Will gold offset the impact of Covid-19 in Papua New Guinea?

 

Alongside the upstream energy sector, mining has long served as the backbone of Papua New Guinea’s economy. In 2019 the mining and quarrying sector accounted for 10.3% of GDP and was a major source of foreign exchange (forex) earnings, according to the IMF. Like the other extractive industries, mining has emerged as a priority for reform under the administration of Prime Minister James Marape, who was elected in May 2019. The country has significant deposits of gold, copper and other precious metals, many of which remain untapped and could generate significant additional state revenue to support education, health care and infrastructure investment.

However, much like with oil and gas, the future of some mining projects in the pipeline remained uncertain as of mid-2020, given protracted negotiations between the government and mining companies. Looking further ahead, Prime Minister Marape appears keen to rebalance the sector towards greater public ownership of mines, although it is expected that the capital and expertise of private investors drawn to transparent regulations will still be required. “In order to attract investors it will be necessary to implement clear policies and regulations,” Jonathan Seeto, managing partner of PwC PNG, told OBG. “In doing so, PNG can be assured of greater participation in and benefit-sharing from its natural resources, without weighing on the confidence of investors.”

Oversight

The sector’s regulator is the Mineral Resources Authority (MRA). It was established by the MRA Act of 2005, which was later repealed and replaced in 2018 by another law of the same name. The MRA has four divisions: corporate services; development coordination; geological surveys; and regulatory operations. There is also a special projects unit in the managing director’s office that deals with donor-funded projects. In addition, the minister of mining – a position held by Johnson Tuke since 2019 – works closely with the managing director of the MRA.

Another important body in the sector is Kumul Minerals Holdings, a state-owned enterprise equivalent to Kumul Petroleum Holdings in the oil and gas sector. Kumul Minerals was established in 2015 as the successor to Petromin PNG Holdings, and is tasked with managing the state’s mining assets. In an effort to advance the development of Kumul Minerals, the government appointed Peter Graham as full-time chairman and acting managing director in 2020, from his previous position as CEO and managing director of the state-owned mine operator OK Tedi Mining.

Mining Act

The main piece of legislation governing the sector is the Mining Act 1992. In June 2020 Parliament passed amendments to the law, as well as those to the Oil and Gas Act 1998. Although the formulation of a new Mining Act remains an objective of the government, the latest amendments passed are in line with the administration’s aim to generate greater benefits for the state from resource projects. In a June 2020 statement to accompany the amendment, Tuke stated that the new legislation would “provide a legal basis for the state to apply for a tenement and develop a mine”. This was, according to Tuke, in contrast with the previous iteration of the Mining Act, which only allowed investors to undertake mineral exploration and mining. Upon the expiry, cancellation or relinquishment of a mining tenement, state entities – usually Kumul Minerals or its nominee– will now be given priority for the new tenure. Furthermore, disputes over reserved land provisions must now be settled only in PNG courts under PNG laws. Another new key legal provision is that every operating mine must provide live data on production, extraction and sales, and submit all mineral and geological data to the MRA.

While Tuke said the amendments were “necessary… to empower the state to participate in the development of our mineral potential,” international investors and domestic mining businesses have not been wholly welcoming of the changes. In a short initial statement following the parliamentary vote, the Chamber of Mines and Petroleum expressed “surprise” at the passing of the amendments, noting that the prime minister and relevant ministers had last engaged with the chamber on the amendments in January 2020, when they had committed to effective consultation. Following this, on June 19, 2020, Gerea Aopi, president of the Chamber of Mines and Petroleum, publicly stated the government had signalled that it now favoured public investment in mining at the expense of private investment. Aopi warned that this risked shifting the burden of risk onto taxpayers, and also noted that local and state-owned actors were not excluded from investment under the current Mining Act. The Chamber of Mines and Petroleum had long cautioned against wide-ranging changes to the existing Mining Act. In particular, it had warned that mining companies needed stability and certainty to commit the significant capital investments required to develop major mines, and that any changes that increase business costs were likely to deter investors.

Licencing

Under the current version of the Mining Act firms typically apply for an exploration licence with the MRA in order to be granted a mining tenement. However, if land is free of tenements companies can apply directly for a mining lease (ML) to develop small and medium-sized mining projects for up to 20 years. A special mining lease (SML) is granted to develop largescale projects for up to 40 years. An alluvial mining lease can also be granted to landowner groups or local citizens for the development of alluvial mines no larger than 5 ha for periods of up to five years. A separate lease for mining purposes may be awarded for the construction of infrastructure required to develop mines under an ML or SML. Meanwhile, a mining easement lease may be granted to develop necessary ancillary operations and services for mines under an ML or SML. Licence applications are reviewed by the Mining Advisory Council, which makes recommendations to the minister of mining on tenement issuance.

The other piece of relevant legislation is the Environment Act of 2000, which is administered by the Conservation and Environment Protection Authority (CEPA). Licence applicants cannot commence operations before submitting an environmental impact assessment to CEPA and receiving clearance.

