Demand brings growth in PNG's mining sector despite legislative challenges

Shaped by shifts in supply and demand, Papua New Guinea’s economy has relied heavily on mineral extraction for most of its modern history. On the back of increased gold, copper, nickel and cobalt production, mining revenue expanded by 18.8% in 2017. As prices rebound, growth in mining activity comes at an important juncture, boosting export and fiscal receipts, as the country grapples with ballooning public debt.

While the economy is still highly vulnerable to commodity price shocks, major investments across a number of strategic mining projects are set to bolster economic output. Despite the positive outlook, inadequate infrastructure, landowner identification issues, the government’s review of resource revenue allocation policies and delayed amendments to the existing mining act continue to hinder the progress of the sector, which by most measures has immense potential.

Industry Challenges

In particular, finding certainty on the framework governing the sector is key for existing projects and potential investors, “Stability in legislation is critical for any major investment,” Peter Graham, CEO and managing director at state-run Ok Tedi Mining, told OBG. “Successive governments have recognised the importance of contract sanctity. PNG is an attractive investment destination from a geological perspective, we just need to get certainty in mining legislation and ensure any that terms remain internationally competitive.”

While mineral wealth has long financed development, it has also encouraged a demand among traditional landowners for greater local autonomy, which has in turn hindered political stability. In addition to the problems associated with struggles for power and resource nationalisation, the government tends to spend revenues before actually collecting fiscal receipts from mining companies, which can lead to financial shortfalls when production levels fail to meet initial estimates.

Additionally, logistical constraints and infrastructure gaps weigh heavily on balance sheets. “About 50% of costs in the mining industry are related to non-mining activities,” John Lewins, CEO of K92 Mining, told OBG. “It costs more to transport concentrate 200 km from the mine to Lae, where it is shipped, than from Lae to China,” he added. However, while the country continues to struggle with its so-called resource curse, mining remains its largest economic contributor. With a number of new projects in the pipeline, and rising demand for certain metals on the back of electric vehicle production, the sector’s economic contribution is expected to grow in the coming years.

Key Figures

Following a strong 2016, the industry witnessed even greater growth in 2017, contributing more than 50% to export revenue, with total revenue at PGK11.53bn ($3.6bn), up from PGK9.7bn ($3bn) in 2016. According to the latest available data from the Mineral Resources Authority (MRA), in 2017 gold was the largest contributor to mining revenue, making up 69.8% of the total, followed by copper (18.1%), nickel (7.5%), cobalt (3.5%) and silver (1.1%). Estimates based on mid-2018 data predict total revenue performance in 2018 may only slightly exceed 2017. This is attributable to the impact of the February 2018 earthquake on the Ok Tedi and Porgera mines and the fall in the gold prices.

Since the closure of Panguna Mine in 1989 (see analysis), the sector has been driven by three main mines: Lihir, OK Tedi and Porgera. All witnessed stronger results in 2017 on the back of better market conditions and efficiencies in production. Improvements at the Hidden Valley, Ramu and Simberi mines, which have grown in contribution since 2015, also boosted numbers. In 2018 the Ramu mine will overtake Porgera as the thirdlargest operating mine by revenue with expectations of achieving almost PGK2bn ($624.4m).The Simberi mining lease expires in late 2018.

According to the central bank, mining sector imports totalled PGK2bn ($624.4m) in the third quarter of 2017, compared to PGK1.5bn ($468.3m) the same period in 2016. For the most part, the increase was driven by higher capital expenditure (capex) by the three largest mines, which offset a capex decline at the Simberi Mine. Under the existing agreements, firms are permitted to use offshore foreign currency accounts to pay for imports. “Gold mining companies are not particularly affected by foreign currency shortages, because they are exporters and they possess a licence that allows them to own a separate bank account to pay for materials and other needs from abroad,” Lewins told OBG.

Lihir

Under the ownership of Newcrest Mining, Lihir in New Ireland Province is the top gold producer, having extracted 10m oz of the mineral between 1997 and 2015. The location achieved new heights in FY 2015/16 when a record annual grinding throughput of 12.1m tonnes produced 900,000 oz of gold. The Australian-run facility has continued to set records, producing 940,000 oz during FY 2017/18, with throughput reaching a record 14.5m tonnes per annum in July 2017. The mine generated approximately PGK3.57bn ($1.1bn) in revenue in 2016, 37% of the PNG’s total for the year, and represents a 42% increase over 2015. For the most part, mill throughput improvements have been achieved with the installation of better designed mill liners as well as timely shutdowns.

