Mining The Rim Of Fire

The Region

The Pacific’s fabled mining field an El Dorado or an albatross for the region?

By geographer Dr John Connell

MORE THAN 400 years ago the Spanish explorer Alvaro de Mcn dana set out from Peru lo dis cover the legendary Isles of Solomon, said lo have been visited by the Incas and ex pected lo be the source of great riches. It is unknown if the Spaniards ever found gold, and by the beginning of the 17th cen tury they had abandoned all attempts lo settle in Vanuatu and the Solomon Islands.

But now, for many Melanesians and European "explorers” alike, the dream of King Solomon’s mines lives on. primarily in Papua New Guinea, but also in the Sol omon Islands and through most of the so called Rim of Fire from the Philippines to Indonesia, Vanuatu and Fiji and south lo New Zealand. Indeed the rim surrounds the Pacific rim itself and further recent gold discoveries have been made in all these countries, as well as Japan and Chile.

In PNG, mining spans exactly 100 years. The first gold rush of 1878 brought white miners to the hinterland of Port Mo resby. They were unsuccessful but were followed, in 1888, by north Queensland miners crowding into Sudesl Island in Milne Bay to pan for alluvial gold. But within a short time, much to European re sentment, it was the islanders who were producing the bulk of PNG’s gold; a situ ation destined to be repealed elsewhere, often after Europeans had abandoned un profitable workings.

After Sudest there were many new dis coveries of alluvial gold on nearby islands, then on the mainland of southeastern New Guinea and, most dramatically, around Bulolo and Wau in Morobe province. From the 1920 s onward, PNG’s greatest gold rush transformed the valleys around the richest alluvial goldfield in the country. Euro pean miners’ fortunes were made, and lost; and as writer Hank Nelson records, local communities evaded them, worked for them, traded with them, fought them and slept with them”. These communities could scarcely avoid the transformation wrought by the gold rush, nor could Me lanesians in the Eastern Highlands, the Sepik and Bougainville, as the alluvial miners moved their frontier onward.

Gold mining in Fiji had a very similar history to that of PNG. The first alluvial mineworking began in 1886, with limited success. When agricultural commodity prices plunged in the late 1920 s and gold prices rose, the stage was set for the

development of the Emperor gold mine at Valukoula.

In the Solomon Islands much the same occurred on a small scale, but the various minor gold rushes never transformed in comes and lives as dramatically as in PNG.

PNG’s first great mining era was in every way superficial. The mines were for alluvial gold, often temporary and often having little long-term impact on the lives of miners and Melanesians. The miners’ contribution to colonial economies was equally brief. Not so with the second phase of mining, the construction of the vast Panguna copper mines in the mountains of Bougainville, close to the liny pre-war Kupei gold mine. After much wrangling over land ownership, compensation and royally payments, what quickly became the largest hole in the southern hemisphere ushered in a new era.

Massive capital flows from the vast in ternational mining giant CRA led to the construction of a local subsidiary BCL (Bougainville Copper Limited) and by 1972 the first copper was being exported.

Prior to independence, the national Government negotiated new contract terms, achieving greater success.

Huge incomes from Panguna more than a third of national income in the early years contributed to development in PNG, emphasised the relative wealth of the North Solomons province (which already produced much of PNG’s copra and

cocoa), provided jobs, developed new skills, and set the country on the path of rapid transformation.

The wealth that Panguna generated within PNG, despite the substantial "loss” of profits southward, was initially not wholly welcome. The Bougainvilleans re sented the loss of land for mines and sought to prevent any further loss.

But mining continued and, a decade later, opposition to mining had virtually ceased. One factor that has contributed to this is gold. Panguna, once a copper mine where gold (and silver) were trivial by products, now produces the same value of gold as copper. Outside Fr John Momis’s Melanesian Alliance, few PNG politicians seek to prevent further mine construction, merely questioning some of the details of royalties, contracts, employment and rev enue flows. The mining explosion has ar rived in PNG.

There is a rush for shares in new min ing companies as soon as they are released on to the PNG market. The release of Pla cer Pacific shares in July 1986 prompted an extraordinary rush. Shares specifically set aside for PNG investors were eagerly taken up, but equally sold off to foreign buyers by ministers, politicians and pub lic servants after fast profits.

By global standards, Panguna is one of the last great copper mines to be con structed. If mineral discoveries at Pan guna were belated, they were well in

advance of those made in the Highlands of PNG. It was not until 1968 that the era of exploitation and discovery brought ge ologists into the most remote Highlands, propelled by high global copper prices and aided by new survey techniques. A decade later Ok Tedi, the first of the Highlands mines, was in production.

