MINING MARKETS & INVESTMENT NEWS — Investment Commentary — Analysts see opportunity in slow startup

Mine startups are rarely bug-free, and it appears the newly launched Lihir gold mining complex in Papua New Guinea was no exception. Gold production has been lower than planned since commercial production began late in 1997, owing to a few startup problems with the oxygen plant and autoclaves.

These startup woes have taken their toll on the share price of Vengold (VEN-T), which became the largest owner of mine operator Lihir Gold by boosting its stake to 19.3% from 12.4% in the third quarter of 1998. Vengold, which has 143 million shares outstanding, currently trades at about $1.20.

But given Lihir’s 39-year mine life, the current weakness in Vengold shares present “an excellent long-term buying opportunity,” says mining analyst Larry Strauss of Canaccord Capital. Accordingly, he rates the shares a buy with a $2.45-per-share, 12-month target.

Lihir produced 130,000 oz. gold in the 1998 third quarter (Vengold’s share was 25,000 oz.) and 392,400 oz. in the first nine months of this year. These results were lower than the original 625,000-oz. annual rate, which has since been lowered to 530,000 oz. for this year. Total operating cash costs, including royalties, increased to US$218 oz. in the third quarter, compared with US$191 per oz. in the 1998 first quarter.

The increase in costs was attributed to operating difficulties at the oxygen plant and autoclaves. “These are typical of startup problems at other mines, and we expect them to be resolved within the next year,” Strauss notes in a research report.

Lihir’s autoclaves had problems with brickwork, which caused a reduction in availability to just 61% in the third quarter. However, modifications are expected to be completed by late this year or early 1999. Modifications to the oxygen plant already have been completed, resulting in 100% availability of the plant, which is now expected to continue to operate at design levels.

Vengold reported a loss of US$4 million in the latest quarter, compared with a loss of US$1.3 million a year ago. The loss for the 9-month period was US$6.8 million, compared with US$3.7 million a year ealier.

Strauss expects that Vengold will report earnings in 1999 and beyond as the company benefits from operating efficiencies at the Lihir autoclaves. “We continue to expect Lihir’s costs to be less than US$200 per oz. when the mine reaches full capacity,” he adds.