Newcrest Mining reported a strong quarter of production in July 2017, as higher mill throughput meant more material passed through the float circuit, which reduced overall plant recovery by up to 3-78%, while all-in sustaining costs (AISC) were $802 per oz.

In December 2017 Lihir had 340m dry tonnes of total reserves, averaging 2.3 grams per tonne (g/t) and 25m oz of in-situ gold. According to the mid-fiscal year results, the annualised mill throughput rate stood at 13m tonne, 4% higher than the same period in FY 2016/17. It was on track for 14m tonnes per annum for the calendar year of 2018, while 15m tonnes per annum was expected to be reached by June 2019.

Ok Tedi

For more than 30 years, the Ok Tedi copper mine in the Western Province has been a major success story for PNG, generating PGK56bn ($17.5bn) in revenue from 1985 to 2016, and accounting for approximately a quarter of national export revenue in recent years. However, the mine has also been hit by a number of natural disasters which have affected output. During 2015 and 2016 the mine was closed for seven months as a result of the drought induced by El Niño, which prevented shipments to Japan, Asia and Europe. The drought was followed by the collapse of a section of the west wall which caused production from the centre pit area of the mine to temporarily cease. During the closure, the mine’s operator took a number of measures to enhance the facility, such as reorganising operations and restructuring the workforce on a fly-in, fly-out basis. After only 10 months of operation in 2015, OK Tedi Mine made a resilient turnaround in 2016 with revenue increasing by 69% to PGK2.06bn ($643m), making it the second-largest contributor to total revenue for the year.

On the back of bullish markets, the mine has increased output. The price of copper has risen significantly since its record low of $1.94 per pound in January 2016, reaching a 52-week high of $3.27 per pound recorded in the first quarter of 2018. According to company data, the mine produced 105 kilotonnes (kt) of copper in 2017, resulting in an annual profit after tax of PGK864m ($269.7m). While the mine experienced a full year of production in 2017, operations were halted for a period of two weeks in February 2018, when a 7.6-magnitude earthquake struck the Southern Highlands and Hela Provinces, leading to a large landslide which blocked road access to the mine and ruptured the copper-concentrate pipeline as well as the backup water supply line. According to senior management, following the brief closure the budgeted production for 2018 was reduced from 110 kt to 105 kt. While improved commodity prices assisted, the mine’s strong performance in 2017 can be attributed to mine optimisation, improved productivity and improved cost controls. Expenses were reduced from an average of $64m per month in 2014 to $39.6m in 2017, while production was increased.

Porgera

Located more than 2000 metres above sea level in Enga Province, Porgera is the second-oldest operating mine in the country. The facility is co-owned by Barrick Gold and China’s Zijin Mining, which formed a strategic joint venture in August 2015. The deal included a 50% share in Barrick Niugini, the subsidiary tasked with managing the Porgera mine, for approximately $298m.

Similar to Ok Tedi, Porgera saw its production halted in early 2018 after a shallow earthquake damaged power infrastructure. As of mid-2018, the full extent of damage had yet to be announced, though the loss in production and more recent fall in the gold price has had a significant impact on first half revenue. In 2016 the mine was the sector’s third-largest revenue generator for PNG, behind only Lihir and Ok Tedi, contributing PGK2bn ($624.3m), around 20% of total mining revenue. Annual gold production stood at around 500,000 oz, with resources of 16.08m oz, averaging 3.3 g/t and reserves of the metal of 6.11m oz at 3.48 g/t. Similar to Ok Tedi and Lihir, Porgera mine has managed to improve efficiency and reduce costs, with an AISC in 2016 of $680 per oz, compared to $785 per oz in 2015.

Other Players

In addition to the top three, a number of other mines increased their contribution to revenue in 2017 and enjoyed a strong start to production in 2018. The Ramu nickel-cobalt project in Madang Province, under the management of Metallurgical Corporation of China, has seen its production rise above its nameplate capacity, due to worldwide increases in electric vehicle production (see analysis). Ramu is proposing a $1.5bn mine, pipeline and refinery upgrade over the next four years, which will more than double nameplate capacity. Simberi in St Barbara has also witnessed steady improvement in recent years, with gold production rising by 38% to reach 110,000 oz in FY 2016/17, up from 79,600 oz a year earlier, according to the Chamber of Mines. Though the increase was driven by an earlier upgrade, the mine’s AISC remains comparatively high at $1080 per oz. In the Eastern Highlands, the Kainantu gold mine, purchased from Barrick Gold in 2015 by K92, has also been earmarked as a key gold and copper producer. Lewins told OBG, “Kainantu, located in the Markham Valley, contains over 2.5m oz of gold. Currently, it is producing 50,000 oz per annum, with a capacity to increase to over 200,000 oz per annum, including 3000 tonnes of copper.”

