destinationpng_141Nearly thirty years ago amendments to the mining laws of PNG made a momentous and now famous distinction.

The new laws differentiated between the owners of land (and thus those who control access to it), and the owners of the mineral resources under the surface. The law now says that the State owns the minerals but must pay “access fees”, or compensation, to the surface owners when it issues a mining licence. In doing so the state must exercise control over the mining process, that is regulate it, and it must at the same time extract revenue from it and distribute this to the people.

destinationpng_148But there is a problem with this. The concept of ‘customary law’, widely accepted and even written into the Constitution, conflicts with these ‘new’ laws. The land, and the minerals beneath it, cannot so easily be bought and sold – by the state or by anyone else. This conflict has already been the source of major difficulties.

Nonetheless these pre-Independence laws were the reason why, twenty years ago, just before Independence, the government set up a 100% state-owned company called the Mineral Resources Development Company as custodian of its interests in mining and petroleum resource projects. Nobody knew then just how huge these would be.

Between 1992 and 1994 the MRDC paid corporate taxes to the State amounting to K33 million. MRDC intends to continue paying dividends and taxes to the National Government, while ensuring that the operations of the projects in which the company has an interest are maintained on the maximum possible profit basis.destinationpng_147

MRDC has (or will shortly have) considerable equity interests in:

– Porgera, the largest gold mine in the world outside South Africa,

– the Kutubu oil project, producing 40 million barrels of light sweet crude oil per year,

– the Misima gold and silver mine,

– the Ok Tedi and Bougainville gold and copper mines and,

– the most recently finalised prospect, the Lihir gold mine.

The mining and petroleum industries (and the list above is by no means complete) are the most significant contributors to the PNG economy and the largest single contributor to Gross Domestic Product, accounting for more than 70% of total export values.“I would say we run the most valuable milking cow in the country”, says MRDC Managing Director, Mr Charles Lepani, “but we have to contend with the strong current of international opinion on public policy, which runs against State ownership and participation in the production process. Currently we’re seeking some form of privatisation which will keep the milk without selling the cow for beef.” The MRDC is concerned not only with government interests in the purchase, control and management of PNG’s mineral and petroleum resources, but also with those of the local land-owners. As an ex-UNDP consultant to the Prime Minister’s Department, Mr Lepani has voiced the view that in the past the State has not always pursued a coherent approach to resource projects. This prevented it from representing effectively the interests of landowners in the initial stages of negotiations with investors. Hence perhaps the tragic events in Bouganville which led to the 1989 closure of the immensely productive copper mine at Panguna, with disastrous consequences, in the short term, for the Mineral Resources Stabilisation Fund into which all government revenues from minerals and oil are paid.destinationpng_149

However, there is a strong belief that the evolution of democratic and administrative processes, which allow the landowners to challenge unilateral decisions about their land, have created a positive atmosphere in the mining and petroleum industry. It is thought that the institutional framework, if properly managed and adequately resourced, should provide sufficient means for building consensus and resolving conflict.

Although MRDC holds stakes in some very large mines, the company has a long term focus on small to medium scale mining and petroleum projects, where MRDC can participate in the equity for the benefit of landowners. This is a strategic decision because it is this scale of project that PNG can effectively own and operate over the medium to long term. The company maintains that it is only through such management that Papua New Guineans will benefit directly and indirectly. Smallscale projects are spread over the whole country, so wealth is distributed more effectively and fairly over the whole economy – hence the company’s investment in the medium sized Tolukuma Gold Mine, where the recoverable ore is measured in hundreds of thousands of tons, as against the millions of tons that are estimated for Porgera.Of course MRDC holds a 10% stake in the Porgera gold mine too, through its subsidiary, Mineral Resources Porgera Pty. Ltd. of which MRDC has 51% and the remaining 49% is shared between the Provincial Government and the local Porgera landowner groups.

MRDC’s other investments include 20% in the Misima gold mine. It also has 30% of the Lihir gold mine through it’s subsidiary, Mineral Resources Lihir Pty. Of this 50% is held by MRDC and 50% by the landowner groups. It is part of MRDC’s role as the people’s trustees to ensure that the optimised return is to all the stakeholders, not just to the national government and that it is in proportion to the equity held. Another subsidiary is Petroleum Resources Kutubu Pty. Ltd. – known as PRK – which holds a 22% equity in the Kutubu oil project. To date, MRDC has relied on borrowings and cash flow from its subsidiaries to finance its participation in the resource projects.

destinationpng_146A recent study of its finances has shown that the ratio of its debts to the equity it holds, in the jargon its ‘gearing’, is higher than many mining houses would sustain, but it has the capacity to reduce this as cash flow from investments, measured in tens of millions of kina, approaches its peak in less than 10 years time.

All mines have a finite lifespan – an estimated 8 years for Porgera’s underground mine, 19 years for its open pit. As Mr Lepani says, “Without vision and increased management skills, the mining industry will leave this country with huge holes in the ground and little or no benefits to the landowners and the nation.” Nevertheless, Papua New Guinea is still a prospector’s dream, and MRDC feel certain that landowners do not have too much to fear, with MRDC protecting their interests.”

Miners and oil men look to the long term. It has taken thirteen years, since the geologists first struck gold at Lihir, to get the new gold mine to the point of construction. Whatever style the government chooses for MRDC to ‘go public’, it looks as if Mr Lepani’s milking cow will live to a ripe old age.