BOUGAINVILLE - Copper Limited

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HISTORY

In 1960, a government geological report confirmed the presence of intensive low-grade copper mineralisation in the Panguna/Kupei area on Bougainville Island . After further tests, preparation including acquiring land, mining leases and port facilities followed.

Construction work on the project continued ahead of schedule and was nearing completion by the end of 1971. The stripping of waste rock and overburden to expose the ore-body and the establishment of mining benches and haul roads continued throughout the year and were on schedule for the commencement of open-cut mining operations.

Total expenditure on mine property and capital works in progress was AU$357 million. This was financed by shareholders ' equity to the extent of $125 million and the balance by borrowings. The estimated overall total cost of the exploration, development and construction program remained approximately $400 million.

Bougainville Mining Limited (CRA) mine started commercial production 1 April 1972.

During 1972, two events both outside the control of the company adversely affected its net earnings.

• The institution by the PNG Government of a 15% withholding tax on dividends paid by PNG companies.

• The downward movement of sterling in terms of both the US and Australian dollar during the period of commercial production, which was not matched by a commensurate rise in the price of copper on the London Metal Exchange . In terms of Australian dollars, this resulted in a reduction in proceeds that the company received from its sales of copper in concentrate. Whilst the rise in the price of gold increased the revenue from gold sales, the higher price was not sufficient to offset the reduced earnings from copper sales.

1973 was a significant year for the company. It marked the first full year of operations, which was most successful both in respect of the development that occurred and the financial results, which were achieved. The company's name was changed from Bougainville Mining Limited to Bougainville Copper Limited (BCL).

1974 was a year in which major world economies were severely strained by rampant inflation and a simultaneous severe downturn in economic activity. During this year the Government of Papua New Guinea requested BCL to renegotiate the Bougainville Copper Agreement , which regulates the basis for the company's operations in Papua New Guinea . After carefully considering the various alternatives, Directors agreed to this and later agreed to recommend results of the renegotiation to the shareholders at an Extraordinary General Meeting held on 10 December. Shareholders ratified the proposed amendments to the Agreement, which became effective on 23 December 1974 when the High Commissioner assented to the Act.

The revised Agreement provided for significant financial changes. The tax exempt period, originally scheduled to terminate on 1 April 1975 was terminated from 1 January 1974. In addition BCL lost the benefit of accelerated depreciation allowances and the 20% tax exemption for income earned from the production of copper. Under the revised Agreement BCL also became liable to tax at a marginal rate of 70% when its taxable income exceeds a certain level. Taxation payable to the Papua New Guinea Government from 1974 earnings was K63.2 million, which was paid in 1975.

A significant portion of BCL's cash flow was required in the early years of its operations to service the company's borrowings as well as to provide working capital and to meet unforseen contingencies. Continuous investment was required in new and replacement equipment. During 1975 the PNG Government introduced its own currency, the Kina/toea, which operated at par with the Australian dollar. Papua New Guinea became an Independent Nation on 16 September 1975.

Some shareholders expressed their concern as to the possible effects of moves for secession of Bougainville from the newly independent Papua New Guinean. While BCL watched the position closely, its policy was to avoid involvement in what it regarded as a political matter to be resolved between the secessionists and the PNG Government. The general recession in the world economy adversely affected copper markets. December 1975 saw BCL completing one of the most difficult years in its short history.

Low metal prices, together with increased costs for raw materials and high wage levels contributed to the continued low level of net earnings in 1976. There were a number of currency changes during the year between the kina, the Australian dollar and the US dollar.

1977 was marked by the inability of major Western countries to lift their economies above the depressed levels prevailing since 1973. The lack of growth in the capital equipment and construction industries restricted demand for metals and kept metal prices at low levels. Copper prices were the lowest in real terms for almost 20 years and BCL's earnings for 1977 were less than in the previous year. Following on the PNG national elections held in mid 1977, the Government entered into a policy of decentralisation. The PNG Government announced the change in its fiscal year to start from 1 January 1978.

