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 23, 2010

PNG Resources

A weekly column on PNG Resources By YEHIURA HRIEHWZI - freelance reporter

Mining sector shocked at Hoods exit from Lihir

THE PNG mining industry was last week shocked with the sudden resignation of Arthur Hood as the Chief Executive Officer of Lihir Gold Limited (LGL) after four years at the helm with just 10 months remaining in his contract of employment.

But the share market appeared to welcome his resignation as the company's share prices on the Australian Stock Exchange  behaved favorably to the news. Speaking to one Papua New Guinean shareholder in Sydney last year, he was disappointed that there had not been any dividends paid by LGL since it started production almost two decades ago until late last year.

Earnings made from its flagship operation on Lihir - one of the best performing mines in the Oceania region - went to purchase other mines including an old goldfield in Ballarat, Australia.

Hood's decision to buy Ballarat in 2006 proved to be one of the worst investments by any Australian company in the past few years. A total of $A350 million (K928.3m) of shareholder funds was thrown away.
LGL has laid off most of its workers in Ballarat and the project is on the auction block with no expression of interest from other miners.

For all the problems with that project Lihir's overall performance in recent years has been good enough to withstand the Ballarat setback and its market valuation was currently about A$7.8b (K20.6b).

When his board chairman Dr Ross Garnaut told him last week that his contract would not be renewed in September this year, he immediately tendered his resignation. LGL's chief financial officer Phil Baker will be interim CEO while the company goes out on a recruitment drive for Hood's replacement.
His base pay last year was $A1.8 million (K4.77m) and he was entitled to $4.8m (K12.7m) in short and long term payments on termination of a five-year contract.

He is leaving 10 months ahead of the expiry of that contract and yet will collect $3.6m (K9.54m) in cash, including $1.3m (K3.4m) to make up for some short term share incentives he will miss out on. But there is debate on whether he should get a good bat on the back for leaving ahead the expiry of his contract of employment.

While he may have mud thrown at him for the Ballarat buy, there are some good decisions that warrant a feather in his head with his departure. LGL purchased another  Australian gold miner Equigold for A$1 billion (K2.65b) to move into the Ivory Coast with the operating Bonikro mine, and the Mount Rawdon mine in Queensland, Australia. He also led the $US860m (K2.45 billion) plant expansion at Lihir that lifted output capacity by 240,000 oz per annum.

Group production in 2009 was a record 1.2 million oz, which was above expectations.
Some analysts and fund managers in Australia have recommended that Lihir should diversify away from a large dependence on PNG, however, Lihir stands out as one of the best gold projects in the Oceania region.
Meanwhile in the oil and gas sector there is plenty of good news coming from the Papuan Basin  where Talisman Energy Corp and InterOil  are planning for development and recovery of oil and gas in their respective licences.

Talisman announced it will start development drilling in one of  its fields and also drill four on-shore exploration wells and InterOil is sending its drill pit deeper into the earth to confirm oil volumes after it hit gas on the top which flowed at world-record level of 705 million cubic feet of gas per day, followed then by condensate, then oil shows in wellbore and is now drilling deeper into the porous reef structure of Antelope 2 where it is anticipating hitting the big one - oil.

In the case of Talisman, its CEO and President Mr John Manzoni announced the company expected to start development drilling this year.
Development drilling is done to recover oil, gas or condensate that has been discovered.
The PNG activities form part of Talisman's global capital expenditure plan of Canadian $5.2 billion (K14.8b) for 2010 announced by Mr Manzoni.

Apart from PNG, Talisman also step up its exploration and production work in Indonesia, Malaysia, Vietnam, Australia, Europe and North America and sell off some non-core assets to assist with financing of its programs. It is already cashed up with CAN$4b (K11.4b)

Among its priorities for the year is to build up its organizational capability. "Our executive team was strengthened last year with the addition of Paul Smith, Richard Herbert and Nick Walker at the executive level, as well as significant new talent across the organization, including new country managers for Malaysia and PNG,"  said Mr Manzoni.

As for InterOil, its positive announcements are causing a frenzy of excitement on the New York Stock Exchange where it is listed. Its share prices quadrupled within the last 12 months to over $US80 per share and is headed for the $US100 mark, if not over. This makes the company's capitalization at more than $US3 billion (K8.5b).

The indications of oil at Antelope 2, if successfully tested to be a significant oil column and commercially viable, will completely change the economics of the second liquefied natural gas project for PNG.

"While cleaning the wellbore to conduct drill stem test No.3, oil shows were circulated to surface at the depth of 2,325 meters," according to a statement released by Mr Joshua Kalinoe, managing director of Petromin, a partner with InterOil in Liquid Natural Gas Limited which will develop the LNG project.

The well was then drilled ahead to 2,337.5 metres, when a drill break was encountered, and in drill samples recovered, light crude oil equivalent to 45 degrees API was extracted," Mr Kalinoe said. "This is a very encouraging result, as it indicates that the top of an oil column under a column of gas may have been intersected." The current operation includes a conventional core sampling program, followed by a wireline logging survey through the potential top oil zone. "Drill stem test (DST) number three will then be performed over the zone below 2330 metres to evaluate the nature of the oil indications, early this week," Mr Kalinoe said.

He said the forward program after DST number three will be to drill ahead to total depth of about 2525 metres and possibly conduct a core sampling program as well. This, Mr Kalinoe said, would then be followed by a wireline logging survey and a possible test after a full log and well evaluation.

Mr Kalinoe said that if a significant column of oil was discovered, the JV Partners would seek approval from the Department of Petroleum and Energy to conduct an extended well testing program, during the second quarter of 2010 to fully evaluate the reservoir fluids and structural properties, of the discovery.

- yehiura@gmail.com

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