Highlands Pacific [ASX: HIG]

Transcription

1 Highlands Pacific [ASX: HIG] Investment Comment Initiation of Coverage: BUY Price Target: 44.0c Big Country / Big Projects / Big Partners. HIG ticks all the boxes. Having a share of two outstanding projects in Ramu Nickel [8.56%] and the Frieda Copper Gold project [18.18%], the company has thus far delivered in project development at Ramu and will now move towards the joint development decision of the Frieda Copper Gold project in early Both projects are long life, low cost and will position HIG as a successful mid cap resources company. We value HIG at $301.0m using US3.0c/lb of copper resource for Frieda Copper Gold [US$141.4m], cash US$15.9m, and using the asset valuation for HIG s share of Ramu Nickel capital costs [US$128.7m]. HIG s 100% owned exploration properties [Star Mountains] we have valued at a nominal $15m. When considering the current market capitalisation of the stock is $165m, we believe there is outstanding value in HIG at current prices. Company Background Highlands Pacific is a PNG incorporated and registered mining and exploration company listed on the ASX and Port Moresby Stock Exchange. Its major development assets include the US$1.5bn Ramu nickel/cobalt project, the Frieda River Copper Gold project and exploration on the highly prospective Star Mountains (Nong River and Tifalmin) licenses approximately 20km north of the Ok Tedi Mine. Ramu Nickel and Cobalt Project [HIG 8.56%] Chart 1: Ramu Joint Venture Structure Ramu Joint Venture Structure Ramu is located 75km from Madang and has 20 years of Reserves The Ramu Nickel and Cobalt [Ramu] project is located 75km west of the provincial capital of Madang and has Reserves for a 20 year mine life producing 31,150 tonnes of nickel and 3,300 tonnes of cobalt metal annually contained in a high grade intermediate product. The resource base has the potential to increase the life of the mine by a further 15 to 20 years. The project is managed by Metallurgical Corporation of China Limited [MCC] and includes joint venture partners Jinchuan Group Limited, Refer to disclaimer on last page Vincent Pisani: vpisani@shawtock.com.au

2 Jinlin Jien Nickel Industry Co. Limited and Jiuquan Iron and Steel (Group) Co. Limited. From commissioning, Highlands has access to its pro rata share of the project s postdebt servicing net cash flow. This 8.56% interest is increased to 11.3% at no cost after the repayment of the project debt (estimated to be 8 years). At this same time Highlands also has the right to increase its interest to 20.55% at fair market value. Chart 2: Ramu Mine & Processing Site Established processing site Ramu s capital cost is US$1.5bn and operations are now gearing towards full production capacity by the end of 2012 Ramu has cost US$1.5bn to complete and is now ready to operate. The project has two major aspects to it, a mining operation and a treatment plant connected by a 135km pipeline. The mining operation and the pipeline have had some initial ore commissioning, however, the treatment plant operation has been held up as a result of the injunction application. Following a Supreme Court s decision, there is no legal impediment to commissioning the project. HIG has commenced preparatory work for the full commissioning process to begin and anticipates the first of the three autoclaves will commence ore commissioning in the December quarter 2011, with the remaining two autoclaves to be brought on line thereafter. Importantly this should see first product being produced in 2011, with a target for the first sales and shipments of nickel and cobalt concentrates early in the June quarter HIG s stake in the project is carried on the balance sheet at A$50m; however, nearly US$100m has been spent by HIG on the project. Concentrate produced is transported 134km to a high pressure acid leach processing plant The Ramu project is premised on mining and beneficiating the nickel and cobalt ore at Kurumbukari, which is located in the foothills of the Bismark Ranges approximately 75km south west of the provincial capital of Madang. The upgraded ore will be pumped, as a slurry concentrate, through a 134km pipeline to a high pressure acid leach processing facility at Basamuk Bay on the Rai Coast. The resulting product will be exported for refining to produce saleable nickel and cobalt products. Joint Venture Interest HIG can increase its current 8.56% interest in Ramu to 11.30% at no cost after repayment of debt Highlands 8.56% interest in the project will increase to 11.30% at no cost after repayment of the debt raised to finance the project has been completed. From commissioning, Highlands is able to have access to its pro rata 8.56% share of Ramu s post debt servicing net cash flow. When the finance is repaid, HIG will also have the option to purchase an additional 9.25% in Ramu at fair market value which, if 2