In the past seven years only eight days of production have been lost. A 3-year contract for the sale of copper concentrate was signed with People's Republic of China in February 1978. The Bougainville Maru , which was built to carry concentrates to Japanese buyers, made its 100 th voyage in August.

Greater use was made of computers during the year. Previously applications had been mainly in the commercial area, but the introduction of new systems for use in operating divisions were broadening this scope. New applications included mine production control through the allocation of trucks to shovels, plant maintenance control systems, geo-statistical models for mine planning and production simulation to evaluate process improvements.

In 1979, copper prices went above US$1.00/lb for the first time since 1974. However, the benefits gained by BCL from the improvement in metal prices were partially offset by lower production and higher operating costs. As expected, ore grades continued to decline as mining advanced into areas of lower mineralisation. Also the extension of the pit perimeter to further open the orebody at depth necessitated the processing of some oxidised material with inferior metallurgical characteristics. The major cause of higher operating costs was the impact of large increases in the cost of oil based products. BCL consumed large quantities of these products in power generation and haul truck operation. In addition, the freight element in the company's supplies was high.

BCL was active in exploring energy conservation opportunities and examining alternative fuel supplies. Studies included an examination of alternative fuels for the oil-fueled power station and the possibility of reclaiming and refining waste oils from the company's operations. Investigations had been undertaken on the viability of extracting other metals, particularly molybdenium and magnetite, from the ore treated, but were not economically justified. Research work had also been undertaken on the viability of obtaining additional copper from the waste dumps by leaching, but results were inconclusive. Additional drilling was carried out on the periphery of the Panguna orebody to provide better geological and geotechnical information for future pit design.

During 1980 the written-down value of assets was increased from K325 million to K625 million. An Asset Revaluation Reserve was credited with the amount of the revaluation. This revaluation more realistically reflected their current worth. Unfortunately the tax system under which BCL operated made no allowance for inflation.

After the first decade of operations (1972-1981) the total production from the mine was 1.7 million tonnes of copper, 188 tonnes of gold and 433 tonnes of silver. This production had a value of K2.4 billion which represented 48% of the country's exports. Over the same period payments to the Government in the form of dividends, taxes, etc amounted to K540 million which represented 22% of the Government's internally generated revenue. Further, the presence BCL on Bougainville Island had encouraged the development of local business enterprises providing goods and services required for the mine's operations and for the island's residents.

In the same month (October 1981) four days production time was lost due to road blocks following a breakdown in negotiations over revenue sharing. A production record was broken for the amount of material mined in one week – volume moved was 1.9 million tonnes.

As a result of the commissioning of new ball mills, the throughput tonnage was the highest on record in 1982. This increased tonnage compensated for the effect of the lower copper head grade. In 1981, BCL commenced a ‘Think Thin' campaign. Efforts to improve operating efficiencies and to eliminate waste were intensified. The success of these efforts was reflected in the modest increase in operating costs in 1982, despite the significant increase in ore removed and milled and the effects of inflation.

A notable feature of BCL's history is the way its profits varied from year to year. This highlights the fact that mining is a high risk investment. Once the difficulties involved in exploration, mine planning, construction and cooperation of a mining venture have been overcome, investors are still faced with the prospects of uncertain and fluctuating returns. The main reason was fluctuations in revenue due principally to fluctuations in metal prices. The volume of sales, although affected by ore grades and changes in milling capacity, has not varied greatly. BCL was able to sell all of its production because of its long-term contracts and the quality of its product.

In July 1983 the largest single concentrate shipment of 37,637 dry metric tonnes was sent to Europe - a record monthly tonnage of 98,551 dry metric tonnes was shipped. In September the concentrate grade for the quarter was the highest since start up (30.99% Cu). The tailings water reclamation scheme was approved in November.

