Mining projects in Papua New Guinea offer potential for economic growth

The mining industry is one of the main pillars of economic growth in Papua New Guinea. In 2017 the sector accounted for 29% of GDP and generated 86% of export revenue. Gold and copper account for the majority of mining export revenue, respectively comprising 76.8% and 13% of total sector exports in the first five months of 2019. The mining industry also remains an important source of job creation, employing more than 20,000 individuals and indirectly supporting another 45,800 people.

Sector Structure 

The largest mine in PNG in terms of operations is Lihir, which produces gold; followed by Ok Tedi (copper, gold and silver); and Porgera (gold and silver). These mines contributed PGK2bn ($606.6m), PGK1.3bn ($349.3m) and PGK945m ($286.6m), respectively, to total export revenue between January and May 2019.

In February 2018 a 7.5-magnitude earthquake struck the Southern Highlands, and the Enga, Hela and Western provinces, severely affecting several key mining operations. The natural disaster underscored the vulnerability of PNG’s economy, in that it remains largely dependent on mining activity. According to preliminary estimates made by the World Bank in July 2019, GDP growth contracted from 2.7% in 2017 to -0.5% in 2018 (see Economy chapter).

Other major challenges include customary land rights and the location of natural resources, which are often in remote and inaccessible parts of the country where security is tenuous and logistics are difficult. These factors have contributed to the high costs of extracting minerals.

“About 50% of capital costs of establishing a new mine in PNG are not directly related to mining. Rather, they relate to supporting infrastructure including roads, electric power, water, housing and transport,” Peter Graham, CEO of state-run Ok Tedi Mining, told OBG. “Logistics in PNG are typically very challenging given the topography, and therefore it is expensive compared with other jurisdictions. Labour costs, however, are typically competitive.”

Regulations & Oversight 

The Mining Act 1992 is the key piece of legislation that governs all mining activities in PNG, excluding the Autonomous Region of Bougainville. However, a series of proposed amendments to this law, which are currently being discussed by policymakers, could see fundamental changes to the regulatory regime governing the sector. Work on revisions to the act began a decade ago, but the reform momentum has gathered pace since Prime Minister James Marape was voted in by the Parliament in May 2019. The new prime minister has repeatedly stated his intention to extract greater fiscal and social benefits from resource projects.

To this end, the expected revisions to the Mining Act 1992 could see production levies and royalty payments increase, maximum leases shortened and restrictions placed on the use of workers based abroad (see analysis). Senior government officials have indicated that the legal revisions will be tabled in the Parliament before the end of 2019, while Graham said at an investment conference held in late August 2019 that the proposed changes were likely to be presented to the Cabinet within a matter of weeks. There is some concern among private stakeholders that the new framework will make PNG a less attractive destination for mining investment.

Despite an abundance of mineral deposits, PNG’s competitiveness is hampered by high capital costs and overheads as a result of infrastructure deficiencies. The PNG Chamber of Mines and Petroleum has called for an independent review of the proposed amendments to fully assess their economic implications before they are implemented In terms of oversight, the Mineral Resources Authority (MRA) issues mining tenements and is the body responsible for managing the exploitation of mineral resources in the country. It is headed by a managing director, who reports to the MRA Board. The authority to grant leases rests with the minister of mining and the National Executive Council, which act on the recommendation of the Mining Advisory Council (MAC). The latter is made up of the managing director of the MRA as chair, as well as representatives from the Department of Treasury, the Conservation and Environment Protection Authority (CEPA), the Department of Provincial and Local Government Affairs, the Department of Mineral Policy, a representative for the minister for mining and three executive managers from the MRA.

Licensing 

To be granted a mining tenement, firms must apply for an exploration licence (EL) with the MRA. The application moves forward after an MRA-appointed warden has recorded the views of the local communities that would be affected by the proposed project in a report submitted to the MAC, which then considers the warden’s report together with any written objections and a technical and financial assessment report, and decides whether to recommend the EL approval. Landowners do not have the power to veto an EL issuance, but they do exercise considerable power to dictate the terms of entry onto their land; firms often find it difficult to operate in areas where they have been granted an EL if they fail to manage their relationship with landowners. “Landownership is a major issue for mining companies,” John Lewins, CEO of Canada-based K92 Mining, told OBG. “Land rights are fundamental and must be protected. The challenge for stakeholders – including the government – is to develop a more streamlined and integrated approach to improve access for exploration and development firms.”

