http://www.theaustralian.news.com.au/story/0,20867,21588114-23634...

http://www.theaustralian.news.com.au/story/0,20867,21588114-23634,00.html



Highlands Pacific (HIG) 19.5c

WHILE Lihir Gold embarks on a $1.2 billion fundraising punt to pay out its unfavourable hedging positions, fellow PNG miner Highlands Pacific pays the cost of hedging gone wrong.

Strictly speaking, Highlands' maladies stem not so much from its 250,000-ounce hedge book, but production woes which meant its Kainantu mine in the Southern Highlands was unable to conjure enough gold to deliver into the hedges.

Highlands' calendar 2006 loss of $US63.8 million was a shocker by any means and the company copped a qualified audit report.

But the loss included a $US36.2 million accounting loss, on the assumption that Highlands would not deliver on a 147,000oz commitment.

Since then, the hedge book has been restructured so that the 160,000oz due for delivery this year is rolled back to 2009. All up, Highlands has to deliver 250,000oz by December 2010, at $US399oz compared with the current spot price of $US690oz.

ABN Amro expects Highlands to average 14,000 ounces per quarter in 2007. "A cash cost of $US428 would see Highlands report a loss with 39,539oz of gold committed at $US400oz for full year 2007," the firm says.

None of this sounds at all promising, but Kainantu remains a high-grade, 1.6 million ounce asset (one drill hole returned 1960 grams per tonne). ABN Amro believes Kainantu is capable of producing 150,000oz per year at a good margin.

Highlands' cash reserves - $US16.6 million at December 31 - were supplemented by a $US20 million January placement to Resource Capital, at 29.7c a pop.

So Highlands would seem to have enough in the kitty to develop the mine. But we don't scoff at the risks, which include earthquake risks and stroppy landholders.

With Kainantu alone, the risk-reward equation is finely balanced: some gold watchers reckon current management is not up to the task.

However, don't forget Highlands' stake in the $1 billion PNG Ramu Nickel Project, which is being run by the China Metallurgical Construction Corp (MCC).

Highlands will have a free-carried 8.56 per cent interest in the project, rising to a potential 20.6 per cent. ABN reckons the project is worth $100 million to Highlands' valuation.

Again, the project is subject to high sovereign risk, including PNG government allegations that the Chinese have treated local workers like slaves.

Highlands also holds a 16.2 per cent stake in the Frieda River copper-gold project and is free-carried by partner Xstrata until Xstrata completes a detailed feasibility study by January 2012.

It's hard to dream up a valuation for this one, but at least it's a case of "no gain, no pain" for Highlands.

Criterion last suggested a Highlands fling at 63c in October 2005, after which the stock hit a high of 75c before everything went pear-shaped. We'll maintain a SPECULATIVE BUY, but it's not one to recommend to mother.