Weekly Commentaries

This is Sunday Chronicle's weekly commentaries on various issues of interest affecting the country. All individual commentators are done by elite Papua New Guineans from diverse educational backgrounds.

Saturday, January 30, 2010

PNG Resources Weekly

As Ok Tedi plans closure a big one comes along


WITH all the government and public attention on the proposed LNG projects in Gulf, Western and Southern Highlands provinces, the mining sector seems to have paled into an insignificant thing of the past. But that is certainly not so. It remains very vibrant and progressive in the shadows of the LNG  hype.

The mining industry continues to be a very important part of the PNG economy contributing directly to infrastructure development, employment, health and education facilities, big-spin-off businesses and billions of kina paid directly into national and provincial governments through indirect and direct taxes and royalties.

Much of the funds used to fly the LNG landowners around the country and paid to the crowds waiting outside the Vulupindi House comes from the mining sector. Our Huli tribesmen have virtually taken over the Finance Department's front yard awaiting payments. If Governor Anderson Agiru doesn't encourage his people to return to their Hela Province, we will have Vulupindi House besieged by people demanding payments, it's happening even before gas production stage.

While we are excited about the gas projects and its benefits, lets also give the same scrutiny to the mineral sector and learn some lessons on benefits distribution and ensure that mining needs are also attended to with equal stamina and attention. On that note, there is an urgent situation that requires immediate and appropriate response to the giant Ok Tedi mine in Western Province.

Ok Tedi Mining Ltd is nearing the end of mining production. It plans to cease operations by the end of 2013 and shutdown and pull out by 2014. Unless the government gives approval to extend its mine life to 2020, the remaining ore body will be lost forever because it won't be economical for another company to move in after demolition and removal of OTML's plant and equipment.

Ok Tedi is among one of the largest open-cut copper mines in the world which has contributed immensely to the growth of PNG since it commenced mining its gold cap on Mount Fubilan in 1984.

It digs up around 23 million tonnes of ore and 30 million tonnes of waste each year to produce 600,000 tonnes of copper concentrate which contains 160,000 tonnes of copper metal and 600,000 ounces of gold. The concentrate also contains a significant quantity of silver.

In huge mining operations like Ok Tedi, environmental concerns are major issues being managed by the company's environmental scientists and the government's Department of Environment. The benefits to the state, provincial government and local communities are quite significant and unlike any other mining and oil company in PNG.

The state's 30 percent equity combined with PNG Sustainable Development Program's 52 percent gives 82 percent of direct cash flow into PNG for nation building, according to OTML Managing director Mr Alan Breen. The financial rewards are expected to climb to 100 percent as OTML assumes Inmet Mining Corporation's 18 percent equity as it opts out of its shareholding in return for 5 percent of Net Smelter Returns.

Since the first gold pour in 1984, the company delivered K13 billion in benefits through taxes, royalties, dividends and infrastructure projects, community projects and compensation payments. A break-down of benefits to date are as follows:
Mine area village royalties          K214 million
Fly River Prov. Govt royalties    K301 million
PNG Govt. taxes                       K5.165 billion
Tax on salaries and wages          K580 million
Dividends to state                       K2 billion
PNG Sustainable Dev. Prog.       K3.388 billion
In-country purchasing                  K3 billion
Health services                            K160 million

If the government and the local communities get their acts together and extend the mine for another 20 years from 2014, there is a further K3 billion to government and K2 billion to PNG Sustainable Development  Program.

Other than the government, OTML is the single largest employer with over 3500 people in its operation as well as 1000 people by contractors and spin-off businesses. Over 95 percent of the staff are PNG nationals.
OTML also has a proud history of training technicians and professionals. It has trained over 1000 trade apprentices and over 300 university graduates in its skilling and graduate programs.

The Ok Tedi mining township has seen a large population growth to about 30,000 people who rely on the mine's continued existence for their livelihood.

Mr Breen says the extension of mine life at Ok Tedi presents a genuine opportunity for the state and for the country "but the window for an extension is fast closing."