Besides submitting an application to the MRA, there are other ways to acquire an EL. Subject to timing constraints and approval requirements, an investor can either acquire or merge with the holder of an EL, or purchase an existing EL from its holder; however, these methods still require MRA approval. The maximum duty applicable on a mining lease transfer is 2%. A key condition for maintaining an EL is to begin exploration within a reasonable period of time. It is granted for a period of two years and can be extended for another two years on an indefinite basis, provided the licence terms are met. In practice, however, there is often a big gap between the time a firm receives an EL and when mining activity actually begins – there have been examples where this period exceeded 50 years before a discovery was made. For instance, while the special mining lease (SML) for the Ramu nickel and cobalt mine near Madang was awarded in 2000, production began in 2012.

Leases 

The MRA issues three types of production leases. Mining leases (MLs) are granted to small or medium-sized mines for up to 20 years, and may be extended by an additional 10 years. This is applicable for a concession area either rectangular or polygonal in shape, of no more than 60 sq km in size. An ML for alluvial purposes can only be granted to a citizen or a firm in which at least 51% of the ownership or interest rests with an individual citizen or a group of citizens. There is no such restriction for a hard rock deposit.

A large mine, meanwhile, requires an SML, which can be granted for up to 40 years and extended for another 20 years. However, a mining firm must have a mining development contract with the state before an SML can be granted. The minister of mining has the power to convene a public forum to hear the opinions of the local community and governments, and to negotiate a benefit-sharing agreement.

Lastly, the right to mine alluvial ore is reserved strictly for customary landowners, provided mining is non-mechanised. In order to have a mechanised alluvial operation and bring in investors, landowners can apply for an alluvial mining lease, which is granted for five years and renewable for another five. Alluvial mining can only be conducted on land that extends no more than 20 metres from a river bed. There are a significant number of alluvial miners across PNG working in the informal sector.

The holder of an ML or an SML can apply to the MRA for a variation of the approved proposals. A separate lease for mining purposes or mining easement is required to build the necessary infrastructure to support the mining operation, such as workforce housing, treatment plants, power transmission lines, slurry pipelines, roads, tailings deposits and transport facilities. Upon starting operations mining firms are required to submit monthly production and royalty returns, and a comprehensive annual report to the MRA showing production, export and revenue figures, as well as detailed resource and reserves information. “This allows us to monitor operations, predict revenue and determine how much is being produced in the mine,” Roger Gunson, executive manager of the Regulatory Operations Division of the MRA, told OBG.

Environmental Protection 

While the MRA is responsible for mining tenement approval, projects cannot commence before receiving environmental clearance from CEPA. To obtain such a permit, miners need to submit an independent environmental impact assessment report and an environmental impact statement (EIS) to CEPA. Companies that are looking to operate in mines classified as 2A do not need to submit an EIS, however, as they require a lower level of assessment. The first step in the EIS process is the submission of a notification of preparatory work, which states the miner’s intent to undertake the project. An environmental inception report, which identifies potential environmental and social issues to be addressed, is also required upon formal classification. In addition, mining firms must submit environment management and social management plans, which explain how they intend to mitigate any impact on the natural and social environment where mining is to take place. The paperwork should include a conceptual mine closure plan. This is often a time-consuming process as CEPA conducts an extensive consultation exercise before granting any environmental permits. The environmental regulation in PNG is governed by the Environment Act 2000.

Sales

The fall in global commodity prices that began in mid-2014 led some operators to sell their assets, while others were bought out against their will. Those that survived revamped management, raised productivity and cut operating costs. For example, state-owned Ok Tedi Mining, which operates the eponymous open-pit copper, gold and silver mine in the Star Mountains of the Western Province, was recording total cash operating costs of $65m per month in 2013; however, by the end of 2018 it had succeeded in cutting this down to $44m.

