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Seeking goal compatibility in a risky climate

BY ‘DEXTER BLAND’

KEITH SUGGESTED I give an account of my own interest in the Ramu nickel case as I seem to be taking a quite different line to most people here.

I responded that I'm not a particularly interesting person as an individual but as my background is quite different it may be interesting to some to get a different perspective.

I am a self-directed investor, not a wealthy or institutional one. Just a working stiff who likes to do my own research in what I invest.

I am originally from PNG and maintain an interest in the country. I believe the increased interest in resources presents a great opportunity for PNG. But I also consider myself an ethical investor and have no interest in plunder and pillage.

At one point I held shares in Highland Pacific (HPL), which discovered Ramu and maintains a small interest. When I first heard the complaints about deep sea tailings placement (DSTP), I was initially concerned. It did sound like a dodgy practice.

But I asked for the company’s side of the argument and was somewhat reassured by information I received. I also read the Lutheran-sponsored report and tried to understand the discrepancies between the two versions.

To me, the SAMS (Scottish Association of Marine Science) report answers a lot of these questions positively, especially around the likelihood of upwelling, and the possibility of bio-accumulation of toxins.

The report does point out some research gaps in understanding the oceanological system, and the deep-sea ecosystem, but my reading is that this is, at most, a case for delay while more information is gathered, rather than a case for halting the development.

I no longer hold shares in HPL, so my interest isn't direct, but I do hold shares in other PNG companies, which tend to be exploration companies, so no environmental issues - yet.

The issue for investors generally is sovereign risk, which is a bit of a catch-all for country-specific issues that pose an investment risk. Resource projects can be blocked or delayed due to environmental issues or indigenous landowner objections anywhere in the world (including Australia).

This is reality in the modern day, and miners and investors accept this and "price it in" while the project is in its early exploration and resource definition stages.

For various reasons, PNG has always been considered a high risk destination, but what stands out about this particular case is that the injunction was made after approvals and permits had been granted and the construction was nearly complete.

That's almost unheard of. It calls into question the government's sovereignty. Are they empowered to grant a permit for a development, or can this be nullified at any point by a third party complaint?

Almost immediately we heard of copycat lawsuits being brought against the LNG project, which had only just been given the go-ahead by its financiers.

The government responded with the Environment Act amendments, which seemed draconian but were trying to reassure investors that the government did have the power to grant approvals and would take responsibility for decisions.

I don't believe that passing laws and winning court battles will reduce investment risk in PNG over the long term, and large scale mines are long life assets.

Governments can change, laws can be challenged in court. In extreme cases (e.g., Bougainville) there is the possibility of violent revolt.

The only way for resource companies to feel secure for the longer term is to win hearts and minds by demonstrating that they can provide a lasting benefit to local communities, as well as the broader population, with minimal cost to the environment.

People like Ross Garnaut, and the new management at Ok Tedi Mining, have been leading the way in these areas and I was baffled by the recent attacks on Garnaut.

As for Ramu, I think its importance is symbolic. Others here have described it as a defining moment - I hope it can be.

I hope the result is a clearer understanding by all sides of the others' point of view, and a rewritten "pact" between all parties, government, miners and landowners.

There is certainly room for miners to lift their game, to contribute more, and to reduce their environmental impact.

And there is room for the government to monitor, tax and police miners more effectively on behalf of their citizens.

In exchange the miners want more security for their investments.

These goals aren't incompatible.

Comments

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Bert Cross

Without getting into the pros and cons of 'Dexter Bland's' argument (pages 14-15 of Attitude 152), and there are many (PNG always high risk; how approvals/permits granted to Ramu Nickel; questionable Environment Act Amendments; etc.), I note that, in paragraph 2, he says he does his own research, yet in paragraph 3 he says "At one point I held shares in Highland Pacific, which discovered Ramu .....".

Very poor research, as Highlands Pacific was first listed on the stock exchange on 12 June 1997, so was then already at least 33 years too late to 'discover' Ramu as, in 1964-65, I was already collecting laterite samples for International Nickel in the Kurumbukari area.

So the prospect and potential was already well known.

Stephen Cox

Dexter you see most everything through the eyes of an investor.

Ross Garnaut, who you seem to champion, is simply someone higher up the food chain, his credibility was shot to pieces by many because of his proposed carbon tax in Australia.

I personally have done much research in this area and am aware of its true goal of making a few people very rich at a cost for everyone else.

His background involved in companies that have operated to the detriment of the people of PNG is well documented when you bother to look.

Like many he has used the smoke and mirror tricks of a conman so he does not make your point of view here seem better to most reading it.

The value of Ramu to the people of PNG is minimal as the Chinese will always use their own people keeping as much money in their hands as possible.

The people of PNG will be lucky to even get token positions, few local companies will be suppliers to the operation of any note, as China has already shown how they operate elsewhere in the world they require total control.

This will of course be of little benefit to PNG excepting shortsighted, greedy, self-motivated politicians and officials of government departments.

Long term we can only hope the damage is not too great, but history doesn't bode well in that regard.

My outlook on shareholders such as yourself is of little people giving power to a minority who then use that financial clout for their benefit whilst fleecing the average person and throwing a few scraps to the fools who sold themselves into slavery to the big multinational corporations.

When some large company posts a massive profit, it is the normal person who has supplied that profit and rarely have they gotten a good deal for their money.

People of PNG will get token scraps from the Chinese as will some shareholders and as usual the people like Ross Garnaut will reap millions regardless of the long term prospects of the company.

