We introduced Highlands Pacific to our Portfolio after having closely followed the stock’s progress for several years. A number of important and positive developments have taken place over the past 12 months. Firstly, its share price has stabilized following several years of decline; its Ramu nickel-cobalt project is producing solidly and first cash flows have been received; uncertainty surrounding the Frieda copper-gold project has gone; and corporate interest has grown as metals trader Trafigura boosted its stake to 16%.
Highlands has operated successfully in PNG for more than 20 years now and is in our view the nation’s premier explorer, developer and producer. It has appraised some of the country’s most important copper, gold and nickel assets. As a result, it is a 20% joint venture partner in the massive Frieda River copper-gold project; it holds an 8.56% stake in the producing US$2 billion Ramu nickel-cobalt mine; and it maintains prospective exploration ground in the Star Mountains, 20km north of the Ok Tedi mine.
Highlands Pacific represents a classic ‘straw hats in winter’ play, with potential for significant corporate action over time. With the removal of uncertainty over the development future one of its key projects, Frieda River, and growing activity on its share register during 2015 – China’s GRAM is now a 14% stakeholder and trading group Trafigura has a 16% stake – the company is in a very sound position to benefit from eventual metals price recovery, with price support provided by potential corporate activity.
Recent Activity
Positive Results from Star Mountains Drilling
Highlands Pacific and its joint venture partner, Anglo American, announced this week having received assay results from two additional drill-holes at their Star Mountains tenements within the Western Province of Papua New Guinea.
Eight diamond drill-holes have been drilled during the course of the current campaign for a total of approximately 3400 metres. Assays from the first four holes were released during late September and four additional holes have since been completed, with one further hole planned for this year to test extensions of the mineralised zone.
Olgal Section view view
Kum Kom section
Encouragingly, the assays received to date have reconfirmed the presence of an extensive low-grade copper-gold porphyry zone at Olgal, as well as skarn mineralisation at Kum Kom.
At the Olgal prospect, hole 018OLG15 intersected 260 metres @ 0.31% copper and 0.19 g/t gold (including 10.9 metres @ 0.60% copper and 0.34 g/t gold from 314 metres down-hole.
At the Kum Kom prospect, hole 004KUM15 intersected 13 metres @ 1.3% copper and 0.53 g/t gold from 107 metres down- hole, as well as 26.5 metres @ 0.89% copper and 1.4 g/t gold from 282 metres down-hole and 30 metres @ 1.0% copper and 0.23 g/t gold from 515 metres down-hole.
Based on the information received through this campaign, and the results of a ZTEM survey to be flown over the entire prospect during the course of the coming weeks, the joint venture intends to commence field sampling and mapping to identify new targets for drilling during the second half of next year.
September Quarter Report
1. Ramu Nickel
The Ramu nickel project saw excellent progress, with throughput rates improving significantly. Production in recent weeks has exceeded nameplate capacity and full-year production is therefore expected to be between 24,000-25,000 tonnes of nickel metal in concentrate, rising to more than 31,000 tonnes during 2016.
Despite depressed nickel prices, the Ramu operation achieved net cash flow (unaudited) of US$8.94 million during the September quarter, after capital expenditure of US$0.74 million. Highlands was entitled to an 8.56% share of the cash flow – equivalent to US$0.77 million – of which US$0.6 million was applied to repayment of Highlands’ share of project debt.
2. Frieda River Copper
Highlands holds a 20% interest in the project, with the majority 80% stake held by Chinese company Guangdong Rising Assets Management (GRAM), following its acquisition of PanAust earlier this year.
The costs of the feasibility study and associated work are being funded by PanAust (GRAM), which is also responsible for 100% of the costs to maintain the Frieda River project site, assets and community relations programs up to the point of lodgement of the Mining Lease or Special Mining Lease application, which is expected during 2016.
The Feasibility Study for the Frieda River project continued to advance during the quarter. GRAM has left the PanAust team in place completing the feasibility study, which remains on schedule for completion by the end of the year. The project plan includes a rigorous independent review of the study prior to release in 2016.
