Papua New Guinea – prepare to be flexible
Michael Schwartz takes a look at this unconventional country, which could prove to be a treasure trove of copper, gold, oil and liquefied natural gas for miners.
Papua New Guinea (PNG) enjoys a rich endowment of natural resources but their future development, as in the past, has been hampered by remote locations in inhospitable, unusual and difficult terrain. Such development is hindered by the extra costs of dealing with these physical challenges, although recently there has been a liberalisation of transportation (most roads in PNG are dirt roads and need investment) and telecommunications.
Any PNG government is faced with the need for transparent and accountable practices, hence the work over the past three years to create a Sovereign Wealth Fund to manage government surpluses from minerals and energy. The Government has acknowledged the need to increase investor confidence as PNG scores very low among many criteria, including land dispute resolution – as revealed by the 2014 Canadian Fraser Institute in its survey of senior mining personnel.
While foreign investment has exploited a large range of deposits, mention should be made of the state-owned Ok Tedi Mining Limited (OTML) gold-copper-silver mine. Operations at Ok Tedi commenced in 1981, but a major change occurred in 2002 when BHP divested its interests to the PNG Sustainable Development Programme. Within 10 years, OTML had become wholly-owned by PNG. In 2013, OTML saw the PNG Government extend its holdings to 87.8%, the rest being contributed by local interests.
Mining will continue at Oki Tedi until at least 2025. Closure had been planned for 2010 but updated analysis and greater support from local communities mean that continuation has been secured. For 2014, the target was 73.5Mt total mined, comprising 20Mt ore and 53.5Mt waste. While production figures for 2014 have not been released, those for 2013 totaled 105Mt – 523t of copper, 364,782oz of gold and 960,502oz of silver, selling for US$1.2 billion in all. Since 1981, Ok Tedi has yielded 4.4Mt copper, 13.6Moz gold and 28.3Moz silver.
PNG is one of four countries whose recent changes in mineral taxation are covered by professional services company KPMG in its Trends in Taxation report. Along with Australia, Mexico and South Africa, KPMG examines how mining operations cope with transparency, mining royalties and volatility.
Michael Frazer, KPMG Australia’s Tax Director, Energy and Natural Resources, notes that, within PNG’s complex resources tax system, varying rates are paid for oil and gas and mining and that, while the current corporate tax is 30%, some older projects incur 50% taxation. One specific example of this lack of consistency occurs with the rent tax (additional profits tax), which only applies to designated gas projects.
In fact, PNG’s entire fiscal regime was under review in 2014, at the hands of a Taxation Review Panel. In Michael Frazer’s opinion, the panel’s review is not likely to be published before the end of 2015 and predicting substantive changes to the present system is difficult. Resource companies can, Frazer continues, expect amendments to tax issues, but it is unclear whether more fundamental change is forthcoming.
On occasion, mining in PNG takes place in unconventional environments. Newcrest Mining Ltd, which operates in four countries, acquired the Lihir operation on Niolam Island when it merged with Lihir Gold Limited in August 2010. The gold deposit at Lihir, one of the world’s largest, lies within an extinct volcanic crater, Luise Caldera, which is still geothermally active.
Most of Lihir’s ore is refractory and is treated by pressure oxidation before recovery by conventional leaching. Unorthodox location or not, Lihir produced more than 720,000oz of gold from January to June in 2014 and more than 9Moz since production started in 1997.
Growth opportunities for Lihir lie in the recent commissioning of mining infrastructure that, in the last two years, has expanded with a new crushing installation, enhanced power and water supplies, and upgraded ore processing. This will enable Newcrest to attain its declared objective of 1.2Moz/y of gold. Even this may be surpassed, as new deposits have just been identified – in some cases, they are restricted only by the Pacific Ocean.
Nautilus seabed mining continues
Mention of the Pacific Ocean – and unfamiliar mining techniques – brings Nautilus Minerals into this review. The December 2014 Materials World article on seabed mining described the progress being made by Nautilus Minerals at its Solwara project, off the coast of PNG.
To bring the most recent developments up to date, Nautilus has just announced that the mechanical and hydraulic assembly of the collecting machine, the second of its three seafloor production tools (SPTs), has been accomplished at the Newcastle-upon-Tyne, UK-based Soil Machine Dynamics workshops. The collecting machine is the lightest of the three SPTs, weighing 200 tonnes when fully assembled. It is designed to collect material cut from the seafloor by drawing it in as seawater slurry with internal pumps, and pushing it through a flexible pipe to the riser-and-lifting system and onto the vessel.
Since then, Rolls-Royce Marine of Norway has been awarded the order for the engines and thruster packages for Nautilus’ production support vessel. The actual shipyard that has placed the order is Fujian Mawei Shipbuilding Limited – more specifically, the order comprises the main engines and thrusters.
The vessel, delivery of which is expected by the end of 2017, will measure 227 metres in length and 40 metres in width, with accommodation for up to 180 people and generation of roughly 31MW of power. To minimise the equipment integration to be completed following delivery of the vessel, all of the below-deck mining equipment will be installed in the vessel during the build process.
Flexibility of arrangements
Foreign investment in PNG is not confined to companies operating independently. For example, Wafi-Golpu, the gold-copper project run by Morobe Mining Joint Venture (MMJV), will move into feasibility this year. MMJV is 50:50 owned by Newcrest Mining and Harmony Gold Mining Company Limited of South Africa. The project goes back to 2008 and looks for opportunities in Morobe Province in eastern-central PNG. Three JVs are operated by a series of general managers who report to an overall 50:50 Harmony/Newcrest committee. The projects are Hidden Valley mine, Wafi-Golpu and Morobe Exploration, covering in total 13 exploration leases over 4,046km2.
In the case of Hidden Valley, there is a memorandum of agreement among the JV, local landowners and Government at all levels. Precedence is given to landowners and local residents. Annually, Hidden Valley is expected to produce 250,000oz of gold and 4Moz of silver. In addition to the mining aspects of Hidden Valley, local residents can opt for training in fish farming, and coffee and cocoa growing.
Wafi-Golpu, at advanced exploration stage, lies roughly 65km south-west of Lae, a port and second city of PNG. The exploration has revealed a world-class porphyry deposit hosting one billion tonnes containing 20Moz of gold and 9Mt of copper. Underground mining techniques are considered appropriate for this project.
December saw the decision to proceed to feasibility study. One interesting financial point is that the PNG Government, as a result of its pro rata investment costs, has the right to purchase equity interest of up to 30% in any discovery at Wafi-Golpu any time before mining starts.
PNG’s deposits might be described as flexible – they are impossible to classify by one decription. Very often, the sheer remoteness of deposits means logistical and financial challenges. Remoteness extends to the seabed as Nautilus proceeds towards its goal. In the case of Ok Tedi, the standard view of a mining operation being owned by one single private company does not apply. Nor does the single-operator model apply at MMJV, as Newcrest and Harmony pool their investments in three JVs.
Initial involvement in PNG may be complex and deterring, but the sheer volume and variety of the resources will surely reward proactive investors and equipment manufacturers.