Lihir suffers landslide (October 14, 2005)

Papua New Guinea miner Lihir Gold (LIHRY-Q, LHG-A) expects to resume full production at its Lihir Island pressure-oxidation and carbon-in-leach processing plant in early November after a landslide that swept away two workers halted production.

Emergency crews continue to search for the two men, while the miner said it was trying to accelerate the recovery process “while ensuring the safety of staff.” The PNG Mines Department is carrying out an investigation.

The Oct. 9 landslide occurred on a hillside to the north of the mine burying a 900-metre stretch of road between the nearby township and the operation. The slide also ruptured the water pipeline supplying the process 4.4-million-tonne-per-year plant. The company says the processing plant and mining infrastructure are unaffected.

Meanwhile, mining operations continue with ore being stockpiled in anticipation of a resumption of processing. The company is currently looking at alternative means of supplying water to the plant, which may allow partial gold production to resume prior to November.

Reconstruction of the roadway and pipeline will wait until the landslide area has stabilized. The company expects the pipeline repairs to run around US$1 million. Access to the operation is currently available via sea and the island’s ring road.

Lihir produced around 600,000 oz. of gold in 2004 and had forecast record gold production of 700,000 oz. for 2005. During the first half of the year, the company poured 231,000 oz. at a total cash cost of US$363 per oz. Production during the second half was expected to double to 470,000 oz. as mining accessed higher-grade ore in the new Lienetz pit.

Mining in the first half focused on a transition from the extensively mined Minifie pit to the Lienetz ore body. With the associated lower production and additional costs incurred in developing the Lienetz pit the company piled up a first-half loss of US$20.8 million. Costs were also higher due to increased oil prices and mining maintenance costs.

Lihir recently tabled plans for a US$160 million expansion of the flotation circuit at the processing plant. The scheme is aimed at boosting gold production by an average 140,000 oz. per year for 7 years, beginning 2007.

In September, the company commissioned a US$5 million gravity circuit designed to recover free gold that would otherwise escape autoclaving and be lost to tailings. The circuit is expected to raise recovery rates by about 1% to around 91%.

The company also recently commissioned a 30-megawatt geothermal power station to help lower costs, and is working on a new 20-megawatt station. The 30-megawatt plant alone is expected to halve the company’s greenhouse gas emissions, which amounted to around 280,000 tonnes of carbon dioxide in 2004, or about 6% of the country’s total emissions.

Lihir’s expansion plans are being funded via recently arranged US$216 million gold loan, which saw the company borrow 480,000 oz. of gold from a group of 12 banks; the ounces were immediately sold at US$419 apiece.

The loan bears initially interest at a rate of 2.1%, and must be repaid in physical gold, beginning in 2007 and wrapping up in June of 2011. Lihir plans to repay the loan out of the increased production arising from the expansion.

Lihir also used US$62 million of the loan proceeds to restructure its hedge book. The company used the funds to pay off out-of-the money hedges, extend maturity dates, and increase strike prices for a large portion of the book.

The hedge book contains 1.22 million oz., plus the 480,000 oz. of loaned gold, with average strike prices varying from US$332 per oz. in 2005 to US$375 per oz. in 2013. Lihir says total forward commitments under the book and loan comprise less than 8.5% of reserves and 4.4% of resources.

The company says the restructure provides an improvement in future cash flow while maintaining revenue protection.

Another US$50 million portion of the gold loan will go to refinance the company’s existing revolving credit facility, which will be retained as a contingency.

In the boardroom, Lihir replaced its CEO Neil Swan with former Placer Dome (PDG-T, PDG-N) senior executive Arthur Hood. The company also concluded its long-standing management agreement with Rio Tinto (RTP-N, RIO-L). Lihir had been managed by a Rio Tinto subsidiary since its formation in 1995.

Rio Tinto is Lihir’s third-largest shareholder with a 14% stake; the mining giant will continue to nominate a director to Lihir’s board as long as it retains its equity position.

At the end of 2004, Lihir had proven and probable reserves totalling 188 million tonnes grading 3.48 grams gold per tonne, for 21 million contained ounces of gold (of which an estimated 18.9 million oz. are deemed recoverable). The estimate is based on a cutoff grade of 1.45 grams gold, and a long-term gold price assumption of US$380 per oz. The reserve is contained within total resources amounting to 421.8 million tonnes running 2.95 grams, for 40 million contained ounces.

Lihir says the reserve is enough to support open-pit mining until 2020; plans call for the processing of lower-grade stockpile material over the subsequent 28 years.