As a means of stimulating the economy within the North Solomons Province , BCL looked for opportunities to assist the development of new business ventures, which provided a basis for local participation, and which were economically attractive. It was hoped such ventures would be of long-term benefit to the province and Papua New Guinea . It would also help develop business expertise and confidence in the community. Once such venture, Bougainville Limestone Mining Pty Ltd was formed with Bougainville Development Corporation (a provincial government-owned organization) and the local landowners as majority shareholders. Bougainville Limestone's mine at Manetai (approximately 32 km from Panguna) together with its K4 million treatment plant was expected to provide all of BCL's requirements for hydrated lime as a flotation reagent.

The Lime Purchase Agreement was signed with Bougainville Limestone Mining Pty Ltd. Operation commenced in 1985. This overcame the need to import a major portion BCL's hydrated lime requirements and reduced reorder lead time, and hence stock holding requirements.

The largest vessel ever to visit Anewa Bay , the Yuho Maru, with a dead weight of 79,999 tonnes berthed on 15 July 1984, and discharged fuel oil.

The year 1984 saw a marked deterioration in BCL's profitability. With reduced production levels and depressed metal prices BCL suffered loss in the second half of the year. Copper prices reached its lowest level for 50 years, US56c/lb in October and averaged US62c/lb for the year. Some of the overall decline in copper demand included:

Substitution, for example, the use of aluminium cable in overhead power lines or plastic instead of copper tubing in plumbing.
Miniaturisation, or more economic use, for example car radiators use much less copper than they did ten years ago.
Technological change, where new methods are developed, for example, fibre optics or satellites for communications

Industrial action by the Bougainville Mine Workers Union during November resulted in 16 days lost production. The moratorium on mineral exploration on the seven Prospecting Authorities held by BCL outside the special mining lease continued.

In February 1984 agreement was reached with Rio Tinto Minera, Spain on a new eight-year contract to run from 1 July 1984. This replaced the original 15-year RTM contract which was due to expire in March 1987. Letters of intent were also signed with Norddeutsche Affinerie and the Japanese smelter group to continue shipments after the expiration of the present contracts in 1987.

Copper prices during 1985 showed virtually no improvement while gold prices actually declined. BCL continued to make profits, albeit inadequate, in an industry, which had been severely depressed for the period. By the application of cost effective technology, sensible cost improvement decisions and management and employee commitment, BCL was one of the few world copper producers, which had consistently made profits during the period. A significant number of mines had not been able to withstand the effect of continued low copper price and had either closed or suspended their operations. At the same time BCL was well placed to take advantage of any future upturn in prices as its decisions on cost containment had not been taken at the expense of long-term efficiency.

BCL had traditionally been in a strong competitive position by being placed towards the lower end of costs within the industry. The critical factors in establishing a mine's competitive position are:

• grade of the ore body

• by products

• location

• scale of operation

• managerial efficiency

• technological application

• government imposts

The first three of these are determined by nature, but are nevertheless critical. BCL's scale of operations had steadily increased in accordance with a strategy to compensate, in part, for declining ore grades. However, irrespective of these factors BCL had always regarded high managerial efficiency and technological application as essential ingredients to a successful operation. Consequently, particular attention had been paid to these factors over the years. Even so, metal price levels made the return on investment unsatisfactory.

A foreign aid sponsored aerial born mineralogical survey was scheduled to commence in early 1986. It was hoped that this survey would provide the stimulus to an early decision on future exploration. This decision was very important as improved knowledge of potential additional mineralisation both within BCL's prospecting authorities and throughout the province would enhance long term planning for both BCL and the Government.

1987 proved to have the best year's results since 1974 with net earnings of K93.6 million, representing a return on shareholders funds of 16.0%. Though this was exceeded in 1988. Two new long-term contracts for the supply of 3.75 million tonnes of concentrate to the consortium of Japanese copper smelters were signed and dependence on the more costly European market was reduced with further diversification into the Asian area.

