Regulatory efforts in PNG improve mining transparency

Long a mainstay of Papua New Guinea’s economy, the mining sector has not been immune to the global economic turbulence that continues to buffet the industry as companies wait out the resulting challenging market conditions. Slack demand for base metal products and decreased access to cash for junior operators has curtailed exploration and development worldwide, delaying a number of PNG operations in the process.

Larger operations such as Ok Tedi, Porgera, Ramu, Lihir and Hidden Valley continue to operate, although each has watched their profitability dwindle on softer commodity prices, which have in turn led to lower export receipts and less revenue for the government in the form of taxes, royalties and other fees levied.

Together with local administrative and logistical hurdles, these challenges have delayed a number of high-potential mineral prospects from entering into later development and production phases. While none of these next-generation projects have come on-line as of yet, parent companies continue to show resolve in bringing them to fruition with ongoing developmental expenditures, which should in time bring new and profitable projects to the market as the older legacy mines wind down their operations.

Cash Flow

The country’s economic diversification into natural gas exports now appears fortuitous, with the value of historic cash-cow exports copper and gold continuing to stagnate. While the revenues from new liquefied natural gas shipments may not be as much as initially hoped, they will somewhat offset declines in mineral exports that have hit PNG’s only copper producer, Ok Tedi, particularly hard. The value of PNG’s copper exports has declined by more than half, from PGK3.1bn ($1.2bn) in 2010 to PGK1.5bn ($567.6m) in 2013, according to data collected by the Bank of PNG.

Production data reported to the mining regulator, the Mineral Resources Authority (MRA), indicates that copper exports in 2014 totalled PGK1.11bn ($421.5m), roughly on par with 2013. While the decline in copper prices is largely to blame for the reduced annual export value, other factors are also in play, including lower overall output due to a number of reasons. Since 2007 the country’s average annual copper volume export index (1994 = 100) has declined from 96.2 to 46.3 through the first three quarters of 2014, nearly halving the volume of average shipments. Since 2013 the index exceeded 50 in just two quarters.

Gold exports have remained more stable, owing to their role as a safe haven for investment during times of economic uncertainty rather than as an industrial input. That being said, export revenues have declined from PGK6.4bn ($2.4bn) in 2010 to PGK5.3bn ($2bn) in 2012 before rebounding to PGK5.4bn ($2.04bn) in 2013. The export of alluvial gold from PNG was at a record high in 2014 at PGK373m ($141m). Exports through September 2014 remained below the pace set in 2013, with PGK3.8bn ($1.4bn) in gold shipped through the first nine months of the year. The average annual production index remained above 100 through 2010, when it registered 110.2 before dropping into double digits in subsequent years, averaging 93, 83.9, 98.6 and 90.3, from 2011 to 2014.

Primary Contributors

The majority of current copper and gold output comes primarily from four mines: the declining but still productive Ok Tedi copper and gold mine located in Western Province, the Porgera gold mine in Enga Province and the Lihir gold mine in New Ireland Province. Other smaller and developing mines include Simberi, Hidden Valley and Tolukuma, as well as a host of small alluvial operations.

LIHIR

Operating since 1997, the Lihir mine remains the most productive mine in the country, producing 721,264 oz of gold for the year ending in June 2014, up from 649,340 oz the previous year, according to sole owner and operator Newcrest Mining of Australia. The mine targets three primary resources of Kapit, Lienetz and Minifie, all within the caldera of the extinct but geologically active Luise Volcano. Primary development has thus far focused on the Lienetz and Minifie prospects, while total resource estimates for the mine site overall are projected at 60m oz of gold, including an ore reserve estimate of some 29m oz of gold.

Newcrest initiated its “million-ounce upgrade” expansion project in 2013, which aimed to boost capacity to 1m oz per annum by enlarging the processing plant and flotation circuit along with other infrastructure upgrades. Other improvements were also made to milling, flotation and oxygen production, as well as additional autoclave and leaching capacity to provide greater flexibility in treating the different ores and stockpiles within the Lihir system. Working to streamline the expanded processing plant and reducing the cost base remain the two key focus areas at Lihir in 2015, according to Newcrest reports. Lihir reported gold production of 669,741 oz in 2014 and 178,628 oz in the year-to-March 2015, according to the MRA.

