Mining opportunities abound despite harsh environment and political unpredictability.
Nathan Allen | Global Business Reports
Papua New Guinea is one of the mining industry’s last truly unexplored frontiers. Covered by steep, densely forested mountains, one of the country’s most remote communities remained completely unconnected to the outside world until the early 1990s when a chance encounter with a team of anthropologists catapulted them into the international media. Whilst it is increasingly unlikely that any further tribal groups continue to live on in total isolation, there is little doubt that the country’s rugged terrain still holds vast undiscovered mineral deposits. The country’s position on the collision zone between the continental crust of the Australian Plate to the south and the oceanic crust of the Pacific Plate to the north has led to the development of spectacular mineralization in almost every province. However, this same characteristic geology makes navigating certain parts of Papua New Guinea almost impossible, and so the country remains one of the most prospective countries in the world, and one of the most unknown.
Today PNG plays host to eight producing gold and copper mines and, since 2011, the Ramu NiCo nickel and cobalt mine, operated by the Chinese MCC. Australian gold miners Newcrest are the country’s most prolific operators, having operated the Lihir gold mine since 2010 and developed the Hidden Valley mine in joint venture with South African producers, Harmony. PNG has not been immune to the spiraling costs that have afflicted mines all over the world, but over the past 12 months most of the major operations have been successful in reining in operational costs to more reasonable levels.
As for the next wave of producers, the release of a major geological survey at the 2010 PDAC conference served to stimulate interest amongst junior explorers from around the world. However, this flurry of activity was short-lived as the predominantly optimistic climate of the global mining boom gave way to the current downturn. This trend has recently been reflected by the exit of several major players: over the past year, Barrick, BHP Billiton and Vale have all abandoned their exploration programs in the country, leaving some concern about the short-term potential for smaller companies to find development partners.
Nevertheless, Papua New Guinea still boasts a very healthy pipeline of advanced exploration projects now at the feasibility stage, which should enter construction within the next two to three years. It is estimated that by 2020, major mining projects could contribute to the economy in excess of $15 billion in capital expenditure alone. Whilst the vast majority of these investments will focus on the type of copper/gold porphyry deposits that have so far typified PNG’s mining industry, there is also great potential for diversification. Brisbane-based junior Mayur Resources has eschewed traditional exploration paths in favor of proving up their high-grade iron sands precint, which surrounds the Gulf of Papua. The company is also involved in early stage exploration for coal in the same region, and preliminary results suggest that the quality and scale of these deposits could rival those of neighboring Indonesia.
In spite of this encouraging news, working in PNG still presents numerous difficulties to both explorers and operators, including security risks and poor quality infrastructure. In the 2013 Fraser Institute Mining Survey, Papua New Guinea takes third place in the ranking of mining areas purely by mineral potential. However, when other factors are taken into account, the country plunges to 77th place out of a total of 96 nations surveyed.
Perhaps the most serious concern for new investors in PNG is the perceived high level of sovereign risk. After the 2012 general election that brought Prime Minister Peter O’Neill to power, it was hoped that a new climate of stability would descend over PNG politics, and to a certain extent this has proved to be the case. However, two key developments over the past year have brought consternation to the international community. The first is the state’s assumption of the Singapore-based PNG Sustainable Development Program’s (PNGSDP) equity in the Ok Tedi mine, effectively bringing the operation entirely under state control. Depending upon which side of the fence you sit, this either constitutes the expropriation of a foreign-owned asset or simply the redistribution of funds, which already belong to Papua New Guineans, amongst the mine-affected communities. The case is currently under international arbitration, and whilst it is difficult to predict what exactly the outcome will be, mine operators have asserted that there will be no impact on day-to-day activities at the mine. The second issue is the state’s failure to comply with a payment program by which they were contractually obliged to pay $118 million for 30% equity participation in Nautilus Minerals’ Solwara 1 deep-sea mining project. After arbitration ruled in favor of Nautilus, payment has still not been forthcoming and the original partnership agreement with the state has been terminated.
Whilst these developments are worrying, it is also important to point out that these two events have done little to stop on-going investments. Australian miner PanAust chose to proceed with the acquisition of Xstrata’s Frieda River assets, even after the takeover of PNG SDP, whilst in the oil and gas sphere ExxonMobil’s mammoth $19 billion LNG investment is forecast to come online ahead of schedule, proving that it is possible to deliver world class projects in PNG. New arrivals must be prepared to take risks and battle with a range of problems, however, for those that stay the course, the rewards can be immense.
This article was written as part of the research being conducted by GBR on Papua New Guinea’s mining industry for Engineering & Mining Journal, which will be published next December 2014. If you wish to contribute with your comments, please contact Pavlina Pavlova at email@example.com.