3 exercised, would take Highland s interest to 20.55%. It should be noted that the development of the Ramu project will be non recourse to HIG with respect to the debt funding, while the equity funding is a free carry to HIG in respect to its 8.56% interest. Permitting The project is fully permitted, having received all the permits and approvals required from the different levels of government. Beneficiation Plant & Slurry Pipeline The beneficiation plant has capacity of 4.6Mtpa of dry ore The beneficiation plant will treat run of mine ore to produce a fully de agglomerated, correctly sized and consistent slurry density feed for overland pipeline transportation to the refinery. The plant will comprise a de agglomeration/screening plant and a chromite removal/slurry preparation plant. The plant has a capacity of 4.6Mt of dry ore at 44% moisture content to provide 3.2Mt per annum (dry) of feed to the refinery having metal contents of typically 1.09% nickel and 0.11% cobalt. The 600mm diameter slurry pipeline will run from the beneficiation plant at Kurumbukari to the refinery at Basamuk via pumping stations at Usino Junction and near Ato. This is a distance of approximately 134km, with a drop in elevation from about 706m to RL 25m above mean sea level. Development Permits There are a number of development permits required The Mining Development Contract (MDC) was signed and the Special Mining Lease (SML) issued in July 2000 and a subsequent revision in August The SML gives the Ramu Joint Venture the right to develop and operate the Ramu project for a period of forty (40) years. The MDC is a contract between the State of Papua New Guinea and the Ramu Joint Venturers. The MDC defines the right and obligations of the parties. The term of the MDC is the same as the SML (40 years). The key elements of the MDC are: The State guarantees to maintain fiscal stability in relation to the project for a period of ten years from the commencement of commercial production; The right to hold foreign currency offshore to meet operating cost, debt servicing, capital expenditure, and dividend obligations in foreign currency from the subsequent six months; The right to use expatriate workers where the skills are not available in PNG; The right to import capital goods, services and consumables and export finished product; The project is zero rated for value added tax. During construction, the project will not be required to pay VAT on imports and recover from the State resulting in a working capital saving; The first 10 years of operation will be on a tax free basis; A net smelter return royalty of 2% is payable; The Joint Venturers undertake to develop the project in accordance with the Approved Proposal for Development; The Joint Venture undertakes to comply with the laws of PNG. 3

4 Frieda River Copper and Gold Project [18.18%] HIG own 18.18% of the Frieda Copper project Current resources total 12Mt of copper and 18Moz of gold The PFS indicated a project operating at 60Mtpa for the first 8 years and producing 246,000 tonnes of copper and 379,000oz of gold Total resources have recently been upgraded to just over 2.0bn tonnes and this is a precursor to a full BFS by January 2012 Cash operating costs per pound of copper are estimated at US43c, using a gold price credit of US$1,000/oz. At current gold prices, the operation would have a negative cash operating cost per pound of copper HIG s ownership 18.18% in the greater Frieda area and 100% in the Nena deposit which is subject to an Option Agreement with Xstrata Frieda River Limited [Xstrata]. The Frieda district contains one of the world s largest undeveloped copper gold resources with a current estimated 12Mt of copper and 18Moz of gold. Xstrata, a subsidiary of Xstrata plc [LSE: XTA], has an 81.82% interest in the greater Frieda area, however, to maintain this interest, Xstrata must complete a Bankable Feasibility Study [BFS] by January 2012 and in doing so fund HIG s share of project expenditure until completion. Xstrata completed a Scoping Study in January 2008, an Extended Scoping Study in December 2008 and a Pre feasibility Study in November This will allow permitting to commence in 2012, construction in 2013 and production in The Pre feasibility Study indicated a project with 60Mtpa throughput for the first eight years with output averaging 246,000tpa of copper and 379,000oz pa of gold. The multi decade life mine will have an average throughput of 50Mtpa. Xstrata has recently finished its entire field drilling at the Frieda project, including resource in fill drilling and geotechnical drilling, and the drill rigs that were on site for much of the past two years have now left the project area. The final resource upgrade for Frieda to 2,090 billion tonnes of mineralized ore is a pre cursor to the delivery of the Frieda BFS in January From an operating cash cost perspective the PFS estimated C 1 cash costs at US43c/lb of copper in the first eight years using a price for copper of US$2.50/lb and gold of US$1,000/oz [currently US$3.40/lb and US$1,650/oz]. The PFS implies that with a gold price of around current levels, C 1 cash costs would be close to zero; in other words the estimated 200,000 to 250,000tpa copper production would be essentially free. HIG s share of the copper production would be 36,000 to 45,000tpa. This is a C 1 margin of US$270m US$340m per annum to HIG. Chart 3: Frieda River mines sites locations Locational map of the main Frieda deposits PFS Modelling PFS assumptions The PFS released in November 2010 indicated a 60Mpta throughput for the first eight years with output averaging 246,000tpa of copper and 379,000oz of gold. The multidecade life of mine will have an average throughput of 50Mtpa. At the PFS commodity 4

