This is an old article from 2003 but gives you a very good understanding of what Highlands (HIG) has in the ground. Nothing has changed in terms of what they've got, except that Kainantu production is not far away and the nickel resource is much closer to production since the article was written.
If you want to look at a similar PNG elephant, look at OSH when it traded at 60 cents with its gas assets. OSH now trading at $4.09 thanks to confirmed contracts for its gas. HIG could easily replicate OSH.
Kainantu readies to break cash-flow drought
Tim Treadgold
Friday, December 12, 2003 FOR $125 million you could own minerals in the ground worth $39 billion. It sounds like a crazy equation, but it's real. The $125 million is the current market capitalisation of Highlands Pacific Ltd. The $39 billion is the value of the company's share of the current resource base identified in its projects and joint ventures.
The breakdown of the resource inventory is 11.3 million ounces of gold, 2.2 billion pounds of nickel, 216 million pounds of cobalt and 11.3 billion pounds of copper. In terms of a mineral portfolio this is world class – and it begs one simple question: if it is so good, why are Highlands Pacific shares, at 38c in early November, so cheap on the stock market?
There are two answers to that question. As the name suggests, Highlands Pacific has most of its assets in Papua New Guinea, a difficult country in which to do business. It is also a company with a logjam of projects and no visible means of cash-flow support. But after five years in the wilderness, the logjam is about to break, and when it does the Highlands Pacific share price has just one way to go - up.
First log to roll away is the Kainantu gold project which is scheduled to get its green light later this year with the aim being to start producing gold at a rate of 115,000oz a year from early 2005 at a low all-up cost of US$142 an ounce. When that happens, the appearance of Highlands Pacific will change dramatically. No longer will it be a company with enormous potential in undeveloped resources, but a business with cashflow and a pipeline of maturing assets waiting their turn to be developed.
Highlands Pacific chief executive Ian Holzberger said final details, including land owner agreements and financing commitments were close to completion. "Once we get started I'm very confident that we will have a project with a life much longer than the four-and-a-half years we're currently planning for."
After Kainantu come the other two jewels in the Highlands Pacific crown. The Ramu nickel/cobalt project and the Frieda River copper/gold project. Both are major developments and it is expected that Highlands Pacific will negotiate down to a smaller percentage stake than the existing 68.5% held in Ramu and 87.9% in Frieda River.
Investors have started to sniff the changing winds at Highlands Pacific. Since early August, the stock has risen from 22c to 38c, a very respectable 72% gain, and one of the best among emerging explorer/producers. Looked at over a long time period and the up-tick since August stands out. Highlands Pacific is now close to its highest price for five years, though well short of the $1 reached back in 1997.
Holzberger agrees, with a suggestion that the outlook for Highlands Pacific is about to change as it moves from its status of being asset rich and cash poor. "Kainantu is going to be a very attractive project," he said. "What you see in the fundamental numbers is good, but the upside potential is even better. In some ways we have only just started to scratch the surface."
The numbers so far are certainly encouraging, with the resource in the Irumafimpa prospect at Kainantu put at 1.7Mt grading a rich 22gpt for a minimum of 1.24Moz using a 5g cut-off. Three other structures Judd, Maniape and Arakompa, remain to be fully explored.
"Development will not be difficult," Holzberger said. "It's not nearly as complex as some other potential PNG projects. We're only two hours by road from Lae. There's a sealed road virtually to the front door. The plant site is on flat land, with a haul road up to the minesite which is accessed from the bottom."
Mining will be achieved using a technique known as full shrink stoping which is considered suitable for the nature of the orebody and high labour component. The capital requirement to launch Kainantu is estimated at US$40 million through a mix of debt and equity with the full cost scheduled to be repaid in 17-19 months." HOLZBERGER said the Ramu laterite nickel/cobalt project, which had once been the flagship of Highlands Pacific, remained an extremely attractive development proposition.
"It is a world-class resource," he said. "It will be able to produce low-cost nickel and cobalt, but we do need to restructure the balance sheet of the joint venture. Technically, the project is very sound, and has been for years."
He said engineering problems with Australia's laterite projects had damaged the outside impression of Ramu but that was changing. "We find that banks are very prepared to sit down and listen to what we're proposing. It's a bit like the first model of a new car. A couple of people have found that the wheels can fall off, now we know how to keep them on."
Located in Madang province, Ramu has ore reserves to last at least 40 years at a production rate of 33,000t of nickel and 3200t of cobalt, with expansion potential. The operating cost, assuming US$10 a pound credit for cobalt, is US41c/lb of nickel. The big issue, however, is the estimated capital cost of US$838 million, a cost which is roughly 10-times the total value of Highlands Pacific as measured on the stock exchange.
The Frieda River project ranks as one of the biggest undeveloped copper/gold deposits in the world with three deposits (Nena, Horse Ivaal and Koki) containing a total of 5.8Mt of copper and 11.4Moz gold. In January last year, Highlands Pacific struck a deal with Noranda which gives the big Canadian miner the option to take up to a 72% stake in the property.
"We are running both the Kainantu and Ramu properties and working up Frieda River, but if you said to me what is your highest priority then very clearly it is Kainantu. It is, right now, our total priority because it represents cash flow and profits, but there is an opportunity with Ramu and that is in the way we restructure the joint venture. The upshot is that we'll end up with a smaller equity in the project."
How much equity would Holzberger like? "If we end up with 15-20% of it then that would be a huge fillip for this company," he said. Who could he see taking the lead role? "It'll probably be one of the mainstream nickel players, one of the big six or seven. Someone with nickel expertise, or the requisite chemistry-set expertise."
No deadline has been set on finding a JV partner but there a search is underway. "These things don't move quickly. Six months would be a very fair timetable to restructure Ramu."
With its impressive asset base it is a surprise to an outside observer that the Highlands Pacific share price, at a time of rising commodity prices, is not flying. "We have the potential to be a beautiful mid-cap mining company," he said. A statement which begs another question about doing business in PNG: how big a factor is it in Highlands Pacific share price?
"It's an added complication, that's all," he said with a turn of phrase which would have made a diplomat proud. "The complication is more one of time than in any other issue, but there is a cost attached to time. The government itself is being most encouraging."
To best understand Holzberger's comment on time it is significant that Kainantu, when it is launched, will be the first major new mine development in PNG since 1995 when the Lihir goldmine was opened. Ten years is a long time between drinks (and new mines), which explains why the government is keen to see Kainantu go ahead, and why Highlands Pacific is poised to write a new chapter in its history, and of PNG as well. - RESOURCESTOCKS
HIG Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
