A new dawn for mining after a lost decade in PNG?

A new dawn for mining after a lost decade?

By Brian Gomez

The National

2nd September 2004

The fiscal incentives implemented in the 2003 budget, most of which were previously promoted in the defunct Mine Talk column, is heralding a new dawn for mining.

Leaving aside the alluvial boom in Bululo in the 1930s, Papua New Guinea is entering its third modern cycle of mining growth and development.

This follows the lost decade of the 1990s when poorly considered tax policies and other negatives spelt the near death of mineral exploration activities.

The turnaround in sentiment has been slowly gathering pace and involves both long running projects as well as some new ones.

What is happening is a good demonstration of a point often made in these columns - that true development involves a long and steady process.

Fitful starts such as the Bougainville copper mine was followed about the time of its premature closure by Ok Tedi, then Porgera and Lihir - not an auspicious way of moving forward.

While big individual projects have huge impacts there is a significant gestation period before the real benefits flow into the economy.

The big capital expenditures often mean it could take five to ten years before these companies become tax- paying entities. In the meantime their ability to help the country earn large amounts of foreign exchange tends to keep the domestic currency exchange rates high and indirectly acts as a deterrent to other less competitive sectors, particularly agriculture.

The amount of labour utilised is relatively insignificant although in Papua New Guinea's situation, where unemployment levels are very high, the 2,000 or more workers at each of the big three mines are a major bonus for the regional economy.

As the country develops new projects one expects to learn from mistakes of the past.

A clear lesson from the Bougainville copper mine was the need to ensure that the views of the local community, especially landowners, have to be fully considered before any such project received the green light.

In retrospect it probably could be said that this was one lesson an independent and sovereign Papua New Guinea did not need to learn because the necessity for full consultation with landowners and the local community has been a deeply ingrained value among the nation's leaders.

It is the modus operandi for any mine, since the country gained independence, to sort out land ownership issues through the legal system prior to development, although landowner relationships continue to remain a problematic area during the life of most projects.

Unfortunately too most communities have little choice but to welcome such developments because alternative sources for employment and socio-economic progress are virtually non-existent.

This places an even greater need for different arms of the National Government, such as the Department of Mines and the Department of the Environment, to ensure there is adequate protection in place in terms of environmental safeguards and monitoring and other potential hazards that require technical input.

The post-Bougainville era has been coming to an end. Prior to last year there had been widespread expectations that early in the next decade all major mining activities would cease with the closure of the big Ok Tedi and Porgera mines.

Only the Lihir gold mine, which has had a poor performance since its start-up in 1997, will soldier as a big mining operation in the longer term.

This situation has changed dramatically in the past year as a result of a more favourable fiscal and economic climate.

The middle of next year will see the commissioning of the Kainantu mine in Eastern Highlands. This might have happened even without the latest fiscal policy changes because of the mine's exceptionally high gold grades, close to an ounce per tonne.

But because of the fiscal changes, we can view the coming period as the post-Kainantu era.
This mine will only produce 115,000 ounces of gold annually and become the country's second underground gold mine after the Tolukuma mine in Central Province.

Unlike the much bigger operations, it will probably start paying corporate taxes to the National Government from its second or third year of operation.

With production costs at around US$108 an ounce, this will be among the lowest cost gold mines in the world.

By the time Kainantu comes on stream, work should also have started on Morobe Gold, which by 2006/07 could be producing 300,000 ounces of gold and 4.5 million ounces of silver annually. Its construction would cost around K400 million.

But Morobe Gold's ultimate parent, Harmony Gold of South Africa, is also keen to commence a pre-feasibility study next year on the nearby Wafi gold project, which contains more than six million ounces of gold.

Not far from this is a big copper-gold porphyry project, now known as Golpu, which is being actively drilled so it to can proceed to pre-feasibility studies and subsequent development.
While these are being developed a couple of smaller gold projects should get underway in New Ireland and East New Britain, adding to the diversity of projects around the country.
Highlands Pacific, which has steadfastly pursued its exploration activities in PNG while other companies fled, is about to see big dividends flow its way after the opening of its Kainantu mine.

The Chinese Metallurgical Construction Corporation is undertaking due diligence studies on Highland Pacific's Ramu nickel-cobalt venture and a decision on Ramu could occur early next year.

Meanwhile, its partner in the Frieda copper-gold venture, Noranda Inc, has stepped up exploration and should be ready in a year or two to commence feasibility studies for a project of similar scale to the Bougainville and Ok Tedi mines.

Noranda has already proved up more than a billion tonnes of copper ore, making it one of the world's biggest undeveloped copper projects. It also still has the option of finalising a separate deal with Highlands Pacific on the 60 million tonne Nena deposit, which has a highly attractive average grade of 2% copper.

The new boom may seem to be a long time coming but we are getting there. The more conducive investment climate means these ventures will provide a more satisfactory and sustainable impact on the nation's economy.