Huntley's investment information on Dairi project

Through its 64% owned Canadian-listed subsidiary, International Annax Ventures Inc (IAX), Herald controls an 80% interest in the Sopokimil Contract of Work in the north-west of Sumatra, Indonesia. This property, which is 20% owned by Aneka Tambang (Indonesia's partly privatised state mining company), contains the exciting Dairi base metals discovery. Aneka Tambang may claw-back to a 30% equity.

Australian investors have been slow to recognise the potential of this find, however with an initial resource estimate expected in a few months, we believe the market will substantially re-rate the share price. We believe the Dairi project has all the hallmarks of being a significant zinc-lead discovery.

Recent drilling results include better intercepts of 19.1 metres grading 16.0% zinc and 7.5% lead, 14.5 metres at 15.9% zinc and 9.0% lead and 10.2 metres at 17.0% zinc and 12.2% lead. The geology of the project area contains several complexities, however in the main area of focus at the southern end of the estimated four kilometre mineralised strike length, HER appears to have outlined a contiguous strike of at least 400 metres of high grade zinc-lead-silver ore to a vertical depth of at least 200 metres. The mineralised beds dip at approximately 45% to the east and are around 15-20 metres thick. Given the high specific gravity of the ore this small portion of the project area could alone contain five to ten million tonnes of high grade ore, which should be an economic proposition assuming there are no metallurgical complexities. In this regard, preliminary testwork has not raised any concerns.

The overall project area is yet to be tested in detail so it is not yet possible to comfortably assume the orebody extends beyond the initial southern zone. Nonetheless, the tenor of many individual drill results along the four kilometre strike length suggests there is excellent potential for, at the very least, repeated high grade ore zones.

The Canadian base metals group Cominco signed a farm-in agreement with IAX in early 1999, whereby it could spend US$10m to earn a 40% stake in the Sopokimil project. It subsequently withdrew from the deal due to permitting delays (now resolved). The casual observer could be forgiven for thinking the general political situation in Indonesia might also have contributed to the withdrawal. We believe that withdrawal may have been a blessing in disguise for HER, which following the recent drilling should be able to seek a new joint venture partner on better fiscal terms. That new partner can then fund costly reserve drilling and feasibility work. We estimate HER will require another six months to complete further drilling work before it contemplates a farm-out.

The market is right to ascribe some discount for Indonesia. However even at this stage, the harshest critic should be comfortable with a nominal project valuation of $20m when Cominco's farm-in terms from early 1999 imputed a greater value and the recent drilling results have substantially upgraded the project! This nominal valuation equates to around $10m to HER (24 cents per share), after accounting for Aneka Tambang's maximum 30% equity entitlement and the IAX minorities. The company also has approximately 17 cents per share in cash, so even on a sceptical valuation the stock is currently cheap.

Once investors decide to value Dairi on a NPV basis (which is likely after the initial resource estimate is released), we believe a project valuation of up to $100m could be justified. This is based solely on the southern portion of the project area covering the initial resource area. A $100m project equates to around $1.20 per share for HER's diluted interest.

This stock stands out as a real speculative bargain and we believe it should be purchased. We recognise the difficulties faced by miners and explorers in Indonesia, however the fact remains that the country has a large mining industry and an established system of exploration and mining permitting which has managed to survive some great stresses in recent years. That alone is testimony to its resilience. Even with a large Indonesian discount the stock would still appear undervalued. (*)