PNG learning not to count all its LNG chickens before they hatch

By ROWAN CALLICK


There's a common view around, even in Australia where after all these years people really should know better, that mining is merely about digging stuff up and shipping it to eager buyers.

Those who think this may well also believe that “attracting” miners is a redundancy: that there's a load of mining money around, and the trick is to choose the best, fight off the rest, and then regulate them sufficiently to make sure they don't utterly destroy the environment, and take off without having paid any taxes.

Our closest neighbour, Papua New Guinea, offers a good insight as to how difficult it can be to build and maintain a mining industry, and how relatively easy it can be to lose one.

Independent PNG, like Australia today, has been substantially built on its resources industry. About 80 per cent of its export earnings comes from resources -- chiefly, until liquefied natural gas kicks in in a couple of years, from minerals.

The big persisting dangers for PNG include spending the money before it's been earned and thus building debt; the usual Dutch disease challenge of preventing resources from crushing the rest of the economy, especially agriculture, which is by far the chief employer; and, of course, debilitating battles between rival groups over the spoils.

The dominant source of this revenue -- and by far the biggest taxpayer in the country -- has in recent years been Ok Tedi Mining.

Recently we've seen the newly elected government ban Ross Garnaut from entering PNG, while he was the chairman of Ok Tedi, and effectively direct pressure on BHP Billiton, which had set up a trust to run the mine, to accede to the changing of the constitutional arrangements that hold substantial dividends back until the mine closes, and also constrain government access to the funds available now for local development.

Finance Minister James Marape has this month sought to redirect some of those funds, which have recently been used to buy boats and aircraft for local use, to a new lobby group.

Hundreds of millions of dollars are now coming into play in this dispute, as the government places pressure on Ok Tedi in one area after another, including the ultimate sanction of refusing to allow an extension of the mine after its approvals end this year.

Then a new operator could be invited in. But from where?

Although copper is today's most sought-after mineral, there is not a long list of aspirants. A Chinese buyer is probably most likely. But with Ramu Nickel, operated by Chinese government corporation MCC, enjoying a 10-year tax holiday, this will mark the starting point in any negotiation with Beijing. Just 100km from Ok Tedi lies another huge copper/gold resource, Frieda River. But unfortunately for PNG, this is mostly owned by Xstrata, which eventually completed just before Christmas, after some postponements, a feasibility study, but which is destined for imminent merger with Glencore.

And Glencore will not want a bar of even such a vast, promising resource as Frieda. Its chief executive Ivan Glasenberg, who will head the merged entity, said last week: "We are afraid of greenfields," which are risky and have capital overruns, and have deals "which kill the NPV (net present value) on those projects".

Glasenberg is a trader not comfortable with waiting five years for a return. The Xstrata-Glencore merger is awaiting approval from regulators in China, which could prove a beneficiary with the promising greenfields Frieda project coming into play.

Brisbane-based Highlands Pacific, a minor partner at Ramu and Frieda, and also an explorer with promising assets close to Ok Tedi, is looking on with hope mingled with anxiety.

Besides these tangles, PNG is fortunate in having landed the firm focus of Newcrest, the world's third-largest goldminer. Half of Newcrest's resources now lie in PNG, and the firm has the technical and strategic skills, the capital, and crucially, the combination of commitment and understanding of how PNG operates, to realise those assets steadily.

The bottom line for PNG is that its government understands that, despite all the zeroes on the dollar figures anticipated from LNG alone, success in managing a massive resources sector is not guaranteed, and that those revenues can dwindle almost overnight, leaving it with no obvious replacement.

This article was first published by The Australian newspaper on the 13th of March 2013