Mining projects roll out across Papua New Guinea

In line with the global industry as a whole, as a result of the downward cyclical trend still buffeting the industry, the mining sector in Papua New Guinea remains in a cooling period in terms of exploration and production activity. To counteract tighter profit margins brought on by sluggish global demand for minerals and the corresponding drop in commodity prices, mining companies across PNG have responded by increasing efficiencies and taking cost-cutting measures.

Adding to the challenge of these market realities were other factors beyond the control of mining operators in 2015, such as a drought that lowered river levels enough to limit access to some mines and cut shipments, as well as temporary shutdowns due to health and safety concerns. These factors aside, the country’s historically strong copper and gold mines remain a crucial component of the economy with operations such as Lihir, Ok Tedi, Porgera, Simberi and Hidden Valley continuing to export minerals out of the country along with the first nickel mine, Ramu Nickel. These mines are backed by the next generation of projects, led by the Wafi-Golpu and Frieda River prospects, along with a host of smaller projects including Woodlark, Wau, Milne Bay, Mount Kare and the first underwater mining operation in Solwara 1.

Untapped Potential

This next generation of mines will be instrumental in helping fulfil the substantial potential of the mining sector, which could help boost government budgets in the decades to come. These new projects should help reverse the declining production experienced in recent years that has seen copper shipments decline by more than half in the seven years to 2014. Exports of the metal have tumbled from 199,400 tonnes in 2007 to just 89,600 tonnes by 2014 and were on pace for a substantially lower output through the first three quarters of 2015, when shipments totalled 44,200 tonnes, compared with 71,900 tonnes over the same nine-month period in 2014.

By contrast, gold exports have remained relatively stable and have ranged from a low of 46.8 tonnes (in 2012) to a high of 64 tonnes (in 2009) through the 2007-14 period. Heavily dependent on global commodity prices, the value of exports from the sector has fallen sharply in recent years as copper receipts declined to PGK1.51bn ($515.5m) in 2014 from a high of PGK3.09bn ($1.1bn) in 2010. The value of gold exports declined from PGK6.38bn ($2.2bn) to PGK5.46bn ($1.9bn) over the same time period, with exports stabilising somewhat in 2015 as shipments totalled PGK4.02bn ($1.4bn) through the first three quarters of the year, down just slightly from the PGK4.12bn ($1.4bn) over the same time period in 2014.

Exploration

In the longer term, exploration activity continues to move forward across the country, in spite of the difficult economic climate, as mining companies continue their search for new mineral deposits which could benefit in the future from a rebound in mineral prices by the time these projects come to fruition (see analysis).

Although activity has declined significantly from its peak only a few years ago in November 2012 – when 179 exploration licences (ELs) were active, with another 111 undergoing renewal and 314 under application – there were still 257 ELs either active, under renewal periods or submitted for approval as of March 2016. These efforts are being further boosted by ongoing mapping activity carried out by the Geologic Survey Division (GSD) within PNG’s Mineral Resource Agency (MRA). Building upon previous work, the agency is currently in the midst of expanding its knowledge base of the country’s mineral potential through a number of surveys. These include a geological mapping programme to produce new 1:100,000 scale geological maps that will have more detailed geological information potential compared to the previous 1:250,000 scale maps; the Western PNG Airborne Geophysical Survey building on the data gained from the EU-funded Central Highlands and Papuan Peninsula airborne magnetics and radi-ometrics survey; and the National Geochemical Sampling Programme conducted in collaboration with China Geological Survey’s Nanjing Institute for Geology and Mineral Resources to produce multi-element metallogenic maps for the country.

Tried & True

Producing gold since 1984, the Ok Tedi mine remains a fixture in the mining community and remains the country’s largest single copper producer by far. Since its inception, the mine has had a complicated history, having been first operated by Australian giant BHP Billiton until its relationship with the state soured due to pollution around the site. As part of the resolution to this issue the company conceded its 52% stake in the mine in 2001 as part of a settlement for environmental damage caused by mining operations which was facilitated through the creation of the independently managed PNG Sustainable Development Programme (PNGSDP), a Singapore-based development fund mandated to operate for the benefit of the Papua New Guinean people and funded by dividend payments forfeited by BHP Billiton when their shares were transferred to PNGSDP.

