Saturday, August 8, 2015

Government finances threatened as drought shuts Ok Tedi mine

August 7, 2015 7:00 pm JST
Papua New Guinea
Government finances threatened as drought shuts Ok Tedi mine
MICHAEL FIELD, Contributing writer
Papua New Guinea's largest copper miner, Ok Tedi, has halted operations for the rest of the year due to a prolonged dry spell.
AUCKLAND, New Zealand -- A harsh dry season and plunging commodity prices have forced Papua New Guinea's biggest copper miner to suspend operations, adding to fears of an impending fiscal crisis for the government. State-owned Ok Tedi Mining produces 25% of the country's export revenue, 5.5% of its gross domestic product and about a quarter of government revenue. "There will be a direct hit on the national budget," mining commentator Martyn Namorong told the Nikkei Asian Review.
Compounding the potential impact of the shutdown, a $19 billion liquefied natural gas complex being constructed by ExxonMobil, the U.S. energy group, is not producing the cash flow Papua New Guinea had expected, because of low energy prices
In its Mid-Year Economic and Fiscal Outlook, released on Aug. 3, the government said its estimated budget deficit for 2015 had risen from 4.4% of GDP to 9.4%, which would be the highest in the country's history. Also, the level of public debt is forecast to rise sharply from an earlier estimate of 27.8% of GDP to 41.3%. Both forecasts are higher than comparable levels in the late 1990s, when the country suffered a severe economic crisis.
The government had already reduced its official forecast for GDP growth to 11.3% from 15% for 2015 to reflect lower global energy and commodity prices. However, the Asian Development Bank said in July, before news of the shutdown of Ok Tedi, that growth was likely to slow dramatically. "[The] consensus forecast sees growth further moderating in 2016 (to 5%)," the ADB said.
Ok Tedi announced in late July that it would close for the rest of the year as a "result of the dry weather event," a reference to the drought caused by El Nino -- an intermittent change in Pacific Ocean currents that can cause weather disruptions. The mine suffered the same fate for six months in 1997 (also an El Nino year) under its former Australian owner BHP, now BHP Billiton.
High in the normally rain-soaked Star Mountains, 15km east of the border with Indonesia that bisects the island of New Guinea, Ok Tedi depends on the 1,050km Fly River to move ore out and bring in supplies. Declining water levels in the river were "creating uncertainty with regard to cash inflows necessary to sustain operation," Ok Tedi said.
The company said there was a 20% chance that rainfall would return to normal within the next six months. But Namorong said Ok Tedi has insufficient credit to remain operating while unable to export its concentrate. "If it is not making cash, it cannot operate," he said.
The miner has begun cutting its workforce of 2,245 employees. Work being carried out by thousands of contractors has also been halted, and more than 2,000 children of employees have had to find new schooling. Small landowners and 50,000 people in 120 settlements along the Fly who receive compensation for mine pollution are also affected. Prime Minister Paul O'Neill said in January that a permanent closure would have "horrendous" economic consequences.
Ok Tedi's first-quarter results, published May 4, show that copper and gold production decreased 18% and 26%, respectively, on the year, while the price of copper fell 16% and gold 8%. Gross revenue fell 58% to 291 million kina ($105 million), and the mine posted a loss of 38 million kina, compared with a profit of 280 million kina a year earlier.
Namorong said the plunge in copper prices, which are at a nearly six-year low, has pushed Ok Tedi's revenues below the break-even point. At the end of July, the global market price of copper was $2.40 a pound. Namorong said the company needs a price of between $3 a pound and $3.50 a pound to be viable.
Always controversial Ok Tedi is Papua New Guinea's oldest operating mine and has always been controversial. In the 1980s, BHP attracted substantial international environmental criticism after mine tailings were found to be damaging the Fly River system.
In 2002, BHP Billiton abandoned the site after years of controversy. In return for indemnity against lawsuits for environmental damage, the company handed over its shares, now worth $1.4 billion, to a trust dedicated to local development.
Sean Dorney, an expert on Papua New Guinea at Australia's Lowy Institute for International Policy, a think tank, said the country's then-Prime Minister Mekere Morauta believed that BHP wanted to close the mine. "Ok Tedi kept operating and has been significantly profitable," Dorney said.
When he came to power in 2012, O'Neill claimed the trust was secretly controlled by BHP. The following year, Ok Tedi was nationalized. A legal battle is under way for control of the trust, which is registered in Singapore. In May, the International Center for the Settlement of Investment Disputes declined to hear the trust's claims against the government. A similar legal case is before the High Court of Singapore, which has yet to issue a judgment.
In March, the government appointed Peter Graham, the former head of ExxonMobil's PNG gas project, as Ok Tedi's chief executive, with a brief to refocus the mine on profitable operations in a world of lower-price commodities.
However, this has been stymied by the rainfall problem. "Even Peter Graham can't control the weather," said Dorney. "The O'Neill government has spent up big anticipating huge revenue flows from LNG, but that is not happening, so the Ok Tedi temporary closure is a real problem."
Mining dominates the economic life of Papua New Guinea's 7.3 million people. In July, Enga Province, home to the country's richest resource project, the Porgera gold mine, was declared a tribal fighting zone, affecting mining operations. Porgera is 95% owned by Barrack Gold of Canada, with the Papua New Guinea government owning the rest.
The Lihir gold mine in New Ireland, 900km northeast of Port Moresby, the capital, is struggling. UBS analysts told the Australian Financial Review in July that the mine's owners, Melbourne-based Newcrest Mining, could be gearing up for a write-down of 2.5 billion Australian dollars ($1.8 billion) following lower returns.
China Metallurgical Group, a Chinese state-owned company, is building the Ramu nickel and cobalt mine on the northern coast at Madang. However, the project is opposed by locals due to pollution fears and anger about the use of workers sent in from China.
Trouble abroad, too Indonesia, the Solomon Islands, New Caledonia and Fiji are also suffering mining headaches as a result of the decline in commodities prices, which has tracked falling demand in China's slowing economy.
In Indonesia, the Grasberg copper and gold mine, 500km west of Ok Tedi's mine, is in a dispute with Jakarta over plans by its owner, U.S.-based Freeport McMoRan, to export 575,000 tons of copper concentrate. Indonesia has banned raw copper exports and demands the construction of local smelting facilities instead.
In the Solomon Islands, the Gold Ridge mine on Guadalcanal closed two years ago after flooding. The mine's Australian owners sold it for A$100 to a local group. But the government last month declared Gold Ridge a disaster area, saying that a toxic tailings dam could burst and pollute the area's palm oil-rich plains and lagoon.
Slumping demand has seen investments in bauxite mining in Fiji come largely to an end. Tens of thousands of metric tons of the mineral are being stockpiled, promoting a parliamentary investigation in the wake of landowner complaints.
Prospects are improving in French-run New Caledonia, where nickel mining has been plagued by environmental concerns and land protests. The Brazilian-owned Vale New Caledonia mine is moving into profit, although it continues to suffer extensive vandalism linked to a local independence movement.
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