In this exclusive interview with Business Advantage PNG, Peter Graham, Chairman of state-owned mining company Kumul Minerals Holdings, talks extensively about the company’s plans for the future, the state of Papua New Guinea’s mining sector, and the future of some of PNG’s key mining projects.

Kumul Minerals Holdings’ Peter Graham

Business Advantage PNG (BAPNG): How are you getting ready for the next phase of Kumul Minerals Holdings?

Peter Graham (PG): In terms of our corporate structure, we have established a number of subsidiary companies under the holding company so that we are positioned to hold interests in significant mining projects. For example, Kumul Minerals Ok Tedi Ltd will hold the State’s 67 per cent interest in OTML; Kumul Minerals Porgera Ltd will hold any interest that the State may acquire in Porgera; and Kumul Minerals Exploration Ltd will hold investments in exploration.

Other subsidiaries will be established as needed. So, we are positioned to move quickly as attractive investment opportunities develop.

BAPNG: What is the reason for the restructure and refocus of Kumul Minerals?

PG: The main challenge for Kumul Minerals over the last several years has been the financial impacts of legacy investments made by Petromin PNG Holdings Limited, the predecessor of Kumul Minerals, which have been a drain on the business.

Tolukuma Gold Mine, the first mining investment made by Petromin, was loss-making and represented a significant drain on cash. Tolukuma was sold for a nominal sum to a shelf company which was subsequently liquidated without paying the purchase price. Petromin was left holding a tax liability and nothing else.

‘We will only participate in mining investments that achieve industry-competitive returns through the price cycles.’

However, the more troubling investment was in the Solwara 1 Deep Sea Mining project. Petromin was a reluctant participant in a ‘proof of concept’ project which had negative economics from the outset. Participation required a State-guaranteed loan of US$120 million (K375 million). To limit the risk of cost growth, Petromin paid the complete sum on day one. Nautilus failed to secure its share of funding and used our contribution in lieu of their funding. For Kumul Minerals, it has been a long struggle to limit our exposures. Attempts to recover some funds were unsuccessful. Kumul Minerals has written off the investment and currently holds a debt of US$120 million.

BAPNG: How have you dealt with these problems?

PG: In a general sense, these problems have reinforced the importance of investment discipline – thorough technical, commercial and legal assessments and engagement of people with significant industry experience. We will only participate in mining investments that achieve industry-competitive returns through the price cycles. With regards to the US$120 million loan, it was covered by a State guarantee and the loan is now being transferred to Treasury. This paves the way for the transfer of the State’s 67 per cent equity holding in Ok Tedi Mining Limited, which will further strengthen our balance sheet.

‘Given the substantial investments typically required for mining projects, we will look to share risk – which frequently involves joint ventures.’

BAPNG: What do the recent changes in PNG’s Mining Act mean for Kumul Minerals?

PG: The recent amendments to the Mining Act effectively gave the State (through Kumul Minerals as an applicant) the legal right to apply for a tenement and develop a mine. In terms of process, there were some amendments that facilitate this outcome. These amendments will, for example, allow Kumul Minerals to make application for a mining license if it is vacant. Other amendments to the Mining Act are under consideration. It’s important to note that the Prime Minister has given an assurance to Newcrest and Harmony (owners of the Wafi-Golpu project) that the project will be developed under the provisions of the current Mining Act and the State is currently targeting award of an SML by September 2020.

BAPNG: Is your strategy similar to that being adopted by Kumul Petroleum, PNG’s national oil company?

PG: In the near term at least, Kumul Minerals will be an investor in mining, rather than an operator of mining projects. That‘s not to say we would not take on the role of project operator if it made sense in particular circumstances. New Tier 1 mining projects require several billion dollars to develop and we don’t currently have access to funds for a significant equity holding to assume the role of operator. In the near term, we will have a small number of staff and retain access to people and expertise under a Services Agreement with Ok Tedi Mining Limited or selected industry advisers.

BAPNG: Will you be pursuing partnerships?

PG: Given the substantial investments typically required for mining projects we will look to share risk – which frequently involves joint ventures. We will look to some exploration opportunities as well as mining developments.

BAPNG: What is your view about the best use of debt and equity when investing in resources projects?

PG: In PNG, there is a strong (cultural) desire to hold ownership in assets rather than, or in addition to, royalties and taxes. Project financing that ownership is frequently challenging for state-owned-entities like Kumul Minerals, who likely have to borrow to cover their share of both equity and debt. To restart the Bougainville mine at previous production levels, for example, might require up to US$6 billion (K20 billion). Repayment of loans for a participating interest would consume much of the equity share of operating cash flows for many years. This has caused the current Marape-Steven government to consider alternate arrangements such as Production Sharing Contracts, which are less common in the mining industry. There is no single best answer and some combination of available regimes frequently works best.

BAPNG: You are on the board of Bougainville Copper. Have there been any significant developments?

The Panguna mine

PG: Kumul Minerals holds 17.39 per cent equity in Bougainville Copper Limited (BCL), which has been promised to Panguna landowners and peoples of Bougainville more generally. The State holds an additional 19.06 per cent. While continuing with small-scale community development projects on site, BCL has recently completed a screening level review of mine redevelopment strategies and identified several interesting economic alternatives. Progress has been impacted by the referendum and now the general election. The results of the election and decisions of the elected leadership will shape the future of the mine and BCL.

BANG: What observations do you have about the level of resources expertise within PNG?

PG: Large-scale mines have been in operation in PNG for more than 30 years and there is now a wealth of expertise – operators and professionals, and an emerging group of seasoned managers. Ok Tedi Mining for example has a very strong management team and a Papua New Guinean as MD/CEO. Ok Tedi’s workforce has about four per cent of expatriates and aims to reduce further. The local talent exists, it just takes time to develop. As an industry, we need to do more on the inclusion and development of females, particularly for leadership roles.

‘Wafi-Golpu is a strong project and one Kumul Minerals wants to be part of.’

BAPNG: Will you be going for a more traditional equity arrangement with the proposed Wafi-Golpu mine?

PG: The State has set a target for award of an SML in September 2020. Construction is then expected to take about six years and cost about US$2.8 billion (K10 billion). The State has a right but not an obligation to take up to 30 per cent equity in the project on payment of a share of past costs. At 30 per cent that would mean about USD250 million for past costs and almost USD1 billion for project construction. With no revenue for almost six years, that represents a challenge for Kumul Minerals. Project financing may be difficult given the operational risks of block cave mining, until proven at this site.

How this plays out will be the subject of negotiations between the State Negotiating Team and owners Newcrest and Harmony in coming months. Kumul Minerals has some ideas about its preferred level of participation and how it might be funded, but this isn’t the appropriate time to outline those plans. Wafi-Golpu is a strong project and one Kumul Minerals wants to be part of.

BAPNG: What about other projects?

PG: Frieda River is the next large project in the queue, but I don’t see this development as likely to progress in the near term. The problem is the remote location, and the associated infrastructure which the project must therefore carry almost doubles the project cost. The project will have its day, but this is a challenging project. There are several smaller operations like Woodlark that are moving forward but we have not pursued an interest at this time.

BAPNG: What else are you looking to do?

PG: Kumul Minerals is planning to start some exploration activities. We plan to start with exploration licences surrounding Ok Tedi’s Special Mining Lease. We are about to start seeking interest from potential partners to join us on drilling and development work, particularly on the interesting Townsville deposit, which has the potential for an underground gold development.