Economic Update

15 Jun, 2016

The mining sector in Papua New Guinea is showing signs of an uptick after operations resumed at one of the country’s largest mines, with new and ongoing projects set to inject much-needed foreign exchange and employment into the economy.

Indeed, revised forecasts for the development budget of the Frieda River project – which could hold the largest undeveloped copper and gold deposits in the world – bode well for the long-term outlook of the sector.

Revised estimates

Last month PanAust, a subsidiary of Chinese state-owned Guangdong Rising Assets Management (GRAM), released the results of its feasibility study for its Frieda River project in north-west PNG.

The open-pit mine is estimated to have an average annual production in concentrate of 175,000 tonnes of copper and 250,000 ounces of gold, and is projected to have an initial operational life of 17 years, according to the study.

The company doubled the forecast budget for the developmental stage of the mine to $3.6bn, and an additional $2.3bn is set to be invested during the life of the project.

In part, the increase in the development budget is a result of higher construction and waste management costs, but also reflects increased expectations for the project, which require more extensive infrastructure.

With the application process for the mine likely to take about two years, followed by an estimated six-year construction period, the earliest that the Frieda River mine is expected to start shipping product is late 2024, local media reported.

As of mid-2016, no formal financing had been secured and a construction date had yet to be announced, according to GRAM.

GRAM bought the leading stake in the project last year, continuing a trend of Chinese firms seeking access to overseas copper sources. China is currently the largest single market for copper, which is currently priced at seven-year lows.

Project pipeline

Coming on-line well ahead of the Frieda River project, however, is the Wafi-Golpu project, a bright spot in PNG’s mining market. First production at Wafi-Golpu – a joint development between Australia-based Newcrest Mining and South African miner Harmony Gold – is slated for 2020.

The companies expect production will reach 320,000 ounces of gold and 150,000 tonnes of copper in the first stage, with an estimated lifespan of 27 years.                                

The first stage of the project will cost an estimated $2.3bn, with life-of-mine expenditure forecast at $3.1bn.

Back in action

PNG’s mining industry received a much-needed boost in March, when the giant Ok Tedi copper and gold mine resumed production after operations were suspended in August of last year due to drought conditions brought on by El Niño.

The lack of rain had resulted in lower water levels of the Fly River, hindering vessels from carrying the take from Ok Tedi downriver.

In the months before the drought broke, disruption to production resulted in losses of P2bn ($43m), according to local media.

Potential regulatory headwinds

Plans to draft new legislation and amend the act governing the industry’s regulatory agency, the Mineral Resources Authority (MRA), could have significant implications for the industry, according to Ken MacDonald, chairman of mining company Highlands Pacific, which has a 20% stake in the Frieda River project.

The revised MRA act foresees a doubling of the production levy payable by miners, which currently stands at 0.25% of assessable income. It also would give the authority control over the proceeds of that levy and remove the industry from representation on the MRA board.

“Perhaps more importantly, a review of the Mining Act is being contemplated, and while the situation remains fluid, it is important that care be taken to ensure that the new act does not […] end up with legislation that discourages further investment in PNG,” MacDonald said at a company meeting last month.

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.

In the shorter term, development of the Frieda River and Wafi-Golpu projects should see billions of dollars worth of investment injected into the PNG economy over the next eight years, providing a much-needed boost for auxiliary industries, such as construction and services, as well as generating jobs, secondary investment and cash flow – all of which have been in short supply in PNG of late.

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