Commodity price fluctuations have rendered sporadic development across Papua New Guinea’s mining segment in recent years. Nevertheless, a diverse basket of minerals continues to attract international investors, who remain eager to unearth the nation’s resources, which have fuelled economic expansion. However, a lack of hard infrastructure and challenging natural conditions continue to escalate operating costs, which hampers revenue streams across the industry.
Despite infrastructure drawbacks, mining continues to play a crucial role in the economy, contributing more than 34% of export revenues, according to figures from the Mineral Resources Authority (MRA). The sector registered impressive production numbers throughout 2016, following a dreary performance in 2015, which was characterised by a depressed commodities market and a temporary closure of one major mine.
Progression
Historically, PNG’s dependency on extractive industries has weighed heavily on its vulnerability to global economic shocks, particularly commodity price downturns. Given global uncertainty, coupled with soft demand for base metals, exploration and development activity worldwide has been sluggish of late. Likewise, narrow access to funding has limited junior operators’ ability to jump start new projects across mining regions. More recent trends have signalled a resurgence in demand, with the S&P GSCI commodity price index, a benchmark for investment in the commodity markets, rising by 36% from the first quarter of 2016 to the first quarter of 2017.
Still, there is no guarantee that the rebound of certain commodity prices will continue, though by most accounts PNG’s mineral sector is well positioned to capitalise once global demand recovers. Even though challenges for the industry remain, including untimely tax hikes and the deferral of proposed amendments to the Mining Act of 1992, increases in productivity and the potential of future projects have bolstered an industry that has significant upside growth potential.
Despite international uncertainties, PNG’s mining sector managed a 38% increase in revenue for the 2016 calendar year, according to MRA data, an impressive turnaround considering mining exploration expenditure fell by slightly more than 10% from PGK360m ($114.1m) in 2014 to PGK323m ($102.4m) in 2015. The increased earnings came at a vital time for the nation’s balance sheet, which has relied heavily on mineral extraction for most of its modern history, with large-scale mining initiated in the 1970s at the Panguna copper mine in Bougainville. The welcome turnaround in revenue throughout 2016 came on the back of a combination of factors, including a strengthening of key commodity prices, particularly gold, which remained steady throughout the year, averaging around $1249 per oz. Another key component of the rebound came as a result of improvements in efficiency and cost-cutting, as well as increased output at the country’s leading Lihir, Ok Tedi, Porgera, Hidden Valley, Ramu and Simberi mines.
Beneath The Soil
Modern geological surveys have not been carried out across much of the landscape. Although efforts are being undertaken by the MRA to better understand mineral occurrences, aspects of the geology and tectonic evolution in certain regions are fairly vague. While their boundaries are not precisely defined, PNG’s tectonic provinces each have a distinct distribution of mineral deposits. Broadly speaking, the geological framework of PNG can be divided into three components: the Australian continental craton, the New Guinea orogen and the Melanesian arc. Stretched over vastly different terrains, attractive mineralisation styles include epithermal- and porphyry-related, high- and low-sulfidation systems; skarns; volcanogenic massive sulphide ore deposits; exhalative manganese deposits; lateritic nickel, chromite and cobalt sulphides; and seafloor sulphide deposits.
While PNG is host to numerous high-potential deposits, the depth of the nation’s mineral wealth remains vastly speculative due to a lack of modern studies over large areas of the country. However, in an effort to better gauge the extent of natural resources the MRA is engaged in the National Geochemical Sampling Project, spending over PGK15m ($4.8m) in 2015 alone on exploration programmes. In early 2017 sampling took place across New Britain Island and will proceed to the Milne Bay Province in 2018 and Central Province in 2019. Initial results from magnetic mapping over the western part of PNG have yielded positive results, showing significant mineral potential between Ok Tedi mine and Frieda River. While results are not final, the programme is aimed at mapping mineral element distribution nationwide and is being viewed as a critical step to encouraging future exploration activity, with a national target of doubling export receipts by 2030.
Returns
As has been the case in recent years, the contribution of the mining sector to GDP continues to be driven by three major mines: Lihir, Ok Tedi and Porgera. All three experienced substantial revenue growth throughout 2016 in comparison to the previous year. Buoyed by improved commodity market conditions and greater efficiencies in production, total mining revenue for 2016 exceeded PGK9.7bn ($3.1bn), with the three mines mentioned above accounting for 78% of total mining revenue. In terms of the contribution made by individual metals, gold represented 78.46%, followed by copper with 12.84% and nickel with 5.52%.
Lihir gold mine, under the management of Newcrest Mining since 2010, after a takeover of Lihir Gold, contributed nearly 37% of total mining revenue for 2016, with PGK3.57bn ($1.1bn), a 42% revenue increase from 2015, according to MRA data. Discovered in 1982, the mine has a life expectancy of 40 years, and exploration of new deposits is still ongoing. With three adjoining open pit mines, Lihir is estimated to have a total mineral resource of 150m oz of gold, according to the MRA. By 2015 the mine had produced over 10m oz of gold since it began production in 1997.
