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.
Related stories
Follow Nikkei Asian Review
