SecProbe.io

CORRESP
1
filename1.htm

corresp

Mr H Roger Schwall

Assistant Director

Division of Corporate Finance

US Securities and Exchange Commission

100 F Street, NW, Stop 7010

WASHINGTON, DC, 20549

3 November 2005

Dear Mr Schwall

Lihir Gold Limited

Form 20-F for the Fiscal Year Ended December 31, 2004

File No. 0-26860

Set forth below are the responses of Lihir Gold Limited (“Lihir” or the “Company”) to numbered
comments 1 through 30 in the letter from the Staff of the Division of Corporate Finance of the
Securities and Exchange Commission dated September 23, 2005 regarding the above-referenced
materials.

The Staff’s comments are indicated in bold, and are immediately followed by the Company’s responses
thereto. All references to page numbers in our responses reflect pagination in the relevant marked
up changes of the Form 20-F enclosed with this letter.

Overview, page 17

    1.

    We note your disclosure that indicates production will drop after the mining period to
approximately 300,000 ounces per year. Please clarify to us how you arrived at this estimate.
We note that the estimated contained ounces in your stockpiles are 3.3 million ounces and the
stockpile processing period is estimated to exceed 20 years.

Response:

We propose to expand our disclosure under the section Mining General (page 17 and 18) to
include the following as paragraph 3:

Economic grade material will be stockpiled during the life of the mining operation reaching
maximum levels of about 118 million tonnes in 2019, and consists of mostly lower grade economic
stockpile material at an average grade of 2.4g/t. After applying recoveries of approximately
85%-87% based on current operating practices, production averages approximately 300,000 ozs per
annum during the post-mining processing period commencing in 2021. The ultimate amount of
material stockpiled and processed may vary depending on

Mr H Roger Schwall

3 November 2005

future cut-off grades policies adopted, error estimation inherent with proven and probable
reserves categories and overall contained final sulphur of long term stockpiles.

Further to the above, we propose to revise the section Mining Production Scheduling (page 18,
paragraph 2) as follows:

At the end of the mining period, the various stockpiles are expected to contain approximately
118 million tonnes of material averaging around 2.4 g Au/t.

Reserve Estimates, page 28

    2.

    Please expand your reserve disclosure to provide additional information concerning your
stockpiles. Specifically, provide a breakdown of tons, average grade and contained ounces by
low, medium and high grade categories.

Response:

We propose to expand the table under the section Reserves Estimates (page 28) to include the
following breakdown of our stockpiles:

    Reserve

    Average

    Contained

    Category

    Tonnes

    grade

    Ounces

    (In millions)

    (g Au/t)

    (millions)

    Economic Stockpiled Ore

    High Grade

    0.4

    4.31

    <0.1

    Medium Grade

    2.8

    3.47

    0.3

    Low Grade

    35.5

    2.57

    2.9

    Total Stockpiled Proven

    38.7

    2.66

    3.3

Item 15. Controls and Procedures

    3.

    We note that the language in Item 15, controls and procedures, does not appear in accordance
with Item 307 of Regulation S-K or SEC Release No. 33-8238. For example,

(2)

Mr H Roger Schwall

3 November 2005

your evaluation of disclosure controls should specifically indicate that your evaluation
occurred as of the end of the period. Please revise your disclosure accordingly, if true.

Response:

Item 15 states that the Company, under the supervision of the Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure
controls and procedures for its fiscal year 2004. Item 15 further states, as required by Item
307 of Regulation S-K and SEC Release No. 33-8238, that, based on this review, “the Company’s
management, including the CEO and CFO, concluded that Lihir’s disclosure controls and
procedures were effective as of December 31, 2004” (emphasis added). The Company does not
believe that Item 307 of Regulation S-K and SEC Release No. 33-8238 require management’s
evaluation of disclosure controls and procedures to occur on a specific date. Management’s
conclusion as to the effectiveness of disclosure controls and procedures must be as of the end
of the fiscal year, but the timing of the evaluation itself is flexible. In the regard, the
Company notes that footnote 97 to SEC Release No. 33-8238 states that, “[t]he final rule
amendments do not require that the evaluation take place on the last day of the period, but
that the statement of effectiveness of the issuer’s disclosure controls and internal control
over financial reporting be as of the end of the period”. As the Company has complied with
this guidance in its 2004 20-F, the Company does not believe that any amendment should be
required.

Financial Statements

Statement of Cash Flows, page F-5

    4.