You say you are an ethical investor, then do some research and if honest you will be dismayed at the number of companies who have raped and pillaged leaving long term economic and environmental disasters and then conveniently folded after the Ross Garnauts of the world have moved on with their ill gotten gains.

Kristian Lasslett

Some excerpts from the SAMS report:

Re Lihir, p.11: "These results show clearly that ongoing DSTP at Lihir has a major impact on the abundance and diversity of animals in deep‐sea sediments".

Re Misima, p.13: "These results suggest that seabed animal communities in the Bwagaoia Basin are still significantly affected by tailings three years after the cessation of DSTP at Misima".

Overall conclusion, p.13: "Our results indicate that DSTP has major impacts on deep‐sea sediments and their biological communities, and that the effects persist for at least three years after tailings discharge has ended...

"Ultimately, the decision to allow DSTP must be a political decision and the logical outcome of that may be that some areas cannot be mined even though they may have valuable resources.

"Alternatively, society may value the provision of income that can improve public services and amenities more highly than the deep ocean floor.

"These are not scientific questions and in different countries there may be different answers ‐ not least because they are geographically different.

"What science can provide are measures to reduce environmental risk once a decision to utilise DSTP is taken.

"If these measures are accepted then it is then a political decision to ensure that monitoring, policing and adaptive management is sufficient to reduce environmental and societal risks to the absolute minimum".

For an investor, DSTP may be an acceptable risk. But for communities - relying on the ecosystems which could be affected, placing their trust in the government to use the revenues from the operation to improve their living standards whilst also rigorously monitoring MCC's environmental standards - this is a huge gamble and one given PNG's history, mine communities have a poor chance of winning.

If they lose, they lose big time, not just their capital, but their land, environment and children's future.

Fair enough, people have concerns.

Peter

Dexter - OK I withdraw my criticism of Lihir as we do not yet understand the long term impacts of deep sea tailings dumping.

However, Tolukuma is an example of what a mine should not do to a local community. Oxfam reported:

"Each year, Tolukuma Gold Mine – formerly owned by Australian-based Emperor Mines Ltd – dumps more than 230,000 tonnes of mine waste into the Auga-Angabanga river system.

"It's a mining practice that's illegal in Australia, but companies can get away with it in PNG, and it's destroying people's lives.

"'Please don’t do it to us … what you do not do in your own countries,' says local resident and Oxfam partner Matilda Koma.

"Communities living downstream from the mine report that:

* People have become sick or died from drinking and washing in the river

* Fish have died and food gardens have been destroyed, threatening their food supply

* Changes in the river flow have caused flash flooding, making it difficult for locals to cross the river and access their market gardens..."

"In 2006, we (Oxfam) commissioned scientific tests and analyses of the water in the river system which revealed levels of arsenic, lead and other metals and pollutants in the water well above World Health Organization standards."

Dexter Bland

Peter - I agree that the history of mining has not been good, though I differ with regards to Lihir.

I think that's a project that has been successful from both environmental and social standpoints, hence my surprise at it being pointed to as an example of degradation.

If we can't agree on that, then there is no real common ground to be found. It becomes simply a choice between mining, and not mining, rather than trying to find a way to ensure mining is done with minimal environmental impact, and maximum social and economic benefit.

I'm not suggesting it will be an easy, but would like to see more constructive dialogue, and mutual understanding, rather than the antagonism that has prevailed so far.

The investor perspective has to be understood as something more then purely profit driven. Perhaps some clever economists can work out new ways to better align these interests.

Valuing mining companies for investment purposes is a tricky business, but never done on profits alone.

Commodity prices fluctuate wildly so miners need to be competitive and control costs in case of a downturn, but they do also occasionally make windfall profits.

Companies tend to be valued by where they rank with respect to peers, in terms of production costs for a given throughput.

These costs are rising the world over. To some degree this reflects tighter environmental controls and expanding human settlement, meaning less, and lower grade, resources are available to be mined.

That increased costs apply almost universally, means they should be reflected in higher commodity prices, so there should be no argument that high environmental standards aren't affordable

Risk is another issue that affects valuations. A mine with a similar resource, throughput and cost base in PNG will be valued at far less what it would be if it was situated in Australia or another country perceived as "stable".

So there is value to be unlocked if these risks can be reduced by creating a stable environment for the long term.

Many South American countries, and some in Africa, have achieved this re-rating in the last decade or so.

This is an investor perspective, company managements may not quite understand this in the same way. They don't always listen to us, or necessarily act in our best interests - though I actively write to them on these matters.

There are also other types of investors of great importance today. The Chinese government in particular has quite different objectives. Their goals are about strategic resource security rather than profits (though again it wouldn't surprise me if ambitious middle managers of SOEs had other ideas).

These goals also can't be achieved with a slash and burn approach.

Keith, thanks for posting this for me and giving me the opportunity to present a different perspective.

I've learned rather a lot myself over the last few months of following this case, it has rekindled my interest in the country, and I would like to make a positive contribution towards its development.

From the "other side" if that's how it must be, but hopefully also find some common ground.

Peter

Dexter - Thank you for having the courage to publish your views here. My one comment is 'by their fruits ye shall know them'.

Look at the history of mining and resource development in PNG and it is not a pretty picture: Tolukuma; Ok Tedi; Lihir; Bougainville.

All have produced massive environmental degradation which has directly affected the health and well-being of thousands of local people.

The track record is not good. Also mining companies get away with practices in PNG which would not be legal in a Western country. Why is this?

Past history suggests that big developers cannot be trusted to work in the best interests of local people in PNG.

Having a few thousand kina in your bank account does not make up for the birth of a deformed child or the loss of a rare species.

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