Performance & Production

Although gold is the most important segment of the PNG mining sector, the country is home to a wide variety of other metal deposits, including copper, manganese, bauxite, coal, nickel, cobalt, chromium, molybdenum and iron sands. Due to the problems of exploration associated with the country’s rugged terrain and limited transport infrastructure, it is widely believed there could be significant amounts of valuable mineral deposits that have yet to be undiscovered.

The country has seven active mines, with the largest being Lihir, which produces gold and is operated by Australian company Newcrest; OK Tedi, which produces copper, gold and silver, and is operated by a company of the same name on behalf of the PNG government; and Porgera, a gold and silver mine. However, in April 2020 operations were closed and placed under care and maintenance at Porgera due to a dispute between PNG and its joint venture (JV) partners, Canada’s Barrick Gold and China’s Zijin Mining Group after the government declined to renew the site’s SML.

Among the country’s other mines is the Ramu nickel and cobalt mine near Madang, which is operated as a JV between China’s Metallurgical Mining Corporation, the Australia-headquartered Highlands Pacific, the PNG government and local holders. PNG is also home to Kainantu, a gold mine operated by Canada’s K92 Mining; Hidden Valley, a gold and silver mine operated by the South Africa-headquartered company Harmony Gold; and Simberi, a gold mine operated by the Australia-based St Barbara.

Ok Tedi is notable for being the only previous example of a large-scale state-owned mining venture in PNG. The mine faced operational difficulties in 2015 after being affected by drought, but has since recovered and been hailed as an example of best practices. The company declared profits after tax of PGK754m ($223.4m) for 2019, a 61% increase on 2018. These increased profits were supported by a 3% annual rise in copper production and a 9% rise in gold production.

According to the World Gold Council, PNG produced 72.9 tonnes of gold in 2019, its highest total output in over 10 years. This was an increase from 68.9 tonnes in 2018 and 64.5 tonnes in 2017, and made PNG the 15th-largest gold producing country in the world. According to government budget estimates gold exports generated PGK1.1trn ($324.4bn) in revenues in 2019, the highest-ever annual total. Copper is the second-most economically important mineral in PNG. The 2020 budget document estimated that the country exported 101.2 tonnes of the mineral in 2019, the highest total since 2012. These copper exports generated PGK2bn ($589.9m), up from PGK1.7bn ($501.4m) in 2018, also the highest total since 2012.

Looking at the wider economic contribution, extractive industries – which include hydrocarbons as well as mining – were responsible for 28% of GDP and 84.2% of exports in 2019, according to the IMF. Overall, the economic output of the mining and quarrying sector was estimated in the government budget to have grown by 2.3% in 2019, a rise that was attributed to the increased production and export of gold.

Prior to the Covid-19 outbreak, the government’s budget projections saw sector growth accelerating to 6.2% in 2020 on the back of higher expected gold, copper, nickel and cobalt output. However, demand for most commodities slumped in the first half of 2020 amid the wider global economic slowdown, which placed downward pressure on prices. For example, copper – which was already on a declining trend due to weakened industrial demand in China – saw prices drop as low as $4626 per tonne in late March 2020, down from more than $6400 in March 2019. The exception was gold, which is widely seen by investors as a safe haven during periods of international financial crises. At the end of June 2020 spot gold prices were hovering around $1760 per oz, up from around $1510 per oz at the end of December 2019.

With the exception of Porgera, PNG’s mines remained operational throughout the first half of 2020, although production was negatively impacted by social distancing precautions and transport restrictions. If mines can maintain operations throughout 2020, there is some hope that forex inflows from gold can at least partially offset any declines in income streams from copper and other metals.

Compared to oil and gas, the mining sector is a much more significant earner of forex revenue. This is especially important in the local context, as the country has faced forex liquidity issues since the end of the construction of the PNG LNG project in 2014. The mining sector generated $1.2bn in forex between January and September 2019, compared to $168m generated through liquefied natural gas (LNG) exports. The low contribution from the energy sector is a result of PNG LNG’s exemption from the Central Banking (Foreign Exchange and Gold) Regulation, which means export revenues do not need to be brought onshore and held in local accounts. Breaking this down, mining was responsible for 44% of all forex inflows in the period, whereas oil and gas contributed 16%. Mining also generated more overall revenue than LNG between January and September 2019, $3.65bn compared to $3.14bn. In addition to being a source of forex, the sector has also proved to be an important source of jobs, with employment in the sector growing by 19% in 2019 to 18,000. Indeed, of the approximately 10,000 formal jobs created annually in recent years, the government estimates that the lion’s share was in mining.

