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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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Papua New Guinea, hurt by commodities drop, on brink of Greek-style crisis

Date: August 6, 2015 - 12:23AM

 

 

John Garnaut

Asia Pacific editor for Fairfax Media

View more articles from John Garnaut

 

 

 

 

 

 

Prime Minister of Papua New Guinea, Peter O'Neill. Photo: Joosep Martinson

Australia's nearest neighbour could be on the brink of a Greek-style fiscal crisis following one of the most spectacular budget blow-outs in regional history.

The projected budget deficit in Papua New Guinea's has been revised up, hitting 9.4 per cent, which is more than double last year's deficit and getting close to the 12.3 per cent figure which helped tip Greece into meltdown last year.

The commodities price downturn, worsened by poor oversight of the nation's mining industry, has been brutal to Papua New Guinea's budget. Photo: Jon Reid

 

 

 

 

 

 

The budget implosion will come as a shock to leaders in PNG and also Australia, who have consistently played down the impact of corruption and sliding commodity prices.

In December the top adviser to PNG Prime Minister Peter O'Neill accused a former Australian Treasury officer, Paul Flanagan, of "political interference" when he warned that such a crisis could be coming.

Foreign Minister Julie Bishop assured reporters at the time that PNG was about to become the fastest growing economy in Asia, with GDP growth as high as 20 per cent.

"Huge revenues are going to be coming into PNG," she said on December 14.

And PNG has since become Australia's largest aid recipient, overtaking Indonesia, with budget outlays expected to reach $554 million this financial year.

But this week's mid-year budget estimate in PNG admits that the huge rivers of resource revenue have failed to materialise.

Instead, economic indicators have all turned south, with overall government revenue expected to shrink by a whopping 20.7 per cent this calendar year.

"This is a frightening document," said Mr Flanagan, in a fresh analysis which he released on Wednesday, showing that the looming crisis had exceeded even his pessimistic expectations.

The resulting budget deficit "would be the highest in PNG's history", he said, surpassing the figures that pushed PNG into balance of payments and economic crises in the late 1990s.

"In Australia, such a rapid change in the estimated fiscal position would go well beyond being termed 'a budget crisis'," he said.

Economists say PNG could either slash spending on crucial services, risking a humanitarian crisis, or seek a bail-out from international partners.

PNG, like Australia, has been struck by collapsing commodity prices. But the impact of falling prices has been compounded by management problems at major resource projects, particularly the recently-nationalised Ok Tedi copper and gold mine.

And it has been compounded by a series of huge corruption scandals. Many of those scandals are closely connected with Australia, which has been accused of sheltering corrupt officials and turning a blind eye to laundered funds.

Last month Fairfax revealed video footage which showed Australian lawyers coaching clients on how to pay bribes "in dribs and drabs" and launder the proceeds in Australia.

A warrant was issued but not executed for the arrest of the Treasury Secretary Diari Vele on corruption charges recently.

Anti-corruption activists in PNG have claimed that Canberra has been compromised by its reliance on Prime Minister Peter O'Neill and the Manus Island asylum seeker detention centre.

Ms Bishop told Fairfax she would not let Australia become a safe haven for proceeds of corruption in PNG

Economist warns govt

Source:The National, Thursday August 6th, 2015

AN economist has warned the Government to exercise wisdom in managing the economy and to avoid burdening the children of tomorrow with “excessive and imprudently accumulated debt”.
Institute of National Affairs executive director Paul Barker told The National yesterday that the Government should have had a supplementary budget as early as last December to make adjustments on allocations in the 2015 national budget.
“There may be recoveries of energy prices and other commodity prices in the next months, but the Government certainly should not bank on it,” he said.
“Now is not the time for brinkmanship, but for wisdom and from learning past lessons.
“And certainly not unduly burdening the future population with excessive and imprudently accumulated debt.”
He was commenting on a report from Treasury on its mid-year economic and fiscal outlook.
He said it was time for the Government to be mindful of the past mistakes and change from it.
“It’s time for focus and stimulating the other sectors, and restraining unsuitable impediments on agriculture and other renewable resources industries, from top heavy and politically controlled new regulatory arrangements,” Barker said.
“As well as ensuring that the investment (including taxation) rules are applied even-handedly to all businesses and investors, not on a selective, or preferential basis, with some exempt.
“A supplementary budget, even if it’s months after it should have occurred, would remain preferable to the administrative cuts occurring now.”
Barker said it would have allowed the process to be undertaken in the open, “with Parliament and the public able to see how allocations are adjusted and for some level of debate into what the priorities should be and how they should be safeguarded”.
“What the Government seems to be doing now has been budget reduction by attrition, instead of using a supplementary, notably by simply failing to release budgeted funds to respective government agencies and provinces, but seemingly deferring payments to contractors.”
He urged the Government to manage funds wisely.

