Newcrest Mining says it can ‘unlock significant value’ at Lihir, Papua New Guinea’s biggest gold mine. David James takes a closer look at a mine forecast to produce over a million ounces a year.

Lihir Gold Mine is in Niolam Island, 900 kilometres north-east of Port Moresby. Credit: Newcrest Mining

According to the company’s half-year results statement, improvements at the Lihir mine, which is the world’s fifth most productive gold producer, have the potential to ‘unlock additional high grade mineralisation’.

The statement says the new mine plan anticipates a higher average gold grade feed to mill which has the potential to make available an additional 1.4 million ounces of ‘contained gold’ from the 2022 to 2034 financial years.

Lihir is expected to produce over one million ounces per annum producer for 10-12 years.

Strong numbers

Lars Mortensen, General Manager of PNG stockbroking firm JMP Securities, says Newcrest has ‘put together a strong set of numbers’ for the half year. JMP is forecasting Lihir will produce 47.8 per cent of PNG’s gold output this year and generate US$1.38 billion (K4.89 billion) in export sales.

‘Strong gold prices will always have a positive impact on both Newcrest’s financial performance and its stock price. However, it is worth noting that several of its projects also produce considerable amounts of copper.’

‘Clearly, significant increases in gold prices (up 25 per cent) and copper prices (up 17 per cent) – when compared to the previous corresponding period – were major contributing factors in the company achieving a US$553 million (K1.95 billion) underlying profit for the six months to December 2020,’ he tells Business Advantage PNG.

‘Strong gold prices will always have a positive impact on both Newcrest’s financial performance and its stock price.

‘However, it is worth noting that several of its projects also produce considerable amounts of copper. The forecast production for the full 2021 financial year is around two million ounces of gold and around 145,000 tonnes of copper. As such, the stock is not an unadulterated barometer for gold prices.

‘It is also important to understand that the Newcrest portfolio of assets contains a mix of projects at various stages of maturity and potential. Consequently, perhaps the key ingredient determining the success or otherwise of the company – as evidenced in profits and share price over time – is the management team’s ability to sweat the existing assets and bring new projects into production or expansions.’

Lihir performance & tax

JMP Securities’ Lars Mortensen. Credit: Linkedin

Mortensen says that, from a Papua New Guinean perspective, the performance of Lihir during the period was ‘pleasing’.

He notes that gold production at the mine increased from 177,000 ounces in the September quarter to more than 200,000 ounces in the December quarter.

‘Lihir contributed US$180 million (K635 million) towards aggregate free cash flows for the period which makes it the second largest contributor to Newcrest,’ he tells Business Advantage PNG

Mortensen believes that the operational improvements at Lihir flagged by Newcrest management will ‘further cement Lihir’s status as a world class gold mine.’

But he warns that costs remain an issue.

‘The All In Sustainable Costs (AISC) at Lihir continues to be high, at US$1,352 per ounce and this is likely to remain a challenge in the coming years.

Tax position

‘For those in Papua New Guinea who have raised legitimate questions in relation to the amounts of corporate income tax paid by Newcrest in PNG, it is important to understand the relatively high cost nature of the Lihir operations – as reflected in the high AISC figures.

‘Whilst it is not specifically disclosed, we estimate the December 2020 half-year accounting profit per ounce of gold sold from Lihir to be around US$265 per ounce.’

‘The aggregate tax payable position of Newcrest/Lihir in Papua New Guinea is also impacted by the charging of US$363 per ounce in depreciation and amortisation during the first six months. This reflects the considerable investments in the asset base of the mine in current and previous years. Whilst it is not specifically disclosed, we estimate the December 2020 half-year accounting profit per ounce of gold sold from Lihir to be around US$265 per ounce.’

Mortensen says Lihir’s overall tax position will be determined by the high costs and depreciation charges, which in the past have resulted in accumulated losses.

‘It is to be hoped that continued improvements in production levels and cost management, combined with elevated long-term gold prices, will ensure that Lihir over time makes meaningful contributions as a corporate income tax payer, as well as to its shareholders and other stakeholders.’