Reko Diq in context of global copper mining regime


In the first part of this article published last week, the discussion was on the financial calamity that had befallen us in the context of World Bank tribunal’s decision that slapped a fine of $5

9 billion on Pakistan in the case of Reko Diq copper and gold project

The article discussed the causes, consequences and the way forward

It would be useful for the readers to get some insight into the Reko Diq project in the context of international mining regime and copper dynamics in the global market

Copper is a relatively abundantly found resource around the world with resources for 200 years of consumption

Recycling has also contributed to the feeling of abundance as 41% of copper demand of the European Union (EU) member nations is met through recycling

There are around 20 countries which produce an output of millions of tons per year

Chile is the largest producer with 5

5 million tons per year whereas China consumes 50% of the world demand

China is also among major copper producers with an output of 2 million tons per year

Thus, there does not appear to be much ground for taking a tough stance on Reko Diq in this background of the wide availability of copper in many parts of the world

In fact, the copper concentration in the ore is not at the higher side and is ordinary

Most of the Pakistani minerals are true of low grade, be it coal, iron, and others

International copper prices are quite variable

In 2002, these were at $5,000 per ton, which rose to $7,000 per ton in 2007 and peaked at $8,000 per ton in 2008

Thereafter, the prices dropped sharply within a year to $3,000 per ton

Prices again started rising and peaked at $10,000 per ton in 2011, remained at that level for a short while and then started going down to $4,500 per ton in 2016

They then again started rising to achieve the current level of $6,000 per ton

Tethyan Copper Company, which had been given the development contract for the Reko Diq project, assumed a long-term price of $2

2 per pound, which translated into $4,840 per ton

Project numbers Let us have some insight into the project numbers

Reko Diq has copper ore deposits of 2

4 billion tons with a copper content of 0

5% (low to medium grade ore - 12

3 million tons of copper metal)

Tethyan did engage in exploration work proving reserves and a feasibility study which proposed the production of 110,000 tons of ore per day, transformed into 200,000 tons of copper concentrate per year (containing 28-31% copper), and 250,000 ounces of gold

A capital expenditure (CAPEX) of $3

2 billion was envisaged, of which Tethyan spent $200 million on exploration and planning studies

Net profit of Tethyan was supposed to be $200 million per year, which resulted in compensation and loss of profit estimates of $10 billion

Pakistan was supposed to earn a roughly equal amount of $200 million per year on average, consisting of royalties, return on equity (RoE) to the government of Balochistan and corporate tax to the federal government

These estimates were based on the assumed average prices of copper, which were highly variable

In Reko Diq, there were three streams of income - 2% royalty and 25% RoE going to Balochistan and 30% corporate income tax going to the federal government

Altogether, it had been estimated that roughly 52% of gross profit would go to the governments of Pakistan and Balochistan and 48% to Tethyan

Apparently, it matches the world trend

However, a sliding scale royalty formula would have been preferred as is common now - low royalty rate of 2-4% at lower copper prices and a higher royalty rate of 10% at higher copper prices, capturing or sharing windfall gains

Mining royalties Balochistan mining rules (2002) provide for a very low royalty rate of 2% on international copper prices quoted on the London Metal Exchange (LME), based on which the Tethyan proposal had been made

Normal royalty rates are 4-5%

One would not like to be a great supporter of current mineral regime prevailing around the world and have severe reservations about some aspects against mineral-producing countries in the developing world

Recently, some African countries, Congo and Zambia, have been able to extract more benefits from the international mining companies, although not much

Congo has managed to increase the royalty on copper from 2% to 3

5%

Zambia has been able to introduce the sliding scale royalty from 5

5% up to 10% depending on copper prices China had also offered a two-part royalty rate to Afghanistan for its Mes Aynak project

It offers a lower rate at low international copper prices and a higher rate at abnormally high copper prices, attempting to share windfall gains

It should be noted that peak prices are short-lived and do not seem to have much impact on the total royalty income over a period

Also, the Chinese formula was not a sliding scale as is being applied in African contracts these days

It did not take care of the intermediate higher prices

In developed countries, there is a preference for profit sharing such as in Canada at 10% of net profit

The net off-take income to host countries in the form of various taxes and royalties varies from a low of 40% in some Indonesian and Chinese contracts to 63% in Canada (Ontario)

The internal rate of return for foreign investors varies from 12-15%

Exploration vs mining rights As per common practice, at first an exploration licence is awarded and at the end of successful exploration, a feasibility study is conducted by the mine developer providing production strategy, CAPEX, and OPEX estimates and profitability projections and sharing thereof

The Balochistan government did not agree with the contents and conclusion of the feasibility study and required more inland processing than proposed

It wanted a smelter to be included

Mine developer Tethyan did not agree to its advisability

Frankly, it was not worth for the Balochistan government to insist on the smelter risking what ultimately happened

The smelter was involved in the Saindak project which did not provide much of the profitability or technological development

However, there is a usual contention on the issue of converting an exploration licence into a mining production licence

Clear policy provision ought to be there to avoid controversy

The 18th Constitutional Amendment has reduced the role of the federal government

However, who will pay the $5

9 billion penalty, may be the federal government and certainly not the Balochistan government, due to its meager resources, although its leaders are large, if not exclusively, responsible for this debacle, due to their unrealistic perceptions

Concluding, there is a need for the stakeholders to understand the international mining regime and world market situation to deal with the Reko Diq issue as well as future mining contracts for other mineral resources

Investors have options

In order to attract investment in the mineral sector, good business conduct and environment is called for

There is competition in the market

The writer is a former member energy of the Planning Commission   Published in The Express Tribune, August 26th, 2019

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Date:18-Sep-2020 Reference:View Original Link