Risks for Mining Companies in PNG

PNG’s mining industry received a much-needed boost in March, when the giant Ok Tedi copper and gold mine resumed production

“PNG’s political environment has historically been characterised by volatility, executive dominance, rampant corruption and deficient institutions

 JLT Group | 24 October 2016

Richly endowed with natural resources, a decade ago Papua New Guinea (PNG) was set to become one of the fastest growing economies in the Asia-Pacific. Yet the end of the commodities supercycle has seen the country’s economy contract considerably, with serious implications for future political stability.

On account of PNG’s over-reliance on natural resources exports, the collapse of oil and precious metals prices in recent years has led to an increase in economic risks, and has further implications for future political stability as the economy struggles to readjust to reduced revenue streams and to diversify away from commodities based income.

Government spending has had to be, and will continue to be, cut back. These cuts, particularly as an election approaches in June 2017, will be highly contentious. The government has little room to manoeuvre; public spending increases before the oil price collapsed will be difficult to claw back, while ongoing debt servicing payments still make up nearly 10% of government expenditure.

The challenging economic conditions in PNG, combined with the upcoming election, only adds a further layer of complexity to investing. PNG’s political environment has historically been characterised by volatility, executive dominance, rampant corruption and deficient institutions. With an election approaching next year, political risks will increase.

The challenging economic conditions in PNG, combined with the upcoming election, only adds a further layer of complexity to investing in the country, which may see miners delaying investment.

PNG’s reputation as a viable destination for foreign investment has been repeatedly tarnished in recent years. The decision of Rio Tinto in June 2016 to relinquish its stake in the Panguna copper and gold mine (Bougainville Copper Ltd) following a dispute with the government stretching back to 2014, and decades of controversy surrounding the mine, is the second high profile exit of a major mining company from PNG.

While undoubtedly the mining sector holds considerable promise, the fact that two of the world’s largest mining companies have exited the country in the last three years demonstrates the sheer scale of the challenge.

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Filed under Corruption, Financial returns, Papua New Guinea

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