March Issue 2015
Let Sleeping Treasures Lie?
The name RekoDiq conjures up an image of a mysterious land, tucked away in a distant galaxy — a land of untold riches, but unreachable. The reality of RekoDiq is not far from this image.
RekoDiq is a vast, barren tract of land in southwestern Pakistan in the Chagai district of the province of Balochistan. The area is a veritable oven in the summers with temperatures ranging between 40-50°C. In the winters, the other extreme reigns when the region becomes freezing cold with the mercury dropping as low as -10°C. To complete the dismal weather picture, there are periods of high winds and dust storms that can paralyse commercial activities in the area. There are almost no roads, water or power lines in this vast, empty land.
But beneath the barrenness of RekoDiq lies the fifth largest deposit of copper in the world and — as if this was not enough of nature’s bounty — there is also a substantial quantity of gold.
Copper is the life-blood of modern industry. Being an excellent conductor of electricity, copper cables are used in the production and transmission of electricity, and in the winding of electrical motors. It is also used in machinery and cars. An average car alone, for example, contains 1.5 km of copper wire.
The main use of gold is in jewellery-making, but it is also used in the manufacture of electronic goods such as cell phones and computers.
Sadly, more than 18 years after the reserves were first discovered, there is no project in place to extract this treasure and the Government of Pakistan (GOP) is in litigation with the international company that had done the exploration and prepared a feasibility study.
In 1993, during the tenure of the unelected government led by the caretaker prime minister, Moeen Qureshi, the GOP awarded Broken Hill Properties (BHP) of Australia an exploration license for RekoDiq.
There are allegations that the 1993 exploration license granted to BHP was tainted by corruption. However, no substantiation or proof of such corruption exists.
In 1997, BHP discovered significant reserves in the area and in 2006 it sold its license to the Tethyan Copper Company (TCC) that is jointly owned by Antofagasta of Chile and Barrick Gold of Canada. Antofagasta is a major player in the copper mining industry of Chile and Barrick Gold is the largest gold producer in the world.
TCC continued the exploration and testing work needed to establish the quantum of reserves. Finally, a detailed feasibility study was completed by TCC and submitted to the GOP in 2010. According to the feasibility study, the total estimated quantity of the copper ore from the RekoDiq deposit was 5.9 billion tons with an average copper content of 0.41 per cent and a gold content of 0.22 grams/tonne.
Not all of this ore can be mined economically because both the mining depths (the pit created by the mining would be 1 km deep) and the reduction in the concentration of copper in the ore become a factor. The quantity of the ore that can be mined economically has been estimated at 2.2 billion tonnes with an average copper content of 0.53 per cent and an average gold content of 0.30 grams/tonne.
It should be understood that what RekoDiq will be selling to the market is not purified copper and gold, but ore that has been crushed, enriched in the percentage of the metal, turned into a slurry, pumped to a near port, de-watered and loaded onto a ship for transport to smelters at international locations owned by others.
As explained on the TCC website, “The proposed processing plant will produce approximately 600,000 tons of copper concentrate a year, which will contain 28-31 per cent copper and
7-22 g/tonne gold, which translates to about 200,000 tonnes of copper and 250,000 ounces of gold per year. The commercial mining operations are anticipated to last for over 56 years with an estimated annual operating expense of about US$ 400 million of which 45-50 per cent will be spent nationally.”
The value of the reserve determined by TCC is US$ 60 billion.
The capital cost of the project is estimated at US$ 3.3 billion for a plant that processes 120,000 tonnes per day. TCC will make 100 per cent of the investment. In return they would get a 75 per cent share and the Government of Balochistan (GOB) 25 per cent. The GOB would also get two per cent of the profits as royalty and the taxes which would take its share to above 50 per cent.
The planned investment includes an open-pit mine, a processing facility, a project village for employees and a 682-km underground pipeline to Gwadar port on the Arabian Sea to carry slurry concentrate to a dedicated marine terminal. Since there is no power in the area, the construction of a 189 megawatt (MW) power plant to operate the project is included in the estimate.