More recently the state consolidated its hold on the company in late 2013 with the nationalisation of the Ok Tedi Mining Limited (OTML) and its full conversion into a state-owned entity. By a unanimous vote in Parliament, the government annulled the PNGSDP’s 63.4% stake in the mine, and issued new shares to the state. This vote also removed BHP Billiton’s immunity from environmental liability, which it had been granted under the terms of its 2001 exit from the country, and gave the state the right to restructure PNGSDP. On the operations side, OK Tedi’s mine life was extended another 11 years in 2014, when the mine decided to move forward with plans to extend mining within the pit shell to access a larger ore body. This variation is expected to produce an additional 700,000 tonnes of copper and 2.3m oz of gold for the mine through its current projected lifespan into 2025.

Setbacks

In 2014 the OTML processed in excess of 16.8m tonnes of ore resulting in 308,387 dry metric tonnes (dmt) of concentrate containing 75,901 tonnes of copper, 241,039 oz of gold and 594,932 oz of silver. The concentrate is shipped to buyers in Japan, the Philippines, Germany, South Korea, India and Indonesia for further refinement. Production saw a significant decline in 2015, however, after mining operations at Ok Tedi were shut down in July of that year due to seasonal low water levels occurring on the Fly River.

Attributed to the severe drought effects brought on by the El Niño weather phenomenon – the worst since the 1997-98 season – water levels receded to the point that they impacted hydroelectric dams powering the site and restricted transport of critical supplies and copper concentrate.

As a result, OTML halted its activity for the better part of nine months from August 2015 to March 2016 when shipments resumed again. With Ok Tedi accounting for the majority of copper production in the country, outbound shipments from PNG fell from 23,400 tonnes in the second quarter of 2015 to just 7.6 tonnes in the third quarter due to the closure. The value of copper exports meanwhile fell from PGK384m ($131.1m) to PGK118.6m ($40.5m) over the same period.

One high-profile move which could provide a silver lining to the shutdown is the decision by the new OTML managing director Peter Graham, the former head of Exxon’s PNG LNG project, to increase operating efficiencies at the mine. Faced with an extended downtime period at the mine due to the inability to export, Ok Tedi underwent a significant maintenance and refurbishment campaign at the end of 2015 including a refitting of the hydropower turbines in the plant supplying power to the project. These and other upgrades made during the hiatus should further bolster future efficiency and output. According to the OTML, the mine boasted overall resources of 911m tonnes with grades of 0.43% grams per tonne (g/t) of copper and 0.52 g/t of gold as of December 2014.

Carrying The Torch

The Lihir gold mine in New Ireland Province remains the star performer of PNG’s gold mining segment, with production on target to hit around 900,000 oz for the 2016 calendar year. Fully owned and operated by Australia’s Newcrest Mining, the project continues to ramp up production, with gold output projected to hit between 750,000 and 800,000 oz for the financial year ending in June 2016, considerably higher than the 688,714 oz extracted during the previous year.

Located within the Luise volcano caldera on the east coast of Niolam Island in New Ireland Province, the mine has been producing gold since May 1997 from a single ore body accessed through three linked open pits. After completing a major expansion of the Lihir processing plant and flotation circuit in 2013, Newcrest embarked on a new operating strategy designed to further increase throughput with the goal of achieving a production rate of 13m tonnes per annum (tpa).

A feasibility study for a further optimisation plan for the mine was also being considered by the company in early 2016, which would be carried out in four stages targeting the Minifie, Lienetz and Kapit stockpiles during 17-32 mine life years and beyond. As of December 2014, the Lihir mineral resource was estimated to contain 59m oz of gold, including an ore reserve estimate of 29m oz of gold.

“Representing six different clans in Lihir gives us the possibility of protecting the interests of the land owners by investing in real estate, trading shares and other liquid assets in PNG as well as Australia, and to use the profit for community services that the central government is not able to reach,” Lawrence Rausim, managing director of MRL Capital, told OBG.

Porgera

Besides the Lihir mine, a handful of other smaller copper and gold operations are also contributing to sector, including the Porgera, Simberi, Hidden Valley and Crater Mountain mines. The second-largest gold producer in the country behind Lihir, the Porgera mine located in the Enga Province, has been operating since 1990 and is expected to keep producing through to at least 2026. The open pit and underground mine boosted gold production to its highest levels since 2013, up slightly from the 306,457 oz produced in 2014, to reach 308,183 oz in 2015.

