggests that the total
to be spent here just to close the hedge book
will be about US$535 million.

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Lihir to Sell A$1.2 Billion
in Shares to End Hedging

By Jesse Riseborough
Bloomberg News Service
Tuesday, April 17, 2007

Lihir Gold Ltd., a Papua New Guinea gold-mining company, plans to sell A$1.2 billion ($998 million) in shares to close its hedge book, repay debt, and fund expansion.

Existing shareholders can buy one new share for every three shares held at A$2.30 each, a 32 percent discount to yesterday's closing price, the Port Moresby-based company said today in a statement to the Australian Stock Exchange.

Lihir joins global gold mining companies, including the world's largest, Barrick Gold Corp., that have been reducing gold sold in forward contracts to take advantage of prices that have more than doubled over the past five years.

"That Lihir will move into a completely unhedged position is a significant positive for the company," said Greg Canavan, an analyst at Fat Prophets Fund Management Ltd. in Sydney. "They have obviously taken a positive view on the gold price and it is an endorsement for the gold market as well."

The shares rose 16 cents, or 5 percent, to A$3.36 yesterday before they were halted on the exchange. The company expects the new shares to begin trading on April 27.

"This restructure we have announced today enables us to reorganize our balance sheet, improve our financial structure, and create a solid platform for the future," Chief Executive Officer Arthur Hood said in the statement.

Existing institutional investors will account for about 80 percent of the sale, or A$856 million, and individual holders will be offered A$214 million, the company said. A further sale to institutions will seek to raise A$120 million.

The funds raised will close out Lihir's hedge contracts of 934,500 ounces of gold at a contract price of $343 an ounce and repay a 480,000-ounce gold loan at $449 an ounce, it said.

Gold for immediate delivery fell 66 cents, or 0.1 percent, to $689.55 an ounce at 12:33 p.m. Sydney time. It rose to an 11-month high yesterday of $690.20.

Gold sold by mining companies in forward contracts fell 25 percent in 2006, the biggest decline in at least five years, Mitsui & Co. said in its annual global survey of 118 producers Feb. 23. Sales dropped 13.4 million ounces, 9 million ounces more than the reduction in 2005, led by a cutback in hedges by Barrick Gold Corp., Mitsui said in the February report.

"They are obviously getting a lot of shareholder feedback saying 'we would prefer you as an unhedged gold company' and it says management are obviously very optimistic on the gold price," said Canavan of Fat Prophets, who holds the stock and recommends it as a buy.

Many producers increased forward sales when gold fell to a 20-year low in 1999, to hedge against further declines in prices Since then, the gold price has more than doubled, forcing mining companies to buy on the spot market to unwind hedges.

Funds raised from the A$1.2 billion share sale will also help boost total production to more than 1 million ounces a year, the company said.

Production from the company's Lihir Mine in Papua New Guinea was 193,300 ounces during the three months ended March 31, a 5 percent increase compared with a year earlier and the second-highest, the company said in a separate statement. Sales for the quarter were $96.4 million, down from $100.8 million a year earlier.

The company increased it first-half production forecast to between 375,000 and 400,000 ounces, Lihir's Hood said. The company expects to meet its full-year production forecast of between 800,000 and 830,000 ounces of gold, he said.

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