An earlier scoping study assessed the establishment of a separate open pit at the Nena deposit for 3 million tonnes per annum of mining over 20 years.
"Xstrata Copper exercising this option further demonstrates their belief in the potential of the Frieda River project," Highlands Pacific managing director John Gooding said.
He said Xstrata's total project expenditure would be around $290 million by the finalisation of the feasibility study this December.
"Including Nena, the Frieda River joint venture has a truly world class resource inventory of almost 11.6 Mt (25.6 billion pounds) of contained copper, 18.2 million ounces of gold and 49 Moz of silver.
"Highland's 18.8% share of this at 2.1 Mt (4.6 billion pounds) of contained copper, 3.3 Moz of gold and 8.9 Moz of silver is a significant endowment for a junior company and we have the benefit also that much of this inventory is in the highest resource confidence levels."
The Nena deposit hosts 51 million tonnes of resources at 2.4% copper and 0.57 grams per tonne gold.
The Frieda River prefeasibility study completed in 2010 estimated capital expenditure costs of $5.3 billion for a 20-year mine life.
The open cut project is targeting 930,000t per annum of concentrate containing 246,000t copper and 379,000oz of gold in the first eight years of its life at C1 cash operating costs of 43c per pound or $1.12/lb without gold credits.
Xstrata assumed control of the project in January 2007 and must complete the feasibility study, due on December 21, to maintain its 81.82% interest.
Highlands was free carried until today, and will be carried under a loan arrangement which will continue through until a special mining lease application is lodged with the PNG government.
Highlands shares were up 1c to 17.5c in morning trade.