Porgera

The second-most-productive mine operating in the country is Porgera, run by one of the world’s largest gold mining companies, Barrick Gold, which owns a 95% stake in the project, with the remaining 5% split equally between local landowners and the Enga provincial government. In production since 1990 and projected to continue producing gold for at least another decade, Porgera boosted its output in 2014 to 375,308 oz, up significantly on the previous year, according to Barrick. According to the producer, the increase was achieved primarily in light of higher recoveries and throughput as a result of improved mill availability. Barrick has recently announced a 50% partnership with China’s state-owned Zijin Mining Group.

Ok Tedi

The longest-operating large-scale mine in the country, Ok Tedi, is similar to the Tolukuma mine, now 100% locally owned. The PNG government now controls the entirety of parent company Ok Tedi Mining Limited (OTML) after the government took control of the majority 63% share of the firm in late 2013 from PNG Sustainable Development Programme, a company established by guarantee that received its stake after BHP Billiton’s exit from the mine 15 years ago.

Operating since 1984, Ok Tedi received a new lease on life when the government elected to prolong operations by approving a “variation” to extend mining within the pit shell, which would allow extraction from the larger ore body to continue through to the end of the current special mining lease in 2022. This initiative is expected to yield an additional 700,000 tonnes of copper and 2.3m oz of gold. The mine’s annual output of concentrate currently averages 400,000 tonnes, consisting of about 100,000 tonnes of copper, 300,000 oz of gold and 700,000 oz of silver, according to company reports. In 2014 OTML mined and reclaimed 15.9m tonnes of ore, resulting in 308,387 dry tonnes of concentrate containing 75,907 tonnes of copper, 241,336 oz of gold and 596,770 oz of silver.

Ramu Nickel

PNG’s first major mining diversification project away from its traditional gold and copper roots is rapidly picking up steam as the Ramu nickel/cobalt mine continues to ramp up production. After initiating operations in late 2012, the $2.1bn project has been progressively commissioning its various operations in stages, with 72% of its projected capacity of 8.5m wet tonnes achieved in the December quarter of 2014. The mine dug up 1.6m wet tonnes of ore in its inaugural year of 2012, followed by 3.5m wet tonnes in 2013, and doubled this figure again to 6m wet tonnes in 2014.

This throughput resulted in 2.3m dry tonnes of ore processed in 2014, yielding 19,595 tonnes of contained nickel, up from 1.3m dry tonnes and 11,369 tonnes of contained nickel in 2013. Another 1990 tonnes of contained cobalt was also produced in 2014, compared to 1338 tonnes the previous year. Throughput is expected to increase to 83% in 2015 before reaching full capacity in 2016, according to joint-venture partner Highlands Pacific. The project was on its way to meeting these projections through the first quarter of 2015 when throughput reached 79% of capacity and produced 6212 tonnes of nickel and 600 tonnes of cobalt.

Situated about 75 km west of the provincial capital of Madang, the operation is one of the most ambitious investments in PNG and the only major new mine to move into the production stage in recent years. Ramu is targeting the Kurumbukari nickel and cobalt laterite resource, which is linked by a 135-km pipeline from the Kurumbukari plateau to the Basamuk processing plant 75 km east of Madang along the Rai Coast.

Exploratory work on the prospect was primarily carried out by Highlands Pacific and its predecessor, Highlands Gold, which took over the project in 1992 and acquired a special mining lease for the development in 2000. Once exploratory results indicated significant potential of the site, Metallurgical Corporation of China (MCC) brought its considerable financing to the project and partnered to form a joint venture in 2005.

The current stakeholders in the project are Highlands Pacific (8.6%), the PNG government and landowner groups (6.4%) and MCC Ramu Nico (85%). MCC holds a 61% stake in MCC Ramu Nico, with the remaining 39% held by a number of other Chinese entities. This structure could change over time, however, as Highlands’ interest in the mine will increase to 11.3% at no cost after internal project debt has been repaid from operating cash flow. Highlands also has an option to acquire an additional 9.3% at fair market value, which could increase its interest to 20.6%. The planned lifespan of the mine, which contains proved and probable reserves of 53m tonnes graded at 1% nickel and 0.1% cobalt, is expected to exceed 20 years.