    We note that your presentation of operating cash flows aggregates operating cash flows, such
as those described in paragraph 14 of IAS 7, into general captions of “Receipts from operating
activities” and “Payments arising from operating activities”. Based on your business
operations it may be helpful to expand your line item classes under your caption of operating
cash flows into more meaningful classifications for instance cash payments for services, cash
payments related to production (deferred mining costs), and cash payments to employees to
enhance investor understanding.

Response:

We propose to expand our disclosure in the Statement of Cash Flows (page F-5) as follows:

(3)

Mr H Roger Schwall

3 November 2005

LIHIR GOLD LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 2002

    Note

    2004

    2003

    2002

    US$’000

    US$’000

    US$’000

    CASH FLOWS FROM OPERATING ACTIVITIES

    Cash receipts from customers

    248,391

    205,851

    199,201

    Cash payments for consumables and supplies

    (102,456
    )

    (81,208
    )

    (74,232
    )

    Cash payments for services

    (39,159
    )

    (44,152
    )

    (33,878
    )

    Cash payments in relation to employees

    (27,022
    )

    (21,528
    )

    (17,277
    )

    Cash payments for mining activities

    (14,262
    )

    (9,696
    )

    (10,119
    )

    Cash payments for processing activities

    (10,188
    )

    (8,307
    )

    (7,128
    )

    Cash payments for power generation

    (1,397
    )

    (1,061
    )

    (1,175
    )

    Cash payments for other operating activities

    (25,741
    )

    (21,228
    )

    (30,179
    )

    Interest received

    3,512

    983

    1,015

    Interest and finance charges paid to third parties

    (1,327
    )

    (2,949
    )

    (3,411
    )

    Net cash flows from operating activities

    8

    30,351

    16,705

    22,817

Note 1: Statement of Significant Accounting Policies, page F-6

Mine Properties, page F-6

    5.

    We note that you are using proven and probable reserves as your base for amortisation of
capitalised mine costs. Please clarify to us and in your disclosure whether the base is
represented by total proven and probable reserves or developed proven and probable reserves.

Response:

We propose to expand our disclosure on Mine Properties (page F-6 and F-7) as follows:

Depreciation and amortisation of mine costs is determined using total proven and probable
reserves. Total proven and probable reserves are used as the existing plant, infrastructure
and other mining properties will be used in the development of all of the Company’s proven and
probable reserves. No future costs have been included in the depreciable base.

(4)

Mr H Roger Schwall

3 November 2005

    6.

    We note that you use the units of production method to amortize a portion of your capital
assets. Expand your disclosure to clarify when a unit is considered to be “produced” to
trigger recording depreciation, depletion and amortisation expense. Note that for U.S. GAAP
purposes, an item is considered to be “produced” for purposes of calculating your
depreciation, depletion and amortisation at the time it is physically removed from the mine.
These costs should then be classified as inventory and subject to inventory valuation in
accordance with ARB 43 for US GAAP. Note that this was addressed in a discussion of
stockpiled inventory at the Appendix to November 25, 2002 International Practices Task Force
meeting. Highlights for this meeting can be located at:
http://www.aicpa.org/download/belt/2002 11 25.pdf. If you require additional clarification,
please contact us at your convenience.

Response:

We propose to expand our disclosure on Mine Properties (page F-6 and F-7) as follows:

Amortisation of costs is provided for using the units-of-production method. The
units-of-production basis results in an amortisation charge proportional to the depletion of
estimated recoverable gold ounces contained in proved and probable ore reserves. Under this
process, production of a unit commences when the ore is extracted from the ground. The
amortisation charge is allocated to inventory throughout the production processes from the
point at which ore is extracted from the pit until the ore is processed into gold dorè.

We supplementally advise this is consistent with ARB 43.

Deferred Mining Costs, page F-7

    7.

    Please expand your disclosures within your significant accounting policies to address the
following regarding your deferred mining costs.

    •

    Disclose how you evaluate deferred stripping costs for impairment.

Response:

We propose to expand our disclosure on Deferred Mining Costs (page F-7) as follows:

(5)

Mr H Roger Schwall

3 November 2005

Impairment testing of deferred mining costs is considered together with the assessment of the
recoverable amount of the Company’s cash generating unit (CGU) as it is not appropriate to
determine the recoverable amount of deferred mining costs in isolation of the Company’s other
mining assets. As indicated in Note 1 (x), consistent with prior years, the Company’s CGU
comprises mine properties and deferred mining costs. The recoverable amount of the CGU is
determined at each balance date where there is an indication that the assets may be impaired.

    •

    Disclose the waste ratios used for each income statement period as well as the actual
ratios incurred for each period presented. In addition, please quantify the deferred
assets attributable to each pit.