In 1981 Sir Julius Chan enthusiasti cally announced that “Ok Tedi represents the pot of gold at the end of the rainbow”.

It was a brilliant phrase, for gold prices were just about to surge through the roof and there was no shortage of rainbows in the rainforests of the Star Mountains. But it was not before years of struggle that the mine eventually came into production. By 1987 what started out as a copper mine had become the largest gold mine outside South Africa.

The third mining era PNG’s second gold rush began in the 1980 s. Indeed, without its gold cap Ok Tedi might never have become a mine. Crucial to the new gold rush was the dramatic rise in world gold prices in 1980-1981, which levelled off in the next few years and soared again in 1986 and 1987, precipitating a new wave of mining and exploitation.

Gold has traditionally been a hedge against inflation, and in the inflationary era that prevailed until the stock market crash of October 1987 it became a major source of investment. Though a deflation ary rather than inflationary period now seems probable and gold prices may fall much further than they did at the start of February, when the gold index dropped to its lowest level since November 1986, they are most unlikely to plunge toward the prices of the 19705.

Copper and nickel prices in the next couple of years should reach higher levels than in the mid-1980s, hence for each of the key Pacific minerals the price pros pects are extremely good. The gold market is unlikely to slump and mining is unlikely to become uneconomic even in the more inaccessible parts of the South Pacific. A worsening political situation in South Af rica, though unlikely to stop South Afri can gold trading, could push Rim of Fire prices even higher.

The combination of new exploration, gold price increases and the necessity for the PNG Government to extend mining development beyond Bougainville guar anteed the wave of drilling, construction, negotiation and share issuing that marked the 1980 s. Without domestic capital and technical skills, virtually all elements of mining have been a function of interna tional capital and expertise. Transna tional corporations (TNCs) have multiplied in the Highlands and islands of PNG. New deposits of gold, oil, natural gas, copper and other minerals includ ing platinum are continuing to be dis covered in what may be commercial quantities, and exploration is far from over.

Mining in PNG has been slowed by

inhospitable terrain (especially in the rainforests that covered Ok Tedi), the ab sence of infrastructure, limited knowl edge of geological formations that are quite different from other world regions and previously unattractive gold prices. Even the relatively accessible Porgera mine in Enga province is 2300 metres above sea level, in mountainous rainforests with a rainfall 0f360 centimetres a year. Only the most attractive prices could overcome such disadvantages, and tempt into the Pacific the TNCs that have been essential for pro viding finance, technology and expertise.

The new mines are quite different from the old alluvial workings. All are closely associated with hot springs and ancient volcanic activity at the mobile junction of the Australian and Pacific geological plates. These are the epithermal mines, whose discovery demanded new geologi cal techniques and where processing de-

This year gold is likely to represent almost half of the total value of Papua New Guinea’s exports

mands new chemical skills. A series of discoveries has transformed PNG; most valuable are the potential mines at Por gera, Misima and, above all, Lihir, the jewel in the crown of the new era.

The size and number of the epithermal deposits points to a long-term future for gold mining. On the tiny island of Lihir, off the eastern coast of New Ireland, de posits are estimated at more than 25 mil lion ounces. If production reaches its anticipated target of one million ounces per year (worth around SA6SO million at current prices) Lihir could become one of the world’s largest gold mines. Explora tion on Lihir did not even begin until 1982, yet this is the ultimate crock of gold. Lihir alone rivals the known gold resources of Australia, the world’s fourth largest gold producer, and exploration is not yet even complete. Not surprisingly, Lihir has proved to be a catalyst to further explo ration throughout the Rim of Fire. A mi nor problem at Lihir is the nature of the Rim itself. Lihir is a caldera, a collapsed volcano; temperatures are extremely high and some coastal gold deposits are en gulfed in boiling water.

The long period often around 10 years it lakes to get a large mine into production means that only Ok Tedi and Panguna are currently exporting copper, gold and other minerals. Even so, in 1986 gold exports alone according to Bank of PNG figures were valued at K4Ol million, some 40 per cent of total exports, and by far the single most important commodity.

Indeed, the value of gold exports has dou bled since 1984. Copper trailed at K 156 million. The total value of agricultural ex ports reached only K 332 million, domi nated by K 209 million worth of coffee. For the first lime, gold was more important than the whole of the agricultural sector.