1988 was year of records:

Gross sales K561.0 million
Earnings before tax K201.8 million
Taxation K93.2 million
Net earnings K108.6 million (best since 1974)
Dividends total K108.3 million
Capital expenditure K87.6 million
Material mined 89.8 million tonnes
Pre-concentration screening plant throughput 31.3 million tonnes

Militant landowners attacked BCL facilities towards the end of 1988. In April and May 1989, there were further attacks, culminating in suspension of operations on 15 May 1989. Prior to 15 May mining activities were affected by intermittent work stoppages due to the toppling of power pylons and to meetings requested by pit employees on security issues related to the Bougainville crisis. From time to time, shovels at the outer perimeter of the pit were shut down outside of daylight hours because of fears by the operators for their personal safety.

With the exception of an abortive attempt to resume production in early September, the mine remained inoperative for the rest of the year due to continued attacks on employees and facilities. Altogether 231 days production were lost. A major retrenchment program commenced on 7 January 1990 and the withdrawal from the island was completed by 24 March 1990.

Arrangements were made with local Bougainvillean contractor groups for the care and surveillance of BCL's assets on the island. This arrangement proved most difficult and ceased on 1 June 1990 when the company's Loloho power station ceased operatons, due to lack of fuel.

The two major shareholders - CRA (now Rio Tinto ) and the Papua New Guinea Government – demonstrated their support for BCL by providing K45 million in loan facilities towards the end of 1989. In 1990 it was assumed that the important thing was to conserve BCL resources until such time as operations could be resumed even though it was extremely difficult to foresee when this might happen.

As a result of continued violence by armed militants on Bougainville , it has not been possible for BCL employees to return to the island since their withdrawal. With no operations possible during 1990, BCL recorded a loss, after extraordinary items of K14.6 million. The main extraordinary items before tax were receipt of K76.3 million on settlement of insurance litigation, provision of K51.5 million for depreciation and write-off of K28.7 million against the value of stores.

BCL monitored progress through consultations with the Government. It is certain that considerable deterioration of mine assets has occurred because of their exposure to the elements and vandalism, pilferage and militant action. The extent of the necessary write-down could not be reliably measured or estimated. At the same time, because the mine assets were not in use, normal depreciation charges, to reflect wear and tear from their utilisation in production, are not technically appropriate.

Although limited government services and more peaceful conditions were restored to a number of areas on Bougainville , continued militant activity around Panguna, Arawa and Kieta prevented any return of company employees to BCL's area of operations. Photographs and reports from various sources confirm widespread destruction of accommodation and infrastructure facilities. The Panguna mine remained idle until 2003 and there has been no opportunity to inspect and assess damage to BCL's facilities.

Detailed reviews of recommissioning concepts and costs were undertaken. These reviews indicate that even if political stability were restored, it would be difficult to resume production. With the passage of time, the estimated cost of retuning production escalated.

In 1996 the then Prime Minister, Sir Julius Chan, announced the appointment of a Judicial Committee of Inquiry presided over by Mr Justice Andrews to inquire into what has become known as the ‘Sandline Affair'. BCL was not called to give evidence at the inquiry nor did Mr Justice Andrews' published report make any findings that BCL or its major shareholder were in any way involved in arrangements with Sandline International. Indeed Mr Justice Andres found at paragraph 4.42 that ‘In relation to CRA/RTZ it should be said that their only involvement in all the matters raised in the enquiry is that they were approached to sell their shares in BCL.'

The second Commission of Inquiry into the so called ‘Sandline Affair' headed by Justice Los, concluded and published its report towards the end of 1998. As was the case for the first Judicial Committee presided over by Justice Andrews in 1997, neither BCL nor its major shareholder was called to give evidence to the Los Commission of Inquiry. BCL did not seek leave to appear at the second Commission, and the Commission's report did not make any findings adverse to BCL or its major shareholder in relation to the Sandline affair.

