Papua New Guinea is looking to build on solid performance in its mining sector in 2016, though legal reforms expected later this year are creating a degree of uncertainty for prospective investors.
Mining revenue grew by 38% to PGK9.9bn ($3.1bn) last year, according to data from the Mineral Resources Authority (MRA).
The increase was led by the Lihir gold mine, which posted annual income of PGK3.57bn ($1.1bn). Despite closure due to drought conditions experienced in the first two months of the year, the Ok Tedi copper mine was the second-highest contributor with PGK2.1bn ($661.5m) in output, followed by the Porgera gold mine at PGK2bn ($630m). Together, these facilities accounted for 78.6% of sector revenue.
High hopes
Speaking ahead of the release of the full-year financial results, industry players at the PNG Mining and Petroleum Investment Conference in December highlighted growing investor appetite in the sector.
“There is a huge amount of private equity capital earmarked for resources,” Graham Smith, global leader of mining mergers and acquisitions at KPMG Corporate Finance, told delegates. “The money is back because commodities are starting to recover.”
According to the IMF’s Primary Commodity Index, the value of metals increased by 33% year-on-year (y-o-y) in December, accelerating to 35.5% y-o-y last month. With substantial copper, gold and zinc deposits, PNG will be hoping to take advantage of the upward trajectory of the commodity price cycle.
Sustained interest in the country’s mineral assets was also evidenced by a rise in the number of tenements last year, which increased from 507 to 543 between January and August, according to the MRA. The same period saw 161 new tenement applications – a substantial increase on the 128 submitted in 2015.
Legislative changes
While prospects for the country’s extractive industry are improving, there remains a degree of uncertainty over the legal terms of new mining tenements.
The industry is currently regulated by the Mining Act of 1992, which grants the government ownership of all minerals within the country. However, the legal framework is set to undergo an extensive overhaul intended to better reflect the sector’s changing conditions and increased importance to the economy.
The reforms – the product of nine years of consultations between officials and industry representatives – are ready for implementation, according to Byron Chan, the minister for mining, and are reportedly slated to go into effect after the general election, which is scheduled for the middle of this year.
While a complete draft has yet to be made public, the updated legislation contains some contentious conditions, including the amount of equity the state holds in mining projects, Chan told local press at the beginning of the year.
Other amendments include doubling the production levy to 0.5% and shortening the term of mining leases from 40 to 25 years.
Prime Minister Peter O’Neill acknowledged the timing and content of the amended legislation had the potential to create uncertainty for investors, saying proper care was needed when finalising and implementing the new act to ensure the interests of all stakeholders were taken into account.
Initiatives on the horizon
Despite some legal uncertainties, international investors remain largely bullish on PNG’s mining sector, which ranked strongly for investment attractiveness in the Fraser Institute’s “Survey of Mining Companies 2015”, released in June last year. With a score of 67.15 from 100, PNG ranked 43rd out of 109 countries. While this was a 15-place improvement on the previous year, the most recent index also comprised 13 fewer nations.
In addition, around 75% of respondents stated that the country’s mineral potential encourages investment under a “best practices” regulatory regime. Given PNG’s modest score of 41.48 for policy perception, this suggests improvements to the legal framework could help unlock more of the country’s unrealised mineral capacity.
Upcoming mining projects are slated to tap this raw potential in the medium term. One such project is the Wafi-Golpu copper and gold mine – a $2.3bn joint development between Australia-based Newcrest Mining and South African minder Harmony Gold. The companies expect peak yearly production will reach 320,000 oz of gold and 150,000 tonnes of copper. The first stage of the project is scheduled for completion 2020.
A second major facility, the Frieda River project in the Western Province, is expected to start shipping in late 2024. PanAust, a subsidiary of Chinese state-owned Guangdong Rising Assets Management (GRAM), released the results of its feasibility study for its Frieda River project in north-west PNG last year.
According to the study, the open-pit mine will produce around 175,000 tonnes of copper and 250,000 oz of gold per year, with an initial lifespan of 17 years.
The mine’s first phase of development is expected to cost $3.6bn, with around $2.3bn to be invested during the life of the project, though no formal financing has been secured as of yet.
Copyright © 2017 Oxford Business Group