This year gold is likely to be almost half the total value of PNG’s exports.

When Misima, Lihirand Porgeracome into production (as all should do) in the next two or three years, PNG’s gold output will rise from 36 tonnes a year to about 75 tonnes by 1992, a leap that will more than compensate for probable declines at Pan guna and Ok Tedi. Other smaller mines may come into full production in the 19905, at Kainantu (Eastern Highlands) and per haps at Hidden Valley (Morobe), Laloki (Central Province) or Tabar Island, north of Lihir. In November 1987 new survey re sults suggested that Safia (Northern Prov ince) might be larger than any of these; the limes of Papua New Guinea welcomed “an El Dorado”.

The mining boom has also led to changes for the TNCs themselves, creat ing through mergers a new generation of extremely powerful mining giants, of which BHP and Placer are outstanding examples. After mergers, Placer has joined Ok Tedi Mining Corporation as the two largest gold producers in the world, both producing an output of about one million ounces in 1987. The sixth largest gold min ing company in the world was Bougain ville Copper Limited with 530,000 ounces.

Placer is currently developing Porgera (along with two Australian companies), owns the whole of Misima, controls Kid ston, the largest gold mine in Australia, and has major interests in Canada.

Three of the largest gold mining com panies in the world are thus prominently represented in PNG, a measure of the ex traordinary significance of PNG gold and its new role in world gold trade and pro duction. In a decade, PNG will have moved from its present seventh place to become the third largest gold producer in the world behind south Arica and the So viet Union.

For small developing nations, bargain ing with massive TNCs has never been easy. Symbolic of the struggle for local de velopment are arguments over whether a mining town should be built on Misima Island, or miners flown in and out from Queensland. The assumption that Mis ima would be a marginal mine and have a life of no more than 10 years led to Placer preferring “commuter-mining”, withK

4 miners flying in from Cairns, as they had done at Kidston in Queensland, rather than construct a temporary mining town and other expensive infrastructure on a remote island. The PNG Minerals and Energy Minister, John Kaputin, sup ported Placer’s proposal but other cabinet ministers and local politicians sought a much greater degree of local involvement, consumer spending in PNG and a rather less visible form of neo-colonial develop ment, with Misima an economic satellite of northern Queensland. After three years of discussion, no agreement has yet been reached.

Ilisnotonly in mining ilselflhatTNCs are involved. In January the MP for Mo resby North-West, Robert Suckling, called on the Government to ensure that all con tracts associated with Misima mine pro ject be awarded to PNG companies to avoid what he described as “The Ok Tedi fiasco” where many supportive contract ing services were awarded to foreign and not local companies.

Environmental issues have also proved difficult to resolve. Substantial compen sation muled the worst complaints from Bougainville, but the loss of cyanide drums into the Fly River below Ok Tedi caused more serious attention to be given to pol lution. Environmentalists in PNG have argued that though environmental impact assessments must be made, the Govern ment has rarely taken a lough line.

PNG Prime Minister Paias Wingti has continued past policies toward foreign in vestment. Speaking in Sydney last year, he emphasised that “we welcome foreign in vestment on our terms. If we cannot ob tain at first the terms we consider acceptable, we will negotiate very robustly so as to achieve those terms. If we cannot agree over the negotiating table then let us simply agree to disagree.”

No disagreements have yet led to the abandonment of mine concessions. The PNG Government has had to accept some mining company proposals since, in the demand for foreign capital, it is crucial for governments to keep mining companies and banks onside. Development of Ok Tedi became very difficult in 1984 when major banks became disillusioned with both PNG and the project which world prices then suggested was risky and in any case, banks are wary of countries ori ented to commodity production. At Ok Tedi the tailings dam was deferred, per haps indefinitely, and PNG-based econ omist Roman Grynberg suggested that “miners have PNG by the throat when, at Misima, the Government signed the country’s first-ever secret agreement with a mining company.

Mr Wingti has emphasised that his Government is not anxious to take up eq uity shares in new mining ventures, though it reserves the right to purchase up to 30 per cent of equity, which would tie up a great deal of scarce capital and impose some risks. Though the Government has taken up 20 per cent of Misima, it prefers to generate revenue through taxing prof its. It even declared that the 20 per cent Government share in Bougainville copper could be sold off to generate much-needed capital for rural development. The Government has also tried to persuade TNCs to undertake as much infrastruc ture investment as possible, to minimise the risk of any withdrawal if prices fall.

