MAC: Mines and Communities

Major disaster kills workers at Lihir mine

Published by MAC on 2005-10-14

Major disaster kills workers at Lihir mine

Two Papua New Guinean workers last week lost their lives in a "landslide" at the Lihir gold mine. Although a spokesman for the company claimed it was "a natural disaster", the evidence suggests it was anything but. As pointed out in Lihir Gold's own environmental impact assessment, thirteen years ago, Lihir island is seismically unstable - having registered several earthquakes up to 7.5 on the Richter scale since the early 1900s.

Ironically, the choice of submarine tailings disposal - itself widely condemned over the past decade - was justified as essential, precisely because of such vulnerability and the paucity of land for storage and human settlement.

Rio Tinto, the operator of the mine until last month, must be held responsible for this recent disaster - one which, according to the investment bank Credit Suisse First Boston, was fore-shadowed in October 2004. Equally important to remember is that Rio Tinto was jointly responsible (albeit as a junior partner) with Freeport McMoran, when a similar, though far bigger, landslide took the lives of eight Papuan workers at the West Papuan Grasberg mine, just one year before that.

There has been virtually no press coverage of this unacceptablee "incident" outside of Australasia. Even (perhaps especially) there, it is investors in the Lihir mine whose views have been making the running, rather than the avoidable loss of two peoples' lives.

They were only Papuans after all...

After the Lihir landslide

Ben Sharples, Mining

October 14, 2005

Lihir disasterFULL production is expected to resume early next month at Lihir Gold's operations in Papua New Guinea after a landslide last Sunday ruptured a pipeline and killed two employees.

Lihir investor relations manger Joe Dowling told the company was looking to access catchment areas close to the plant, including creeks and dams, to supply sufficient water to partially fire up the processing plant.

Dowling refused to comment on a report by analysts at Credit Suisse First Boston which said the stability in the area that collapsed was being queried as long as 12 months ago.

A mine visit by analysts in October 2004 noted a site newsletter that "discussed ground movement in the area around the northern end of the Kapit stockpile and incinerator that was being monitored by the geotechnical team twice daily", it said.

"In this context, one must question the safety of other areas until now assessed as geotechnically stable. This includes the mine and intended sea wall to enable recovery of deeper gold," the report by CSFB analysts Michael Slifirski and Julian McCormack said.

Dowling said the company did not have an estimate of how long it would take to stabilise the landslide area, but the company was "monitoring it continually and won't be doing anything until it's safe".

Lihir was forecast to produce around 700,000 ounces in 2005, the majority in the second half of the year.

The impact of the slope failure on the forecast has yet to be quantified.

"We are doing what we can to ensure that we maximise production in the current quarter and we'll give an update in due course," Dowling said.

The PNG Mines Department is investigating the landslide.

Landslide In Lihir: Setback Or Symptomatic?

October 11 2005

Australasian Investment Review – (AIR) Lihir Gold (LHG) has recently polarised broker opinion about whether the stock’s heavy leverage to the gold price should justify its significant premium. There is little consensus.

Lihir disasterNow a devastating landslide on the island of Lihir in PNG has cut power, water, and the only road, resulting in a delay to production of a yet undetermined period. Two PNG nationals are also believed to have lost their lives. Broker response has again been mixed.

Credit Suisse (Underperform) suggests recovery from the failure may be rapid and earnings limited to a single year, but the fact remains it is well established that Lihir is an unstable island, and this disaster points to either error or compromise in the location of a long term stockpile.

The analysts suggest that in this context, one must question the safety of other areas until now assessed as geotechnically stable. This includes the mine and intended sea wall to enable recovery of deeper gold.

They see the incident as confirming the risk associated with Lihir and questions why the equity is able to attract such an enormous premium to valuation. Risk normally is priced with a discount.

JP Morgan (Underweight) has also questioned Lihir’s premium, which is presently 117% above the analysts’ NPV calculation. While details are scant at the moment, the analysts calculate that a 25koz production loss could result in a US$12m 2005 operating cash flow loss and a US$8m loss of profit. They remind investors that while Lihir has benefited to leverage to rising gold prices, just as influential is its leverage to production volumes.

Lihir disasterUBS has chosen to downgrade Lihir from Buy to Neutral. Lihir has been the analysts’ preferred gold play due its greater leverage to the gold price, and expected step-change in production. Despite the downgrade, the landslide and temporary production interruption has not changed their view. UBS remains positive on the stock and continues to be positive on the outlook for the gold price in 2006 and beyond. As proof, the analysts have lifted their target price from $1.70 to $1.85.

GSJB Were (Outperform) is largely unperturbed. While admitting the landslide is a negative, and that it highlights the risks associated with single-mine companies, the broker has not readdressed its rating and is waiting until further clarification is available.

In the mean time, GSJB Were has reiterated its long term Buy recommendation, based on the fact this is a temporary setback, it will not impact on 3Q production, and that an incident at Zinifex’s (ZFX) Century operation saw the market overreact on the downside before the stock re-rated and rose 50%. Lihir Gold last traded at $1.83.

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