Papua New Guinea Sustainable Development Program Ltd appears to be resigned to losing its main asset, the Ok Tedi mine, to the State. What are the implications if the takeover goes ahead?

The Ok Tedi mine. Credit: PNGSDP

In a speech last week, PNGSDP Chairman Sir Mekere Morauta appeared to concede that the PNG Government could and would move to make it impossible for PNGSDP to continue to hold its majority share in Ok Tedi Mining Limited (OTML), the company which runs PNG’s largest mine.

‘Constructive dialogue to put in place a fair and transparent exit of PNGSDP from OTML is necessary,’ he told delegates at the launching of PNGSDP’s 2012 annual report. ‘Until final decisions on the future are made, PNGSDP remains in a period of uncertainty.’

Furthermore, Morauta conceded that PNGSDP was unlikely to get a fair price for its 63.4% share in OTML, which he valued at US$1.1 billion.

‘PNGSDP recognises that the National Government may be unable or unwilling to pay a full price for PNGSDP’s shareholding in OTML,’ he said. ‘Therefore alternative ways of continuing to put the dividends foregone by Western Province to constructive use will have to be considered.’

‘We have previously cited such shortcomings in the investment climate as a key constraint for the further economic development of Papua New Guinea and thus the sovereign rating’

He did not canvas what those ways might be.

(PNDSGP was established as a not-for-profit organisation in 2002 to take over BHP’s share in the Ok Tedi mine when it departed PNG in the aftermath of major environmental damage at the mine. The assets are held in trust for the people of Western Province.)

Miners watch on with interest

According to Morauta, Ok Tedi’s exports of copper and gold accounted for a massive 27.3% of Papua New Guinea’s total exports in 2012 and 9.5% of gross domestic product. In 2012, OTML generated US$913.3 million in profits and paid US$444.8 million in taxes to government.

The forced handover of such a major asset is inevitably making other mining companies in PNG—already under increased commercial pressure due to falls in world mineral prices—consider the implications for their own PNG operations.

‘We expect mining companies will be watching the Ok Tedi process closely to assess whether it could have any broader implications for the mining sector,’ Craig Michael, Sydney-based Associate Director at Standard & Poor’s Ratings Services told Business Advantage PNG.

Much will depend on how the PNG Government handles matters from here.

‘Should miners’ perceptions of the risks of investing in PNG rise, and the outlook for investment, growth and government revenues deteriorate materially as a result, this could put downward pressure on Papua New Guinea’s credit rating,’ says Michael.

Uncertainty affects credit rating

Rival credit rating agency Moody’s has confirmed to Business Advantage PNG that the uncertainty surrounding the OK Tedi has already had a negative impact on PNG’s sovereign rating.

‘The risk that PNGSDP would be taken over by the PNG Government reflects some of the uncertainties related to the operating environment.

‘We have previously cited such shortcomings in the investment climate as a key constraint for the further economic development of Papua New Guinea and thus the sovereign rating,’ says Moody’s Sovereign Ratings Group Vice President and Senior Analyst, Christian de Guzman.

Not all bad

However, the resolution of the uncertainty, while a catastrophe for PNGSDP, can actually be viewed in a positive light.

The planned US$822 million extension of the Ok Tedi mine, which will keep the mine operational until 2022, was stalled by the PNG Government in an apparent move to make PNGSDP fall on its own sword. The extension, which is predicted to deliver some US$4.3billion in benefits, now looks more likely.

‘The potential takeover of PNGSDP effectively removes some of the uncertainty with regards to the continuation of mining operations at Ok Tedi past the expiration of the current licence in 2014,’ explains de Guzman.

‘In other words, production will continue over the medium-term, which will support growth and assure the continued accrual of dividend income to the Government … the removal of the uncertainties related to the potential shutting of the mine actually is positive for the rating.’

PNGSDP’s future

Meanwhile, without its major asset, PNGSDP would be forced to move into a new phase of existence; albeit one it has been planning for from its creation in 2002, as Sir Mekere Mourata explained last week:

‘The Government’s decision to remove PNGSDP as majority owner of OTML would be the trigger forced on the company to start drawing down the US$1.4 billion in the Long Term Fund.’

It has always been PNGSDP’s intention that this Singapore-domiciled fund would be spent solely in the Western Province once the Ok Tedi mine closed, in order to shield the Province from the impact of losing its major source of income and employment.

Now it seems, the 185,000 inhabitants of the province will continue to enjoy the asset, albeit at a reduced scale of production, while it is PNGSDP that will be cut adrift.

However, whether they enjoy the full value of that asset, 63.4% of which PNGSDP currently holds in trust on their behalf, remains to be seen.