Wingti has also stated; “Most of our mines, actual and prospective, are in re mote areas. Mining is a means to what we regard as real or true development. We will not override legitimate local interests, which are our end, in pursuit of the means.” However, a very crucial question that has posed enormous difficulties in several existing mining areas, including Boungainville and Ok Tedi, is who exactly are “local” people. Deciding where the “local” region is has caused enormous dif ficulties for employment and compensa tion policies.

At Porgera what was once a thinly pop ulated area now has a growing population hotly contesting land ownership and thus access to incomes and jobs. On Misima. too, there has been a steady migration of young men for several years in eager an ticipation of prestigious, exciting and highly paid employment. However, min ing is a classic capital-intensive industry and the unskilled jobs that are the prov ince of “local” workers are hard to gel.

In the Highlands especially there has been widespread concern over “foreign ers” from other parts of PNG, especially from the richer coastal areas, seizing the best jobs and profiting at local expense.

Access to income is at least as crucial as access to jobs, and has been a source of constant political friction. At the start of mining in Panguna, Alexis Sarei, later the Provincial Premier, declared that “Bou gainville was not a fat cow to be milked for the rest of Papua New Guinea”, and de manded a greater share of benefits for Bougainville. A brief secession movement led to the abortive declaration of a Repub lic of the North Solomons and the even tual emergence of the first real provincial government there.

Around Ok Tedi there was a move to establish a North Fly Provincial Govern ment, breaking away from Western Prov ince, and everywhere there have been disagreements over the local, regional and

The paradox of Pacific mining development: mineral self reliance for island nations depends on overseas investment

national distribution of spoils. All this emphasises the local and the regional in equalities that have followed mining de velopment and the friction over vast new incomes, access to jobs and contracting services. At the national level, too, the at tractions of political power and jockeying for that power can only increase.

Beyond revenue, mining has brought obvious benefits. Papua New Guineans have gained new jobs in exploration, con struction, transport and in the public and private mine bureaucracy. In some re spects there has even been an “internal brain drain” as skilled economists, sci entists and others are attracted by high mine salaries. But Papua New Guineans have predominantly taken their place in the lower levels of the workforce.

At a national level, the costs and bene fits will continue to be even more mixed.

A major cost is that PNG is wholly de pendent on external capital to finance mine development and therefore depend ent on the movement of global commod ity prices and whims of international corporate decision-makers. The gold price fall in January and February, to prices that are still exceptionally high by historical levels, has already led to a decline in the commitment to exploration in “high-cost” areas, including PNG and the rest of the Rim of Fire. The giant TNCs have pulled back further than more local companies.

Higher costs and the longer times re quired for exploration, negotiation and development in these more remote areas have meant that companies needing to conserve their capital have had to reduce their activities drastically.

Garry Davies, chairman of Solomon Pacific Resources Ltd, recently told Busi ness Review Weekly that “exploration in the Pacific is still moving ahead, and we are getting very good grades at our Wai nivesi plant in Fiji, but the need to get into production is fundamental. You can’t go back to the marketplace for money. We have cut back in the Pacific; in this envi ronment you have got to be more hard nosed.” Though the PNG Government anticipates that by the end of the century mining will have taken on a much more indigenous flavour, the experience of mines elsewhere in the developing world suggests that a radical change is rather un likely. When world gold prices sneeze, PNG cannot avoid catching cold.

The final destiny of the wealth PNG’s golden future will bring is a critical issue.

PNG has had a continual balance of pay ments deficit since 1980 as the import of consumer goods maintains some living standards at very high levels. In nearby Nauru, where phosphate has resulted m a

Pacific version of a Persian Gulf “oil sheikdom”, much national income has been squandered on disappointing na tional investments and individual ex penditure has resulted in a consumption pattern that has led to the world’s highest incidence of diabetes, high rates of suicide and alcoholism and an extraordinarily high number of traffic accidents in an is land with only two roads. Few males live beyond the age of 50.

Much larger PNG is unlikely to share quite the same fate. PNG has greater ex port diversity and a subsistence safety-net to ward off the worst problems, but it is probably true, as economist Roman Grynberg hinted last year, that “PNG is simply not ready yet for enormous amounts of wealth to hit it all at once.

Nothing could be more devastating for the economy or Melanesian cultures and traditions.”

Wisely, Paias Wingti has stressed that agriculture will be given the greatest sup port in national development. After all, most people in PNG are both food and cash crop producers, and in 1980 less than 10 per cent of the population was in formal employment. Some degree of self-reliance in food production and diversity of ex ports are crucial to future development.