The project team has continued to refine project schedules, capital cost estimates and financial analysis to identify optimal project design and production configurations. An updated Mineral Resource estimate is being prepared for the Horse-Ivaal-Trukai zone, which will provide the bulk of ore supply in the initial stages of the project.
The feasibility study concept is based on an open-pit feeding ore to a conventional flotation processing plant at an average processing rate of 30Mtpa, over a 20-year mine life, to produce average annual copper and gold in concentrate of 125,000t and 200,000oz, respectively.
3. Star Mountains
The 100%-owned Star Mountains exploration tenements encompass an area of 515 sq km situated 20km northeast of the Ok Tedi mine and 25km from the support town of Tabubil, in the West Sepik Province.
Assay results from two of the diamond drill-holes completed during the current exploration campaign have confirmed the presence of higher-grade copper and gold mineralisation. A total of six diamond drill-holes have so far been drilled in the current campaign, for a total of approximately 3,600 metres.
Intercepts from the two holes included:
- At the Olgal prospect: 434.9 metres @ 0.52% copper and 0.72 g/t gold (including 100 metres @ 0.82% copper and 1.4 g/t gold) from 76m down-hole.
- At the Kum Kom prospect: 30.6 metres @ 0.61% copper and 0.54 g/t gold (including 12.1 metres @ 0.94%copper and 0.72 g/t gold) from 292.9m down-hole.
The results confirm the presence of a copper-gold porphyry mineralised zone at Olgal and attractive skarn mineralisation at Kum Kom. Exploration is to continue over the next 12 months, fully-funded by Anglo American as part of their earn-in commitment for the project.
Corporate Machinations
GRAM Bid for PanAust
China’s Guangdong Rising Assets Management (GRAM) earlier this year made a successful cash takeover offer to purchase the 77.5% interest in PanAust that it didn’t already own. GRAM’s bid in my view reflects China’s strategy of taking advantage of a low commodity price environment and depressed resource equity sector to acquire quality, long-life copper assets.
GRAM’s bid comes after Chinese-dominated miner MMG paid $US5.85 billion for Glencore’s Las Bambas copper mine during 2014, and follows China Moly’s $US820 million acquisition of Rio Tinto’s Northparkes copper and gold mine in NSW during 2013. GRAM inherited PanAust’s two operating mines in Laos, which both have about seven years of mine life.
PanAust acquired Xstrata’s 80% stake in the Frieda River copper-gold project during Q3 2014 and maintained work on the project feasibility study, bringing a revitalized approach and revised development plan for Frieda after Xstrata exited the project following several years of indecision. GRAM’s takeover of PanAust left it with a 14% stake in Highlands and an 80% stake in Frieda River.
Trafigura Boosts Stake
Separately, commodities trading giant Trafigura during March 2015 boosted its stake in Highlands Pacific from 9.7% to 16.03% via the purchase of more than $4 million worth of shares, including a tranche previously held by PNG superannuation fund, Nasfund.
Trafigura first acquired a stake in Highlands during November 2014, when it bought an initial 9.7% stake from Sydney resources fund Baker Steel. Trafigura’s intentions are not yet clear, but its buy-in is significant given the corporate actions of GRAM.
Frieda River Project
The Frieda River district mineral endowment totals around 2.8 billion tonnes of resource, containing 12.9 Mt of copper and 20.4 Moz of gold, making it PNG’s largest and most important copper‐gold project. The studies to date have focused only on the three deposits – Horse, Ivaal and Trukai – which are estimated to contain 2.09 billion tonnes at a grade of 0.45% copper, 0.22g/t gold and 0.70g/t silver.
PanAust is responsible for all costs associated with the Frieda project joint venture right through to the Definitive Feasibility Study (DFS) stage, whilst also being responsible for 100% of the costs to maintain the Frieda project site, assets and community relations programs up to the point of lodgement of the Mining Lease or Special Mining Lease application.
As part of its due diligence work on Frieda, PanAust has completed a Scoping Study based on a smaller 24 Mtpa conventional open-pit and flotation operation, producing a copper‐gold concentrate for export to custom smelters. The beauty of this scenario is that it is significantly less costly and much more manageable in the current market environment than Xstrata’s previous design plan.
