Complex challenges for PM O’Neill in mining

Steering govt through rocky rival interests

Rowan Callick | Islands Business

Early in the term of Papua New Guinea’s new government—which has ensured, by a constitutional amendment, that it will be in power at least until this time in 2015 – it is facing some complex challenges, especially around the country’s biggest revenue earner, mining.

There’s a common view, even in PNG which has more than a century’s history of the industry, that mining is merely about digging rocks up and shipping them to eager buyers. But it is as difficult to build and maintain a mining industry as it is easy to lose one.

Independent PNG has been substantially built on its resources, the source of about 80 percent of its export earnings—chiefly, until liquefied natural gas (LNG) starts producing revenue in a couple of years, from minerals

The big persisting dangers for PNG include:

  • Spending the money before it’s been earned and thus building debt;
  • The usual “Dutch disease” challenge of preventing resources from crushing the rest of the economy by inflating prices, especially damaging agriculture which is by far PNG’s chief source of employment and of family incomes; and, of course
  • The debilitating battles between rival groups, including elements in various levels of government and within landowner groups, over the spoils from mining.

The dominant source of such resource revenue—and by far the biggest taxpayer in the country—has in recent years been Ok Tedi Mining Ltd. In 2011, it provided the government with about $US550 million—about 16 percent of its total income. Recently, the government has banned leading Australian economist and public intellectual Ross Garnaut from entering PNG, even though he was the chairman of Ok Tedi, the country’s highest tax paying company. It sought, by ratchetting up tensions around the mine and its governance, to place direct pressure on BHP-Billiton, which a decade ago withdrew from the operation due to environmental embarrassments, and set up a trust to run the mine.

Relax rules
The government appears to want BHP to agree to change the constitutional arrangements that hold substantial dividends back until the mine closes—now worth about $US1.5 billion. It also wants BHP to relax the rules that constrain its access to funds available annually for local development. Garnaut has stood aside this year for former prime minister Sir Mekere Morauta, who now chairs not only Ok Tedi Mining Ltd but also PNG Sustainable Development Program Ltd, the chief shareholder in Ok Tedi, which manages the holding in trust for the people of the mine area of Western Province and of PNG more broadly. PNG Finance Minister, James Marape, has recently sought to redirect some of the funds provided annually for local development, which have recently been used to buy boats and aircraft for local use to a new lobby group.

Hundreds of millions of dollars are now coming into play in this dispute, as the government places pressure on Ok Tedi in one area after another—including the ultimate sanction of refusing to allow an extension of the mine after its current approvals end this year. It is almost unthinkable that the mine would then permanently close. The thriving mining township, Tabubil, is being redeveloped as a centre for training and tertiary education, and for health work and research. But this transformation is far from complete. In the meantime, Tabubil continues to provide jobs and incomes for large number of families, and local people benefit from spin-offs and infrastructure work. So despite the mine’s many problems, starting with the collapse of its tailings dam causing mine waste to be flushed down the river system, permanent closure is most unlikely.

The far more probable course, is that the government would invite in a new operator. But from where? Although copper is today’s most-sought mineral, there is not a long list of aspirants. A Chinese buyer is most likely, given the country’s eager appetite for access to the resources its industrial growth requires. But Ramu Nickel, which recently began production, is operated by Chinese government corporation MCC. And it enjoys a surprising ten-year tax holiday, agreed by the Somare government in the face of opposition from within the bureaucracy. This would thus mark the starting point in any negotiation with Beijing. It is hard to imagine any other Chinese state owned enterprise accepting less than a ten-year tax holiday—which then raises the question of how this would benefit PNG, especially given the usual practice of Chinese corporations importing much of their own labour for such projects.

Just 100 km from Ok Tedi lies another huge copper/gold resource, Frieda River. But unfortunately for PNG, this is mostly owned by Xstrata—which eventually produced just before Christmas, after some postponements, a feasibility study. But some outstanding work remains. Xstrata is destined for imminent merger with Glencore, which is a Swiss based resource trading giant. And Glencore will not want a bar of even such a vast, promising resource as Frieda. Its chief executive Ivan Glasenberg, who will head the merged entity, said recently:

“We are afraid of greenfields”—new mines, which are considered risky and sometimes have capital over-runs.”

Glasenberg is a trader not comfortable with waiting for five years for a return. The Xstrata-Glencore merger is awaiting approval from regulators in China—which could itself prove a beneficiary, with the promising greenfields Frieda project coming into play. Brisbane-based Highlands Pacific, a minor partner at Ramu and Frieda, and also an explorer with promising assets close to Ok Tedi, is looking on with hope mingled with anxiety.

Meanwhile, over in Bougainville, the prospect of reopening the vast copper mine there—which featured at the centre of the decade-long civil war from which the autonomous province is still steadily recovering—hangs over any consideration of economic rejuvenation. President John Momis is calling on his considerable experience to urge all sides to take this prospect slowly. Any rapid change in the position on reopening the mine—which is still mainly owned by Rio Tinto Ltd—would play in to the referendum on Bougainville’s future that is due in a couple of years. But Bougainville will seek to insist, whatever happens constitutionally, that any future mine revenue stays in the province and doesn’t come through Port Moresby.

Besides these tangles, PNG is fortunate in having landed the firm focus of Melbourne-based Newcrest, the world’s third largest gold miner. Half of Newcrest’s resources now lie in PNG and the company has the technical and strategic skills, the capital, and crucially, the combination of commitment and understanding of how PNG operates, to realise those assets steadily.

And Mines Minister Byron Chan wants to change the laws to give the lion’s share of mining revenues directly to the landowners—although rival landowner groups frequently challenge each other over “true” ownership, when the unique opportunity arises to realise their core asset, access to their land.

The bottom line for PNG is that its government has to understand that, despite all the zeroes on the kina figures anticipated from LNG alone, success in managing a massive resources sector is not guaranteed, and that those revenues can dwindle almost overnight, leaving it with no obvious replacement.

Prime Minister Peter O’Neill thus still has to steer his ship of government through dangerous seas full of rocky rival interest groups. His core challenge is to help create, preserve and invest the wealth released by resource exploitation, rather than simply dividing up the spoils.

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Filed under Financial returns, Papua New Guinea

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