Following the completion of the feasibility study in 2010, TCC submitted a mining license application. The GOB rejected the application in 2011 on the grounds that the feasibility study was incomplete since it did not cover the total quantity of the minerals to be produced and exported. Another reason for the rejection was that the study did not contain a proposal for a plant in Balochistan to purify the copper ore to the finished stage as this would add value to the product.
The matter did not end with the rejection of the mining license. A case was ï¬led in the Balochistan High Court (BHC) in 2006 by Maulana Abdul Haque Baloch, a member of the Jamaat-e-Islami, maintaining that the exploration license granted to BHP/TCC in 1993 was illegal. The petition was dismissed by the BHC in June 2007. In August 2007, a number of similar petitions were filed in the Supreme Court of Pakistan. In January 2013, the court declared the 1993 exploration as being against the laws of Pakistan. The agreement was thus rendered null and void, leaving TCC with no further rights of exploration under the license.
TCC took the case to the International Court for Settlement of Disputes (ICSID). They pleaded that the GOB should be stopped from working in the lease area as it was under dispute. In December 2014, the ICSID ruled that the GOB was within its rights to continue exploration activities in the area. TCC has now withdrawn this claim.
TCC also pleaded to the ICSID that Pakistan is liable for compensation for the work done to date. If the ICSID determines that it has the jurisdiction in this matter, it will start the process for determining the amount of such compensation. In the meantime GOP has started negotiations with TCC regarding their claim.
The government has engaged top British and Pakistani lawyers, including the firm of Mrs Cherie Tony Blair and the ex-law minister Ahmer Bilal Soofi, as its legal counsel.
According to TCC representation to the Supreme Court in January 2011, it had spent in excess of US$ 400 million on the project to date.
Exploration, testing and preparing feasibilities are expensive activities and the figure claimed by TCC does not appear to be inflated. In any case, it is easy to get an audit of this amount.
The project has attracted a lot of media attention. Most media reports allege blatant robbery of Pakistan’s resources. Some claim that it is a Zionist conspiracy as the founder of Barrick Gold, Peter Munk, is Jewish.
Reports also quote wildly varying estimates of the reserves. Figures like US$ 250 billion to US$ 1 trillion are regularly floated in news reports without any qualification as to what parts of the lease they are referring to.
Those opposed to the deal have three key objections.
First, that TCC estimates for the quantity of copper and gold in RekoDiq are based on a much smaller area than the full lease and if the total area was taken into consideration the figure would have been much higher. If the higher figure is considered, the value of the reserves is much higher and Pakistan could have a better share than the 25 per cent that is stipulated in the current contract.
The question here is that what is the source of this higher estimate? The only exploration license for the area was held by TCC, which conducted testing and a detailed survey to arrive at the quantum of the reserve. Also, TCC has stated that revenues from any additional reserves would be shared on the same basis as the currently determined reserve.
As to the claims that the 25 per cent/75 per cent sharing of profit between the GOB and TCC is inequitable, that is a moot point. There is no hard and fast rule for determining the ‘correct’ division of profits. Such decisions are based on the specificities of a project. For example, there is zero equity participation of the GOB in the project. What must also be taken into consideration is that the project is located in a province where the political situation is extremely volatile and there is an ongoing armed conflict, and also where there is no infrastructure.
Putting all these factors together it is clear that the project is a high-risk venture and Pakistan is not in a position to strike a very favourable deal with any foreign company.
The second objection is that only primary refining is proposed to be done in Pakistan and the final conversion to pure copper and gold will be done at smelters abroad. This would result in a revenue loss for Pakistan due to not benefitting from value added by smelting.
This objection ignores some facts of metal processing. Smelting is a technologically challenging, environmentally sensitive, and financially a costly operation. The waste from the smelter has to be treated properly before it can be released into the land and in the atmosphere. The economic viability of the additional cost of smelting cannot be taken for granted. If the smelter is built near the mining site, additional costs may be incurred to build roads to transport the pure copper.
The third objection is that Pakistan has the technical expertise to do the project itself.