5 price assumptions (US$2.50/lb Cu / US$1,000oz Au), HIG will have annual cash flows of US$170m for the first 8 years and US$111m for the LOM. Using slightly higher commodity price (US$3.50/lb Cu / US$1.350/oz Au), HIG s share of annual cash flow for the first 8 years equals US$273m and US$183m for the LOM. Table 1: Frieda River PFS Analysis Main determinants of the PFS Without gold credits, annual operating costs for the first 8 years are US$1.12/lb copper and of the LOM US$1.25/lb copper. Resource The Bankable Feasibility Study is focused on just three of the main ore deposits, namely Horse, Ivaal and Trukai These have a Measured resource of 780Mt, almost 13 years of production The Nena deposit is subject to an option by Xstrata to acquire 81.82% and thus have it on the same terms at the main Frieda JV. This way, Nena can be incorporated into the full BFS study The current resource equates to 9.4Mt of contained copper and 14.8Moz of contained gold from just the Horse, Ivaal and Trukai deposits, which are the subject of the BFS being completed by Xstrata. The Measured Resource category the highest confidence resource category under the JORC code of 780 Mt is effectively 13 years of operations. Xstrata has spent almost US$250 million and free carried HIG through an extensive drilling program. The great thing about Frieda is that 780Mt at a copper grade of 0.51% and gold grade of 0.28g/t are in this highest confidence resource category, which means a financier can plan with confidence for at least 10 years of mine. Other deposits within a 15 km radius, add to a further 300Mt of indicated and inferred resource at the Nena and Koki deposits consistent with a copper porphyry cluster. This means the district resources stand at close to 12Mt of contained copper and 18Moz of contained gold. Deposits like Nena have not been drilled since 2006 and the last resource statement showed 51Mt at 2.43% copper and 0.57g/t gold. As part of its joint venture agreement on the Frieda project, Xstrata also has an option to acquire an 81.82% interest in the adjacent Nena deposit (HIG 100%) by paying HIG US$10.8M. Nena is a classic porphyry epithermal high grade system. At 2.43% copper, it provides optionality value for the project and could make a material difference to production in future years. Just 5 Mtpa from Nena could be an extra 100,000 tpa of copper. Xstrata can at any time before 23 January 2012 elect to exercise its option and incorporate Nena into the Highlands/Xstrata Frieda Joint Venture. 5

6 Table 2: Frieda River Resources Total resources for the Frieda River area Star Mountains Prospects The Star Mountains project currently is 100% owned by HIG, with Xstrata have a 72% clawback. A JORC compliant resource on the Olgal prospect is expected in 2012 Ownership: HIG s EL %; EL % subject to a claw back by Xstrata of 72%). The Star Mountains licenses are located approximately 20km north of the Ok Tedi Mine. These prospects lie within the highly prospective New Guinean Orogenic Belt, home to deposits like Grasberg, Ok Tedi, Frieda, Porgera and Hidden Valley. A US$3M exploration program was undertaken during 2010 on EL1312 with some encouraging diamond drilling results. A JORC compliant resource on the Olgal prospect is expected in Xstrata has the right to claw back into one of the three exploration licenses in the Star Mountains area; for a 72% interest it must reimburse three times HIG s exploration spend. HIG is expecting to spend US$13M on the licence by the end of 2011, so if Xstrata choose to come back into the joint venture, HIG will be entitled to a payment of US$40M. Location of the main Star Mountain prospects together with the added discoveries within the Olgal prospect Chart 4: Exploration targets in the Star Mountains 6

7 Rating Classification Buy Hold Sell Not Rated Can be added to the portfolio immediately Fair value at current price Divest as fundamentally overpriced, or risk profile outweighs potential reward Shaw has issued a factual note on the company but does not have a recommendation Risk Rating High Medium Low Higher risk than the overall market investors should be aware this stock may be speculative Risk broadly in line with the overall market Lower risk than the overall market. Disclaimer Shaw Stockbroking Limited ABN ( Shaw ) is a participant of ASX Limited and holder of Australian Financial Services Licence number ANALYST CERTIFICATION The Research Analyst who prepared this report hereby certifies that the views expressed in this document accurately reflect the analyst's personal views about the Company and its financial products. The Research Analyst has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendations or views in this report. As at the date of this report the Research Analyst does not have an interest in the financial products of the Company. DISCLAIMER This report is published by Shaw to its clients by way of general, as opposed to personal, advice. This means it has been prepared for multiple distribution without consideration of your investment objectives, financial situation and needs ( personal circumstances ). Accordingly, the advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not the advice is appropriate for your personal circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of your Shaw client adviser. This report is provided to you on the condition that it not be copied, either in whole or in part, distributed to or disclosed to any other person. If you are not the intended recipient, you should destroy the report and advise Shaw that you have done so. This report is published by Shaw in good faith based on the facts known to it at the time of its preparation and does not purport to contain all relevant information with respect to the financial products to which it relates. Although the report is based on information obtained from sources believed to be reliable, Shaw does not make any representation or warranty that it is accurate, complete or up to date and Shaw accepts no obligation to correct or update the information or opinions in it. If you rely on this report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Shaw disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence. DISCLOSURE Shaw will charge commission in relation to client transactions in financial products and Shaw client advisers will receive a share of that commission. Shaw, its authorised representatives, its associates and their respective officers and employees may have earned previously, or may in the future earn fees and commission from dealing in the Company's financial products. Shaw s Copper Gold Conference 2011 is sponsored by Highlands Pacific. SYDNEY OFFICE: Level 15, 60 Castlereagh Street, Sydney NSW 2000 Tel (02) MELBOURNE OFFICE: Level 20, 90 Collins Street, Melbourne VIC 3000 Tel (03) PARRAMATTA OFFICE: 55 Phillip Street, Parramatta NSW 2150 Tel (02) Visit our website for a comprehensive range of investment and client services. 7