A key earner: With numerous new projects coming on-line the sector is poised for large increases in production

Since large-scale mining was initiated in the 1970s at the Panguna copper mine in Bougainville, the revenue derived from mineral extraction has served as the backbone of Papua New Guinea’s economy. While Panguna is no longer operating, a host of new largescale gold mines have stepped up to fill the void and now contribute the vast majority of the nation’s exports and tax revenues accounting for more than 70% of PNG’s GDP each year.

IN HIGH DEMAND: Mineral and petroleum tax revenues represented more than two-thirds of the country’s revenues in 2011, totalling PGK1.08bn ($514m) with dividends registering PGK230m ($109.5m), according to the country’s national statistics office. With precious metal prices continuing to climb as demand soars, international developers are increasingly turning to frontier countries such as PNG. As the price of gold pushes northwards of $1400 an ounce and copper doubling in value over the past two years, the motivation for these enterprises is clear. More easily obtainable reserves in developed countries with more stable and predictable business environments are now few and far between, while the inconveniences of less established markets are outweighed by their vast stores of mineral wealth. PNG has a consistently higher than average mineral content in its ore, making it a prime target for mining companies. In fact, PNG has so much potential mineral wealth that nearly the entire territory is stitched up with mining permits. As of June 2011 78.6% of the country’s landmass was permitted for mining activity of some degree, according to PNG’s Mineral Resource Authority (MRA). This includes 16.9% for current mining permits, 5.2% for renewals and a further 56.5% for those in the application stage. As a result of this renewed interest in the mining sector, the declining production of some of PNG’s maturing brownfield mines are expected to be more than offset by the production from numerous new ventures coming on-line in the next few years.

BIG THREE: As of early 2012 there were nine active mines operating in the country, all of which focus primarily on precious metal extraction. These are headlined by three large mines: the 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.

One of the country’s longest-running mines also received a new lease of life in 2011 when the lifespan of Ok Tedi Mining was extended another nine years beyond its planned closure date of 2013. With the current high commodity prices continuing to drive strong profits, the decision was made to continue to work the site through a combination of two underground mines and one pit mine until 2022. The scaled-down operations are expected to yield an estimated 700,000 tonnes of copper and 2.3m ounces of gold over the nine-year extension period. In 2011 the mine registered total copper production of 130,456 tonnes and gold output of 13 tonnes (417,236 ounces), an annual decline of 18% and 14% below 2010 production, respectively.

LOCALLY OWNED: Originally operated by BHP (now known as BHP Billiton) when mining was initiated in the 1980s, Ok Tedi is currently the country’s only major 100% locally owned mine. Under the current ownership structure, the state owns a 36.6% stake in the project, with the government-owned but independently run PNG Sustainable Development Programme (PNGSDP) retaining the remaining 63.4% after it bought out Canadian mining company Inmet’s 18% share in January 2011.

BHP divested its 52% share to the PNG government in 2002 following a well-publicised environmental incident in which a large amount of toxic waste was dumped into the nearby Fly River and associated tributaries, which resulted in widespread and long-lasting damage to the ecosystem. The PNGSDP was subsequently set up as a partially independent investment vehicle that was tasked with developing new business ventures in the Western Province as a means to compensate local populations that were affected by the toxic fallout.

LIHIR GOLD MINE: Dating back to its inception in 1997, Lihir gold mine, located in New Ireland Province, has yielded approximately 8m ounces of gold as of 2011 and is expected to be productive for another three decades. After buying out competing interest in the mine from Lihir Gold in September 2010 for $9.2bn, Newcrest Mining, Australia’s largest gold mining outfit, now owns the mine in its entirety. But despite gold reserves estimated at 28.8m ounces, Newcrest has experienced operational difficulties with the site since its acquisition, which it has blamed on underinvestment and a lack of maintenance under previous ownership. As a result of the treatment plant’s shortcomings, Newcrest announced that its first quarter 2012 production could be reduced by as much as 60,000 ounces worth more than $100m. The company will proceed with sustained capital expenditures of $200m annually for the next few years to rectify the problem.

For the 12-month period ending June 2011, gold production from the mine totalled 639,256 ounces. This figure is expected to climb to over 1m ounces annually starting from 2013 through the company’s expansion programme appropriately called the “million ounce plant upgrade”. On-site processing is currently carried out through a refractory that utilises pressure oxidation in its three autoclaves with a combined capacity of treating in excess of 6m tonnes of ore per annum, which can produce more than 800,000 ounces of gold. Under the upgrade plan, a fourth, larger autoclave that has a wider diameter and increased capacity will be added to the refractory. This will boost maximum potential capacity by an additional 11m-12m tonnes, leading to a corresponding annual increase in gold production of as much as 240,000 ounces. The expansion activity was initiated in 2008, with the new capabilities scheduled to come on-line by the close of 2012. These improved production rates are expected to continue until at least 2021, following which a decline in output is expected through 2030 when lower grade stockpiles are processed.

