THE events of August 2, 2011 saw the overthrow of the Somare government and the installation of the O’Neill-Namah government – but it was the prior enigmatic period that has exposed the latest sovereign risk issue for the PNG mining industry. By Wantok
Toronto-listed Nautilus Minerals was a happy recipient of a mining licence in January 2011 and was busily planning what had been intended as the world’s first deepsea mining project.
When the government was overthrown in what has been regarded as a parliamentary coup that went against the spirit and letter of the PNG Constitution, things went awry for Nautilus.
Despite the tacit approval of the Somare government and the issue of a mining licence by the Mineral Resources Authority regulator, bureaucrats at the Treasury Department decided they wanted to torpedo the deepsea mining venture on grounds that have not been adequately explained.
The Treasury action, taken without the approval of any minister in the O’Neill-Namah government or since, is about to cost PNG taxpayers tens of millions of dollars.
The true costs will probably never be known because Treasury went outside the realm of normal government processes in its determination to stall the Solwara-1 deepsea mining project of Nautilus.
To back up its case Treasury ignored the normal channel of utilising the offices of the Attorney General and Solicitor General to hire its own team of private offshore lawyers, again ostensibly without any specific approval from the Treasurer or from the National Executive Council.
Among the theories offered for the Treasury course of action were questions regarding the commercial viability of Solwara-1, the first of a number of seafloor massive sulphides found in the deep waters between the islands of Manus and New Ireland.
Another was that Treasury had an expectation that prior to commitment to mine Nautilus needed to have raised the entire finance for the project, rather than phased funding as the project progressed through different stages.
Secrecy surrounding the arbitration and the late filing of its allegations means the public may never really know the true motivation of Treasury.
The losses to the PNG government are believed to be considerably higher than the legal costs of prosecuting its own case without reference to other key departments, such as the Attorney General and the Mineral Resources Authority.
And Nautilus now has the unenviable task of pursuing Solwara-1 during a downturn in the minerals cycle.
The dispute over the mining agreement was announced on June 1, 2012 after Nautilus declared on March 29 that the PNG government’s Petromin Resources had not met its obligation of paying up for 30% of sunk costs following a national government decision to take up equity in the venture.
Nautilus did its utmost to resolve the situation through direct discussions with various Cabinet ministers and government officials – but to no avail.
On June 20 the PNG government, in reality the Treasury Department, issued a notice of arbitration.
After delays caused by the late submission of the grounds of its case by Treasury, the arbitrator – Murray Gleeson – announced that hearings would commence on August 26 and that 10 days had been set aside for hearings.
The hearings were concluded by September 9 when Nautilus reiterated its preference that the “dispute” be amicably resolved through negotiations between the government and the company.
The arrogance with which Treasury had dealt with the entire process has been met with a stunned silence to the arbitrator’s decision last Thursday that the PNG government had breached the state equity option agreement of March 2011 signed by both parties and that it had failed to complete the purchase of a 30% stake in Solwara 1 on November 7, 2011.
The arbitrator’s decision, which is final and binding, requires the PNG government to complete the purchase of a 30% interest and to pay 30% of all incurred expenditure within a reasonable timeframe.
Whereas the state had been required to pay a total of $US75 million in November 2011, it now faces a total bill of about $118 million, including interest, which is due by October 23, according to a statement released by Nautilus.
As the purchaser of the equity on behalf of the state, Petronas will face this cost and may never be able to shaft home the blame for one of the nation’s great financial fiascos in recent times.