Highlands Pacific Limited (ASX: HIG) is a mining company with emerging copper-gold and nickel cobalt projects in Papua New Guinea with major global partners Xstrata Copper and China Metallurgical Construction Corporation (MCC). Highlands’ assets include an 8.56% investment in the US$1.5 billion dollar Ramu Nickel mine which is in the process of commissioning, a 18.18% interest in the Frieda Copper Gold Project, and an exploration programme in  the Star Mountains 20 kilometres north-east of  the Ok Tedi Mine in PNG.

In this Open Briefing®, MD John Gooding discusses:
-  Star Mountains drilling results
-  Ramu commissioning progress
-  Frieda Project outlook 

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Highlands Pacific Limited (ASX: HIG) has completed a 14 hole diamond core drilling campaign at Olgal, one of a number of prospects in the Star Mountains copper-gold exploration licences situated 20 kilometres north-east of the Ok Tedi Mine.  Results included an intercept of 596 metres at 0.61% copper and 0.85 g/t gold from 24 metres below surface.  To what extent do these results confirm previous electromagnetic (EM) survey data, and what do they indicate about the outlook for the rest of the prospects?

MD John Gooding
The success at Olgal and copper indications at other prospects reinforce our belief that we’re in a new copper-gold porphyry district. Now it’s a matter of finding the prospect most amenable to development and potentially to feed the Ok Tedi Mine, which will require supplemental mill feed in coming years.

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What has this round of drilling taught you about the grade tenor and local geological structure?  What grades are required at Star Mountains to confirm its potential for development?

MD John Gooding
As you would expect the grades for copper-gold porphyries can vary and Olgal is just one prospect.  The last drilling at Olgal encountered 596 metres at 0.61% copper and 0.85 g/t gold from just 24 metres from surface which is very encouraging.  They are good grades and near surface (refer announcements made on 2nd October and 12th September for full details of this drilling result).

I don’t think we should look at grade in isolation; it needs to be in the overall context of width, depth and potential tonnages.  Sure, we’d love to find another large scale Ok Tedi or Frieda in the Star Mountains, but maybe there is just as much advantage delineating a number of moderate scale operations that can be simply developed within a much shorter time frame.  Such moderate scale finds in a copper porphyry district could bring earlier results for shareholders and for Ok Tedi and that’s our focus at the moment. However, if we jag a giant, that would be great too.

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Drilling is continuing at Star Mountains on other prospects, and assays from drilling at Rattatat and Pad48 are still pending.  Can you outline the drilling plan for the remainder of the campaign?  What is the drilling campaign designed to achieve? 

MD John Gooding
Our aim is to test as many prospects as we can in the next 12 months and see if we can chase the copper-gold zones from the Olgal prospect to their source.  The more prospects we test, the better we’ll be able to potentially identify this source and scope the regional potential for multiple prospects to provide resources that in aggregate could provide meaningful volume to Ok Tedi.

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The drilling completed and planned so far in Star Mountains is focused on the bottom south-east corner of Exploration Licence (EL) 1312 which covers large areas along the New Guinea Orogenic Belt.  What is your strategy for the broader ELs?

MD John Gooding
At the moment we have an $8 million to $10 million budget for 2012 on EL 1312, which is covered by a JV arrangement with Xstrata.  Under this arrangement, if Xstrata wishes to participate in the future (post our completion of a pre-feasibility study) it would need to repay us three times our exploration spend, currently US$20 million, and then fund and complete a feasibility study. 

We hold 100% of the other Star Mountains tenements; EL 1392, EL 1781 and ELA 2001, with about a dozen prospects identified.  We may consider sole funding or JV opportunities for these next year once we’ve completed the current 2012 round of drilling. 

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The Ramu Nickel Project (HIG 8.56%) is being commissioned, with 25 weeks continuous operation completed and full production rates of 31,500 tonnes nickel and 3,300 tonnes cobalt per annum expected by mid 2013.  Does Highlands have an active role at Ramu?  When will you begin to see a positive cash flow contribution from your interest in Ramu?