Regulation

Under PNG’s Mining Act of 1992, all minerals existing on, in or below the surface of any land in PNG, including all minerals contained in any water lying on land in PNG, are the property of the state. Due to the fact that around 97% of land in PNG is held by traditional owners under customary principles of land ownership, land owner identification tends to be a significant and complicated hurdle for resource extraction projects. However, land ownership issues are not relevant to the tenement approval regime in PNG, and various separately legislated procedures are available to resolve land-related issues. The MRA is responsible for approving and overseeing all aspects of mineral exploration and production, including the issuing of licences and leases. It should be borne in mind that the tenement regime gives rights to the minerals only, and regulates access to the land solely for that purpose. A mineral tenement does not convey ownership of the land to the tenement holder, merely sufficient rights to access it for the duration of its mining purposes.

One type of licence used in PNG is the exploration licence (EL), which is valid for two years but is renewable for an indefinite number of two-year cycles, provided the tenement holder has complied with the EL’s terms. Those terms include the contractually mandated objectives laid out in the mandatory work plan submitted every two years. ELs are transferable after the first term, provided the new party has the technical and financial capacity to undertake the work program.

The maximum land area available for an EL is 2557.7 sq km, limited to 750 sub-blocks each measuring 3.41 sq km. This area is reduced upon renewal, at which point at least half of the area of the original licence must be relinquished. This process is repeated in each subsequent renewal until such time as the area reaches between 30 and 75 sub-blocks, when a waiver may be sought to retain all of the area remaining. When an EL reaches 30 sub-blocks (about 100 sq km), no further relinquishment is required.

Special mining leases are used for major projects for a term of up to 40 years (extensions of up to 20 years may be applied for on renewal) and are contingent upon the mining company (generally the underlying EL holder) negotiating a mining development contract with the government. This contract requires a consensus agreement on the terms of the contract between all affected parties, including the company, landowners, and national and provincial governments.

Other available leases include the mining lease (ML) issued for small- to medium-scale operations no larger than 60 sq km and valid for a term of up to 20 years, with the possibility of an extension of up to a further 10 years. Also used for small-scale mining operations (less than 5 ha), an alluvial mining lease is valid for five years but reserved for native Papua New Guineans conducting alluvial operations on their own land within 20 metres of a river bed. An ML may be issued for larger-scale alluvial mining, and these must be 51% held by PNG citizens. These leases are suitable for joint ventures to enable technical, management skills, equipment and financing to be brought to the venture by investors. As of June 2015, a total of 757 mineral tenements were registered with the MRA of which 554 were active, the balance being new applications. The greatest number of tenements are ELs, with 183 issued around PNG, followed by 181 mining leases, 88 alluvial mining leases, 75 leases for mining purposes, 22 mining easements and five special mining leases.

Under Review

As mining companies show increasing interest both onshore and offshore across the country, the government is also in the midst of a lengthy review process of its mining policies and legislation in order to develop and implement updated regulations for the sector. Among the key issues to be addressed in the new draft policies are offshore mining, sustainable development, involuntary resettlement, mine closure protocols and geothermal operations. The new draft policies and Mining Act had reached advanced stages of development by mid-2015, having been referred to the government following significant consultation with stakeholders, including landholders, local level government and industry, according to the minister of mining, Byron Chan.

The Department of Mineral Policy and Geohazards Management, which has policy responsibility for the new legislation, has introduced many changes. It has extended licence terms from two year to five, expanded licence size, introduced a retention licence, given timeframes for tenement administration, placed greater emphasis on social mapping, made significant changes to the requirement for mine closure and security for damage to the environment, given greater powers for compliance and enforcement, and introduced transparency provisions. Fiscal matters may be considered by the ongoing Fiscal and Taxation Review. The prime minister has consistently stated that the mineral ownership approach will not change, and has recognised the importance of ensuring that the legislation remains investor-friendly. New mining safety legislation is also being drafted separately.