Not to be overshadowed, Ok Tedi copper mine in the Star Mountains of Western Province, owned by Ok Tedi Mining, a state-run company, had a resilient turnaround in 2016. The mine was the second-largest contributor to mining revenue, with PGK2.06bn ($653m), a staggering 69% increase from 2015, according to the MRA. This rise was the result of 10 months of production after the mine was closed due to low water levels during an El Niño-related drought that restricted the movement of supplies to the mine and prevented shipments of concentrate for smelting to much of Japan, Asia and Europe.
The third-largest revenue contributor in 2016 was the Porgera gold mine, located more than 2000 metres above sea level in Enga Province and contributing total revenue of nearly PGK2bn ($634m), or around 20% of total mining revenue for 2016, according to MRA figures. Other notable contributors included the Ramu nickel mine (PGK705m, $22.5m), Hidden Valley gold and silver mine (PGK603m, $191.2m), Simberi gold mine (PGK407m, $129m) and Alluvial Exports (PGK354m, $112.2m), with combined total revenue of around PGK2.1bn ($665.7m), making up 21.6% of PNG’s mining income in 2016. Total net royalties generated by sector activity in 2016 were PGK158.1m ($50.1m), with Lihir gold mine contributing 43% at PGK68.52m ($21.7m), followed by Porgera with nearly 25% (PGK39.46m, $12.5m) and Ok Tedi with a total contribution of 17.9% (PGK28.34m, $9m) towards net royalties.
Grassroots
Small-scale alluvial mining has a long history in PNG dating back to the first discovery of gold in 1877. The often overlooked segment, which is still underexplored and underdeveloped, is a vital asset to rural communities spread across the country, the majority of which are disconnected from commercial centres and rely heavily on the informal sector as a means of income. The nature of small-scale mining also suits the traditional lifestyles of many locals, who will ramp up efforts when funds are needed for family expenses such as travel or school fees.
However, a major drawback of the rural practice is the use of mercury, which is convenient in terms of access, but detrimental to health. And because symptoms can take years to appear, there is little understanding in most communities as to its harmful use. In an effort to reduce the damage of mercury use various community outreach programmes are being spearheaded by both the private and public sector and non-governmental organisations to improve skills and educate communities on how to use mercury in a safe and environmentally friendly manner.
There are also concentrated efforts to improve the uptake of mechanised techniques which would not only generate more hard currency export earnings, but also generate significant revenue for rural players. According to MRA statistics, alluvial gold accounted for PGK352m ($111.6m) while silver accounted for PGK1.7m ($539,000) in export revenue for 2016.
Rising Stars
The Ramu nickel-cobalt project near Madang, on the north coast of PNG, continues to yield impressive production numbers and is growing in importance in terms of export revenue. In 2016 the mine produced PGK705m ($223.5m) in revenue, up from PGK552m ($175m) in 2015, according to MRA figures. The mine has benefitted from a significant increase in cobalt demand, a key ingredient needed to produce lithium ion batteries used in electric vehicles, resulting in the cobalt price moving up from $11 per pound floor price in January 2016 to just over $26 per pound by June 2017, a 136% increase. With the rise in the popularity of electric vehicles, the future of Ramu mine looks bright. Tesla, for example, uses NCA lithium batteries, which include a combination of 80% nickel, 15% cobalt and 5% aluminium.
Promising Deposits
Other notable developments include the ongoing appraisal of Yandera, a significant copper-gold prospect near Ramu mine in the Madang Province, under the management of Era Resources, with a resource containing some 1.6m oz of gold and at least 2.4m tonnes of copper.
Meanwhile, PanAust is still awaiting approval for the Frieda River copper-gold project in West Sepik Province, but the project seems to be gaining headwind and is estimated to be one of the world’s largest known undeveloped copper deposits. With an existing resource base of 2.5bn tonnes of ore, the project has significant long-term growth prospects. However, a number of major obstacles will need to be overcome once approval is granted, including a lack of port facilities, reliable access to power and road infrastructure, and environmental concerns.
Another closely watched development is that of Wafi-Golpu, a project located in Morobe Province and awaiting approval of the state. Under the management of Wafi-Golpu Joint, an equally split joint venture between Newcrest and Harmony Gold, the project is considered to be the 12th-largest gold deposit in the world, containing 26m oz of gold, 8.8m tonnes of copper and 48m oz of silver, according to Newcrest estimates. In addition to these prominent prospects, there are a number of other potential projects, including Woodlark, Nakru and Mount Kare. PNG is also developing the world’s first deepsea mining operation at the Solwara 1 in the Bismark Sea, 30km off the west coast of central New Ireland.
More To Offer
While PNG is known for its gold, silver, copper and nickel-cobalt production, it also has a wide array of proven deposits of other commodities that have the potential to attract international prospectors. According to MRA data, there are six known occurrences of bauxite across PNG, with Bulawe Minerals currently prospecting for bauxite along the South Fly region of Western Province. According to the most recent MRA data from 2014, there are 15 known occurrences of chromite and four exiting prospects.