He says that in order for new ore to be available for processing in 2014, stripping of the west wall must be commence this year (2010). That requires completion of a feasibility study along with informed community consent and government approvals by no later than October this year together with an environmental impact study, says Breen.

The project can only proceed if the environmental impact study proves that there won't be any "material changes" to what is already being caused.

He says any delay in the project by up to 18 months will result in a production gap that will "significantly devalue the project in terms of economics and efficiencies"

While he may sound ambitious, he admits it's easier said than done and the mine life extension is at "considerable risk."

He concedes that while the national government's primary focus is on LNG, the extension of Ok Tedi's mine life extension is not quite in the same league as LNG, the decision on Ok Tedi "is as important for the country as LNG and requires the same level of scrutiny."

In comparison with the proposed PNG LNG employment figures, he says from his data, OTML mine life extension will employ more than double the PNG nationals than will the PNG LNG project and because of OTML's unique shareholder structure, the combined additional benefits to the state and PNGSDP dividends is more than half that derived from LNG.

Whether or not the mine closes at the end of 2013 or is extended until 2020, it is something that will ultimately be determined by mine impact communities and the state.

If it closes, the impact will be adverse. Tabubil will turn into a ghost town. Under the project agreement, PNG Power will take ownership of the hydro-power station that powers the mine but it will eventually grind to a halt. Schools and the medical services will shut down, the road to Kiunga and the Tabubil and Kiunga airports will fall into disrepair and eventually be abandoned. The village communities will return to their dark ages.
In anticipation of mine closure, the PNGSDP last week advertised for a mine closure community relations manager and a community relations officer to start the process of educating and creating awareness among the impact communities on the inevitable.

There is also an opportunity for some of the 3500 OTML staff to be absorbed into the Frieda Copper and gold mine which is located almost like over the next valley. If understanding could be reached between relevant government authorities and Xstrata, the developer of Frieda, some facilities at Tabubil could be leased by Frieda, eg; housing for Frieda workers who could commute between Tabubil/Kiunga and Frieda. PNG Power could also sell electricity to Frieda by running pylons across from Tabubil. OTML's trades training centre could be maintained to supply skilled manpower to Frieda. A pipeline could be build to pump slurry from Frieda to Mt Fubilan and on-connect to Kiunga for processing and export.

There are a lot of opportunities which the relevant parties should quickly consider if it chooses to shutdown Ok Tedi come 31st Dec.  2013.

Frieda is expected to commence production in 2017 with prefeasibility study expected to be completed in the third quarter of this year and construction to commence in 2012.

Xstrata is a Swiss mining giant which took over Frieda River project in 2007 and since then has been fast-tracking assessment of its large gold and copper deposit and increased the size of its orebody by 26 percent last week which vastly improved the economics of the project.

Dugie Wilson, Xstrata's general manager in PNG told ABC radio that the mine has an expected life-span of 20 years and this would rank as one of the top ten Greenfield projects in the world.

In comparison with Ok Tedi which processes 23 million tonnes of ore a year, Frieda proposes to dig up 40 million tonnes a year which makes the Frieda project mindboggling.

Waste management at Frieda will be an important issue and Mr Wilson assured ABC radio it will not dump tailings into the Sepik River system. He says Xstrata places a high priority on environmental sustainability.

"We would not build a project which resulted in tailings being dumped in the river. Xstrata just would not be there," said Mr Wilson.

Asked if that meant Xstrata devising a new means of waste management aside from riverine disposal, he said: "Well certainly, as I said, Xstrata will not build a project which dumps tailings into the river. We have a design which is being developed of how we will actually store the waste rock and also the tailings. I mean both of them are significant challenges, but we think that we have some answers there as a risk mitigation that we are through the studies carrying more than one option, so that then if we start finding that we are entering a blind alley and that we see some technical difficulties with a particular option, that we have still got others. So we don't get forced into a place we don't want to be"

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