Along with a regulatory overhaul, the MRA has also been working on extending its geological database with expansion of MRA-funded airborne geophysical surveys along the PNG-Indonesia border and Goilala areas. The former survey has revealed significant mineral potential between the Ok Tedi and Frieda River mines, which includes the Star Mountains prospect between Highlands Pacific and PNG newcomer Anglo American. The OTML Townsville exploration site near the current OK Tedi pit is similarly looking highly prospective. The MRA also rolled out its new World Bank-funded electronic mineral tenement management system in June 2014. The Flexi system allows online access to tenement maps and permits, the ability to make electronic payments for fees and rent, the opportunity to follow the progress of an application, and will eventually offer the ability to register an application online. The project also grants the government significantly greater data compilation and analysis abilities.

State Participation

Long dependant on resource extraction to balance its budget, the government continues to earn a substantial portion of its annual revenues from the mining sector in spite of the decreased commodity prices affecting the industry. Mining and petroleum taxes (disaggregated data remains unavailable from the government treasury) totalled PGK794.2m ($300.5m) in 2014, up from PGK666.7m ($252.3m) the previous year, while the government’s direct ownership stakes in various mining projects such as OTML and Ramu Nickel provide additional income, although this is largely intended to flow to the benefit of local level government and mine area landowners.

While national stakes provide a much-needed source of state revenues for PNG, some of which can be distributed to mining areas, state participation can also, in some cases, bring other problems. One example is the production delay at the world’s first commercial underwater, deep-sea mining operation targeting copper-, gold-, silver- and zinc-rich seafloor massive sulphide deposits located at the Solwara 1 mining lease site in the Bismarck Sea (see analysis).

Because Solwara 1 was a pioneering venture, run by Toronto-listed Nautilus Minerals, the state of PNG was willing to support the project. It therefore exercised its state equity participation option for the maximum 30% stake, entitling it to a proportional share of future profits contingent upon the state paying its share of the up-front development and production costs needed to get the project running. Unfortunately, a dispute arose over some commercial aspects of the equity deal, which was unable to be resolved at the time, and was referred to international arbitration by the state. Progress was delayed, with Nautilus left unable to fully fund the construction of new equipment. The arbitrator eventually concluded in October 2013 that the state was legally responsible for the agreed-upon funding.

Despite the dispute and delay, both sides remained amenable to developing the project. Further negotiations spawned a new contract in which the state would take on a 15% stake in the Solwara 1 project, which included intellectual property rights. To solidify the new arrangement, the state paid a $7m non-refundable deposit to Nautilus in April 2014 along with a commitment to transfer the $113m developmental funding commitment into escrow.

The official joint venture was formed in December 2014 between Nautilus and the state’s nominee Eda Kopa (Solwara), a wholly owned subsidiary of Petromin PNG Holdings, when the funds of $120m were released from escrow to Nautilus. Under the terms of the deal, Eda Kopa was also given the option to take up a further 15% interest within 12 months. The option is exercisable in three 5% lots within six, nine and 12 months from the date the joint venture was formed.

Outlook

The ongoing challenges posed to the global mining industry will continue to squeeze operations in PNG in the short term. With mines continuing to weather the storm, some positive signs of a rebound have become apparent and any upward movements in the commodity market cycle should lead to a quick recovery for many of these operations. Future projects that have slowed or stopped development for the moment remain poised for a breakout as well, with early exploratory results indicating a number of significant and profitable operations waiting in the wings for the right time to move forward. The alluvial sector is expanding – alluvial gold exports in 2014 were a record PGK373m ($141.1m) – and provides smaller operators with an opportunity to enter a regulated market.

Cuts in exploration budgets could hurt further development in the longer term if current trends continue, although any resurgence in commodity markets and ensuing profitability bumps from mining companies will likely lead to a new cycle of investment. On the regulatory front, any efforts to improve the efficiency and transparency of the mining system would be welcomed by the private sector, although any uncertainties related to continuity or substantial shifts in taxation and licences could have a cooling effect on investment.