Papua New Guinea's economy faces turmoil as mining stalls

BRISBANE, Australia (Reuters) -- A dramatic fall in foreign mining in Papua New Guinea threatens to derail economic reforms launched by Prime Minister Mekere Morauta, observers say.

Multinationals, at one time happy to spend millions of dollars exploring and laying claim to vast untapped reserves of oil, gold, copper and nickel, are now abandoning the impoverished South Pacific nation.

The giant British mining house Rio Tinto has all but walked away from its once-profitable Panguna copper mine on Bougainville Island after separatist rebels shut it down 11 years ago.

More recently, Australia's Broken Hill Pty Co said it wishes it had never got involved in the Ok Tedi copper mine near the border with Indonesia because of the hundreds of million of dollars spent paying off pollution compensation claims.

OK Tedi alone accounts for 10 percent of the country's gross domestic product and politicians fear economic disaster if the mine is idled.

Global exploration funds have been constricted by a cycle of low commodities prices in the 1990s, but the situation is proving particularly unsettling for Papua New Guinea, which has little to offer in the way of foreign currency-earning exports.

Exploration spending for the entire country this year is likely to reach only about US$17 million, against $83 million 10 years ago, local industry figures show.

"There is very little being spent on grass roots exploration and because that has dropped right off, it won't give us discoveries for the future," said Greg Anderson, chief executive of the Papua New Guinea Chamber of Mines and Petroleum.

"We are really existing on past prospects, past success, and if we don't maintain our basic exploration we won't find replacements for those prospects and new options for the future," he told Reuters.

"In the medium- to long-term we are looking at a decline in the mining sector and we have to address it urgently."

At stake: Quarter of total GDP

Anderson said Papua New Guinea risked losing a big chunk of foreign income as the mining and petroleum sectors traditionally contribute about a quarter of total gross domestic product.

"We have the geological potential, it's a matter of keeping the exploration going and you've got to fight hard these days to attract the exploration dollar."

But Papua New Guinea may be losing that fight.

Observers point to the country's historically unstable political and economic regime, a raft of litigation against major mining companies and lawlessness. Tax laws also are viewed as a disincentive for investment.

The one-year-old Morauta government has initiated changes to stablise the economy but admits a turnaround could take years.

"There is an additional cost for security for any company when they invest up here and it is definitely a disincentive," said Andrew Gall, treasurer for Westpac Bank in Port Moresby.

Morauta has pinned his hopes -- and some say his political future -- on getting a new nickel mine up and running as well as a 3,000 km (1,760 mile) pipeline laid under the Coral Sea between his country and Australia.

Blueprints for both projects have existed for years, but no ground has been broken.

"There's an awareness that if one of these big projects doesn't get up, in 10 or 15 years there's going to be nothing left," Gall said.

The pipeline, costing nearly US$3 billion and headed by Chevron Corp, would provide Papua New Guinea with a steady export income for decades, Anderson said.

On a smaller scale, Highlands Pacific Ltd of Australia has spent 18 months negotiating with the government and local landowners to obtain a coveted "special mining lease" for its Ramu nickel mine, but still needs one or more investors willing to contribute to the $838 million cost of development.

Managing director Ian Holzberger said sovereign risk issues were making it difficult to find investors.

A survey of sovereign risk for mining companies by Resource Stocks magazine consistently ranks Papua New Guinea near the bottom of the pile.

A taxation review promised by Morauta was urgently needed to help spur foreign investment, Holzberger said.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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