PORGERA: The third major producer is the Porgera gold mine located in the central highlands Enga Province at an altitude of between 2200 and 2700 metres. Active for more than two decades, the project is 95% owned by the largest gold producer in the world Barrick Gold, with the remaining 5% ownership stake split between the Enga provincial government and local landowners.

In 2011 Barrick’s share of total production was approximately 500,000 ounces, with proven and probable reserves at 6.37m ounces at a grade of 0.084 ounces per tonne, according to the company’s annual report. This marked a 4% year-on-year decrease, which Barrick attributed to lower grade stockpiles that were used in production. The projected lifespan of the Porgera mine extends to roughly 2020. The company continued exploratory drilling in the Project X and AHD areas of the Porgera mine in 2011, and is set to continue its exploratory efforts throughout 2012 in order to more clearly define a number of other target areas.

NEW ON THE BLOCK: The newest addition to the sector, Hidden Valley mine has the fourth-largest output of gold. It is operated by Morobe Mining Joint Venture, a 50:50 partnership between Harmony Gold of South Africa and Newcrest of Australia, and commenced production in 2009. Located in Morobe Province approximately 90 km south-west of Lae, the site lies partially along the same orogenic belt that has established highly productive mines such as Porgera and Ok Tedi. In 2011 the mine produced 200,464 ounces of gold and 1.35m ounces of silver in its first full year of operation, according to Newcrest. The site is expected to produce annual yields of more than 250,000 ounces and 3.6m ounces of gold and silver, respectively, at full capacity throughout its estimated 14-year lifespan. As of the middle of 2011, total estimated resources of the mine were 5.4m ounces of gold and 109.6m ounces of silver.

EL DORADO: There are a number of smaller but nonetheless productive mines that are also spread throughout the country. These include the Tolukuma mine (gold, Central Province), Kainantu (gold, Eastern Highlands Province), Simberi (gold, New Ireland Province) and Sinivit (gold, East New Britain Province).

The remote Simberi gold mine is situated on Simberi Island in the north-eastern corner of PNG’s territory near the Lihir mine in New Ireland Province. Production began in 2008, and the mine has a projected lifespan of around a decade with an average annual output of between roughly 60,000 and 70,000 ounces per year. It most recently turned out 58,000 ounces in 2011. Owned by Allied Gold, the Simberi project is in the midst of a capacity expansion programme for its oxide process plant which is expected to increase throughput from 2.4m tonnes per annum (mtpa) to 3.5 mtpa upon completion in September 2012. The upgrade is expected to boost annual production to around 100,000 ounces of gold. Further expansion of both the mine and processing facilities are also being considered, which could boost production as high as 300,000 ounces by the middle of the decade if fully implemented.

Owned and operated by Niugini Gold Corporation (NGC), the Sinivit project has been operating since 2007 on New Britain Island roughly 50 km south of the port of Rabaul. The project is 92% held by NGG, with the remaining 8% stake belonging to Gold Mines of Niugini Holdings. During the first six months of 2011 the mine produced approximately 23,550 ounces of gold, according to the company. Information released by NGG in October 2011 indicated that total inferred resources of the site are estimated at 3.4 grams per tonne (gpt) for gold along with 0.25% copper grades from a total of 1.7m tonnes. Indicated resources estimates for 354,000 tonnes are 0.29% for copper and 3.8 gpt for gold.

The Tolukuma gold mine is operated by state vehicle Petromin and located in the Central Province at an altitude of 1500 metres in the Owen Stanley Ranges, around 100 km north of Port Moresby. Declining production at the mine has resulted in an average annual output of approximately 48,000 ounces of gold per year, down from 85,715 ounces in 2004, according to Petromin. Tolukuma began producing in 1995, with 90% of operations currently focused underground and augmented by a small pit mine. Petromin acquired 100% ownership of the mine from Emperor Mines in February 2008.

As a result of the 2008 transaction with Emperor Mines, Petromin acquired 13 exploration licences encompassing a total area of 5064 sq km surrounding the Tolukuma mine site, which has the most promising areas for gold, copper, platinum and palladium in the Saki, Soju, Seriseri, Etasi, Genga, Badim, Kone-Belavista, Hula, Aikora, Joma and the Ipi River prospects. Prospect drilling was carried out to supplement previous 3D seismic surveys for the Saki and Ipi River sites in 2011. Previous examinations of the area projected gold grades of between 12 and 35 gpt, with a total estimated resource of 35,000 ounces for the Saki tenement alone.

