Good as Gold

 

LIHIR Gold Limited CEO Arthur Hood believes 2008 has been a ‘transforming year’ for the company, but reveals there will be no more mergers and acquisitions for quite some time.

Hood has virtually put the brakes on any major changes, following a frenetic first half of the year which resulted in a net profit of $42 million – or a 78 per cent increase.

The profit results largely from a number of strategic moves, including a merger with Equigold NL, planned expansion of the Lihir Island operation in Papua New Guinea, and the development of the Ballarat project in Victoria.

Speaking from the board room of the company’s Queen Street headquarters, where he incidentally, wears a silver watch (he has a real gold one at home) and a gold tie, Hood believes now is the time for consolidation.

“Our aim is to have long life, low-cost mines and be a quality company for investors,” he says.

“We have organically a great growth profile in front of us now and we are creating a pipeline of projects particularly through the development of the Ballarat mine, through the expansion of the Lihir mine and through the exploration assets we’ve acquired in the Ivory Coast in West Africa.

“We have a great pipeline of projects coming through. We see no need to go out and do mergers and acquisitions for the sake of it and to generate growth.

“However if a quality opportunity comes along, and the circumstances are correct.”

Hood shares the views of some 38,000 LGL share holders world-wide that gold is an asset that will never lose its appeal.

“Less than 40 per cent of our share holders are in Australia and so well over 60 per cent of our shareholders are overseas, focused primarily on North America and then in declining order Europe and Asia,” he says.

“Lihir is a gold mine and most gold stocks trade at a premium to their net present value and that makes gold unique in the stock market generally and certainly in the mining industry. Most shares trade at a discount to their net present value, to the underlying value of the company, and so companies that are in gold tend to stay there.

“Due to the introduction of ETFs (exchange trading funds) there has been an increase in ownership in individuals owning pure gold over the last three or four years. They’ve been selling at the rate of 250 tonnes a year – about eight million ounces of gold a year are being bought – effectively that’s people coming together like a unit trust and buying shares in gold bars.

“It’s made gold ownership far easier than having to buy gold bars or gold coins.”

But Hood believes there’s more to gold than just the value.

“Gold always has that inherent mystical quality. You talk about ‘this place is a gold mine’ and ‘as good as gold’, it’s part of the language and there’s that inherent intrinsic value or perception in gold. Gold was once the backer of paper currencies, it was the original currency,” he says.

“Gold always was the original underlying store value that denoted an individual’s wealth. While that has certainly deteriorated over the last 50 years or so it is still seen as having underlying intrinsic value.

“Although its perception has declined in the western world, in places like China, India and the Middle East it has that semi-mystical value.

“As the CEO of a gold mining company I don’t view gold as a commodity, I view gold as a precious metal and an underlying store of value and a hedge against inflation.”

He believes the boom is set to last for some time to come, based on the back of the BRIC (Brazil, Russia, India and China) countries.

 “There will be fluctuations but I don’t think you will see the busts that have generally occurred. You will get boom and then gentle decline and then rise again,” he says.

“We are in a long, strong upward trend for resources demand. You have over 20 million people a year moving from the countryside into urban China and if they want to have the same standard of living in Australia, that means all the infrastructure that’s been built in Australia in the last 200 years has to get built every year in China.

“I think the commodities cycle is going to be strong for some time to come. Ten years ago, if the economic concerns that have manifested themselves in the US over the last year had occurred then, that would put the world into recession. The global economy is being carried along by the BRIC countries now. Certainly Europe and North America are struggling at the moment but India, China, Brazil are carrying the world economy.

“You can see declines coming but you can’t see the big busts that we had in say 1974.”

In terms of mining for gold itself, Hood believes there is loads of untapped markets for the resource.

“There’s still plenty around. I think there is a finite amount and certainly the heavily explored areas are heavily explored and there are no new larger discoveries in Western Australia or Queensland,” he says.

“You have to go to more remote places, less explored places to find new large discoveries which is why we are in West Africa now.

“You are marketing to investors in Boston and New York at the beginning at the week and you can find yourself in the bush in the Ivory Coast at the end of the week.”

Indeed, only a small portion of Hood’s staff are based in the Brisbane head office – around 85 (with plans to grow that to 100 by the end of the year) but LGL boasts 3000 employees world wide and a further 2000 business partners on operations.

It’s a far cry from three years ago when Hood joined the company and there were just two other people.

Not surprisingly, he has no plans of retiring when his five-year contract ends in two years.

“We started the year as a single mine company and we end the year with four operating mines in three different companies so we’ve become a diversified producer with a very strong balance sheet,” he says.

 “If the board want me there then I am happy to stay. I still feel we’ve got a lot to do. We are in the midst of the transformation journey at the moment. Although the mine at Lihir has been operating for 10 years, this is almost like building a new company.

“The whole management team is a new management team and so we are really at the beginning of a journey and I feel there is still a lot to do.

“I’m still energised and excited by what I’m doing and I consider it a great opportunity to be able to do this. We’ve grown a company on the back of a fantastic asset in Lihir.

“I certainly wouldn’t want to be doing this if I wasn’t as excited and energised by it, but I am.”

One thing’s for certain, it will be quite some time yet before Hood himself, accepts the proverbial gold watch.
 

“Some of the top 50 companies have a very high media profile others just aren’t in the media spotlight so if you are not Qantas or Tabcorp or Macquarie or the Big 4 Banks or Rio Tinto it just seems that the media spotlight tends not to fall on you. Our primary focus is to improve shareholder value and while the media publicity is nice or shows a good reflection upon the company it only has a marginal impact on the share price, if any.”

 

“We looked at logical places looking at the eastern seaboard of Australia. Brisbane proved to be a favourable location. Certainly, as a mining location, Brisbane is where more mining companies are coming, where there are more mining service companies, the engineering companies tend to be more in Brisbane and Perth rather than Sydney or Melbourne.”

 

“Brisbane works very well. There’s a shortage of hotel accommodation and office space at the moment but that’s going to change over the next few years but that’s part of the resources boom. We are part of the benefit for Queensland. What would you rather have, no resources companies here?”

 

“What’s been demonstrated in the market so far as the best decision has been the one for three rights issue last year – we raised $1.2 billion of funds from our share holders by giving them the right to purchase one share for every three that they held at a deeply discounted rate. Our shareholders made money, the company in which they had shares had a much strong balance sheet, unhedged, debt free and therefore able to fund future growth opportunities. That’s by far and away what has been demonstrated as clearly one the best business decisions we’ve made in the market. Afterwards people actually talked about doing a ‘Lihir’.

 

“We are debt free so that really doesn’t impact on us too much. We’ve got a very strong cash flow position and at times like this, cash is king. So being debt free, unhedged and a strong cash flow puts you in a strong position to ride through the interest rate cycle.”

 

“The vision for the company is people, results, growth. There’s no tricks but the HR strategy is people come first and then the results and growth will come along afterwards. You try and reward people accordingly and give them an attractive and exciting environment in which to work. (But) There’s no free samples, no.”