Oversight

As it stands,regulatory oversight for the industry belongs to the MRA with the Department of Mineral Policy and Geohazards Management (DMPGM) responsible for policy. Established in 2005, the authority is tasked with issuing tenement licences consisting of exploration licences (ELs), mining leases and special mining leases. By the end of 2016 a total of 182 mineral tenement licences had been issued, with a total of 595 registered tenements and 246 registered ELs, ranging from active plots to extensions and new applications.

The MRA is also responsible for promoting the sustainable development of the industry through the collection and distribution of geological data under the Geological Survey Division, as well as the coordination of the State’s development agreements and settling agreements for mine revenue distribution with landowners and provincial governments. Under its policy role the DMPGM has responsibility for the various mineral policy documents now referred to Government and the amendments to the 1992 Mining Act, which have been in discussion for several years and are proving to be a source of frustration to the industry. In February 2018 the reforms had yet to be formalised, however, the prime minister’s office announced that they should be put before Parliament by November that year.

Under Discussion

Stakeholders have expressed a number of concerns over the legal changes under discussion. Some fear that the doubling of the production levy rate from 0.25% to 0.5% and the requirement to remit 35% of annual production levies to the DMPGM could hinder the execution of projects. Others are worried that a planned reduction in maximum term leases from 40 to 25 years, along with a shortening of renewal periods from 20 to 10 years, will detract from investment as such proposals, along with the state’s right to compulsorily acquire a mine upon expiry of the first term of the mining lease, would undermine long-term security in development investment.

The Chamber of Mines has also voiced concerns over a delay in an independent review of amendments to the act, agreed upon in 2017. In addition, the chamber has been outspoken about the potential removal of direct industry representation on the MRA board. With successive governments benefitting from the independent role played by the authority, many are strongly against the suggestion to remove industry representation.

Tenements

Tenement activity in recent years has declined, but the fall in exploration licence applications plateaued in late 2017. In terms of new applications, cobalt exploration has been bolstered by the electric car market, with the success of the Ramu nickel mine a good indication of the country’s potential (see analysis). While requests for cobalt licences have increased, The MRA has been pro-active in the removal of tenements that were no longer active.

Upcoming Projects

Despite the recent streamlining of tenement activity, several new projects are in the works and generating interest. The Frieda River copper-gold project in Sandaun Province, for example, is one of the world’s largest known undeveloped copper deposits, with a base of 2.7bn tonnes of ore. Though Australian firm PanAust, the lead developer, lodged its application for a special mining lease in June 2016, the assessment process has been postponed while the feasibility study is updated. “The mine will be developed with Chinese partners,” Fred Hess, managing director of PanAust, told OBG, adding that necessary developments, such as port facilities, power supply and road access, as well as managing environmental concerns would have a wider economic impact on the region, with a large focus on industry via downstream development.

Another highly anticipated development is that of Wafi-Golpu, in Morobe Province. The mine is considered to be the 12th-largest gold deposit in the world with 37.6m oz of reserves. If approved, the project will be under the management of Morobe Mining Joint Ventures, a combined enterprise of Newcrest and Harmony Gold, while Kumul Minerals Holdings, which holds the state’s mining interests, is expected to take up its rights to 30% equity in the project. According to initial estimates, the deposit contains 26m oz of gold, 8.8m tonnes of copper and 48m oz of silver.

Outlook

Continuing with the existing trend, PNG’s economic dependence on gold will ease as production of copper, nickel, cobalt and other minerals increases.

“The mining sector is in a strong position as nickel, cobalt and copper are hot properties,” Roger Gunson, executive manager of the MRA, told OBG. “PNG now has a greater mineral base and is well positioned to take advantage of the electric vehicle and lithium battery market.” Major mines will continue to benefit if favourable market conditions continue, with a consensus expecting the price of copper to remain around $3 per pound throughout 2018. While the price of gold is more difficult to forecast, and has recently suffered a sustained fall from 2017-18 highs, if it remains near the $1200 to $1300 per oz mark, producers will continue to see strong results at existing AISC levels. Meanwhile, cobalt and nickel prices are expected to rise steadily.

There are still significant short- to medium-term challenges for the industry. The sector must contend with a number of environmental issues, as well as land rights ambiguities and the uncertainty associated with delayed legislative changes. However, as far as economic output is concerned, mineral resources will continue to be the primary driver of the country’s growth.

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The Report: Papua New Guinea 2018

Mining chapter from The Report: Papua New Guinea 2018

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