The eastern highlands-based Kainantu gold mine also operated from 2006-10, but has since shut down operations pending the results of further exploration.

GILDED AGE: While great fortunes of precious metals have been flowing from PNG’s soil for decades, the combined potential of the next generation of new large-scale mines that are set to open in the coming years will in all likelihood boost mineral extraction to unprecedented levels.

Owned and operated by Toronto-listed Marengo Mining, the Yandera copper-molybdenum mine, located in Madang Province, is projected to be the first of the new large-scale mines to come on-line, with initial production expected before 2015. Early feasibility studies indicate that there are substantial reserves in the area, with a total indicated resource of 315m tonnes containing indicated copper and molybdenum grades of 0.48% as well as inferred resources of 352m tonnes at 0.43%. Initial production levels are expected to start at approximately 25 mtpa in 2014, with full-scale operations achieving up to 50 mtpa in later years.

At the beginning of 2011 Marengo signed a memorandum of understanding with China Non-ferrous Metal Industry’s Foreign Engineering and Construction Company to help design the processing plant as well as take on the role as primary construction contractor, which is a key component in completing the definitive feasibility study that is necessary for acquiring a long-term mining lease. Marengo raised $54.5m in December 2011 for investment in the project, which has an expected lifespan of between 20 and 30 years. The project was originally explored in the 1970s by Barrick Gold.

FRIEDA RIVER: Next in the pipeline is the Frieda River copper and gold project spanning both the East and West Sepik Provinces in the north-west of the country. The project is led by Brisbane-headquartered Xstrata Copper, which has an 81.82% share and Highlands Pacific with 18.18%. Japanese consortium OMRD originally held a 6.75% interest in the project, but withdrew from the venture in 2010. Since assuming control of the Frieda River project in January 2007, Xstrata Copper has carried out an ambitious resource evaluation programme. The most recent results of these exploratory efforts have resulted in a resource estimate released in September 2011 of 2.09bn tonnes containing an average grade of 0.45% copper (at a copper cut-off grade of 0.2%) as well as 0.22 gpt of gold and 0.7 gpt of silver. This represents 9.4m tonnes and 14.8m ounces of contained copper and gold metal, respectively, as well as a likely 46.9m ounces of silver produced as a secondary mineral. The project’s feasibility study is due to be completed by the end of 2012 pending the evaluation of new power supply options. Production is expected to begin in 2016, with initial targets at the open cut mine estimated at 200,000 tonnes of copper and 240,000 ounces of gold per annum with a lifespan of approximately 30 years.

WAFI-GOLPU: The Wafi-Golpu copper-gold project is slated to come on-line just after Frieda River in 2017. The project is being developed by partnership of Newcrest, which already runs the Lihir and Hidden Valley mines, and Harmony Gold Mining Company. Situated in Morobe Province approximately 65 km south-west of the town of Lae, the site contains a substantial body of gold-only epithermal style mineralisation (Wafi) as well as a deeper porphyry copper-gold mineralisation (Golpu). As of June 2011 Newcrest pegged the total estimated resources of Wafi-Golpu at 26.6m ounces of gold and 9m tonnes of copper, although further exploration focusing on the northern area of the tenement was still ongoing in 2012. A pre-feasibility study was being developed as of early 2012 and was expected to be completed by June of the same year.

MOUNT KARE PROJECT: Last but not least, the Mount Kare project is located in the same central highland region of the country as the Ok Tedi, Frieda River and Porgera mines. The project is operated by Indochine Mining, which has a pre-feasibility study in the works scheduled for completion by mid-2012. Results of the initial $59.5m exploratory efforts made up of 350 separate drill sites indicate that the site contains at least 1.8m ounces of gold and 20.40m ounces of silver. Indicated and inferred mineral resources were calculated from an estimated 28.3m tonnes of material with an average of 1.9 gpt of gold and 22.5 gpt of silver at a 0.5 gpt cut-off grade. Further exploratory drilling is currently under way to identify new mineralised zones and expand the resource base. Indochine took control of the project in June 2011 when it purchased PNG-based Summit Development, the latter of which held the mining rights for Mount Kare, for $26.8m.

In addition to these onshore projects, the world’s first deep-sea mining lease was offered to Canadabased Nautilus Minerals at the beginning of 2011 to operate the Solwara 1 offshore mine. Nautilus will work in partnership with Petromin, and the mine is expected to begin high-grade copper and gold extraction by 2013 (see analysis).

