Highlands Pacific: Minerals

THE COMPANY: Highlands Pacific (HIG) is a diversified mineral resource company that is listed on both the Australian Stock Exchange and the Port Moresby Stock Exchange. It has projects that include the Ramu nickel and cobalt mine, the Frieda River gold and copper project and the Star Mountains exploration tenements.

Ramu is fully constructed, at a cost of $1.5bn, by the developer, Ramu NiCo. HIG has an 8.56% interest that will increase to 11.3% at no cost after repayment of the project debt (estimated to be in eight years time). From commissioning, HIG has access to its pro-rata 8.56% share of Ramu’s post-debt-servicing net cash flow. HIG has an option to increase its project equity to 20.55% at fair market value.

The lifespan of the Ramu mine is estimated to be more than 20 years, with a capacity to process 3.4m tonnes per annum, producing 31,150 tonnes of nickel and 3300 tonnes of cobalt per annum. HIG’s share of production is 2666 tonnes of nickel and 282 tonnes of cobalt per annum.

Full production at the Ramu mine will commence in mid-2013. Production has begun to ramp up, and will continue over the next 12-18 months. Ramu initially planned to begin production in December 2011, but was delayed due to a lengthy court dispute between Ramu NiCo and other landowners not party to the memorandum of agreement.

Landowners sought a court injunction to stop the construction of the deep-sea tailings placement system, even though all statutory and environmental approvals were received before construction commenced. The Supreme Court dismissed the landowners’ appeal in December 2011.

A pre-feasibility study released in November 2010 determined that the Frieda River gold and copper project contained a multi-decade mine life. It has the capacity to process up to 60m tonnes per annum in the first eight years, and will subsequently average 50m tonnes per annum for the remaining period.

Frieda’s annual output is expected to average 246,000 tonnes of copper and 379,000 ounces of gold in the first eight years. The mineral resources inventory at Frieda now stands at 2.09bn tonnes, with measured resources representing 37% of the total.

Frieda’s capital cost was estimated at $5.3bn in 2010, including a 16% contingency and $803m for a hydroelectric power scheme. HIG has an 18.18% interest in the Frieda River project. Assuming there are no further cost increases, HIG will be required to finance its share of around $963m during Frieda’s construction phase.

The Frieda River feasibility study was scheduled to be completed in January 2012. However, the timeframe was extended by 11 months to December 21, 2012, to provide sufficient time for the study to evaluate alternate gas power supply options.

Xstrata is evaluating a hydroelectric scheme to power the mine, and is exploring options to source gas-fired power under an arrangement similar to that between Oil Search and Porgera Joint Venture.

Oil Search supplies gas-fired power to the Porgera gold mine. A number of wet and dry gas deposits have been discovered south of the town of Tabubil, and have the potential to supply enough gas to power the Ok Tedi mine and the Frieda River project.

DEVELOPMENT STRATEGY: Frieda’s gold and copper resource inventory is likely to increase before production commences in 2017.

The ongoing drilling, in conjunction with the definitive feasibility study, is likely to add additional resources to the reserve category. HIG’s share of capital expenditure based on the estimated total project capital expenditure is $963m. There are various options open to HIG to fund its portion.

Ramu will commence production in 2013, and Frieda’s feasibility study will be released in December 2012. Drilling results from the Star Mountains continue to show significant grades of gold and copper, and it would seem HIG has a bright future.