Ore dilution nightmare haunts Highlands Pacific

HIGHLANDS Pacific shareholders will meet at 4pm on September 27 at the Crowne Plaza ballroom in Port Moresby to approve the issue of 10 million options to their managing director John Gooding. By Brian Gomez

In the audience are likely to be disenchanted Highlands shareholders, many of whom would have participated in a company share purchase plan just over a year ago pegged at A67c (US56c) a share.

The SPP, which closed on April 21 last year, coincided with an institutional placement that had been announced a month after underground mining started at the Kainantu mine in PNG's Eastern Highlands.

At this time the share price hit a near record 80 cents on the Australian Stock Exchange. Investors had high hopes the long-heralded Kainantu gold mine was about to become a "jewel in the crown" for Highlands.

The March SPP was indeed a turning point, with share prices heading downwards ever since, having settled at a plateau of around 16c.

None of this corporate misfortune can be blamed on Mr Gooding, who took over the helm of Highlands Pacific on May 21 after chairman Robert Bryan described him as the man to turn the situation around as a mining engineer with "very wide underground mining experience".

The problem lay with "excessive dilution" at the mine. A review of the mine's geological model resulted in a reserves upgrade from 940,000 ounces to 1.2 million ounces at the crucial Irumafimpa orebody, while average grade was revised down by 21% from 21 grams per tonne to a still substantial 16.7gpt.

Mining operations have come nowhere near the latter figure with ore grades averaging 9.6gpt in the June quarter, while somewhat confusingly treated ore at the mill only averaged 7.5gpt.

June quarter production and performance remained dismal, although mining and milling costs were close to budget levels.

Chairman Robert Bryan told the company's annual general meeting in Port Moresby on May 30 that the 2006 year had been one of "the agony and the ecstasy".

He could well repeat a similar refrain at next year's AGM, although there have been high hopes the four top executives recruited by Gooding could engineer a turnaround. They were at the mine site by the end of July.

However, there seems almost no hope of achieving the prediction of former Highlands managing director Ian Holzberger, in the 2006 annual report, that production should be ramped up to 110,000oz annually by the end of 2007. Gold production in the first half of this year was only 11,373oz.

When Holzberger resigned after 16 years of building up one of the biggest resources portfolios held by any junior company worldwide, he left with a grand total of 350,000 options and 78,500 Highlands shares. A talented exploration geologist, Holzberger left in the wake of operational difficulties at Kainantu.

The 10 million options being granted to Mr Gooding, presently in the money, have an exercise price of 15.5 cents and will expire on May 25, 2010. In its wisdom, the Highlands board has set share price hurdles of 25c for the first 1.5 million options, 35c on the 2nd tranche of 3.5 million options, and 50c on the third lot of 5 million options.

The options, which come into force over three years, will amount to 1.5% of Highlands issued capital if they are all exercised.

The previous hurdle rates for executive share options set in July this year was 42 cents.

Chairman Bryan told the recent AGM that "clearly a Kainantu resurgence holds a key to Highlands’ future", but this may not be the case for the hurdle rates set for Gooding.

Less than two months ago, on July 23, Gooding announced Highlands was looking to sell its free-carried stake in the big Ramu nickel mine, which is expected onstream in the second half of 2009.

A decent price for this asset - some in the market suggest it could be as high as A$150 million - could push Highlands over the 50c hurdle even though it may not stay there if bad news from Kainantu continues to flow.

Although shareholders will be asked to grant 10 million options to Gooding, it is likely two other newly hired executives - mine general manager David Whittle and mine manager Gary Valey - have critical roles if mined ore grades are to show significant improvement.

There are grounds for scepticism about the revised reserve grade of 16.7gpt, but one has to assume serious consideration is also being given to the west lode at Kora, where the inferred 380,000t resource is said to average an exceptionally high 36gpt.

Another hurdle has come the company's way with the latest announcement it will be taken off the S&P-ASX300 listing after Sept 21, possibly forcing some institutions off its share register.