Business reporting often ignores the vast bulk of human beings and focuses solely on company profits. Take this lead story in today’s Murdoch Australian:
Papua New Guinea specialist Highlands Pacific has long been known as an asset-rich, share-price-poor type of stock. There is a feeling out there that this year could well see that change for the better, due to a couple of milestones that are to be clocked up.
The first is the commissioning of the $US1.5 billion ($1.47bn) Ramu nickel-cobalt project in PNG, 8.56 per cent-owned by Highlands and with the ability for it to go to an eventual 20.55 per cent stake.
China’s MCC is the major partner and operator of the project, which has cost more than originally planned and is two years behind schedule.
None of that really matters to Highlands as it has been carried in the development.
Assume a long-term nickel price of $US9 a pound (now $US8 a pound) and Highlands could receive $US3 million-$US5m a year up until about 2018, when project debt is assumed to be paid off. After that, Highlands’ stake increases to 11.3 per cent and its share of free cashflow could be $US15m-$US20m a year, with the option to go to a 20.55 per cent equity interest should it desire.
All that is not bad in itself for a company that yesterday was being valued by the market at $106m (15.5c a share).
Given Ramu’s development cost, it seems fair enough to suggest Highland’s market cap is covered by the Ramu interest alone.
But just like a late-night TV ad throwing in steak knives as part of the deal, there is more to Highlands, most notably its 18.8 per cent stake in the Xstrata-led Frieda River copper-gold project in PNG.
It is one of the world’s biggest undeveloped copper-gold deposits (12.9 million tonnes of copper and 20 million ounces of gold). Xstrata delayed a feasibility study into its development to December this year.
That raised concerns in some quarters that Xstrata had gone cold on the project. But the reality is that Xstrata delayed it to study power options for Frieda River in greater depth. The emerging availability of gas in that part of the world means that the original plan for an $US810m hydro-power project could be replaced with the cheaper option of gas-fired power.
Like Ramu before it, the delay at Frieda River is neither here nor there, given that when it is developed it is going to be around for decades.
Throw in Highlands’ exploration hunt near the almost exhausted Ok Tedi copper-gold mine in the Star Mountains in PNG, and it is easy to see why valuations of Highlands runs well ahead of its current share price. Euroz settled on a 40c share price target in a recent research note on the company after first having arrived at a 51c valuation.
Understand any of that? Of course you didn’t, you’re a real person who actually wonders what social and environmental impact such explorations may have on the poor people of PNG.
Here’s the Oxford Business Group highlighting calls for the PNG government to make sure these vast revenues don’t all leave the country:
A series of significant mineral finds in Papua New Guinea (PNG) have highlighted the role exports are set to play in the nation’s economic future. However, there have been calls from industry players and opposition officials asking the government to do more to ensure revenues stay in the country.
In mid-April, state-owned Petromin announced that it had found a 364-metre intersection of porphyry copper, molybdenum and gold mineralisation at its Ipi River prospect, located 50 km north of its Tolukuma gold mine in Central Province.
In the same month, Australia-based Indochine Mining announced that gold and silver finds at Mount Kare had underlined the “outstanding potential” of the project to become one of PNG’s next major mining operations. Officials also revealed that KULA Gold’s Woodlark Island project, which has estimated reserves of 700,000 ounces, was on track to start producing in 2014.