Partner Anthony Latimer and consultant Daniel Ward analyse the big opportunities for Papua New Guinea’s mining sector.
This article was originally published by the Mining Journal and is reproduced with permission.
PNG gets thumbs up despite obstacles
Papua New Guinea has a wealth of natural resources including rare earth elements, gold, copper, iron, platinum, nickel, cobalt, chromium and molybdenum. Due to these significant natural resources, the country is often regarded as the most important economic power in the Pacific islands region.
As such, the mining sector is a major contributor to PNG’s economy,providing a large part of the government tax revenue. Despite global prices for raw materials dropping to multi-year lows, the PNG mining industry remains vibrant and progressive. Even though there has been a slowdown in the world economy, foreign companies continue to invest into PNG’s mining industry.
Major mining projects such as Lihir, Ok Tedi, Porgera and the Hidden Valley gold mine joint venture between Harmony Gold and Newcrest Mining have recognised the importance of PNG’s natural resources and injected billions of dollars into the country’s economy. Other major projects still in the early stages of development, such as the Wafi/Golpu copper-gold project and the Frieda River copper gold project have the potential to inject many more billions of dollars into PNG’s economy. These projects and others offer the potential for longterm growth and prosperity for not only PNG but also investors.
As one of only a few countries in the world to grant permits for deep sea mining exploration, companies such as Nautilus Minerals have been given opportunities to commercially explore the seafloor for high grade copper, gold, zinc and silver. But despite a stream of mining projects in PNG, mining investments face certain local challenges. We focus here on some of the current challenges.
One of the greatest challenges effecting offshore companies is gaining support from landowner communities where the mining operations are to take place. Without the support of landowners, long-term success will not be possible. PNG gets thumbs up despite obstacles - Mining Journal Page 1 of 3 http://www.mining-journal.com/services-top-articles/png-gets-thumbs-up-despite-obst... 20/05/2016
With no written laws governing the use of customary land, negotiations with local landowners are certainly achievable; however, the process is often complex.
Even though the state of PNG is legally empowered to issue exploration and mining leases, the consent of landowning communities to proceed with resource development activities is still required. This is because most of the land (estimated 97%) is still held under a customary tenure system.
There is no obligation to partner with a local PNG entity in mining projects. The state is entitled to enter into an agreement with a mining company in relation to the development of a mine and may under that agreement acquire a participating interest in that mining development.
Given landowner issues are always an important consideration in any proposal to undertake resource development in PNG, developers should ensure any developments have the support of local landowners and a suitable benefit sharing agreement is not only entered into but also understood and capable of implementation.
Finally, in order to maintain ongoing support from effected landowners, mining projects will often include landowners in business opportunities such as providing site security, transport and maintenance.
Even though the PNG Government has significantly increased funding for national infrastructure improvement programs, decades of underfunding has meant PNG continues to lag behind most other major economies in the region in key infrastructure, including transport, electricity, and water supply, according to the Asian Development Bank.
Though there is a real commitment by the PNG government to improve the existing infrastructure, the reality is decades of underfunding has meant the problems of poor infrastructure will not be resolved quickly.
As such, foreign companies are faced with higher costs and a lack of reliability in transport, electricity, telecommunications (including internet) and water infrastructure.
Law and order
PNG has a fiercely independent judicial system. Foreign companies should have confidence their commercial interests can be defended, knowing PNG judges will seek to follow the English common law position. An important consideration for foreign companies undertaking resource development projects in PNG is law and order.
The cost of security is likely to be one of the biggest overheads: more than two-thirds of businesses in PNG employ private security staff and spend an average of 5% of their annual costs on security, according to the World Bank.
Though the security environment in PNG can be considered challenging by some foreigners, there is currently no reported terrorism threat in PNG. Most crime in PNG is opportunistic and minor (for example pickpocketing).
Offshore companies wanting to conduct mining operations in PNG need to be aware that skills shortages are widespread.
Though there are highly skilled nationals, most companies operating in PNG are often forced to source experts (including management) from overseas for specialised or highly skilled roles.
Employment of foreigners will require additional approvals such as work permits and visas.
A major cost to business in operating in PNG is accommodation.
While the cost of expatriate rental accommodation has come down in recent years, it still remains very high. For example, in Port Moresby, the average rental for a two bedroom apartment is still about K4,000 (US$1,320) per week, plus GST.
Registration and approvals
A foreign company wanting to conduct mining activities in PNG can do so, provided it is properly registered as an overseas company, or has incorporated a PNG subsidiary company under the Companies Act 1997. Depending on the structure of the company, it may also be required to obtain the requisite approvals from the Investment
Promotion Authority (IPA) pursuant to the Investment Promotion Authority Act 1992 to conduct the business and in order to enter into contracts to engage citizens and non-citizens in employment in PNG.
Without IPA certification any contract, agreement or understanding would be considered unlawful and may be found void and unenforceable.
To be registered as an overseas company, the company must appoint a resident agent. A resident agent must be a resident of PNG and can be an individual or a company.
Rights of foreign investors
There are no distinctions between the mining rights that may be acquired by a domestic or a foreign investor. A foreign investor is not required to incorporate a company under local law, in order to be granted a mining licence.
It must, however, obtain certification from the IPA in order to ‘carry on business’ in PNG, and once certified may hold its interest through a foreign body corporate registered in PNG as an overseas company.
There are no requirements of minimum state or domestic ownership of mining companies or mining licences but the state does have a right (not an obligation) to back-into mining projects in PNG by acquiring up to a 30% interest in any mineral discovery made during the exploration phase.
PNG is not a signatory to the New York Convention.
The extent to which foreign arbitral awards may be enforceable in PNG is, accordingly, solely a question of local law.
Judgements entered in certain foreign jurisdictions with reciprocal arrangements may be registered and enforced in PNG in accordance with the Reciprocal Enforcement of Judgements Act 1976.
PNG has also ratified ICSID’s Washington Convention.
Public sources indicate PNG has bilateral investment treaties (BITs) in force with the UK, Australia and Germany. Those BITs might provide for a right of arbitration for investors in the event of a breach of BIT rights.
Offshore companies wanting to repatriate funds out of PNG need to consider PNG’s exchange control approvals.
Under the PNG Central Banking (Foreign Exchange and Gold) Regulation Chapter 138 (Foreign Exchange Regulations), it is an offence if a person, except with the authority of the Bank of PNG, issues, transmits or transfers any security to a person
who resides outside PNG.
It is also an offence if a person, except with the authority of the Central Bank, makes an entry in a register that recognises or gives effect to the allotment, issue, transmission or transfer of any security to a person who resides outside PNG.
Capitalisation of a foreign registered company would require exchange control approval, in order to ensure the capital can be repatriated. In the event an offshore company is registered, it would be necessary to make an application for Exchange
Most recently, the Central Bank has restricted the trading range for the PNG kina and the US dollar and has begun rationing foreign exchange.
A recent ANZ business survey (https://anzlive.secure.force.com/cms__Main?name=Regions&tags=Regions%2FPacific) found “88% of firms highlight difficulties (accessing foreign exchange), with 49% of them noting that it is a ‘significant’ cost to business”.
Despite challenges, mining companies continue to focus on PNG.
With extraordinary mineral resources, a stable government and a mining-friendly environment, PNG will likely remain a desirable destination for mining investment in the near future.