By YEHIURA HRIEHWAZI in Brisbane
THERE is still room for negotiation in Newcrest Mining’s bid to buy Lihir Gold Limited, according to latest information emerging from the two companies.
Lihir chairman Dr Ross Garnaut said his company was significantly undervalued because of its ill-fated acquisition of the Ballarat gold mine in Victoria, Australia, and the market’s lack of understanding of its expansion at the flagship Lihir Island mine in New Ireland province.
The market had virtually given Lihir the thumps-down when it purchased the old rundown Ballarat mine several years ago for about US$480 million but found it uneconomical and auctioned it off at a give-away price recently.
In the scheme of things, veteran CEO Arthur Hood was given the marching orders, after he successfully implemented a large expansion programme at the island mine alone which increased gold production to more than one million ounces a year.
LGL had also acquired another mine in Australia and purchased one in West Africa.
Dr Garnaut said Newcrest would have to increase its take-over price from A$9.2 billion (K24 billion) if it wanted to re-engage with LGL.
“The premium that was offered by Newcrest was off an unusually low base for us, and we have a lot of value to come through as a stand-alone entity, especially now we’ve appointed a first-rate chief executive,” he said.
After meeting investors last week, Dr Garnaut stuck to the line shareholders wanted Lihir to hold out for a better price.
“The overwhelming shareholder response is there is value in the combination but there should be a higher price,” Dr Garnaut said.
He would not say whether Lihir’s top three shareholders – Colonial First State, BlackRock and Fidelity – who together own 34% of the company and are also Newcrest’s top three, were included as part of the overwhelming response.
Dr Garnaut said market perceptions of management had weighed on the share price after the acquisition of Ballarat turned sour, leading to its March sale for a fraction of its acquisition price.
“We also don’t think the market has yet factored in the huge option value of the large resource at Lihir (Island), where Lihir hopes to boost production to an average 1.1 million ounces a year,” he said.
Former BHP Billiton executive Graeme Hunt was appointed to the top Lihir position earlier this month, after the departure of Mr Hood in January.
He is said to be one of the best in the industry and was expected to add significant value to the LGL group of companies.
He was yesterday reported to have told the Courier Mail newspaper in Brisbane that shareholders of LGL had expressed that they saw merit in combining with a bigger rival in Newcrest but had warned: “don’t sell the company cheap.”
Newcrest CEO Ian Smith said his company had also been consulting with Lihir shareholders and the feedback had been positive.
“I think it’s fair to say that everyone can see the compelling industrial logic,” he said.
“We think our offer, that is still open and on the table is full and fair,” Mr Smith said.
When Lihir rejected the Newcrest offer last week, Mr Hunt said the “ball is in Newcrest’s court”.
Some of the major shareholders of Lihir also have substantial shares in Newcrest.
“As much as they like idea of perhaps the two companies being put together, Lihir shareholders want to make sure they get appropriate value for their investment,” Mr Hunt said.
“They are clearly saying to us, on one hand, don’t sell the company short, but they are also saying to us ‘there are merits in this, it could well be nice if this happened, so carefully consider what might come forward in the future,” Mr Hunt said.