In 1998 BCL property was being stolen and destroyed as part of a commercial scrap metal business. Legal action by BCL stopped this illegal trade but not before considerable damage was caused to mine site and port infrastructure. For example, all that remained of the power station was the shell of the building and badly damaged generating equipment. BCL had also received reports that virtually no mine site infrastructure had escaped damage.

By 1999 the BCL Board's optimism for the resumption of operations, even in the medium term, had waned considerably culminating in studies being undertaken on alternative strategies for the company. The economics of restarting the mine were not favourable. The prices of copper and gold were lower in historic terms than 1989 when the mine closed, while in real terms the situation is much worse. Most of BCL's plant and equipment has been badly damaged while fixtures such as roads, pipelines and even pit benches have deteriorated considerably after a decade without maintenance.

BCL's financial position, while satisfactory to continue on a ‘care and maintenance' basis, was not sufficient to do much more than a mine restart feasibility study. Its financial situation was not helped by the major devaluation of the Kina against currencies needed to fund redevelopment. It cannot be assumed BCL would be able to raise the funding needed to reopen the mine. By government regulation the company is required to hold its cash reserves on shore in Kina. This regulation was put in place in 1995 when the Kina was floated. Although interest rates have generally been high often resulting in an increase in profit each year, any business holding Kina and required to find foreign imports was severely disadvantaged.

From 1999 to 2000, BCL's main source of income was interest on cash investments in Papua New Guinea . BCL consulted widely on a range of issues that may affect its future. As a result a number of possible strategies for the future were identified and reviewed by the Board in 2000.

One of these strategies was the disposal of the Bougainville assets. In addition to the economic and political issues associated with a mine restart was the opposition some on Bougainville have to BCL as mine operator. It is not a simple matter for BCL to dispose of its Bougainville assets. The Chairman had dialogue on this matter with the Government, and he moved at the Annual General Meeting (AGM) in 2001 that the Board be authorised to dispose of the Bougainville assets on such terms as it thinks fit.

Also at the 2001AGM, the Board reported that it had also taken advice from a number of experts on both liquidating BCL and making investments in other than interest bearing deposits. The Board recommended to members that it be authorised to seek alternative investment opportunities such as investment in equities including companies with projects in Papua New Guinea . The aim was to grow the value of the company rather than maximise available cash. This new investment strategy was not contingent on BCL disposing of its Bougainville assets, however having made a decision to do so, it no longer has the requirement to preserve cash to allow it to undertake a mine restart feasibility study.

The timing also coincided with a period of falling interest rates in PNG. Investment in listed companies, particularly those selling commodities in $US, is a hedge against any further decline in the value of the Kina.

Throughout 2001 BCL worked with the National Government to find a mutually acceptable exit for BCL from Bougainville . As a result of the decision to develop a portfolio of cash and equities, including investments in PNG projects, BCL chose to reposition itself as an investment company.

In 2001, BCL's first investment was made in Lihir Gold Limited shares and was followed by investment in the top 50 index of companies listed on the Australian Stock Exchange. The Board continued to review the mix of cash and equities. BCL's ability to purchase shares offshore was limited as it required Central Bank approval.

In 2002 and 2003, BCL operated as it had since the mine closed, as an investment rather than a mining company.

LINK

Bougainville crisis

Chronology of Peace Keeping Process

Years in Brief 1982 - 1990 (Subtitle)

1982 1983 1984 1985 1986 1987 1988 1989 1990

Production

Concentrate (tonnes) 598,634 636,932 542,260 581,752 586,552 585,503 552,012 224,646 -

Containing

Copper (tonnes) 170,004 183,191 164,447 175,048 178,593 178,211 165,957 68,717 -

Gold (kilograms) 17,528 18,002 15,673 14,372 16,367 15,088 13,862 6,977 -

Silver (kilograms) 43,153 47,414 44,400 46,112 50,385 50,599 48,414 20,494 -