RECONCILIATION: Another area with a complicated past that could see new activity in the near future is the Autonomous Region of Bougainville (ARB). Once the site of PNG’s most prolific mine – the Bougainville Panguna copper mine run by Rio Tinto – production has been dormant for a quarter century while a guerrilla war simmered between Bougainvilleans and the government from 1989 to 1997. Investors have been slow to return to the autonomous region since hostilities ceased. This could change in the near future, however, as both the ARB and PNG governments are stepping up cooperative efforts to resume mining operations. In preparation for reopening the ARB to investment, PNG’s MRA is engaging its ARB counterpart in an effort to build its own capacity for mining operations as well as assist in renegotiating terms for the copper mine.

The World Bank is also assisting the rejuvenation of Bougainville’s crucial mining sector through its second mining sector institutional strengthening technical assistance project, which is worth $18.7m ($17m from the International Development Association and $1.7m from the PNG government). Running from 2008 to 2013, the programme is designed to bring much-needed mining revenue streams on-line by bolstering the ARB’s mining framework. The five target components include: strengthening the policy and regulatory framework for the mining sector; enhancing governance, regulating and sustaining development outcomes; improving revenue collection and audits; strengthening the foundations for a conflict-free mining sector in Bougainville; and project management. MRA officials told OBG that the process is critical for the ARB to reopen the mine and that negotiations related to this subject are scheduled to take place later in 2012.

NEW FIELDS: While copper, gold and silver prospectors have been staking their claims in PNG for more than a century, it has only been recently that the sector has begun to seriously diversify into other arenas. However, with the Ramu nickel and cobalt mine slated to come on-line in mid-2013, the status quo in the country looks to be changing.

As the single-largest investment by China in the South Pacific, the $1.5bn Ramu project represents a substantial step forward in the diversification of the domestic mining sector. When production is fully ramped up, the mine is expected to yield some 31,150 tonnes of nickel and 3300 tonnes of cobalt per annum for its 20-year projected lifetime ( supplemented by further prospects which could extend production by an additional 15-20 years). Located in Madang Province approximately 75 km southwest of the city of Madang, Ramu’s total resources are estimated at 243m tonnes, including 78m tonnes of measured and indicated reserves.

The massive project will require substantial transport and support infrastructure for its Krumbukari mine, including a 135-km-long pipeline to transfer the slurry from the mine site to the refinery located in Basamuk Bay as well as a de-agglomeration plant, power and water facilities, slurry treatment plants and other infrastructure.

The project is operated by the Ramu NiCo Management (MCC), an unincorporated joint venture between the MCC, which has an 85% stake, Pacific Highlands subsidiary Ramu Nickel Limited (RNL) with an 8.56% share, PNG government representatives Mineral Resources Madang Limited (MRML) with a 3.94% share and local landowner representation through the Mineral Resources Ramu Limited (MRRL) with the remaining 2.5% share. The project has a fluid ownership structure that will evolve over time upon repayment of initial debt, with ownership further divided to the point where MCC’s ownership stake will be reduced to 80% with the new increased distribution of minority partners as follows: 11.3% for RNL, 5.2% for MRML and 3.5% to MRRL. Finally, the government also has the option to acquire an additional 15% stake in the project, which if enacted would result in the following ownership structure: MCC Ramu NiCo with 65%, RNL with 20.55%, MRML with 9.45% and MRRL with 5%. MCC Ramu NiCo is 100% owned by Chinese consortium MCC-JJJ Mining led by the China Metallurgical Group Corporation along with other major Chinese nickel and steel operators Jinchuan Group, Jilin Jien Nickel Industry Company and Jiuquan Iron and Steel Group.

Following close on the heels of the Ramu project is the Yandera mine, which is scheduled to begin production in 2015. Although it will still produce large amounts of gold and copper, significant quantities of molybdenum and rhenium will also be extracted at the mine. Demand for these products is growing, with molybdenum used extensively to strengthen steel alloys and rhenium, the price of which has increased 10-fold over the past five years, is used in the manufacture of jet aircraft turbines.

OTHER EXPLORATION: A second nickel project is also in the later stages of exploration at the Wowo Gap being developed by the Resource Mining Corporation (RMC). Studies released in October 2011 by RMC estimate an indicated content of 1.03% and 0.07% for nickel and cobalt, respectively, from a total of 72m tonnes as well as inferred grades of 1.09% and 0.06% from 125m tonnes.