MD John Gooding
We’re not the operator of Ramu, but we play a role and it’s a valuable asset that could be monetised in the future.  We have ability to increase our stake towards 20% once the non-recourse project debt is repaid by about 2018. 

For us, our stake is a valuable holding in a world class US$1.5 billion project, one of only a handful of new nickel projects built this decade, and a project that will sit midway on the nickel cash cost curve.  The project is still in commissioning, which is expected to continue into 2013.  I wouldn’t expect it to provide material cash flow for us until the end of 2013, but as an asset on our books it has realisable value for the future.

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Last year Highlands Pacific and Xstrata Copper announced an extension to 21 December 2012, for the scheduled delivery of the feasibility study (FS) for the Frieda River project (HIG 18.18%, Xstrata Copper 81.82%) and some months ago Xstrata indicated the project was the subject of a global project review process.  Is there any indication from Xstrata as to when its intentions in relation to Frieda will be clarified?

MD John Gooding
We expect Xstrata to deliver the study in December this year to secure its 81.8% interest in the project, but as to the nature of its discussions with third parties or the potential divestment or reduction of its share in Frieda, that is a matter for Xstrata.  A lot has changed in the past six months, not least of which have been the delays in the proposed Xstrata and Glencore merger and the trend worldwide by major mining houses to review their project pipelines and budget allocations.  No doubt in January 2013, after the FS is delivered, we will sit down with all stakeholders including the PNG government, to review the FS and review issues such as the energy options, development options, partner options, and potential for government participation in relation to Frieda.   

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Highlands Pacific completed a $15 million placement to PNG Sustainable Development Program (PNGSDP) in July and had cash of $20 million as at 31 August.  Will this be sufficient to sustain all exploration and operating expenditure until you begin receiving income from Ramu?

MD John Gooding
Yes, our current budget includes spending of $8 million to $10 million per annum on Star Mountains exploration, but with more success we may increase this.  I don’t think shareholders would mind us raising some more cash if that led to faster results from Star Mountains.  The important thing to keep in mind about Ramu is that while we may not get much by way of free cash flow until the end of 2013, we won’t have any cash outflow, given we’re quarantined and the project debt within Ramu is non-recourse to Highlands. 

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Highlands Pacific has minority holdings in two projects with major partners and its own emerging Star Mountains exploration programme.  What are the major risks Highlands faces in the short to medium term?  What are the opportunities?

MD John Gooding
We take a portfolio approach and look to quarantine risks. For example, with Ramu we have a valuable share in a US$1.5 billion asset that has no recourse financial risk to us.  For Frieda we’re effectively carried by Xstrata to the point of application for a mining licence which would be repaid from production. So in reality we have no cash outflow for Ramu or Frieda, and a modest but effective spend on Star Mountains. 

Our opportunities are around maximising the value of all three assets and working a lot more closely with the PNG Government and our major shareholder PNGSDP which has a similar vision for the resource potential of the country. 

We believe we’re in an enviable position in terms of projects coming into production, development and exploration, and while we can’t control world commodity prices and market sentiment, we’re confident we have our risks pretty well covered in PNG.

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Thank you John.

For more information about Highlands Pacific, visit www.highlandspacific.com or call John Gooding or Craig Lennon on (+61 7) 3239 7800

DISCLAIMER: Orient Capital Pty Ltd has taken all reasonable care in publishing the information contained in this Open Briefing®; furthermore, the entirety of this Open Briefing® has been approved for release to the market by the participating company.  It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information.  We strongly advise that you seek independent professional advice before making any investment decisions. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use.

