Highlands Pacific – a well-structured streaming deal

About the author:

Chris Brown
Author name:
By Chris Brown
Job title:
Senior Analyst
Date posted:
28 May 2018, 1:06 PM
Sectors Covered:
Emerging resource sector

Highlands Pacific (HIG) and Cobalt 27 (TSXV: KBLT) have structured a streaming deal with HIG moving from an 8.56% interest in the Ramu nickel-cobalt project to 11.3% (a 32% increase in HIG's equity in Ramu) for US$113m.

Cobalt 27 and "the deal"

Cobalt 27 is listed on the Toronto Ventures Exchange. It owns over 2,980Mt of physical cobalt and manages a portfolio of ten royalties. Its focus is cobalt. It will pay HIG US$113m to acquire the right to an estimated LOM average 204tpy of cobalt (55% of HIG's attributable production) and 1,020tpy of nickel (27.5%) from the +20-year Ramu nickel cobalt mine PNG. 

Cobalt 27 will also acquire a 13% equity interest in HIG and seek anti-dilution clauses.

Are battery makers watching?

HIG can take its interest in Ramu to 20.55% by paying market value, and have access to this attributable production, which is a mixed nickel-cobalt hydroxide product in a form and Ni-Co ratio that is very attractive to battery makers. Major resource operations in PNG operate to high standards of environmental and social governance, with billions of dollars invested in the PNG LNG operations, and the world-class Lihir and Wafi-Golpu operations, amongst others.

Ramu

Ramu is a long life, low cost source of nickel and cobalt.

Through 2017, Ramu operated above nameplate capacity. We have modelled a return to LOM averages for future production. Allowing for the offtake to the streaming deal, and using a long term cobalt price of US$60,000/t (currently above US$90,000/t), and a long term nickel price of US$17,632/t (currently US$14,665/t), we generate a value of A$0.221/HIG share on the expanded issue capital after the issue to Cobalt 27. 

At current spot prices the Ramu valuation is A$0.26 per share.

Broader implications

The deal should focus market interest on the inherent value of Ramu, and HIG's exposure to nickel and cobalt. With the move to eliminate the debt repayments and move to 11.3% of Ramu, the cashflow becomes available to HIG, placing it in a stronger position to negotiate its dispute with GRAM over Frieda River, and to advance its other PNG projects.

We increase our share price target and retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and upgraded share price target for Highlands Pacific (HIG). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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