Under review: The state of the Wafi-Golpu project and future investments

The future of Wafi-Golpu, a major gold and copper mine in Morobe Province to be developed by South Africa-headquartered Harmony Gold and Australian-owned Newcrest, appears uncertain after the government of Papua New Guinea told investors it intends to seek further benefits. Sam Basil, the then-treasurer, announced in June 2019 that the negotiation with the two firms was on hold until the national government negotiating team talks to the Morobe provincial government about its objectives for the project, following a court injunction.

The provincial government is seeking a greater stake in the project and has challenged the legality of the memorandum of understanding (MoU) that the joint venture partners had signed with the government of former Prime Minister Peter O’Neill. The MoU was signed in December 2018, and committed the government and the investors to finalising an agreement by end-June 2019. However, a new political environment emerged in May 2019 when O’Neill was replaced by James Marape, who has promised to review such deals. “We must find a way to ensure that these resource project deals capture enough value for the state and our people,” Basil told international media in June 2019.

Project Plan 

If the project goes ahead, it is estimated to be worth an initial investment of $2.3bn, with a payback period of 9.5 years, and the mine is expected to yield 320,000 oz of gold and 150,000 tonnes of copper annually. PNG has the right to buy 30% equity in the Newcrest-Harmony project at any time before the grant of the SML, though it has no obligation to do so. The developers have proposed accommodation facilities for some 1400 employees, along with a temporary construction camp for 1000 people. The site is located 65 km south-west of the commercially significant city of Lae. The proposed mine site sits at an elevation of approximately 200 metres above sea level in mountainous terrain and is located near the Watut River, approximately 30 km upstream from the confluence of the Watut and Markham rivers.

Deep drilling conducted since 2008 identified three distinct sets of deposits: the Golpu porphyry deposit, which was estimated to contain 18.6m oz of gold and 8.6m tonnes of copper; the Wafi epithermal deposit, which has an estimated 7.2m oz of gold; and the Nambonga porphyry deposit, which was estimated to contain 1m oz gold and 86,000 tonnes of copper. Porphyry deposits are ore bodies formed from hydrothermal fluids that originate from magma chambers several kilometres below the deposit itself. Associated with these fluids are vertical dikes of porphyritic intrusive rocks, from which this deposit type derives its name. Epithermal deposits are hydrothermal deposits formed at shallow depths below a boiling-hot spring system. According to an updated feasibility study in March 2018, however, the Wafi-Golpu deposits were estimated to contain 13m oz of gold and 4.4m tonnes of copper.

Environmental Concerns 

The initial focus of the project is on the Golpu porphyry deposit. Pre-feasibility and feasibility studies were completed in 2016, and an application for a special mining lease (SML) was submitted to the Mineral Resources Authority (MRA) the same year. Further technical assessments were subsequently undertaken, and in June 2018 an environmental impact statement (EIS) was submitted to the Conservation and Environment Protection Agency. Newcrest and Harmony have made the EIS public and carried out an extensive public engagement exercise to reassure local communities that measures will be taken to curb the project’s environmental impact. More than 1000 people from Lae, Wagang, Wampar, Chifasing, Yanta, Hengambu and Babuaf raised concerns about the pollution that may result from the discharge of tailings into the Huon trench off the coast of Lae. In response, the joint venture partners said that water discharge from the site will be captured and treated before being released by the deepsea tailings placement method at depths well below 200 metres to ensure there is no damage to fish stocks, which support local livelihood.

Public Relations 

The joint venture has made great efforts to win public approval for the project. It invested over PGK1m ($303,000) on cocoa development in the lower Watut region; trained women in food processing skills; up-skilled locals in catering, bakery, food safety, hospitality, and occupational health and safety; carried out literacy campaigns; and contracted small landowner firms for local services, such as transport and rubbish disposal. Newcrest and Harmony also refurbished local school infrastructure, supplied learning materials and funded teacher training programmes, as well as pledged to abide by a formal code of conduct that prohibits its employees from engaging in bribery and corruption. Additionally, the joint venture promised to give preference to locals in procurement and employment, and laid out a roadmap to enhance business opportunities for landowners. It also committed to spending 20% of its expenditure budget on PNG firms during the construction phase and establishing a local supplier database.

Project Progress 

Wafi-Golpu is the first largescale mining project in Morobe Province since Hidden Valley started operations in 2009. While initial capital costs are pegged at $2.8bn, the total project could cost as much as $5.3bn over the 28-year mine life. The project is expected to create over 2500 jobs during the construction phase and 850 during the operation stage. The deadline to sign a final agreement was set for June 30, 2019; however, progress stalled after Ginson Saonu, the governor of Morobe Province, challenged the legality of the MoU signed between the government of former Prime Minister O’Neill and the developers. According to the MoU, the terms of the deal were to be set in compliance with the Mining Act 1992, which has been due for amendment. Prime Minister Marape indicated at the beginning of August 2019 that he intends to make an announcement on the future of the project before national independence day on September 16.

Investment Climate 

Investors fear that proposed changes to the Mining Act 1992 may discourage further investments in the sector. One proposal is to reduce the SML term from 40 years to 25 years and its renewal period from a maximum of 20 years to 10 years. The second is to give the state the right to acquire the mine upon expiry of the first term of the mining lease. The third is to prohibit the shuttling of workers in and out of the country as a matter of routine; the so-called fly-in, fly-out arrangement is common practice in the mining industry, which critics say allows firms to avoid taxes. Concerns have also been raised over the doubling of the production levy from 0.25% of gross production to 0.5% and the increase of royalties from 2% to 3%. Other aspects of the proposed changes have also been questioned, including the limitation of the state’s exposure to sunk costs, the imposition of stiffer penalties on miners for violations and the short lead time of 12 months for firms to comply with the changes. The PNG Chamber of Mines and Petroleum, a body that represents the extractive industry, says such changes pose significant deterrents for investment in future projects and will be a serious impediment to the operation of current mines in PNG. As of July 2019 the proposed legislative changes were being reviewed by lawmakers and set to be submitted to Parliament the coming September.

Looking Ahead

Projects such as Wafi-Golpu are subject to the risks normally associated with joint ventures that have long gestation periods. Even before the first drilling was made on-site, Newcrest and Harmony had collectively spent over $80m on the project since 2017. Disagreement between partners on how to develop the mine efficiently, difficulties meeting financial obligations and the high political risks associated with a sovereign state that seeks more returns could have a negative impact on the viability of the project if the risks are not managed well. It could also have a cascading effect on future mining projects, as investors may become wary of making large financial commitments in a sector that is prone to policy and regulatory uncertainty. It remains to be seen whether Prime Minster Marape can effectively balance community complaints and voter aspirations with the demands and expectations of foreign investors. If he succeeds, the future of the mining sector in PNG will remain bright.