And not even the most optimistic of re source economists can guarantee future gold prices. No government can afford to neglect agriculture.

Channeling mineral incomes into other sectors of economic growth, however, is likely to continue to prove difficult. The Panguna mine contributed KBl5 million to the PNG economy between 1972 and 1986 yet, since independence, PNG’s growth record has been poor. Population growth has generally been in excess of eco nomic growth. Agricultural development has promised much and delivered less.

The “hard kina” policy that has been a foundation of PNG’s macro-economic

policy may be called into question when national gold income increases. Any min eral boom would worsen the problem of choosing an appropriate exchange rate.

What is quite conceivable is that PNG might experience a version of the “Dutch disease”, where the success of the min erals sector in generating export income would force up the exchange rate and make it extremely difficult for other sectors of the economy to be competitive (more or less the situation during Australia’s mineral boom). In short, the success of mining would make it much more difficult to achieve agricultural growth.

If PNG is already achieving dramatic changes from the various new pots of gold, any similar transformation has been elu sive elsewhere in Melanesia and the rest of the Rim of Fire. In Fiji, the Emperor gold mine has taken on a new lease of life as the first overseas productive interest of the Western Mining Corporation. Yet in the last Fijian Development Plan of 1981 -1985 gold mining had virtually been written off after years of stagnation. Placer has ex plored virtually the whole of Vanua Levu, is confident that at least a couple of sites will yield workable deposits and has ex tended its exploration to Ovalau. In the present straitened economic climate, Fiji will need every bit of revenue that can be squeezed out of the Vatukoula mine. Two devaluations have certainly helped.

Vanuatu and the Solomon Islands have largely remained the realm of smaller pro spectors, since PNG and Fiji are ahead of Vanuatu and the Solomon Islands in two key areas: the existence of comprehensive exploration and mining legislation and a basis of background geological knowl edge, even though epithermal gold has de manded a different kind ofknowledge. The major global TNCs are concerned about outdated tax acts and mining legislation and want new ground rules to be estab lished before they are tempted in.

In the Solomon Islands small-scale al luvial gold operations have been going on for half a century, especially around Gofd Ridge in central Guadalcanal. In the pres ent boom years this has intensified and gold smuggling has reached epidemic pro portions. Though several gold smugglers have been jailed, this is merely the tip of an iceberg of lost revenue.

The Gold Ridge deposit licence, much of which is owned by Amoco (Cyprus Minerals), has been estimated to contain more than three million ounces of gold but Amoco has had problems maintaining the licence under satisfactory terms, though negotiations are continuing. It has not in vested in development, despite the dis covery of large, low-grade epithermal deposits. The small mining company Za nex withdrew from the Solomon Islands at the end of 1987 in frustration over Government taxation policy that Zanex considered “not conducive to profitable mining”. For the moment, a real King Sol omon’s mine remains elusive and the pot of alluvial gold is trickling away.

Of all the Melanesian states, Vanuatu has benefited least from the gold price boom though, as in the Solomon Islands, there is some gold panning. Vanuatu has allowed prospecting concessions, which cover almost all the country, and gold de posits have been found in southwest Santo and Malakula but so far there is no sign that they will be mined. Alluvial gold has also been discovered at Big Bay, Santo, though probably not in modern commer cial quantities.

Unlike the Solomon Islands, Vanuatu has a history of mining (with the Forari manganese mine closing late in the 19705) but for the moment it is lagging.

Already richer in the conventional Pa cific trilogy of copra, cocoa and coffee, the gold-rich Melanesian states now have one further opportunity of achieving faster economic growth than the smaller, more isolated Pacific microstates, which seem destined to continue to rely overwhelm ingly on aid and migrant remittances rather than achieving successful domestic economic growth. Gold will further em phasise the gulf between Pacific haves and have-nots, though it is possible that Tonga and Samoa could yield gold.

Ultimately, for all of the countries of the Pacific, as Paias Wingli has recently stressed, “we in PNG do not pretend to be in anything like in total control of our eco nomic destinies. But that does not mean we do not make and take opportunities when they arise to increase our self-reli ance. Our resources provide us such an opportunity.” Indeed they do, though the paradox of mining development is that only the most comprehensive (albeit ne gotiated) dependence on overseas invest ment will enable even financial self reliance. The costs of achieving this may yet be high but, for the moment, the Rim of Fire has delivered the jackpot. □