The country also has a variety of platinum group elements, with the rare precious metal found in the West New Britain, Sandaun, East Sepik and Eastern Highlands provinces, as well as the Papuan Peninsula and Samarai Island. In addition, other commodities found across the country include manganese, molybdenum, vanadium and industrial minerals, as well as ferrous metals and fossil fuels.
Ferrous Metals
Accounting for approximately 95% of the total metal tonnage worldwide, iron ore is a key component in the manufacturing of heavy machinery, including vehicles such as trucks and trains. The Amazon Bay-Iron Sands project located in southeast PNG, is 100% owned by Titan Mines and is a major underdeveloped iron ore project that has the potential of up to 445m tonnes of iron sands stretched across four major areas along 160 km of coastal area.
Official estimates suggest that 95% of iron concentrate can be recovered through a gravity-magnetic separation process. According to assays of the area conducted by Titan Mines, metallurgy is 45% iron, 0.5% vanadium, 10% titanium, 9% silica (quartz), 3% aluminium oxide and 5% calcium oxide.
Fossil Fuels
The potential of coal mining has been a controversial talking point in PNG for several years. According to local press reports, in 2015 the government allocated PGK10m ($3.2m) to the MRA for research into coal mining and coal seam gas industries in the country. With known deposits of coal in 12 provinces, the government is considering the potential of fossil fuels to reduce the country’s power gap.
On the other hand, while coal occurrences are spread throughout the country, coal beds or seams are relatively thin and have been reported as generally lower in quality. While the future of coal mining is currently under debate, certain projects are gaining traction. Using coal from the Gulf of Papua, Mayur Resources of Australia has proposed a PGK400m ($126.8m) generation project in Lae, with the power station expected to be operational 24 months from the commencement of construction.
Rule Of Law
The task of monitoring PNG’s mineral sector falls under two government bodies: the MRA and the Department of Mineral Policy and Geohazards Management (DMPGM). The MRA is responsible for the issuing of tenement licences consisting of exploration licences, mining leases and special mining leases. In addition, the authority is charged with promoting the sustainable development of the mining industry through the collection and distribution of geological data under its Geological Survey Division, one of five units that fall under the MRA’s purview. The remaining units include the Corporate Services Division, Development Coordination Division, Regulatory Operations Division and the Special Projects Unit, all of which collaborate on different matters to form a robust minerals authority that granted a total of 182 mineral tenement licences in 2016, up from 128 in 2015. By the end of 2016 there was a total of 595 registered tenements and 246 registered exploration licences, including active, extensions and new applications.
The DMPGM is mainly responsible for policy matters and has been working on amendments to the Mining Act of 1992 for several years – although proposed amendments have thus far failed to satisfy all stakeholders and there are even concerns they may jeopardise the development of the sector.
“The Mining Act of 1992 has served PNG rather well. It just needed to be updated, not overhauled. Some of the proposed amendments are, in our view, very negative, such as the 50% reduction in the term of a mining lease and compulsory acquisition rights for the state after the first term of the lease,” Greg Anderson, the executive director of the PNG Chamber of Mines and Petroleum, told OBG, LEGAL REFORM: Extensive measures are also being taken to develop clear mine closure and offshore mining policies, among others, which the 1992 act lacks. Industry stakeholders agree that benefits such as royalties, employment, education and training be continued under the new law and have advocated for an increase in the term for exploration licences from two to five years, as the current two-year term is impractical due to infrastructure limitations and issues related to community relations.
To address these gaps the DMPGM released its Corporate Plan 2017-22 and Strategic Plan 2017-22, both of which are aimed at encouraging the adoption of international best practices. The new five-year plans cover offshore mining policy, mine rehabilitation and closure, sustainable mining development, geothermal resource policy, and highlight the importance of upgrading monitoring equipment (see analysis).
As the 2017 election was upcoming, the passing of the new mining act was put on hiatus. Roger Gunson, executive manager of the MRA, told OBG, “The draft has been deferred because the government has recognised the concerns of the industry and the MRA. The sector’s overall contribution to PNG’s economy is extremely important. The new government has a critical task of addressing the draft act.”
Outlook
While recent trends signal a rebound in production activity, the short to medium term still holds significant challenges for the mining industry. Still, the presence of large gas fields, large nickel laterite deposits and growing interest in fossil fuels shows that PNG is more than just a precious metals destination. If commodity prices remain steady, particularly for gold and copper, and production rates continue, surpassing the PGK10bn ($3.2bn) revenue mark is well within reach for the mining sector in 2017.
Certain factors should play out over the short term that will bolster mining output and activity. Both the Ok Tedi and Ramu mines are expected to have a full production cycle in 2017, while progress in mechanised alluvial mining and the Frieda River and Wafi-Golpu projects is expected to bring in much-needed investment to the sector. Although, the next generation of mines will play a critical role in PNG achieving its mining potential, much of this will depend on the proposed amendments to the Mining Act of 1992, which will be a major priority for the new government.
The challenge for the new administration is to set the scene to better encourage investment once commodity prices have fully recovered. If incoming policies and legislation are competitive, and not too disruptive, then existing investors will significantly increase activity.
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