Future Direction

The future of the Porgera mine will have implications for the development trajectory of the wider industry. The leased life span for JV partners Zijin Mining Group and Barrick Gold expired in August 2019 and the government rejected their application for a 20-year extension. With probable reserves of 2.3m oz, it is among the world’s top-10 biggest gold mines and accounted for 10% of the country’s exports in 2019. Backed by independent experts, the government cited environmental and social problems when rejecting the extension.

The decision not to renew the SML is widely viewed as the first concrete example of the government following through on its electoral rhetoric “Take Back PNG” in the mining sector. This slogan encapsulates the policy to generate more substantial benefits for the state from the country’s resource wealth. Although the move was in line with policies articulated by the administration of Prime Minister Marape, there is some concern that it could deter investors from committing the substantial capital outlays required to develop remaining untapped reserves. At the time of writing production had been suspended at Porgera and its future was uncertain. Since ceasing operations the JV partners were reportedly losing $1.7m per day. They have warned that the mine’s closure could affect the livelihoods of 3600 employees and 1500 contractors. Preceding a judicial review to determine whether the government had followed due process, interlocutory matters were scheduled to be considered by the National Court on July 20, 2020. The JV partners have signalled their willingness to resume negotiations with the government in the meantime.

Exploration

According to the 2020 national budget PNG has four potential mining projects, namely Wafi-Golpu (copper and gold); Frieda River (copper and gold); Yandera (copper); and Solwara 1, an offshore project for metal sulphides, gold and silver. Of these, Wafi-Golpu and Frieda River are currently the most significant. In particular, the former is widely considered to present significant potential for GDP growth and export earnings. Once operational, it is expected to have a lifespan of 28 years, with an annual production of 16 tonnes of gold. The initial investment from the JV partners – Newcrest and Harmony Gold – is estimated at $2.8bn, with the government expecting returns of $9.2bn. Although the indications are that the project is likely to go ahead, no final investment decision had been reached as of the end of June 2020.

The prime minister has repeatedly alluded to the project being instrumental for economic development. However, negotiations stalled over the government’s claims for a 40% stake, whereas the previous administration had not made any specific demands or commitments regarding their share of ownership. Progress was also held up in 2019 by a court challenge issued by Ginson Saonu, the governor of Morobe Province, on a perceived lack of consultation on the project – although this was dismissed by the National Court in February 2020. All sides have publicly professed their willingness to reach an amicable agreement.

Elsewhere, the proposed Frieda River project aims to tap one of the largest undeveloped copper and gold deposits in the world. Once operational, it is expected to produce 170,000 tonnes of copper and 250,000 oz of gold per year. The mine forms part of the Sepik Development Project, which also includes plans for a hydroelectric dam, a power grid and infrastructure development. The project is being pursued by the Australia-based, Chinese-owned mining firm PanAust and is expected to receive support from Australian Aid and the PNG government for the infrastructure components. A proposed integrated storage facility with tailings and waste rock storage is under review by consultants acting for CEPA and the MRA. Although a final investment decision may take up to 10 years, PanAust estimates that it would have a lifespan of 45 years and generate A$12.45bn in tax, royalties and levies for the state and customary landowners. However, a June 2020 report by the NGO Jubilee Australia stated that the project could potentially damage the river ecosystem and spark social unrest over resources. In response, PanAust stated that it has submitted an environmental impact assessment and is committed to engagement with landowners. The case highlights the delicate balance that exists between the unlocking the potential of resource wealth, while safeguarding the environment and the rights of local communities.

Facing Challenges

Exploration expenditure has fluctuated in recent years – falling from PGK373m ($110m) in 2016 to PGK340m ($100.3m) in 2017, then rising to PGK378m ($111.5m) in 2018. Globally, a slump in commodities demand and prices is likely to curtail mineral exploration expenditure in the short to medium term. Furthermore, the Institute of Geoscientists PNG cautioned in June 2020 that the amendments to the Mining Act could have a negative impact on exploration, as investors may feel less certain about their long-term rights to resources.

Bougainville may offer future lucrative mining opportunities. The island, which voted for independence in a referendum in late 2019, is known to be well endowed with copper and gold deposits. Australian and Chinese mining firms have reportedly been engaging with landowners and local politicians with a view to gaining future mining concessions. However, the referendum was non-binding and the eventual path to independence remains uncertain as of July 2020.

Outlook

In the short term significant gold deposits could help PNG offset the impact on other mineral exports brought about by the Covid-19 pandemic, while also boosting forex liquidity. Looking further ahead, a swift and amicable resolution to negotiations regarding the Wafi-Golpu project would provide a timely boost to the economy while also reassuring investors of PNG’s commitment to positive engagement with foreign investors. International mining companies eyeing opportunities in PNG will need to engage closely with local communities to ensure they benefit in a sustainable manner from the utilisation of the country’s resource wealth. They will also need to cooperate with the government to ensure that a mutually acceptable fiscal agreement can be achieved. Nevertheless, opportunities still exist for profitable long-term projects that can offer mutual benefits to investors, the government and customary landowners.

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The Report: Papua New Guinea 2020

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