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HIG highlands pacific limited

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I am a comfortable shareholder but I cannot understand if the...

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brightpower

875 Posts.

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14/08/17

20:04

Post #: 26490522
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Originally posted by finnigan86 ↑

I'm new to Highlands though have had it on my watchlist for several years. I bought in recently for the following reasons:

Macro
- EV and storage space gathering momentum by the day yet still in it's infancy. The disruptive nature of this has already seen the price of cobalt double. Copper and nickel should see sustained benefits also in the short to medium term.
- Very few reasonably priced juniors on the ASX that actually have producing cobalt exposure now with most yet to go through lengthy exploration / development stages.
- Most cobalt comes out of the Congo. Supply could see further disruption and price upside shortly with the president (whose final term expired last year) still showing no signs of holding elections and relinquishing power.
- China which is currently the main game for EV uptake, is moving away from previously favoured LFP chemistry to NMC and NCA chemistries which offer better energy density and therefore range. This should see further tailwinds for cobalt and nickel demand.
- Next generation solid state batteries suitable for EV (e.g lithium-air and lithium Sulfur) still have limitations and are several years away from commercialisation.
- Loss making Nickel laterite mines that aren't saved by the bi-product cobalt rally are being put on care and maintenance (e.g Ravensthorpe and potentially Vale in New Caledonia). This should provide a floor for the nickel price.
- The majors including Glencore, BHP and Rio have all had recent announcements positioning themselves for the impending EV and storage commodity boom for cobalt, copper, nickel and lithium.

Frieda River
- One of the biggest undeveloped copper resources globally
- Copper price starting to move with solid gains so far this year
- Based on the quarterly, if Hig is looking at other potential near term producing mine acquisitions, any funding would have to come from a sell down of Frieda. There must be some element of optimism within the company that a deal can be done with Gram or another presumably Chinese company. The quarterly says the result of the sale process started in December 2016 will conclude this quarter so there should be some news shortly on this.
- Given the complex and costly nature of the proposed development, Hig's and BDA's concerns with the feasibility study particularly regarding the lack of information on the embankment construction for tailings and waste disposal (estimated at approx. 40% of project capex) seem well founded and that smaller less risky / costly development options could improve project economics and are worth further consideration.
- Based on the above, and given Gram's failed attempt at the board spill, this should put Hig in a strong position going into arbitration (if it makes it that far).
- Morgans have an aud $180m price tag on Hig's stake in Frieda and although conservative, is still more than 3 times the current market cap of Hig. Any partial or full sell down would see significant gains on the current share price.

Ramu
- Operating above nameplate and generating strong free cash flow with cobalt credits despite the low nickel price.
- Hig have approx US $125M owing on their portion following repayment of 2015/16 working capital losses that the JV partner covered for Hig. Working capital losses should be repaid by the end of this calendar year. Based on consensus long term pricing for the mixed hydroxide product produced by Ramu, the company is predicting approx 8 years to pay down it's share of the development debt which will come from Ramu free cash flow.
- Based on the quarterly, Hig should receive it's maiden distribution this year (presumably 20% of free cash flow applicable to it's stake with the remaining 80% going to commencement of debt repayments). The quarterly suggests the company is trying to extend the debt repayment structure with it's JV partner, which could create further free cash flow. Alternatively, I'm not sure if the company would look to repay some of this debt following any Frieda sale given it's stake automatically increases to 13% at no additional cost following completion of debt repayments?
- The option to increase to a 20% stake that is then available to Hig would be attractive to other players.

Star Mountains and Sewa Bay offer exploration upside though I've paid little attention to this.

I can understand long term holders have suffered for years, however with critical near term newsflow due this quarter, I feel patience will be rewarded in this stock in the short to medium term. Any thoughts on the above are appreciated. Cheers

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I am a comfortable shareholder but I cannot understand if the assets,albeit undeveloped are so valuable ,why does a multi national resource company with strong borrowing capacity not make a bid.Not my preferred outcome but a South 32 or an international resource house as a JV ?

HIG Price at posting: 6.2¢ Sentiment: Hold Disclosure: Held
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