initiation of coverage

From Euroz Resources September Quarter Report (Who saw/predicted the potential of MML and RRL when they were in sub 50c..):

HIG
Price Target: $0.60/sh

HIG is on the cusp on an exciting six months: drilling has started at its 100% owned Star Mountain project, the Frieda River PFS study is on track for delivery in Sept10 and we are hopeful the Ramu Tailings dispute will be resolved shortly. Its exposure to two world class assets are difficult to value in the traditional dcf method, but ultimately we believe HIG has potential to be multiples of its current price.

Highlands Pacific Ltd (HIG) offers equity exposure to two world class, Tier 1 assets located in PNG, namely an 18.18% in Frieda River and an 8.56% in the Ramu Nickel project. The Frieda River project (HIG free carried to BFS) has a global resource of 8.1mt of Cu and 13.4moz of Au. A scoping study showed a project capable of producing 160kt of Cu and 240koz pa for +25yrs at an operating cost of US$0.25/lb. Capex is estimated at US$4.4bn.

A prefeasibility study is due in the 3rd Q and is a considering a larger throughput and production scenario. We believe up to 60mtpa project maybe considered which would result in initial production of 260kt of Cu and 390koz of Au, ranking it as one of the largest undeveloped copper/gold projects in the world. We expect operating costs to be in the range of US$0.20-0.30/lb depending on price assumptions and gold credits.

There are currently 10 rigs at Frieda on in-fi ll, in pit geotchechnical drilling and infrastructure drilling, however deep drilling (last yr) intersected 968m @ 0.5% Cu and 0.4 g/t Au from 10m. Mineralisation extended for ~ 300m below the proposed open pit and clearly shows the scope to increase the global resource/extend mine life.

The Ramu Nickel Project (HIG free carried through to production) is on track for commissioning by the end of CY10/1st Q CY11. The project is forecast to produce some 31kt of Ni and 3.3kt of Co pa at an operating cost of US$4.1/lb for +20yrs.

Ramu is an excellent call option on the nickel price as HIG has no exposure to capex increase or project delays. It has a non recourse loan of US$81m, due to be repaid, out of cashfl ow, over a period of 8yrs. Surplus cashflow (during periods of high nickel price) will be available to HIG shareholders.

In Mar10 an interim injunction on the construction of the Deep Sea Tailings Displacement (DSPT) was made and subsequently upheld by the National Court in Mandang. The DSPT has been subject of extensive testing and is regarded as being the safest and most appropriate method for the Ramu project. The dispute is not delaying production as yet and we are confi dent/hopeful this will be resolved in the near term it should be remembered this is a fully permitted project.

Drilling has commenced at its 100% owned Star Mountain project, located 30km NE of Ok Tedi. HIG plan to drill at least 2,500m to follow up previous drilling completed in the early 1970s, including results of 90m @ 0.66% Cu and 0.35g/t Au from 24m and 89m @ 0.6% Cu and 0.4g/t Au from 16m.

HIG has current cash of A$24m and a further US$10.8m is possible if Xstrata exercises an option to acquire a 81.8% in the Nena deposit close to the main Horse-Ivall-Trukai resource. We expect Xstrata to exercise this option prior to the release of the BFS in Jan12.

Investment Case

A recent site visit confi rmed the quality, scale and upside in the projects. It is unique in the mid cap sector with exposure to two world class projects that potentially offer 3-4x the current price as development hurdles are overcome and Frieda River moves into production.

Our valuation ranges from $0.60-0.85/sh and with share price some 40% below year high makes current price an attractive entry point. A resolution on the Ramu Tailings dispute, results from Star Mountain drilling and the Frieda River PFS are all price catalysts over the next six months.