Another project in the advanced stages of exploration is the Amazon Bay, which is being developed by MIL Resources through its now fully owned subsidiary Titan Metals. Early studies of the Amazon Bay beach sands have indicated rich concentrations of vanadium based on the prospective output of 2.5 mtpa of titanomagnetite concentrate. Titan Metals is also exploring other PNG sites, such as the Poi copper-gold prospect, which is located close to the southern tip of the main island.

Other projects include the Papuan Precious Metals Corporation, which is in the early stages of platinum exploration at its Doriri Creek prospect, as well as the Mambare nickel laterite project that is being explored by Regency Mines.

COAL INTEREST: Interest in coal has also increased recently, with prospectors snapping up dozens of new coal exploration permits starting in early 2011. Australia-based Waterford is investigating a coal seam along the Sepik and Ramu basins in the north-east of the country, while other attention has also been shown in the gulf basin in the south-west. Having completed initial exploratory efforts, the results are now being analysed and are expected to be submitted to the MRA by mid-2012.

LEARNING FROM THE PAST: While the plethora of new mining projects will undoubtedly bring a cavalcade of new export revenue streams into the country, the rapid proliferation of so many projects brings with it increasing threats to the surrounding environment. While environmental protection has not been a strength of the country in the past, the government is now making renewed efforts to shore up domestic environmental regulations.

However, the substantial long-term damage that was caused to both indigenous populations and the ecosystem by earlier operations has led to strong scepticism and opposition from landowners, nongovernmental organisations and politicians. The Ok Tedi mine is an example of this. When mining operator Barrick Gold dumped waste tailings into the adjacent river (with the government’s blessing), the resulting toxic pollution essentially destroyed the river’s ecosystem. The backlash to the damage forced Barrick to abandon the project, which was turned over to the federal government, which then created the PNGSDP as a vehicle to recompense the damage.

“Ok Tedi was a case in point – we permitted this practice and the magnitude of damage was severe,” Philip Samar, the executive manager of the MRA’s Development Coordination Division, told OBG. “With Ok Tedi the lesson we learnt is that our environmental practices and waste disposal needed to be improved upon. If we were to permit the upcoming Wafi project to utilise the river for waste disposal we have not learned anything. The government needs to move away from river disposal, which it has not yet done.”

DSTP: More recently, deep-sea tailings placement (DSTP) waste disposal is another process that is being increasingly employed in PNG. The method involves collecting the discarded waste tailings from processed material and transporting them out to specific deep-water locations around the country.

First used in the 1980s by the now defunct Misima mine, the process is currently employed at the Lahir and Simin mines, with the Ramu nickel plant also planning to utilise this method. To minimise the impact that this practice has on the environment, the government has brought in an impartial third party to evaluate the process. The Scottish Association for Marine Science first commenced evaluation of the original Misima dump site, where it monitored the impact of the waste. Using this information as well as other more recent studies conducted at other similar sites in the country, the government is trying to refine the system to mitigate the damage to the surrounding ecosystems.

This knowledge will be put to the test in the near future when the massive Ramu nickel-cobalt mine starts operations in 2013 and begins disposing of an estimated 5m tonnes of tailings in the sea per annum. According to plans detailed by Ramu’s operator and approved by the PNG government, the tailings will be neutralised to a pH level similar to that of the surrounding seawater and be devoid of any reactive chemicals such as cyanide or acid. The discharge point will be 500 metres offshore at a depth of approximately 150 metres. The Yandera coppermolybdenum mine in Madang Province is also planning to employ the DSTP method.

With regards to other projects that are operating in the hinterlands far away from the coast, where DSTP is not a viable option, other methods for waste disposal are necessary. The Hidden Valley project will be the first to have long-term storage built to hold its tailings, while similar methods will also be utilised at the Frieda River mine as well as at the WafiGolpu copper-gold project.

OUTLOOK: The country’s largest source of revenue and biggest export earner, the mining industry is poised for a breakout that should see production increase exponentially over the coming decades. With scores of new projects of all sizes in the pipeline and hundreds of more applications for new exploratory licences now under review, mining sector looks to maintain its leading role in the economy despite the growth of other sectors such as the new PNG liquefied natural gas project scheduled to come online in the coming years. These new mining projects will more than compensate the declining production and eventual closure of the more mature sites such as Ok Tedi. Coinciding with this age of growth, the new mining legislation currently awaiting approval is also hoped to resolve a number of issues that have negatively affected the sector in the past, especially in the areas of transparency, social, health and environmental regulation as well as a new framework that will govern the growing offshore mining segment.

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The Report: Papua New Guinea 2012

Mining chapter from The Report: Papua New Guinea 2012

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