AN INQUIRY INTO THE REKODEQ COPPER, GOLD PROJECT
SYED AKHTAR ALI,
Feb 28 - Mar 6, 2011
There is a lot of controversy these days over the Rekodeq Copper and Gold project. A foreign company Tethyan has completed exploration of the resource located in Chaghi, the famous place where Pakistan's first nuclear explosion was carried out, and has prepared and submitted a feasibility study for consideration and approval of the government of Balochistan.
The company claims, and perhaps rightly so that it has spent some USD200 million on the project studies and exploration over the past several years. The company expects that it is given mining rights pursuant to its exploratory efforts and investments. The company proposes to bring a foreign investment of USD3.2 billion and has provided for spending 50 per cent of the investment on local procurement of goods and services.
For seemingly archaic confidentiality reasons, the company has refrained from revealing its feasibility study, which has created doubts and controversy among the mind of public. The project is opposed by many quarters.
1) Present mineral sector output in Pakistan is a paltry o.4 per cent of GDP, way below its potential variously estimated at 2-3 per cent of GDP, which would mean an annual output and exports of 5000 Million US dollars. By comparison, IMF contribution to foreign exchange deficit is slightly more than 1000 million USD. However, mineral sector has been stagnating due to low technology and small-scale mining and that mostly in non-metal sector. Except for Saindak with an output of 16000 tons of blister copper, there is no sign of large-scale mining, benefiting from foreign capital and technology.
2) TCC-Rekodeq is a good window of opportunity; Pakistan has been waiting for years. With a foreign investment of USD3.2 billion and an annual output of 220,000 tons of copper and 16 tons gold, resulting in annual exports of more than one billion USD, it is a project of international scale in every respect.
3) The project has been opposed on many counts, the most significant ones are as follows; a) the monetary terms offered by the foreign JV TCC are not adequate; b) we can do it on our own and make more money; c) there should be local processing done within the country instead of the export of raw concentrate. The alternative cited is a Ecnec approved project.
4) We have studied the international copper industry and its workings including several large-scale projects in the pipelines. We have examined the PC-1 of the Ecnec Copper Rekodeq project and other claims that have been made in this respect. We have also studied the data of Saindak metals in so far it is publicly available. We have also examined the TCC project data, mostly based on the data and info available on the company website, and some press reports containing some useful data. We also had an opportunity of examining the data from Aynak project in Afghanistan, which contract has been recently awarded to MCC of China.
5) The Ecnec project is very small with a daily ore output of just 5000 tons, as opposed to 110,000 tons per day of ore output of TCC proposal. It is even smaller than the existing Saindak. ECNEC proposal relies on small-scale mining of the local mining companies. It is doubtful, if even 5000 tons of ore can be mined by the local sub-contractors. Understandably, its cash cost per ton are very high, i.e. USD3158 per ton, several times higher than international cost including those of TCC. It is widely known that small-scale mining operations are uneconomic and the ECNEC project only supports that. There is a high probability that this project runs into snags, cost over-runs, and lack of output. There may be a good chance of success, however, if the ECNEC project restricts itself to mineral processing, a point that we are going to take up later in these passages. ECNEC project does not make the kind of claims that have been attributed to the project. There is no possibility that it can give an output of 45000 tons per annum of finished copper. The claims of the ability to give profits of USD133 billion can only be termed too exaggerated, unrealistic and grotesque, if not out rightly false. Apart from a poor economics, the premise of relying on local mining contractors to provide the raw materials output for such high through-put rates so as to generate USD133 billion of gross profit, does not stand up to robust calculations and judgments. It cannot be done. Hence, no profit or outputs in those scales are to be expected.
6) If there is a compulsive need for demonstrating capability, excellence, and utilization of S&T manpower, it can be done on many unexplored and unexploited resources lying dormant in Kohistan, Waziristan and in Chagai itself. The ECNEC project, as small as it is, may be implemented on those resources. These areas badly need investment and employment opportunities. ROZ funds of the USAID could be mobilized there as well.
7) On the other hand, TCC proposal has been prepared by world-renowned consultants and overseen by two big JV partners Antafagosta of Chile, where the latter operates several copper mines including Leach-Electro win operations. The other minority partner, Gold Barrick specializes in gold project. The project structure and numbers are in broad conformity with similar international projects. It is quite likely that the proponents would make a success of the project and would be able to produce and export in the quantities planned.
