Years ago, when Lihir Gold was still independent and the second largest gold producer listed on the ASX, analysts from Credit Suisse returned from a site trip with nothing but admiration in their suitcase. They decided to dedicate a whole research note to explain exactly how challenging the gold mining operation on Papua New Guinea's Lihir Island turned out to be. They'd never seen anything like it. Apart from being on a tropical island, which has its challenges for transporting people and equipment, the Lihir mine is located inside a cooling volcano. Rocks mined and crushed can be up to 70 degrees Celsius at the source.
CS's adventure story made for interesting reading, but it also proved prescient for what shareholders in Lihir Gold were yet to discover: mining gold on Lihir Island is a big challenge, best not to be underestimated and there's no other mining operation elsewhere that compares to it. Needless to say, by the time Newcrest Mining (NCM) launched its $9.5 billion takeover bid for Lihir in 2010, most shareholders were all too happy to accept as the share price had effectively gone nowhere for years on the back of (predominantly) continuous disappointments from the company's key operation on Lihir Island.
The Lihir Gold experience at the time provided investors with one important message: seeking leverage to the price of gold via the share market is seldom a straightforward exercise (if it is, it usually doesn't last long). One has to also appreciate the specific risks that come with buying equity in a gold producer.