The year 2018 proved to be challenging for the company, with the earthquake in February halting production for three weeks and a drought in the last two months of the year affecting shipping. As a result, its total sales in 2018 stood at PGK2.8bn ($849m), down 15% on the previous year, according to the company’s annual report. It generated PGK466m ($141.3m) in after-tax profits, PGK383m ($116.2m) less than in 2017, and produced 96,000 tonnes of copper, down from 105,000 tonnes in 2017. However, production of gold was up marginally, from 271,000 oz to 280,000 oz. Since the start of operations the mine has produced more than 33m oz of silver, 14.8m oz of gold and 4.8m tonnes of copper. In terms of dividends, the company distributed PGK100m ($30.3m) to its shareholders over the year before declaring further dividends of PGK200m ($60.7m) in January 2019, to be paid by the end of the first quarter.

Major Mines 

Ok Tedi Mining’s operating performance has been enhanced largely through changes in mining strategy, disciplined cost control, improved reliability and usage. According to the CEO, the firm is targeting another 10-15% improvement in performance through simple initiatives. “We have business improvement initiatives under way focused on reducing time lost during each operating shift, equipment reliability and productivity, operator training, improved metal recovery and disciplined execution of plans,” Graham told OBG, adding that Ok Tedi Mining has spent more than $240m on an in-pit crusher replacement and relocation project, and plans to invest in upgrades to its mining fleet and processing facility. The company expects mining costs to stay under $2.40 per tonne in 2019.

On Lihir Island, output at the large, Australian-run Newcrest mine increased by 2% from some 940,060 oz of gold in 2017 to 955,156 oz in 2018, with an all-in sustaining cost (AISC) of $934 per oz. Meanwhile, the Simberi gold mine run by Australia-based St Barbara produced roughly 135,000 oz of gold, up from 116,000 oz in 2017. Its AISC, however, dropped from $1190 per oz to $1070 per oz.

The Kainantu mine resumed production after operations were halted in 2008 by then-owner Canada’s Barrick Gold for maintenance and care. In 2014 Barrick sold the mine to current lease holder K92 Mining, which in 2016 completed financing of $4.8m with CRH Funding II, a subsidiary of global private equity firm Cartesian Capital Group, to restart the Kainantu project. In 2018 the mine produced 45,810 oz of gold, at an AISC of $795 per oz. It hit a record high in the first quarter of 2019, with gold-equivalent production of 19,778 oz, 20% more than the previous record of 16,844 oz in the last quarter of 2018. In March 2019 K92 announced plans to invest $30m in the mine and double capacity to 400,000 tonnes per year.

In the Enga Province the Porgera mine – owned by Barrick Gold, China’s Zijin Mining and landowner group Mineral Resources Enga – produced 454,295 oz of gold in 2018, with an AISC of $1083 per oz. The Porgera mine, as with other mines in PNG, was facing some uncertainty as of September 2019, as the company attempted to negotiate an extension of their lease, which was due to expire in August 2019. Prime Minister Marape, who was voted in by the Parliament in May 2019 following the resignation of his predecessor, struck a nationalistic tone in his inaugural speech when talking about resource projects, indicating an intent to review some planned mining and energy investments.

Ramu Mine 

The $2.1bn Ramu nickel and cobalt mine near Madang has been one of the largest mining projects since 1996, when Lihir commenced operations. The Chinese-run project reached annual nameplate capacity in 2017, exceeding 32,600 tonnes of nickel and 3300 tonnes of cobalt. In October 2018 controlling shareholder Metallurgical Mining Corporation of China announced plans to invest a further $1.5bn to expand the project, but the MRA has expressed concern over excessive stockpiling of output, and royalty deductions remain a matter of dispute. A 10-year tax exemption given to the Chinese company which commenced in 2016 has also proved to be controversial, with community landowners arguing they are being deprived of revenue and benefits.

Questions have similarly been raised about environmental management at the mine, particularly when a reported pump failure caused red slurry to be discharged into the sea in late August 2019. Investigations into the impact of the pollution were ongoing as of August 2019, but the discharge was reportedly having an adverse impact on the marine environment and local livelihoods, leading to an appeal from Peter Yama, the governor of Madang Province, for the mine to be closed completely. This would place upward pressure on global nickel prices due to the venture’s international significance, given that Ramu represents 23% of global supply. Indeed, nickel price spiked to a five-year high following the spillage.