8) This, however, does not mean that TCC proposal cannot be improved and altered, keeping in view some of the reasonable aspirations and requirements. Local processing component could be added, for a portion of the output. Local processing can be done by TCC itself based on its operations in Chile or give it to a local or foreign JV or to the proponents of ECNEC project. Other financial terms offered can be negotiated as well. It should be discussed in a business like setting in a transparent environment, avoiding legal battles and claims on both the sides.
9) ECNEC approval of a copper project is rather strange in the wake of a consensus on FDI and privatization and in the light of a bad experience in Saindak. GOP has privatized many profitable ventures in the past and many strategic projects like HMC and KSEW have been put on privatization list. Some explaining of the rationale is in order.
10) TCC could have followed a better project politics and communication policy, which would have prevented hostility and debate against the project. It has taken the classical view that the ore being Sulphide cannot permit the much economic and viable route of Leaching. There is abundant evidence to the contrary. Many projects have been launched recently by such big names like Phelps Dodge, BHP, Codelco etc. In fact earlier data available on the internet about Rekodeq as released by TCC included a leaching component for a percentage of output. We have included a table to substantiate this. Local processing is an important political issue, if not an economic one. It should have received much more serious attention. Secondly, it is the archaic attitude to secrecy contending that its feasibility studies contain technical secrets. This is untenable. TCC cannot possibly teach its competitors any thing new. A more open communication policy would have been in its own interest generating public confidence and support.
11) TCC project can be a start of a new chapter in Pakistan's mineral sector offering technology, capital and exports and can be a good example to attract investments in other minerals. The reverse can also happen, if this opportunity is vitiated and wasted in hostility and delay.
12) No looting is involved in the project proposal, neither is the Rekodeq project out of this world and not certainly worth trillions of dollars. In fact, its Cu content is lower than elsewhere and matches only the US deposits, which are generally considered inferior. Its on-surface valuation of USD100 billion is realistic, and the proponent company may not be able to net over more than USD3-4 billion over the entire project life cycle of 56 years, as is the case with other comparative projects.
13) A 50 per cent share in gross profit is a good formula and matches with competitive offerings elsewhere. Contract framework must ensure that the promised terms actually result in the expected income. Contracting for such high value projects is a highly complicated business. Government of Balochistan should establish a transparent negotiating structure and process under the guidance of a transaction adviser seconded or selected by multi-lateral agencies and their processes.
14) Government of Pakistan may do well by launching an information campaign disseminating true and realistic data and information to correct public opinion and perceptions mired in conspiracy theories and unrealistic presumptions regarding uniqueness of mineral deposits in Balochistan and Pakistan. The reality is that there are abundant mineral resources in the world vying and competing for the investment of foreign capital and technology. The uniformed public opinion in Pakistan creates mistrust and unrealistic romanticism and folklore, which in turn feed separatist tendencies.
The proposed Rekodeq project is in national interest and it should be allowed without stalling it in unnecessary argumentation. It would bring in much needed foreign investment and would contribute in a meaningful way in energizing Pakistan's economy.
Government of Balochistan should adopt a transparent process in negotiations with the company with suitable advice and over sight. Government of Balochistan should engage the services of an independent professional transaction advisor to facilitate a reasonable agreement maximizing national and provincial interests in the framework of adequate profitability and international good practice. International tendering is not the only feasible option always.
Environmental aspects should be investigated adequately and requisite remediation provided for within the established rule and good practices.
The company is expected to adopt a more open policy towards releasing adequate information out of the feasibility study conducted by it. Trying to hide facts does not create confidence in the minds of the general public, either in Balochistan or elsewhere in the country. It would be in every body's interest if all aspects of the projects are out in the open.
As revealed by the company on its website, the total Rekodeq deposit is of 5.9 billion tons, out of which 2.2 billion tons has been declared as economically feasible. Ore composition averages at 0.41 per cent of copper and 22 Gms per ton, which is rather low grade. The company proposes to mine the richer parts with an average of 0.53 per cent of Copper and 0.3 Gms per ton of gold. At these prices, the total surface value of the deposit comes out to be USD96 billion out of which one-third would be gold and two-third would be copper. It must be borne in mind that, it is the surface value which is obtained by putting in some two-third of this figure as a production cost. To realize the USD100 billion of the asset value, USD70 billion has to go towards production costs. Its valuation in buried form as it is today may be computed as the present value of earning streams to the parties involved. As a rough measure, it can be valued at the royalty rate for Pakistan, which comes out to be only USD4.79 billion.