Response:

We propose to expand our disclosure in Note 11: Deferred Mining Costs (page F-18) as follows:

The following table reflects the ratios associated with the calculation of deferred mining
costs for the reporting periods

Deferred Mining Costs

    Ratio

    Actual

    Opening

    Ending

    Used

    Ratio

    balance

    Deferred

    Expensed

    balance

    US$ 000

    US$ 000

    US$ 000

    US$ 000

    Minifie

    Phase 3

    2002

    1.29

    0.20

    862

    81

    926

    17

    Phase 3

    2003

    0.51

    25.00

    17

    148

    165

    0

    Phase 4

    2002

    2.74

    3.25

    16,439

    5,296

    1,398

    20,337

    Phase 4

    2003

    3.47

    0.88

    20,337

    0

    17,534

    2,803

    Pit

    2004

    2.59

    0.41

    2,803

    7,903

    10,706

    0

    Lienetz

    Phase 5

    2002

    5.88

    88.33

    0

    1,551

    0

    1,551

    Phase 5

    2003

    5.37

    189.38

    1,551

    24,714

    0

    26,265

    Pit

    2004

    4.84

    11.86

    26,265

    68,750

    28,082

    66,933

The stripping ratio throughout the mine-life of a pit will normally differ from the pit’s
average stripping ratio on a year-to-year basis as, once the initial pre-production development
is

(6)

Mr H Roger Schwall

3 November 2005

completed and ore is exposed, the waste required to be removed before ore is exposed decreases
progressively with ore-body depth. As a result, the actual stripping ratio during the
pre-production and early productive life of a pit is high, resulting in stripping ratios being
greater than the average. As mining nears completion for a pit, the result is usually a much
lower stripping ratio than the average. Accordingly the difference between the actual and
average stripping ratio for any year normally reflects the position in the mines life cycle.
An exception to this is noted in the above table which shows a high actual ratio for mining in
Minifie Phase 3 in 2003 that resulted from a highwall failure that required extra waste
material to be moved.

    •

    Explicitly state that the accounting for stripping costs smoothes the cost of
waste-rock removal over the life of the mine.

Response:

We propose to expand our disclosure on Deferred Mining Costs (page F-7) as follows:

Stripping costs have the effect of smoothing the cost of waste-rock removal over the life of
the mine, to better align the cost of stripping with the associated future benefit expected
from the ore that is accessed.

    •

    Disclose the year that the deferred costs and credits are expected to be fully
amortised.

Response:

We propose to expand our disclosure on Deferred Mining Costs (page F-7) as follows:

This will result in deferred mining costs being fully amortised by the end of the mining and
process phase of the operation.

    •

    Disclose the amount of deferred stripping costs or credits amortised for each period
presented.

Response:

We supplementally advise that the deferred stripping costs that is amortised to income is
disclosed for each period presented in Note 6 (page F-15) as well as in the response above.

    •

    Disclose that there is mixed accounting practice among industry participants in this
area and that some mining companies expense waste removal costs as incurred, which results
in greater volatility reflected in the results of operations from period to period.

Response:

(7)

Mr H Roger Schwall

3 November 2005

We propose to expand our disclosure on Deferred Mining Costs (page F-7) as follows:

As there is currently no authoritative pronouncement under IFRS relating to the accounting for
deferred stripping costs, the accounting practices among industry participants in this area is
mixed. For example, some mining companies expense waste removal costs as incurred, which
results in greater volatility in the results of operations from period to period. In our view,
the practice adopted by the Company best reflects the risk and reward measures of the mine.

    •

    If you have included deferred stripping costs in your determination of investing cash
flows, for U.S. GAAP purposes we believe you should revise your consolidated statements of
cash flows to report the cash activity associated with deferred stripping as a component
of operating cash flows. Please refer to Appendix A of the November 2002 International
Practices Task Force Meeting Highlights.

Response:

We supplementally advise that the Company has not treated the cash activity associated with
deferred stripping as an investing cash flow but as a component of operating cash flows. Please
refer to Note 8 (page F-16),

    •

    Add discussion in your operating and financial review and prospects to identify changes
in this ratio from period to period, explain why the changes occurred and the impact to
your financial results.

Response:

We supplementally advise that the Company’s method of deferring mining costs is subject to
changes emanating from a change in the Ore Reserves. For the existing pits, it is likely that
an increase in ore reserves would result in a decrease in strip ratio as some of the material
contained in the pit would be stockpiled as economic grade ore rather than being dumped as
waste. Similarly the reverse is likel