hig hartleys opinion

Highlands Pacific Limited (HIG)
Disappointing Quarterly – Full Report
Sell 0.135
Event
HIG’s 1Q07 production of 5,378oz was 14% below the
previous quarter and well below capacity of 110koz a year.
Kainantu has been in production for over a year. Cash costs
remained very high with net operating cashflow worsening
from –US$6.3m to –US$8.7m on cash receipts of US$2.8m.
The hedge book stands at 247koz @ US$400/oz. At the
current spot price of US$685/oz, the hedges are US$70m
out of the money. Hedge commitments total 7koz in 2Q07,
12koz in 3Q07 and 17.5koz per quarter thereafter.
HIG modest net cash of US$2.3m with US$22.3m of debt.
The move from narrow mining to larger scale did not work.
HIG reported problems with dilution from waste rock and has
chosen to refocus efforts on narrow vein mining. It was
hoped bulk mining would access more ounces and lower unit
costs.
Impact
We have withdrawn our valuation due to short term cashflow
uncertainty, the large out of the money hedge position and
unreliable performance of the Kainantu mine. Production in
1Q07 was well below expectation and worse still was poorer
than the previous quarter. We anticipated improvement. HIG
does not have the breathing room for further setbacks.
Significant improvement is needed to lower cash costs and
provide gold in excess of hedges for sale at higher spot
prices. Based on the recent performance, it’s unclear if
substantial near term gold will be available for spot sales as
is needed.
Our forecast FY07 net loss worsens from US$7.6m to
US$26.4m due to downgraded production expectations and
expected higher unit costs. We withdraw our FY08 forecast
due to lack of clarity.
HIG is a Papua New Guinea (PNG) based miner focused on
its 95% owned Kainantu Gold Project, 400km NW of Port
Moresby. Annual production of 110koz of gold in concentrate
is planned over nine years. Upside is from conversion of
some of the 2.0Moz resource to reserves, exploration and
potential expansion. HIG has substantial option value from
minority interests in the Ramu nickel laterite and the Frieda
River copper gold projects in PNG. Exposure to deposit
development and exploration upside appeals. HIG is only
suitable for red blooded speculators given Kainantu´s
troubled birth, poor hedging and sovereign risk. Negative
operating cashflow is a concern.


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