SAMAR MUBARAK MAND (SMM) PROPOSAL
Dr. Samar Mubarakmand ,formerly Chairman NESCOM and currently Member Science & Technology Planning Commission of Pakistan , has got a Project for Rekodeq mining approved from ECNEC , while it is not known on whose behalf it is. His project, hereinafter called SMM project, proposes a Mining and Mineral processing facility to produce Electrolytic/Electrowon copper. It's claimed output is 15000 of ore per day and 45000 tons of Electrolytic copper per annum. The project cost (CAPEX) proposed are only USD54.3 million and an operating cost component of USD90 million per annum. Apparently, no major mining equipment has been included and the reliance is made on the output and capabilities of local private sector mining companies and labor force.
Yet, there is another variant of the project, with only 5000 tons per day of ore, which means an annual copper output of only 6-7000 tons per year, with identical capital cost. Perhaps, these are the original figures of the ECNEC approved project, from which later extrapolations have been made. This later one is too small to have any value. Although the project has been championed by big names, as has been mentioned earlier, we have a number of questions about the project structure and strategy.
Firstly, it is highly doubtful, if the local mining companies can provide the require output on a daily basis. Secondly, the mining out put provided cannot give the required output of 45000 tons.
It is rather obvious that 5000 tons per day ore capacity project is a toy project, as compared to the TCC project of 110,000 tons per day. By no sense of imagination, it can graduate, in some near or even distant future, to internationally competitive scale. And certainly, the projections of delivering USD132 billion to Balochistan government's coffers are grossly unrealistic. It is rather unfortunate that overnight, ECNEC project capacity has been tripled for public consumption purposes, without making any upward revision in capital costs and erroneous, if not false, claims of an output of 45,000 tons per year of finished copper have been made.
It appears that SMM project has not been prepared without adequate care, neither in terms of basic parameters and nor in other project data.
The foreign company led investment project involving three billion dollars is opposed by various quarters. Firstly, there is a general and usual argument of Baloch exploitation with generalities and statement of lot of generally known grievances, which are not specific to this project alone. Their specific complaint is that they get very little out of the exploitation of their natural resources. They have very little say or control on such projects and that most Baloch cannot even enter those project areas, as those are declared as "sensitive" installations. Secondly, there are those who think that government of Balochistan is not getting a fair deal from the company and that it should get more than what has been offered. They believe that international tendering would have resulted in a better deal.
Thirdly, there are objections on project structure whereby refining and smelting has been proposed by Tethyan to be done abroad by third parties.
THE RESOURCE CURSE AND THE POLITICAL ECONOMY
Many economists dislike mineral sector and have coined the term of Resource Curse. They question the rationale and impact of mineral sector on the welfare of the host countries. The evidence is divided, of the countries who have lost and who have prospered as a result of mineral production and exports. They cite that except for small population oil producing countries and a few other mineral countries in developing countries, most others are basket case poor countries despite their large mineral resources and their extraction and exploitation.
Ore exports in the concentrated form has been derided and disapproved by some development experts as sign of gross under-development. This is not necessarily so. Significant amount of Cu concentrate is shopped to Japan from the US, while in some African countries total local processing has been employed. A lot of factors depending on current business environment and strategies ,local risks, self-owned or contractor smelting facilities elsewhere etc determine the scope of local processing, although transport logistics and costs dictate in favor of local processing. Thus, there may be a strong case for a part of the mineral output to be at least partially locally processed.
The proponent argues that, it has no experience in smelting and refining and cannot handle this difficult area. One is inclined to take this assertion with a pinch of salt, to say the least. They argue that if refining is feasible and attractive, other investors can be attracted and given the responsibility. In this scribes' view, a variable royalty rate formula ala-Western Australia, as mentioned elsewhere, could also be adopted in this respect to encourage local processing in time. We have also recommended in the following that the proponent consider and study the economics of local copper smelting, possibly in place of the proposed slurry pipe line of 689 kms for transporting 600,000 tons of concentrate from the Mine site to the Gawadar port. And, the pipeline investment can be diverted to the smelting or other processing facilities. These proposals may, however, need not stall the project.
