Hill 50 proves its worth

At the time of the purchase the share price was under 40 cents. It has since doubled. The fact remains, though, that this potential has been a long while coming.

Hill 50 is now at it again, having recently purchased gold giant Newcrest Mining's New Celebration WA gold tenure for $10m. We think it can repeat its success but to explain why, we'll need to show how Hill 50 made Mt Magnet work.

Capital intensive

When the company took over Mt Magnet from WMC, it pretty much started from scratch. With 75% of the resource base requiring underground mining, against the far cheaper open-pit mining, production has been capital intensive.

However, for the financial year to June 2001, the mine reduced cash costs to $330 an ounce and is targeting $310 this year.

Total production has also increased 37% to over 200,000 ounces, producing a profit increase of 34% to $11.7m. Management hopes to emulate this performance at New Celebration.

Although Newcrest may get a royalty stream if certain criteria are met, Hill 50 thinks this deal is better than the one it struck with WMC.

Considering current costs are around $460 an ounce - probably why Newcrest tossed it - that's a big ask but MD Peter Cook (no, there are no Duds on the board) is confident of slashing this figure to $350 this year on production of 90,000 ounces.

Head start

To our minds, Cook and his team have already proved their worth. With much of the capital development already done, Hill 50 has a head start.

The finances are in great shape, too, with very little debt and good cashflow. That means the company can easily support the development of new discoveries. Due to its hedging strategy, there's more of the same to come.

The company has established revenue protection at around $520 an ounce on about 60% of its gold reserves. Hill 50 may have short changed itself during the recent gold price spike by missing prices around $570 but, for the first time, greater cashflow certainty has led to a dividend payment of 4.5 cents, with the promise of more to follow.

That's nice but it is also a reminder of the risks. To pay dividends you need good cashflow. If revenue were to fall after a collapse in the gold price or a cost blow-out - always a possibility with underground mining - cashflow would be severely curtailed.

Gold bugs may have noted our recent cautious approach, with 'Hold for the Upside' recommendations for straight gold plays, Delta and Lihir.

However, where we liked Lihir for its minimal hedging to fully exploit any gold price increase, we like Hill 50 for its stable cashflows and growth opportunities. That's the conservative in us. If you want to speculate, stick to Lihir but if you want income, growth potential and downside protection then go with Hill 50. LONG TERM BUY.