Admit PNG in financial crisis: MP tells Govt

Source:The National, Wednesday August 5th, 2015

OPPOSITION leader Don Polye has urged the Government to admit that the country is in financial turmoil.
“The Government is so secretive about this cash flow shortage problem, thus keeping government institutions, business houses, financial institutions and even the people in suspense,” he said in a statement.
“The Government is irresponsible in failing to tell the truth so as to prepare the people to adjust to the financial crisis at hand.”
He said schools in Morobe were closing down and soon schools in East Sepik and in other provinces would follow suit.
Polye said the signs of a financial crisis included:

·      K200 million budget cut to the Health Department;

·      forcing the National Fisheries Authority to declare half-year profit and pay dividends to the Government contrary to set procedures of declaring profit at the end of a financial year;

·      forcing the National Petroleum Company to declare a half-year profit to pay dividends to the Government to boost cash liquidity;

·      lack of funding for the National Development Bank; and,

·      Mismanaging PNG Power Ltd, resulting in its bankruptcy.

Polye said the solution should be introducing a revised budget to correct the 2015 Budget figures, then advise the country of strict belt-tightening measures to follow.

Polye: National security is at risk

Source:The National, Wednesday August 5th, 2015

OPPOSITION leader Don Polye says national security is at risk given that a number of foreigners were recently appointed as heads of State-owned enterprises.
“I am not talking about race nor am I talking about skin colour,” he said in a statement yesterday.
“We have to be careful that confidential information and state secrets are leaked out as they are here for better perks and privileges.”
Polye called on Prime Minister Peter O’Neill to exercise caution in the appointment of foreigners because PNG had highly qualified professionals who should be given a chance.
“These foreigners are appointed by the O’Neill Government into positions at the expense of local professionals,” he said.
“I am calling on Papua New Guineans to be wary of a Prime Minster who uses all kinds of disguises to belittle and ignore the rights and the potential of our people in their own jobs and businesses in their own country,” Polye said. He condemned the Government for failing to live up to its promise to promote small to medium enterprises “with financial backing”.
“It was appalling to note that more than 200 customers at the National Development Bank, with loans worth more than K53 million having been approved, but credit has not been transferred due to non-funding in the light of the government’s revenue problem,” he said

State: Stay calm

Source:The National, Wednesday August 5th, 2015

By MALUM NALU
THERE is no need for a supplementary budget at this stage of the financial year because the national economy is being well managed, Finance Minister James Marape says.
“There is no need for a supplementary budget at this stage. We are controlling expenditure through warranting and cash flow management,” he said.
He told the people to stay calm when responding to a call by the Opposition for a supplementary budget to take into account unforeseen factors in the 2015 national budget such as the drop in global oil and commodity prices.
The next session of Parliament will start on October 27 which is expected to run through to the 2016 budget session in November.
Marape admitted that revenue forecast in the 2015 budget had been affected by the drop in global commodities including oil (by 50 per cent) which “is something we can’t control”.
“What is within our control is to manage our economy by sticking to core priority areas of our budget and curtailing wastages and recurrent expenditures as well as deferring some development agendas to future budgets,” he told The National.
Deputy Opposition leader Sam Basil said they were hoping that the Government would pass a supplementary budget so that they could manage the economy well.
“The economy is in a recession right now. Oil prices are going down and they are doing department cuts and calling everyone to Port Moresby to do cuts, which will affect the delivery of goods and services,” he said.
“We strongly think that a supplementary budget is the way to go but they haven’t done that.
“In the next few months, what is the Government going to do aside from asking departments to make cuts?
“If they ask departments to make cuts, and make figures, they have to print those figures in the newspapers to tell investors and the people that they are managing the economy.”
A treasury department statement this week said the fiscal outlook had deteriorated in the first half of 2015.
“With no adjustment to budgeted expenditure in 2015, the fiscal position is expected to be a deficit of K4,817.4million or minus 9.4 percent of GDP - an increase of K2,545.6million compared to the initial deficit of K2,271.8million or minus 4.4 percent of GDP at the time of the 2015 Budget.
“This mainly reflects a significant downward revision to tax and non-tax revenue receipts, particularly from mining and petroleum taxes, and low receipts of dividends from State entities.”
The Treasury says total revenue is estimated at K11,381.7 million with the short fall of K2, 545.6million. The estimate for expenditure and net lending remains at K16,199.1m.
It also expects the debt-to-GDP ratio to rise to 41.3percent, “exceeding the debt limit of less than 35 percent of GDP as set out in the amended Fiscal Responsibility Act 2014”.
The Treasury department says the immediate challenge for the Government “is to maintain fiscal discipline throughout the second half of 2015”.