Perhaps most critical of the argument and a legalistic question is whether government of Balochistan is obliged to award the mining contract to the investor Tethyan. There is a simple and reasonable question, as to why should a foreign company invest in exploration and bring the project to an implementation stage. They are not a foreign government or a donor agency. We did not hire them as contractors. They are to bring a foreign investment of USD3.3 billion, largest in Pakistan history, in a highly discouraging security environment. LNG companies are dragging their feet on coming to Pakistan like many others who even do not consider Pakistan at all .There is a mineral policy and there are mining rules, under which the project has been designed as clarified by the ministry of petroleum officials. For years, government of Pakistan and Balochistan have been lobbying such companies hard to come in and invest. There is hardly any appreciable foreign investment in mineral sector, although there is significant potential.
Successive governments including the present one have shunned the policies of launching public sector enterprises and privatization is being pursued. There is almost a national consensus around it. Even profitable enterprises like PTCL have been privatized and more are on the list including very profitable ones. It is one of the key options in reducing foreign debt and improving balance of payments. Attracting direct foreign investments is a declared government policy. It is ironic that some of the public servants have been allowed to speak openly against a project that has been cleared by responsible officials of relevant ministries. These persons should have been disciplined by GOP.
CAN WE DO IT ON OUR OWN?
The most difficult question is of development of these resources by our local scientists and technologists as mentioned before. This is a cherish-able goal and the aspirations of our local scientist are laudable. But let us be slightly more realistic and objective. Firstly, it is not simply a technical issue; it is a business issue as well as has been noted earlier. It is one thing to handle something on a small scale in a non-commercial context, it is quite another to be able to handle large mining business and enterprise. And then where is the money. GOP does not have money at all, and the government of Balochistan has asked the foreign company to finance its share of equity through interest free loan; so much for the financial capability. And no matter how respectable, our scientists may be ,would they have credibility before international lending agencies to finance the debt portion of more than USD2 billion and where would the collateral come from. There are other projects where they can demonstrate their capabilities. There are other minerals lying unexploited.
Mineral policies and rules should have been lobbied in favor of local development much earlier and should be reserved for future projects, if at all. And if they insist despite all these arguments, 10 per cent of area could be allocated for them through negotiations with the company.
As to the local capability, it took the then Resource Development Corporation and its successors several decades to implement a much smaller Saindak project and we had to literally beg the Chinese to take over. Neither could we produce, nor finance and even could not sell the product. The country is under energy crisis and major large public sector projects are running under losses and subsidies.
Unfortunately, having been under colonial rule for long, we seem to look into these things in the context of British East India Company. In an international economic climate when exports led growth and Direct Foreign Investment is being encouraged and widely practiced, such anti-foreign company attitude may be counter productive and untenable. This attitude has discouraged many foreign companies in the past and has prevented possible influx of foreign investment. The most recent case is of Senhua of China, which spent two years in Thar and made a reasonable offer. Bickering and uncooperative attitude sent them away, with the result that we are sitting on one of the largest coal deposits and are suffering under a persistent energy crisis. It is highly doubtful that any other mining company would make the offer for Rekodeq, if the present project fails to materialize. It would send the kind of wrong signals among investors abroad, that we can least afford.
Normally, explorer has a preemptive or preferred right to develop and operate a mineral deposit, subject to the announced policies of the host country. Admittedly, it is a large unprecedented project and many issues may not be spelled out by the broad policies. Neither should the government of Balochistan try to find legal loopholes to deny the foreign investors of their due, nor should the foreign company assume an unlimited license to demand unreasonable terms. A negotiated settlement can be reached on the basis of usual international practices.
POTENTIAL FALL-OUT OF THE CONTRACT CANCELLATION
What if the government of Balochistan unilaterally terminates the agreement? In that case, complicated international Chamber of Commerce proceedings may be invoked by the aggrieved party and make huge claims not only for recouping its investment but also for the loss of potential profit valuing in excess of USD13 billion. Whether ICC would grant it, is an open question. Would GOB be subsequently able to call international tenders? Litigation may stall international tendering and international companies may not adequately respond due to the insecure legal situation.
Would government of Balochistan be able to implement the project, financially and technically?
It says it will and states that it has provided for 2 billion rupees for the project in the budget against a requirement of 250 billion rupees. In terms of technical capability, they have the support of some glib talkers who know and can do every thing from Thar Coal to Copper mining to nuclear weapons and missiles.
One may be inclined to ask them ,as to why didn't they applied their knowledge and skills in much simpler and less expensive exploration activity in the first place , to preclude any preemptory claims of foreign mining companies. And in that case, international tendering could have been done. Easier said than done. Results equivalent to international tendering can be obtained, as suggested earlier, through hiring third party services and the services of multilateral agencies such as the World Bank, IFC etc.
The author is Chief Executive, Pro-Plan Associates.