Morgans 2016 Report

Hopefully attached is the front page of Morgans June 2016 report. For full report just google Morgans Highlands Pacific, top of the page.Valuation they admit very much discounted of 39cps, much good has happened since then.

Looking for leverage – Ni, Co, Cu, Au?

• We reinitiate coverage of HIG with an Add rating and A$0.20 target price. HIG is a mining and exploration company with copper, gold and nickel operations in Papua New Guinea.
  
  
• The US$2.1bn Ramu Nickel JV (HIG 8.56%) operated at 91% of nameplate producing 7,071t of nickel and 694t of cobalt in concentrate in the March 2016 quarter. Ramu reported a net cash outflow of US$2.1m for the quarter, funded by Shanghai-listed JV partner Metallurgical Corporation of China (MCC), but has been shut since a fatality in April 2016.
  
  
• HIG has a 20% interest in the Frieda River copper gold project, with Guangdong Rising Assets Management (GRAM) holding 80% after taking over ASX-listed PanAust Limited (PNA). A full feasibility study was delivered to HIG in May 2016, with a condition of the recent tenement renewal that an application for a Special Mining Lease (SML) is to be made by 30 June 2016.
  
  
• Exploration drilling continues in the Star Mountains, 20km northeast of Ok Tedi. Anglo American is earning an 80% interest funding exploration and evaluation of copper gold porphyry targets, through to completing a definitive feasibility study. HIG and partner Sojitz are also evaluating the Sewa Bay laterite nickel project in PNG.
  

Ramu – nickel and cobalt leverage

HIG has an 8.56% interest in Ramu Nickel, with the operator MCC holding 85% and the PNG Government 6.44%. Ramu reported negative cashflow of US$2.1m for the March 2016 quarter, after capital expenditure of US$1.6m. Under the terms of the JV agreement, MCC covers cash shortfalls, with HIG’s proportion to be repaid from future cash flows. We estimate a cashflow breakeven cost of approximately US$4.00/lb Ni for Ramu, with Ramu – and HIG – highly leveraged to nickel and cobalt prices.

Frieda River – copper and gold

PNA acquired an 80% interest in HIG’s Frieda River copper-gold project. GRAM acquired PNA through an off-market takeover in June 2015. GRAM delivered a feasibility study into a US$3.6bn project processing 40Mtpy of ore to produce 175ktpy of copper and 250koz of gold in concentrate at an AISC of US$1.23/lb copper in May 2016. Under the terms of the tenement renewal there is an obligation to apply for an SML on or before 30 June 2016.

Valuation - target and risk

We have revised our HIG valuation, incorporating HIG’s 8.56% interest in Ramu at NPV rather than historical cost (down from A$286m to A$160m) and increased the value of HIG’s 20% interest in Frieda River from A$120m to A$180m using US5 cents per pound of contained copper and US$5/oz of gold in the Horse/Ivaal/Trukai resource only – approximately 70% of the Frieda River resource – discounted by 25% as a non- operating interest, and discounted by a further 50% with application for the SML and the development funding route yet to be determined. Our valuation is A$0.39 per HIG share, and our target price is 50% of that at A$0.20 per share.