Highlands Pacific: Resource Upside Driving Premium Rating

Highlands Pacific (HIG.AX) the Papua New Guinea (PNG)-based miner officially opened the Ramu nickel/cobalt project and exported its maiden shipment of mixed nickel cobalt hydroxide product in November 2012. Full commissioning should be by mid-2013 producing c 31,500 tonnes of nickel pa and c 3,300 tonnes of cobalt pa from a laterite open-pit mine. With a bankable feasibility study (BFS) recently completed on the giant Frieda River copper/gold project (of which HIG 18.2% and Xstrata 81.8%) and significant drill intercepts reported at its copper/gold porphyry exploration project at Star Mountain, the near term appears favourable for HIG.

Ramu – c 31,500Tpa nickel
HIG currently holds an 8.56% interest in the Ramu project, increasing to 11.3% after repayment of the project debt expected by FY18, but entirely dependent on the nickel price received at market. Current spot nickel prices are US$17,425/tonne quoted on the London Metals Exchange (LME) compared to Edison’s long-term nickel price of US$23,250/tonne. Once the debt is repaid, HIG has an option to acquire an additional 9.25%, which would increase its interest in the project to 20.55%.

Frieda River – gigantic copper/gold project
The Frieda River copper/gold project in PNG is one of Asia’s largest copper/gold resources with 13Mt Cu and 20Moz Au. HIG’s 18.2% interest equates to 2.3Mt Cu and 3.6Moz Au. The BFS for the project was completed in December 2012, estimating a 20-year open pit producing c 204,000Tpa Cu and 305,000oz pa Au at a capital cost of US$5.6bn. First production is envisaged for 2017. We expect the project to be advanced once discussions are held between the JV participants and the government to determine equity ownership (the PNG government can elect to be a 30% equity participant), permitting and development timeline.

Valuation: Resource upside drives premium rating
Including only the Frieda River project copper resources, HIG’s current market cap of A$110m implies a value of US$0.019/lb (US$44/tonne) on an EV/Resource basis, which appears very undervalued versus Edison’s copper EV/Resource for explorers of US$0.067/lb (US$147/tonne). If the PNG government becomes a 30% equity partner, HIG’s interest will reduce to 12.7% and the implied value of its resource would be US$0.0285/lb (US$63/tonne).

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