As output remained stable, the ownership of the mine underwent a reshuffling when Zijin Mining Group – China’s largest gold producer, and second-largest copper producer – purchased half of Barrick Nuigini’s controlling interest in the mine in August 2015. The $298m cash deal created a joint venture partnership with Canada’s Barrick Gold and Zijin Mining, each holding a 47.5% stake in the company with the remaining 5% held by Mineral Resources Enga (MRE), which is equally owned by the Enga Provincial Government and the Porgera Special Mining Lease landowners.

Chipping In

Led by the Simberi mine, a handful of slightly smaller producers round out the group of primary contributors in the sector that continue to boost output. Operated by the Australian Stock Exchange-listed St. Barbara company, the Simberi mine has been lowering costs and is on pace to exceed 100,000 oz of gold for the first time in 2016 after producing approximately 80,000 oz in 2015. The mine has shown particularly strong growth in 2015, posting record-high output marks in five consecutive quarters, starting from the 12,700 oz produced in the first quarter of 2015 and culminating in 29,359 oz in the first quarter of 2016. The Hidden Valley mine, which is 50% owned by Newcrest, produced 189,202 oz of gold and 1.79m oz of silver in the 12 months ending 30 June 2015.

The most recent addition to this collection is the Crater Mountain copper and gold mine located approximately 50 km southwest of Goroka, the regional centre for the Eastern Highlands Province. The mine, which is fully owned by Crater Gold Mining, sold its first gold shipment in June 2016 and is projecting a production run of some 10,000 oz in its first full year of operation.

Finally, after beginning operations in 2012, the country’s first major nickel operation has ramped up to 81% of planned output by the third quarter of 2015. The Ramu Nickel mine achieved output of 55,863 tonnes by October 2015 with maximum aggregate output expected to reach approximately 31,000 tonnes of nickel and 3000 tpa of cobalt. This progress was halted, however, in early 2016 after mine operations were suspended in April 2016 following the death of a worker on site. As of June the mine remained effectively shut as the MRA carried out its investigation into the matter.

Law Of The Land

As of early 2016, the country’s mining sector was still operating under the Mining Act of 1992 which grants the government ownership of all minerals within the country. Other supporting legislation has since augmented this legal framework, including the Environment Act of 2000, the Mineral Resource Authority Act of 2005 and the Mining Safety Act in 2007.

Two government bodies hold the primarily responsibility for mining activity in the country: the MRA and the Department of Mineral Policy and Geohazards Management (DMPGM). The MRA acts as the administrator and oversight body for the mining sector, and its duties include issuing mineral tenement licences and leases as well as monitoring mining companies’ compliance with the Mining Act. The MRA’s other duties are focused on facilitating growth in the industry including through the collection and dissemination of relevant geological and exploratory data, providing support to operating companies, landowners and communities, and encouraging sustainable development.

The separate DMPGM is mainly responsible for drafting sectoral policy and has been working on a new, updated mining act for several years to update the now outdated 1992 Act.

Licensing

The commonly utilised mining licence activities consist of the granting ELs, mining leases (MLs) and special mining leases (SMLs), each issued for different stages of development. All permits are issued on a first-come, first-serve basis with the initial applicant granted a concession provided they meet minimum criteria. Multiple companies can apply for the same permit, with other companies in the queue waiting for their opportunity should the initial candidate fail to comply with requirements. Both MLs and SMLs are necessary for commercial extraction operations and grant the mineral tenement holder the right to access the land for the duration of the contract, leaving full ownership with the original land holder.

Mining licences for small- and medium-sized operations (up to 60 sq km) are valid for a period of 20 years with the possibility of an additional 10-year renewal, while licences for larger mines are valid for 40 years with a 20-year extension. Environmental approval documents are a prerequisite for the granting of production licences along with a consensus agreement on the terms of the contract between all relevant parties, including the national and provincial governments, the mining company and the landowners.

Allowing for exploratory activities but not commercial mining operations, ELs are valid for a period of two years with the possibility of successive two-year extensions dependent upon adherence to the contractually obligated work programme. Alluvial mining leases are also issued only to PNG nationals for smaller mines of less than 5 ha of their own land. These are valid for a period of five years for operations in areas within 20 metres of a river bed.

