Diverging paths for Oil Search and Lihir Gold
PNG’s two biggest companies – Oil Search and Lihir Gold – have undergone a major transformation in the last three or four years.
Both are now laying plans for another strategic transformation.
The similarities end there because both are charting entirely different courses.
Lihir made its first gold pour in May 1997 after discovering one of the world’s largest gold reserves.
Its 11-year history makes it a virtual Johnny-come-lately compared with Oil Search, which next year will celebrate the 80th year since its incorporation in PNG in 1929.
Lihir went through many teething technical problems in its early years as it came to terms with the high geothermal gradient in the area it was mining and the refractory nature of gold mineralisation, which increased the complexity of processing operations.
Its maiden dividend payment in 2003 was the first and the last as Lihir steered its way through a major growth phase.
The departure of Rio Tinto from an operational role in 2005 and appointment of an independent chief executive heralded the start of a major transformation and new phases of expansion.
The overhang of a debilitating gold hedge book, out of sync with a strongly rising gold price, encouraged managing director Arthur Hood to raise A$1.2 billion through a share issue so he could close out the hedge book and pay off debt.
Simultaneously, the company began a new phase of expansion focused on creating a greater international presence through last year’s merger with
Ballarat Goldfields and last week’s merger announcement with Australia’s Equigold NL.
In both cases, Lihir saw overseas diversification as reducing its risk profile as a one mine operator in PNG.
As Mr Hood put it: “The new company will hold a portfolio of long life, high quality assets in diverse geographic locations, effectively eliminating single mine asset risk and leading to improved valuations for the combined group.”
The merger with Equigold, which is expected to make Lihir one of the top 30 companies on the Australian Stock Exchange with a market capitalisation of around A$9 billion, will give the group gold mining operations in PNG, Australia and in the Ivory Coast in Africa.
Oil Search is charting quite a different strategic path and will continue to have a growing focus on its core operations in Papua New Guinea.
It first got a chance to operate PNG’s oilfields following a takeover of a stake held by Chevron Niugini in 2003.
Managing director Peter Botten breathed new life into rapidly declining oil reserves and production scenario which, along with a surge in oil prices, has helped underwrite his company’s meteoric rise.
In the past five years, it has been the fifth best corporate performer on the Australian Stock Exchange with compound growth in total shareholder returns of 58% a year.
It is not surprising therefore, that Botten has made no reference in recent times to country risk or project risk in terms of its PNG operations which has a sterling export record.
Nevertheless, with less than satisfactory exploration results, Oil Search has in the last few years sought international diversification through expansion into the Middle East and North Africa.
Although it has commenced oil production in Yemen and Egypt, the company has also been disenchanted with the level of overseas exploration success and a significant level of divestment is now planned.
Its next phase of transformation will occur through the coming into reality of the ExxonMobil-led LNG project in Papua New Guinea and Botten has decided to sell off some of the overseas assets to reduce outlays and raise capital to maintain its focus as an impending LNG producer.
Lihir announced its latest A$1.1 billion merger with Equigold last Thursday (March 20), only a day after Botten and his top executives briefed Australia’s top oil and gas analysts on the Oil Search strategy over the next five years.
Becoming a successful producer and exporter has been a much longer and tougher achievement for Oil Search than for Lihir, which essentially started out as a gold mine operator.
It took 63 years before Oil Search paid its first dividend.
It has continued to do so every year, except for a four-year break after 1997.
Its revenue last year was just over K2 billion and its company tax bill was K519 million.
Oil Search is now either the largest or second largest corporate taxpayer to the PNG Government, helping fuel the large surpluses the government has been able to enjoy since 2005.
Lihir carries large losses from prior years and appears to be in a situation where it will still not be paying corporate tax in 2011 when its Lihir mine is anticipated to produce a million ounces of gold annually, making it one of the largest gold mines in the world.
The solid cash flows enjoyed by Lihir because of gold prices that have recently hit US$1,000 an ounce and from larger and more stable PNG operations is now set to fuel its corporate growth on the international front.
Lihir’s total revenue last year was K1.4 billion.
Lihir has never shown any interest in conducting exploration elsewhere in PNG outside its Lihir home base, but is looking forward to significant exploration potential that Equigold brings with it from its African operations.
It is certainly arguable if political risk is any better or worse in the Ivory Coast compared with PNG, though recent history suggests PNG is more stable politically.
In sharp contrast, Oil Search is presently seeking to sell down newly acquired exploration and production assets in Yemen, Egypt, Libya, Tunisia and in Kurdistan in northern Iraq to focus its cash and its energies on completion of the LNG project.
And because 40% of its gas reserves are not dedicated to the LNG venture, the company will in the next four years pay special attention to use of these resources for additional LNG production, petrochemicals, fertilisers and possibly power generation within PNG.
Its role and synergies within the PNG economy can only grow to new heights, given its strategic plans while Lihir will bank on its massive PNG proceeds to pursue international diversification.
Columns