However, the experience from the nearby Saindak copper mine flies in the face of such claims. Saindak was developed with Chinese assistance. It was completed in 1995. However, due to the lack of technical expertise and required funding, the project could not be operated. Finally, in 2002, foreign investors were invited to fund and operate the project. The Chinese company, Metallurgical Corporation of China (MCC) Ltd., won the contract. According to the contract, 50 per cent of the proceeds went to MCC. Out of the 50 per cent share of Pakistan, only two per cent went to the Balochistan government and the remaining 48 per cent to the federal government. This created major resentment in Balochistan and has made Balochistan sceptical of the federal government’s intentions regarding RekoDiq.
In addition to being a technical and financial failure, Saindak also has serious environmental issues with the waste from the plant not being handled properly.
Another example of Pakistan’s inability to develop major projects is the Thar Coal project, which included mining, development of infrastructure and power generation using coal as fuel. Pakistan invited one of the largest coal mining and processing companies in the world, the Shenhua Group of China, to carry out a feasibility study for a US$ 1.5 billion project that would produce 1000 MW by 2010. The project was vetoed by the Water and Power Development Authority (WAPDA), headed then by General Zulfiqar Ali Khan, as the power tariff demanded by Shenhua was deemed too high.
Power from coal is also a good example of the failure of the tall claims made by Pakistani scientists like Dr Samar Mubarakmund, Chairman of the Board of Governors of RekoDiq and member Planning Commission, who is at the forefront of the campaign to cancel the TCC license and to develop RekoDiq with Pakistan’s own resources.
Dr Mubarakmund insists that power can be produced by extracting gas from underground coal. This technology is in its infancy and is not being used on a commercial scale even in the countries that have the technological expertise. Valuable time and money was lost in this quixotic venture while the conventional mining of coal was put on hold. Today, conventional mining and power generation is being used to develop the 650 MW Thar Coal project.
Dr Mubarakmund’s scientific credentials were again put in serious doubt in 2012 when he supported a quack engineer, Agha Waqar Ahmed, who claimed that he had invented a mechanism whereby automobiles could be run using water as fuel.
Even the much-venerated father of Pakistan’s nuclear bomb, Abdul Qadeer Khan raised serious doubts about Pakistan’s ability to develop RekoDiq on its own. In an article in the Daily News, January 24, 2011, he wrote, “Whether we are talking about the Thar Coal project, the RekoDiq project or any other major project, we need young, experienced, highly committed engineers with the proper educational background. It is an extremely difficult and lengthy process and the team leaders and engineers will have to make it their life’s work to complete the project.
“The present government, or any that may follow, will never be able to provide enough funds to keep such projects going. An initial investment of hundreds of millions of dollars will be required with little to show for it in the beginning. The projects will drag on and the poor people will see gold, copper and electricity only in their dreams. Looters will have a heyday and they will walk off with filled pockets. In a country where officials cannot even build, complete and maintain schools, colleges and hospitals, how can one expect such miracles?”
So where do we go from the current impasse?
An encouraging sign today in the RekoDiq saga is that the Pakistan Muslim League-Nawaz (PML-N) government has entered into negotiations with TCC. It appears that the Sharif government has correctly concluded that if a fair settlement is not arrived at with TCC, Pakistan could be blacklisted by major western companies.
Some observers of the RekoDiq project think that the cancellation of the TCC lease is part of a larger geopolitical play, with elements in Pakistan favouring a Chinese presence in Balochistan rather than a western one.
So what are Pakistan’s choices now? It clearly cannot carry out the project using its own financial and technical resources. If it goes out for international bidding it is unlikely that the bid will be taken seriously in the market after the TCC fiasco. Most likely, the only country that would be interested in the project will be China. In any case, the project would face long delays and deny the country direly needed revenue.
These are hard questions and the GOP owes answers to the people of Pakistan who are the real owners of these valuable resources.
Twenty-two years after it began in 1993, the saga of RekoDiq stands at a dead end without an ounce of copper taken out of the ground. Clearly, the ineptness and corruption in successive governments, the infighting between the organs of the state and the centre-versus-province conflicts are responsible for denying Pakistan the benefits of the project.
It is important for the government to recognise that the claims of some powerful lobbies that the country can develop the project itself are false. Therefore, Pakistan has no option but to procure foreign technology and capital. It should do so intelligently and honestly to get the best deal as soon as possible.
This article was originally published in Newsline’s March 2015 issue.
The writer is an engineer by training and a social scientist by inclination.