Change Up

As the sector became more complex and more companies began operations, both public and private stakeholders recognised the need to make alternations in the law to accommodate the new environment. This ongoing process has continued on through mid-2016 as policymakers and the private sector continue to hammer out a framework which could prove attractive enough to incentivise ongoing investment, while at the same time providing the state with adequate financial compensation and safeguards against mismanagement and environmental damage.

As of mid-2016, the finalised draft had yet to be submitted for public inspection, and the ultimate composition and approval date could stretch into 2017. Although the final details have not been released, the new mining law is expected to address six primary areas: amending the underlying technical details of the 1992 Act, offshore mining, involuntary resettlement, geothermal resources, project rehabilitation and closure, and sustainable mining development policy.

Private-sector players that have seen drafts of the legislation have noted that while the technical aspects of the new scheme remain generally acceptable from an investment point of view, there remain concerns that additional layers of administrative and bureaucratic requirements could make the sector more difficult to navigate. For example, the PNG Chamber of Mines and Petroleum has warned that the downturn in the global commodities market has already seen a number of foreign investors walk away from projects in PNG, and some stakeholders fear that a more stringent operating environment could exacerbate this trend. However, supporters of the reforms say the changes will make mining firms more accountable, ensure an equitable distribution of earnings and provide long-term sustainability to communities beyond the operating life of a mine.

Dynamic Duo

The next wave of large new mines is being headed up by a pair of highly anticipated projects in the Wafi Golpu mine located in Morobe Province along with the Frieda River mine on the border of the Sandaun and East Sepik provinces. Owned by a joint venture of Australia-based Newcrest Mining and South African firm Harmony Gold, the Golpu prospect is estimated to contain 20.2m oz of gold and along with 9.4m tonnes of copper, while the Wafi resource is thought to contain another 7.2m oz of gold, with further exploration of extensions and nearby areas yet to come.

The first stage of production is projected to commence in 2020, which will start the clock on the estimated 27-year lifespan for stage one of the mine’s development, with annual output expected to peak in 2025 at some 320,000 oz of gold and 150,000 tonnes of copper. The first stage of the project will cost an estimated $2.3bn, with a life-of-mine expenditure forecast at $3.1bn.

The Frieda River mine also possesses substantial potential to boost the output of the domestic mining sector with an estimated resource inventory of 12m tonnes of copper and 19m oz of gold, greater than that of the Panguna mine in Bougainville. The finances of the mine received a boost in mid-2015 when primary shareholder PanAust agreed to a takeover by China’s Guangdong Rising Assets Management (GRAM). Following extensive scoping and assessment, GRAM announced that it would increase the mine’s production capacity and improve waste management, raising the estimated construction cost from $1.7bn to $3.6bn.

Development of the Frieda River and Wafi-Golpu projects should see significant investment injected into the PNG economy over the next eight years, providing a much-needed boost for auxiliary industries, such as construction and related services.

Nautilus

Along with these new high-potential traditional mining operations, another new project is taking shape offshore. Underwater mining sites are attractive for companies in specific mineral-rich areas due to unique geological conditions. Miners are able to target these extensive, mineral-rich and high-grade sulphide deposits which form on the ocean floor as superheated water, laced with metals carried from deep inside the earth, mix with the cold seawater where the minerals then collect en masse. These deposits are similar to the massive, high-grade volcanogenic sulphide deposits that have traditionally been mined on the land primarily for copper, gold, zinc and silver.

The first deepwater site targeted for exploitation is Solwara 1 – solwara means “salt water” in the local pidgin dialect – located on the floor of the Bismarck Sea near the island of New Ireland. The project is a 70/30 joint venture between the Toronto-headquartered Nautilus Minerals, acting as the operator, and the PNG government as the minority stakeholder.

Exploratory drilling was initiated in March 2007 and the firm was granted the world’s first 20-year deep-sea mining lease, encompassing an area of 59 sq km, in January 2011 for Solwara 1. Construction of the specialised seafloor vehicles is finished and work on the vessel is currently under way.

Outlook

The vast mineral potential of PNG continues to attract investment from around the world, even during the current low point of the commodity cycle, and bodes well for the sector’s future prospects, particularly once demand begins to rebound. In the short term, advanced projects should result in a much-needed boost for productivity over the next decade, which will supplement the established operations.

Further out on the horizon, many of the earlier-stage prospects may yet provide the basis for the next generation of projects, although new exploration and investment will likely remain slow until commodity prices begin to recoup some of the losses they have incurred in recent years.