Energy & Resources

Digging a deep hole

Will the row over a gold mine derail relations with Papua New Guinea?

James-Marape-w

PM of PNG: James Marape

A lot of the world’s Chinatowns are older than the People’s Republic of China itself, but not the one in Port Moresby, the sprawling capital of Papua New Guinea (PNG). Announced only last April, the still-in-the-making district is going to be developed at a cost of $414 million, representing the country’s largest private investment from China thus far. Hosting apartments, shops, restaurants, a cinema and a hotel, the area is meant to accommodate the roughly 20,000 Chinese nationals living and working in PNG. The number will likely grow as trade between the two countries, reaching $3.6 billion in 2018, is expected to double by 2025.

At the ceremony to launch construction – which featured a traditional PNG “sing-sing” and a Chinese lion dance – Port Moresby’s governor Powes Parkop brushed off concerns about his country’s closer ties with China. “That’s mainly a concern of Australia and the US, it’s not a PNG concern,” said Parkop. “When I look at the world, I look at America and Europe – they are talking about nonsense. They are talking about a wall, they’re talking about Brexit; in the meantime, China is going to the moon,” in defence of PNG’s pivot toward the Middle Kingdom (see WiC436 for more on China landing a lunar rover on the ‘dark side’ of the moon).

Such cosy relations, however, might be under threat, thanks to PNG’s recent decision not to renew a 20-year mining lease at a gold mine at Porgera. Located 600 kilometres northwest of Port Moresby in Enga province, the site had been owned and operated by China’s Zijin Mining Group and Canada’s Barrick Gold Corp through the joint venture Barrick Niugini Limited (BNL) since 2015. The mining giants each had a 47.5% stake in BNL, with the remainder split between the provincial government of Enga and local landowners.

BNL said in a statement that its rights to renew were confirmed by the PNG National Court last August when the previous lease expired, as the company had been in continual discussions with the PNG government since June 2017. In the process BNL had proposed a benefit-sharing arrangement that would potentially deliver more than half the economic benefits to PNG stakeholders, including the government, for 20 years. It says the government never put forward any alternative terms on which the lease could be extended, nor indicated that it would not be.

“The Government’s decision not to extend its Special Mining Lease was tantamount to nationalisation without due process and in violation of the Government’s legal obligations to BNL,” complained the mining firm.

While expressing its willingness to discuss the issue with James Marape, elected PNG’s prime minister last May, the company emphasised that it will pursue all legal avenues to challenge the decision and to recover potential damages. It warned of “a catastrophic situation” for Porgera, Enga, and the country as a whole if the row isn’t resolved. Having suspended the operation of the open-pit and underground mine, BNL also made a point of not assisting any transitional arrangements for the management of the mine as the government hoped.

Ore extraction at the Porgera Gold Mine began in 1990. Last year it produced 597,895 ounces of gold at a cash cost of $838 per ounce (the current spot price is around $1,720), it is considered one of the world’s most lucrative gold mines. Optimistic that the lease would be renewed, BNL had mulled elevating it to “tier-one” status in January, meaning that the reserves would be capable of producing half a million ounces of gold annually for a decade, noted Reuters.

In a filing to the Shanghai stock exchange, Zijin acknowledged that the loss of the Porgera project, which accounted for 20% of its annual output last year, was going to hurt the company “rather considerably”. Upon the mine’s suspension, Zijin immediately revised down its mining production target for 2020 to roughly the same level as last year, or 40.8 tonnes of gold. Previously it targeted 44 tonnes for 2020 and 49-54 tonnes for 2022. Moreover, it warned it could only reach these levels by speeding up the upgrades of existing projects in its portfolio such as Longnan in the north-central Chinese province of Gansu.

Founded in 1993, Zijin is China’s largest gold mining company (we first wrote about the firm in 2009; see WiC15). It had a 14% share in the country’s total gold resources and 13% in output last year. Since 2005 it has been expanding abroad aggressively, with overseas assets accounting for at least half of its portfolio last year, according to its annual report for 2019. The Porgera mine, which Zijin invested $298 million into in 2015, was the second largest Chinese investment in PNG, following the nickel-cobalt project operated by the Metallurgical Corp of China (see WiC41) at Ramu.

In a letter to Marape last week, Zijin’s chairman Chen Jinghe described PNG’s decision not to extend the lease as “shocking” and added that he was “saddened” by the impact it will have on employees and locals, reported the Australian Broadcasting Corp. The mine contributes 3.8% of PNG’s current GDP, and for the past three decades had provided around 10% of annual export income.

“If Zijin’s investment in Porgera mine is not properly protected by the PNG Government, I am afraid there will be significant negative impact on the bilateral relations between China and PNG, which is something we definitely do not want to see,” warned Chen.

Last August Marape reportedly sought China’s help to refinance PNG’s entire government debt of 27 billion kina ($7.8 billion), equivalent to 33% of its gross domestic product. The move came as the country reported its largest ever budget deficit, while trying to move away from an “aid-donor” relationship with Australia. In recent years China has emerged as PNG’s biggest bi-lateral creditor too, says Reuters, with annual repayments projected to surge 25% to about $67 million by 2023.

Marape’s decision to ‘nationalise’ the mine is due partly to public pressure, suggested Jeffrey Wall, a political consultant, in an op-ed for the Australian Strategic Policy Institute. “In recent years, domestic and international environmental and anti-mining groups have conducted a sustained social media campaign against Porgera and Barrick over the environmental and social impacts of the mine and claims of a heavy-handed approach by police and joint venture security staff. Marape referred to these issues when justifying the refusal to renew the lease,” wrote Wall, noting that criticism on social media had helped bring down PNG’s last prime minister Peter O’Neill.

“We can endure short term pain for long term gain. Don’t be cry babies and pessimists, because the world will not end if Porgera closes,” Marape told his compatriots in a Facebook post, dismissing BNL’s warning that the mine’s suspension will compound PNG’s debt challenges and potentially result in the permanent loss of the mine.

Meanwhile, he pressed Barrick to maintain its operations until the transition is fully completed. “If you sabotage or close the mine, you leave me no choice but to invoke orders to take over the mine,” Marape proclaimed. “Don’t fight me (I am in my country and I lose nothing), work with me for your ease of business during this transition and exit phase (you never know, negotiations may buy you extra mine operation time).”


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