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 Impact We have withdrawn our valuation due to short term cashflow uncertainty, the large out of the money hedge position and unreliable performance of the Kainantu mine.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.
As you were,
DARBOX
HIG Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held