Upcoming Projects 

A notable project in the pipeline is the $5.3bn Wafi-Golpu joint venture between Newcrest and South Africa-headquartered mining company Harmony Gold. While the project was put on hold as a result of a court injunction obtained by the local governor, the approval phase had been advancing until that point (see analysis). The Frieda River venture of Chinese-owned PanAust could also help to boost production levels. The gold and copper mine is projected to have a lifespan of 45 years and generate A$12.5bn ($9.2bn) in tax, royalties and production levies for PNG. As of June 2019 the project’s EIS was under review. Development is expected to take up to eight years with capital cost rising to almost $8bn.

Elsewhere, the launch of the country’s first deepsea mining project, Solwara 1, has been deemed a failure after its developer, Canada-based Nautilus Minerals, ran into further financial problems and sought bankruptcy protection in February 2019. The project was proposed in 2008 and seeks to harvest mineral deposits found near underground hydrothermal vents. Opposition from environmentalists and citizens urging the government to withdraw from the deal – in which it has a 15% stake – is growing amid concerns that the project is proving to be a burden rather than a fillip to the economy.

Speaking at the Pacific Islands Forum in August 2019, local media reported that Prime Minister Marape referred to Solwara 1 as a “total failure”. The prime minister appeared to be leaning towards support for Fiji’s proposal for a 10-year moratorium on seabed mining in the Pacific, though he has left the door open for future deepsea mining ventures if developers can prove proposed projects are financially feasible and environmentally sound. PNG has incurred substantial financial losses on the Solwara 1 project, estimated by the government at PGK300m ($91m). In addition to its 15% stake in the venture, state-owned Kumul Mineral Holdings is seeking redress for unearned revenue of PGK173m ($52.5m).

Bougainville 

An exception to the Mining Act 1992 is the Autonomous Region of Bougainville, where all extractive activities are instead governed by the Bougainville Mining Act 2015. The Bougainville Mining Advisory Council (BMAC), comprising nine members, reviews all tenement applications and functions in much the same way as the MAC. The BMAC is chaired by a civil servant who holds the title of secretary. February 2019 a controversial amendment to the Bougainville Mining Act 2015, which would have effectively allowed the transfer of mining rights held by the Australian Securities Exchange-listed Bougainville Copper Limited (BCL) to a new entity, was rejected by various landowner groups. Specifically, the amendments would have facilitated the re-opening of the Panguna copper and gold mine, which was run by BCL until it was shut down in 1989 following disputes with locals that escalated into a civil war. A parliamentary legislative committee argued that the bill needed further consultation and that it should be resubmitted in December 2019, after Bougainville’s November independence referendum. During its operation, Panguna was, for 15 years, the largest open-pit copper gold mine in the world and accounted for 44% of the country’s total exports. By the time of closure Panguna had produced PGK1.7bn ($515.6m) in revenue and PGK99.6m ($30.2m) in royalties. It is estimated to hold 19.3m oz of gold and 5.3m tonnes of copper, worth a combined $58bn.

Electronic Data 

PNG is a member of the Extractive Industries Transparency Initiative, a global standard that promotes the open and accountable management of natural resources. The MRA is investing in boosting its own capacity to collect, audit and monitor mining-production data as part of efforts to improve transparency and efficiency.

Under the country’s Mineral Tenement Management Project and in partnership with South African software development company Spatial Dimension (now Trimble), in 2014 the MRA implemented the Mineral Tenement Management System, which is based on the FlexiCadastre (now Landfolio) framework and provides real-time information online to the government and investors. They can also upload certain documents remotely and monitor their existing tenements online. The next phase of the project awaits relevant legislation to legally support the implementation of the online MRA Mining Cadastre Portal, and thereby allow investors to upload their applications remotely, removing the need to physically visit the MRA to submit documents.

Outlook 

Mining in PNG is closely tied to demand from China, as the world’s second-largest economy consumes half of the world’s nickel and copper, and generates almost one-third of global demand for gold. Therefore, if China’s imports of key commodities fall in response to its trade war with the US, it will adversely impact mining in PNG. The political environment may also affect sector investment. Prime Minister Marape has signalled a more cautious approach and intends to acquire greater financial benefits for PNG from the extractive industries. However, upcoming mining projects will continue to be negotiated case by case. As a harbinger of things to come under the new administration, the outcome of the Wafi-Golpu negotiation and the proposed mining legislation will likely have a significant impact on investor confidence.