PanAust estimates total development cost in the range of US$1.5 – US$1.8 billion, which equates to a competitive capital intensity of less than US$13,000/t of annual copper equivalent production.
Receipt of Ramu Operating Surpluses
Highlands became entitled to receive cash flow from the Ramu joint venture for the first time during the June quarter, with an 8.56% project interest. Under the joint venture agreement, Highlands was entitled to nominate at a date of its choosing, when it wished to begin participating in the operating results, effectively shielding it from losses incurred during the commissioning stage.
Following its decision to participate, Highlands has begun receiving its pro-rata share of operating surpluses and will continue to contribute its share of on-going capital expenditure requirements. Of the funds to be distributed to Highlands, 80% initially will be applied to repay its 8.56% share of a capped Ramu capital cost of $1.010 billion (approximately US$86 million). The remaining 20% will be available to Highlands for other purposes.
Based on a nickel price of approximately $20,000/tonne, it is anticipated that Highlands will have repaid its share of the capped project capital by 2025, at which point its share in the project will increase to 11.3% at no cost. During that time Highlands expects to receive approximately US$50 million in cash flow, after debt repayments. Highlands also holds a further option to acquire an additional 9.25% interest in the project at fair market value, increasing its interest to 20.55%.
The Ramu nickel project produced a record 17,763 tonnes of concentrate during Q3 2015, equivalent to 91% of nameplate capacity. The strong production performance has confirmed the plant remains on track to achieve full capacity during 2016, following continued refinement of plant setting to achieve maximum throughput. Production has also exceeded 100% of nameplate capacity in recent weeks.
Star Mountain Farm-Out
A significant aspect of Highlands’ tie-up with PanAust was the company’s ability to retain 100% control over its Star Mountains exploration project, comprising EL 1312, located 20km north of the Ok Tedi mine. Star Mountains has been an important exploration project over recent years and retaining 100% ownership meant Highlands was able examine farm‐out/joint venture options with third parties, having already spent more than US$20 million on the lease so far.
The Star Mountains exploration tenements lie within the highly prospective New Guinean Orogenic Belt, which hosts the Grasberg, Ok Tedi, Porgera and Hidden Valley mines, as well as the Frieda River deposit. Highlands is targeting multiple copper porphyry exploration targets containing an aggregate of a minimum of 100 – 200 million tonnes of material grading 0.5% to 1% copper.
These exploration target tonnes and grade ranges are considered realistic because they are well within the typical size and grade ranges expected for porphyry copper deposits within this and other southwest Pacific island arcs.
Importantly, Highlands advised earlier this year that it had finalized a major joint venture agreement with Anglo American, encompassing exploration and development of the Star Mountains project. The joint venture agreement comprises:
- US$10 million payment – Anglo American will pay Highlands US$10 million in two tranches of US$5 million each. The first payment of US$5 million has been paid and the second US$5 million installment will be paid by February 2016.
- Phase 1 (51% interest) – Anglo can earn a 51% interest in the joint venture by spending US$25 million on exploration over four years, and declaring a 43-101/JORC-compliant Inferred Resource of 3 million tonnes of contained copper-equivalent within five years.
- Phase 2 (80% interest) – Anglo American can move to an 80% interest in the Joint Venture by completing and funding a Bankable Feasibility Study (BFS) within 15 years of the execution of the Farm‐in and Joint Venture Agreements.
- Development Free‐Carry – Anglo American will provide Highlands with up to US$150 million in project development funding as a deferred free‐carry following completion of the BFS.
Highlands will continue to manage the project; however Anglo American will have the right to take over management of the project once it has invested US$25 million in project expenditure.
Summary
We believe market interest in Highlands Pacific will grow for several reasons, not least of which is the spectre of potential corporate interest surrounding the company. GRAM has inherited an 80% stake in the Frieda project, along with a sizeable 14% stake in Highlands itself. Meanwhile, commodities trader Trafigura has boosted its Highlands stake to 16% during 2015. Driving this interest is Highland’s status as a diversified production story, with two advanced projects (Frieda and Ramu) and an early-stage, big-picture exploration play (Star Mountains) – all of which have been fully-funded through large-scale, farm-out deals with high-quality partners. Highlands Pacific will therefore remain held within our Portfolio.