Cabinet order to disband task force to go to trial

Source:The National, Wednesday August 5th, 2015

NATIONAL Court proceedings relating to Cabinet decisions to disband Operation Task Force Sweep in June last year will go to trial next month.
Chairman Sam Koim, pictured, filed judicial review proceedings in the National Court last year challenging the process involved by the National Executive Council in arriving at its decision to disband the team.
Justice Colin Makail, who presided over the matter in Waigani yesterday, told counsels that the trial would start on Sept 29.
Koim’s lawyer advised the court that the review was filed and served to the respondents – Prime Minister Peter O’Neill, National Executive Council and the State.
Lawyer Tiffany Twivey, representing O’Neill and NEC, advised the court that she needed to cross examine Koim on factual issues relating to his contract of employment.
She said one legal issue was whether the court had powers to review executive decisions.
Lawyer Nicholas Tame is representing the State.
All parties have engaged overseas counsels for the trial that is expected to take two days.
The National Court in July last year granted a stay of Cabinet’s decision to disband Task Force Sweep Team pending the determination of the judicial review proceedings.

Minister hails road completion

Source:The National, Wednesday August 5th, 2015

WORKS Minister and Imbonggu MP Francis Awesa has welcomed the completion of the Mendi-Kandep Road last week by Chinese company COVEC.
The road will for the very first time link Southern Highlands to Enga.
“It’s a very important project as far as this Government is concerned,” Awesa told The National.
“It’s one of the projects we have funded - well over K250 million - which has opened up Kandep in Enga to Mendi in Southern Highlands.
“It opens up Laiagam and Porgera in the Enga.
“Now you can travel from Porgera to Laiagam to Mendi in two to three hours.
“Previously, there were no road connections. It’s all ready to go and I’m looking forward to the opening.It’s now just one hour from Kandep to Mendi.
“We spent about K300 million, and for the first time, I’m very happy to report that we’re going to open this important road.
“This is a very important access, shorter in terms of getting flights for people from the Western end of Enga to come to Mendi and catch flights to Port Moresby and other places.”
Awesa said plans were afoot to connect Tari in Hela with Mendi.
“We are spending about K90 million on that,” he said.
“It will be about one-and-a-half hours from Tari to Mendi, short-cut from Kandep, Laiagam and Porgera into Mendi.
“We have the Mendi Airport coming up.”
Awesa said these major impact projects will open pto link the two provinces.
“These services will help improve the delivery of basic services at the village level,” he said

Mendi-Kandep Road Construction ends @ a Cost of K166m

K166m road work ends

Source:The National, Friday July 31st, 2015

THREE years of work on the K166 million 50km Mendi-Kandep Road linking Enga and Southern Highlands have come to an end.
The road, through rugged and mountainous terrain was completed by Chinese contractor COVEC (PNG) last week under Asian Development Bank funding. An official opening date is yet to be confirmed.
Leaders such as Works Minister Francis Awesa and Kandep MP and former treasurer Don Polye had been pushing hard for this project since 2012.
COVEC (PNG) acting general manager and project manager Tony Liu said it was the first time for a  direct road connection between Southern Highlands and Enga.
“I’m very, very happy that this road has been completed on time,” he said.
“We built this road to a very high quality and the local people will benefit.”
Liu commended the local people for their understanding and help, the Government, sub-contractors, and landowners.
“This is teamwork, not only one party could have completed this road,” he said.
“We will continue to maintain the road and we look forward to more opportunities to contribute towards the development of this country.”

More Photos of the Current Mendi-Kandep Road in the Photo Gallery on this blog; Refer LINK HERE!