REKO DIQ PROJECT

AN OPPORTUNITY FOR PAKISTAN

BY JAMAL JAMIL
(feedback@pgeconomist.com)

Dec 13 - 19, 2010

Pakistan's largest province, Balochistan is known to have more than half of the national prospective geology for minerals. Yet unlike other developing regions with similar mineral endowment, Balochistan has not been able to exploit adequately its geological potential for the prosperity of the people. This fact is corroborated by World Bank's Balochistan Economic Report(2008) that even though global metal and mineral prices have gone up sharply , Balochistan's mining sector's contribution to provincial GDP has stagnated and to national mining GDP has fallen.

In this context, Reko Diq project located in district Chagai of Balochistan is an exception. This project is being developed by Tethyan Copper Company Pakistan(Pvt.) Limited(TCC) which is jointly owned by Barrick Gold Corporation (Canada),the world's largest gold producer , and Antofagasta plc.(Chile) the 5th largest copper producer. The combined Market Capitalization of these two companies is about US$ 67 bn and between them they are operating 30 mines spread over five continents. Since 2006, when these mining giants acquired TCC , the profile of Reko Diq mine has changed dramatically. In just four years, it hired more than 200 permanent employees and more than $220 millions investment has been done on extensive exploration campaign(approx.300000/-meters) technical studies ,environmental and social impact studies (ESIA). All this culminated in a world class bankable Feasibilty Study of Reko Diq project. Minerals being a provincial subject under the constitution of Pakistan, this report has been submitted to the government of Balochistan by TCC.

Considering that investment in exploration for base mineral is high risk and on average only about one in every hundred metallic mineral prospects explored goes into to production, it is indeed a big achievement that Reko Diq project has reached a stage where its viability for production has been established. Feasibilty report of Reko Diq project has been done by one of the world's top three technical and engineering firm. According to the Feasibility report, Reko Diq is what is typically known as a large scale ,low grade ore deposit. Mineral resource estimated is 5.9 bnT [Cu grade 0.41% & Au gold grade 0.22 gm/ton] of which technically and economically mineable resource is estimated to be 2.2 bnT. With a through-put of 110 000 t/day of ore in the concentrator, the average annual production is estimated to be 200,000 tons of copper and 250,000 ounces of gold for 56 years of mine life.

A project with a profile such as that of Reko Diq -large-scale, low grade ore deposits- needs to be operated at the highest possible levels of efficiency to be profitable and to actually realize the fruits of mineral wealth buried and scattered for centuries under rock and earth. It is only companies with proven track-record that are really capable of successfully turning such ventures into profitable operations. Much needed foreign investment, technology transfer and mining expertise will only come home through such ventures.

The unique profile Reko Diq project has several facets: it is first large scale mining project in Pakistan; it is first private sector funded mining venture in Pakistan history; it is the largest ever FDI in mining sector in Pakistan and last but not the least it is first project in which Balochistan is poised to receive greater share in revenues as a partner in the project. Balochistan Mineral Rules(BMR) are designed to create an enabling environment for attracting and retaining private investments. Under these rules, an investor holding an Exploration Licenses (EL), who does the risk investment has exclusive rights to exploration. The investor, whether national or international is entitled to mining lease after having fulfilled the all the requirements of EL. So state/government participation in the mining business is not mandated under these rules and as regulatory authority the state receives taxes and royalties just like in other majority of the mining countries of the world.

As an exception to the BMR and the international mining industry practice, Reko Diq project agreement gives the right to the provincial government to receive 25% share in profits as well in addition to royalties and taxes. This agreement signed between BHP and government of Balcohistan in 1993, is known as Chagai Hills Exploration Joint Venture agreement (CHEJVA). Under this agreement TCC and government of Balochistan are partners for EL5 on 75% and 25% basis respectively. It is infact a public-private partnership where the government keeps profit sharing with 25% Balochistan's interest being free-carry till the completion of feasibility. No other exploration license holder in district Chagai has government as a partner. Consequently, of the free cash flow of the Reko Diq project more than 50% will go both to federal and provincial governments in form of taxes, royalties and profit-sharing. Without making any risk investment, government has ensured its profit-sharing in the project at a stage when its financial and technical feasibilty has been established.

In addition to generating a long-term reliable stream of revenues for Pakistan and Balochistan, the spill-over effect of large scale mines in form of creating mining clusters will have a ripple effect on overall economy. Mining related industries, specialized suppliers, service providers and other inter-linked industries will be established in close proximity to the Reko Diq mine, thus also creating significant indirect job opportunities for the locals in addition to direct employment of 2500 people during the mine operations. Four years of infrastructure development for making the mine operational will provide jobs to about 11500 people. At present more than 80% of TCC permanent employees are from Balochistan. With the corporate values that the co-owners of TCC have, demonstrated in their ventures in other countries as well, no project is considered feasible without having a commitment to the welfare of the local communities. TCC even during the exploration stage has carried out community development initiatives in health, education, water supply and training of local workforce and is committed to allocate significant funds for community investment when the operations begin.

With $3.3bn of investment required for initial mine development at Reko Diq, this project can become a magnet for FDI in Pakistan. Here is one example in form of Reko Diq project that can demonstrate it is possible for foreigners to work in Pakistan. And more importantly that the investor-friendly Balochistan mineral rules not only attract foreign investors but also provide level playing field through good governance of the mining sector; stable fiscal and regulatory regimes; and compliance with rules and regulations. Only this can ensure continuous process of exploration and discovery of new mineral deposits of the untapped mineral resources of the province. The key is not in the potential but transforming the mineral potential into a catalyst for the prosperity and development of the people. This requires risk capital, highly skilled work force, advanced technologies and equipment to attain efficiencies through economies of scale.

In the current environment, it is not easy to attract genuine investors in Pakistan and when two internationally reputable companies like Barrick Gold and Antofagasta are willing to invest in Balochistan, it is an opportunity that Pakistan should not let go. With the investment of over $220 million in last four years, these investors have established their credibility as serious investors and have demonstrated their commitment by complying with all the rules and regulations and respecting the long-standing agreement which was signed by their predecessors. This in contrast to the fact that there is not a single other serious investor working in mining sector at present.

As Pakistan has no history of modern large scale mining, there are misconceptions about the value and quantity of the mineral resource at Reko Diq. Quantifying resources and its valuation is a complex and technical process and it's easy for non-professionals to get carried away by simplifying it. Valuation of a mineable resource factors-in several variables which includes technical issues like metallurgical recoveries to non-technical variables like cost of doing business in a country. However, for analysts who understand the business, it is quite clear that the reporting mechanisms of the co-owners of TCC relating to declaration of resources; production figures etc.are of international standards and all figures are audited by leading auditing firms and any misreporting by them can land them into trouble with their shareholders and securities exchange commissions of London, New York and Toronto where they are listed.

Reko Diq project is golden opportunity for Pakistan and Balochistan in particular. National and provincial interests have been secured in unique arrangement whereby more than 50% of free cash flows will go to national and provincial governments and transparency has been ensured by having investors who are accountable at two levels- TCC through its co-owners is subjected to international checks and compliances; and is also to obligated to comply with national rules and regulations.

Due to absence of any mining geared infrastructure in the province, the cost of doing business is high. Once the infrastructure is laid out for Reko Diq mine and mining cluster starts developing around it, Balochsitan will become a hub of large scale mining in the region.