STAR MOUNTAINS: The following statements apply to the Star Mountains exploration results and exploration targets; (i) Mineralised intersections are quoted as down hole widths. The porphyry mineralisation occurs as disseminations and vein stockworks. Drill intersections described in this report are based on core lengths and may not reflect the true width of mineralisation. (ii) Collar locations are in UTM Zone 54 co-ordinates using the AMG66 horizontal datum. (iii) Drill core is PQ, HQ or NQ size. (iv) Assays were carried out on half sawn core.  The half core is crushed and pulverized to ~ 180 mesh.  200 gram samples are used for assay. QAQC control samples make up approximately 10% of each batch sent for analysis.  The unused half core is stored on site. (v) Samples were analysed at ALS-Chemex in Townsville.  Gold is by 50g fire assay and copper by ICP-AES on an aqua regia digest.  Samples assaying greater than 0.5% Cu are re-assayed using an ore grade method suitable for higher grade samples. (vi) Hole positions are based on surveys of the drill pad.  Actual collars are within 10m of stated locations.
Star Mountain Competent Persons Statement: The exploration results and exploration targets reported here are based on information compiled by Mr L.D. Queen who is a member of the Australasian Institute of Mining and Metallurgy, and who is employed by Highlands Pacific Limited.  Mr Queen has sufficient experience relevant to the style of mineralisation and the type of deposit under consideration, and to the activity which he is undertaking, to qualify as a Competent Person as defined in the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, The JORC Code 2004 Edition”.  He consents to the inclusion in the report of the matters based on the information compiled by him in the form and context in which it appears.

RAMU RESOURCE COMPETENT PERSON STATEMENT
Resource: The Ramu resource is estimated at 143 million tonnes at 1.01% nickel (Ni) and 0.10% cobalt (Co).  The resource report is shown in the Table below:

Mineral Resources (excluding +2mm internal rocky material)

Notes: (i) No upper cut off used. Maximum grade (lithology composite) is 3.44% Ni and 0.91% Co (ii) Lower cut off of 0.5% Ni used to define the down-hole limit of the overburden. (iii) The lower boundary of the rocky saprolite is determined by either the first 1.5 metre boulder intersected or a 3 metre intersection of greater than 50% of the volume of the intercept being rock. (iv) 1,139 HQ and NG diamond drill holes totaling 22,363 metres, with an average depth of 19.6 metres per hole. (v) Most drilling on a nominal 100 metre by 100 metre grid, with select areas closed down to 25 metres by 25 metres to establish geostatistical variability. (vi) 22,145 drill samples were assayed for Ni, Co and Mg.  Selected samples and composites were analysed for Mn, Al, Si, Fe and Cr. (vii) Bulk density measurement from 1,550 drill core samples and 12 insitu tests. (viii) Face sampling and mapping from two trial mining pits (ix) 60 line kilometers of ground penetrating radar (GPR) survey to map the depth profile of the laterite development between drill holes. (x) In addition to the 143 Mt of Mineral Resources, the Ramu laterite contains oversize material grading below the lower cut off of 0.5% Ni.   This material is easy to remove by simple screening.

Competent Person: The information in this report that relates to Mineral Resources is based on information compiled by Lawrence Queen, who is a Member of The Australasian Institute of Mining and Metallurgy.  Mr Queen is a full-time employee of Highlands Pacific and has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’.  Mr Queen consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.

Ore Reserves: An Ore reserve was designated from part of the mineral resource, reported above, during the Feasibility Study and has subsequently been reviewed and confirmed by SRK Consulting.

Ore Reserves

The ore reserve calculation includes low-grade rocks and rock fragments, which are present at the base of the ore body.  These rocks and rock fragments, which are considered as internal waste, along with chromite will be removed at the mine site in the beneficiation plant.  The resulting autoclave feed grade will be 1.01% nickel and 0.11% cobalt.

Competent Person: The information in this report that relates to Ore Reserves is based on information compiled by Dr Brian White, who is a Fellow of The Australasian Institute of Mining and Metallurgy.  Dr. White is employed by Brian White Mining Services and has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves.’  Dr. White consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.