Minews Story Date: February 15, 2006 Highlands Pacific...

Minews Story Date: February 15, 2006

Highlands Pacific Anticipates Additional Gold Resources At Depth At Kainantu

By Our Man In Oz

Down on the docks of the historic town of Lae, on the north coast of Papua New Guinea, is a sight to make the shareholders of Highlands Pacific weep with joy. In a number of containers waiting shipment to Japan is the first gold concentrate from the company’s Kainantu mine. In a few weeks, assuming the ship comes in, the story gets even better because after almost 10 years of trying Highlands gets its first cheque. “I’m not calling it a high water mark,” said Highlands chief executive, Ian Holzberger, from his Port Moresby office. “We’ve got a lot higher to go yet.” The plan is to finalise commissioning of the process plant in the next four-to-six weeks, and then settle down to at least five years of producing around 115,000oz of gold (in concentrate) at a cash cost of around US$142/oz. The fact that production at Kainantu has started at a time of high gold prices explains much about the doubling in the share price of the Australian-listed Highlands up over the past six months from around A41 cents to A80 cents.

In theory, the market performance should be better because Kainantu is a rich mine, and fresh discoveries are being made at depth and around the orebody. In fact, the company is carrying the burden of a bank-induced hedging programme which sees the first 275,000 ounces being delivered at the relatively unattractive average price, by today’s standards, of US$404.06/oz. “That was part of the debt package we signed up for,” Holzberger said. “We just have to manage it carefully, and the way to do that is to recognise that every ounce we produce above the book is at spot. So long as we’ve got the reserves we can manage our book by rolling some of the stuff out.”

If the hedging programme was the price of raising the required US$57 million to build Kainantu it might one day be seen as a reasonable fee. Like so many gold projects in the islands of the Pacific once started they seem to just get better, and while the 275,000oz hedged represent 55 per cent of scheduled production and 23 per cent of the current gold resource the key word is current. Beneath the workings at Kainantu there have been early sniffs of something bigger. In the December quarterly, filed on January 31, Highlands said it had hit a new gold lode. This latest discovery, named Chinook, is 250metres below the bottom of the mine ore reserves, and could represent a major future expansion opportunity which will lift the current resource of 1.8 million ounces into something much more substantial. Holzberger was cautious when asked about Chinook. “At the moment we’ve got an embarrassment of targets to follow up,” he said. It’s a matter of prioritising things. We’re very much focused on getting this mine up and running,” he told Minesite. “We’ve got to make it run, and then look at extending the life. Exploration will ramp up over the next three to six months as the mine settles down.”

This sounds like good management, but it still has to be asked whether Kainantu will have a life longer than the official plan of 4.5-to-five years. Holzberger’s cryptic answer is that: “Kainantu will be operating long after I’m retired.” Because he’s kindly come out of a board meeting to speak with Minesite the obvious (cheeky) question about whether that inferred his early retirement is not asked. Apart from anything else, Holzberger is a big, strong, chap, and Port Moresby isn’t that far away. Details of the Chinook lode will have to wait assay results. All that Highlands has said so far is that the lode intersected is 2-metres wide, “well mineralised and gold-bearing”. The formal report added that the discovery represented significant potential “for additional gold resources and reserves in the mine and confirms the potential of this untested area”. More testing of the new discovery area is scheduled for the next few weeks.

Despite Holzberger’s reluctance to discuss what might lie at depth Minesite persevered with its questions, including the somewhat obvious remark that epithermal gold deposits do often get better at depth. “No, it’s not epithermal,” Holzberger said. “You’ll get me really cranky if you call it epithermal. This is meso-thermal. It’s almost a unique style.” For one of the few times in many years (decades, actually) Minesite’s man in Oz is stumped for words. Why on earth would Holzberger be cranky over precision in such esoteric terminology? The answer, to round out everyone’s education, is that meso-thermal means a deeper mineralised system. “The fundamentals are roughly the same, but what it really means is that you have more vertical potential than you have in an epithermal. So ultimately, the system has more potential.”

Having dispensed with today’s geology 101 lecture it’s back to Highlands and its ability to deliver on promises made 10 years ago when it was a company being followed for a range of projects. In its early days, the Ramu laterite nickel project was seen as the company-maker. Then came the Frieda copper/gold project, and finally Kainantu. As events conspired, Ramu was too complex for Highlands and is now 90 per cent Chinese controlled. Frieda is still 88 per cent Highlands, but the big Canadian miner, Inco, has the right to earn up to 85 per cent under a deal struck by Falconbridge before it was acquired by Inco.

The farm-out deals on Ramu and Frieda mean that the immediate future of Highlands is very much being driven by Kainantu, completion of plant commissioning, successful delivery of the first concentrate, and additional depth exploration. With so much early-stage production covered by hedging, the real interest for investors is in the future drilling on the freshly-discovered Chinook lode. If this lives up to its potential Highlands could carve out a much more profitable, and un-hedged, future.