19

Letter, Espie To Warwick Smith

Melbourne, 25 February 1966

Bougainville copper operation

At our discussions in Port Moresby1 it was decided that we should prepare a summary of the points dealt with which will have to be incorporated in an overall agreement. This has been completed and copies are attached.

The purpose of this document was to provide a basis for examination and further consideration prior to the next meeting which is set for 25th March at Canberra.

No attempt has been made to set anything in legal form as it was thought this was premature.

I am also sending copies of the document to Mr. Henderson at Port Moresby.

Attachment

BOUGAINVILLE COPPER OPERATION

Background

We opened our discussions indicating that our Board feels we should negotiate as soon as possible an enduring agreement which will satisfy us that it is prudent to continue our current rate of expenditure, and in addition will satisfy the overseas investment houses that with this agreement the project is an attractive proposition. We added that we felt strongly that this agreement should be passed by the Papua and New Guinea Assembly and that on independence day the Central Government, Local Government Council and the immediate local population should feel that the project was good for all of them.

We indicated that the possibility of the local population being dissatisfied because of nominal compensation for land could create problems for the company in the future and we would prefer to see this subject approached on a more liberal basis.

Scale of operations

The Administration indicated that to help them in the discussions they would like to have some idea of the size of our operation. We pointed out that modem thinking for major projects requires some computer studies to indicate the optimum production rate, and as essential figures required for the calculation of this were not yet available, the Administration must take our figure as indicative only and possibly subject to considerable later change. We mentioned production of 30,000 tons of ore per day.

The Administration then asked for a capital cost and we stressed that in addition to other variables, capital cost would depend on the tonnage per day, but again in an attempt to assist the discussions and not in any way as an accurate indication of capital expenditure, we mentioned $A100m.

We added that our present expenditure programme would not give us a reasonable indication of the size and grade of our ore body before the end of 1967 and therefore an accurate feasibility study could not be available until after that date. However, the study of markets, treatment methods, tailings disposal, etc. had already commenced and we expected our figures on capital costs and production to improve in accuracy between now and the end of 1967. We were asked for an operating cost and explained the influence of the overburden to ore ratio on this cost and added that at the commencement of a drilling programme it is not possible to have a reasonable approximation of this ratio. However, as a guide, we mentioned a direct operating cost of $A2 per ton.

When asked for a profit figure, we replied that any figure quoted would probably be unsatisfactory, but on being questioned on the type of income the Government could expect from equity participation, we said that in view of the risk in the area the company would require a return of more than 15% after tax.

Other figures mentioned were a power station of 30 megawatts, and an exploration expenditure in each of 1966 and 1967 of $A2.6m. on Bougainville.

Financial interest of Administration

It was proposed that the Administration or a statutory body on its behalf should identify itself with this large venture through a shareholding which would in the result deal with the question of mining royalty and provincial or State taxes and the normal facilities provided for industry by Government.

On the assumption of two thirds of the capital required being financed by loan it was suggested that the Administration should have a shareholding of 20% of the initial equity of the mining company to work this deposit. These shares would have the same rights as other shares and thus be entitled to bonus and cash issues.

Part of this equity would be subscribed for at par in cash such funds in reality being for the company to use for the construction of road and the port.

Information is being obtained on the scope of Canadian Government assistance to open up new mining projects—it should be available shortly.

The second part would be issued without a cash subscription but in lieu of royalties and provincial taxes.

The immunity from provincial or State taxes would possibly have to be dealt with by an indemnity agreement and is referred to later.

Taxation

1. It was explained that it would be essential for all capital expenditure on the mining venture to be covered by the expression ‘necessary plant development of the mining property or housing and welfare’ used in section 155 of the Taxation Ordinance of the Territory.
Learned counsel has given opinion that the words quoted would undoubtedly embrace all expenditure on the Bougainville project. If the Taxation Department did not agree with this an amendment to the Ordinance would be necessary.

2. The Ordinance gives a mining company an accelerated write off of capital expenditure.
In some cases where dividends go overseas the investor does not receive the maximum benefit available from this provision. When recognition is given by capital exporting countries for ‘tax holidays’ of capital importing countries it is generally expressed as being applicable to income which is exempted in specific terms and not where an exempt element arises in result only.
This matter needs more detailed examination before a complete proposal can be put before the Administration but as a general indication it could be illustrated by saying that an alternative choice could be given to a mining company taxpayer.
The choice could be expressed to say that the assessable income in excess of allowable deductions other than deductions under the mining division will be exempt with a corresponding reduction in the capital expenditure otherwise deductible.

Provincial or state taxes

The company proposes that part of the share to the Administration should be in lieu of royalties and provincial or state taxes.

The Administration is asked to undertake to indemnify the company if provincial or state taxes are ever imposed to the extent that they are not allowed as a credit against Central Government income taxes the amount to be paid by the Central Government to the company.

Municipal rates

The Central Government is to indemnify the company if municipal rates exceed a maximum standard as agreed between the company and the Administration.

Export tax and excise

The company is to be indemnified if an export tax or excise is imposed on it which does not exist at the date of agreement.

Stamp duty

The company to be exempted from stamp duties arising out of the establishment of the operation such as on the acquisition of interests in hand.

Land

The Administration asked our requirements in land and in brief we indicated 4,000 acres at the coast for loading facilities, expansion for secondary industries, an extensive area of swamp land for tailings disposal, perhaps 50 square miles of land around the operation and possibly a right of way for an aerial rope way or other handling arrangements between the coast and the mining site would also be required.

The Administration made it clear that requests for land areas of this size posed serious problems for them. In regard to the land at the operation site, we pointed out that the area of 50 square miles was with minimum planning on the location and size of the open pit, overburden dumps or leaching dumps and that with future study of the topography it would appear that this area could be considerably reduced, but that it would be some time before we could give a firm figure. Similarly we would review our figure for the coast.

The term of the grant of all land is proposed as an initial period of 42 years with rights of successive renewals of 21 years on the same conditions.

Tailings

Because of the topography the heavy local rainfall would make it difficult to build tailings dams usually seen on mining properties in Australia and therefore it will be necessary to dispose of tailings in the Kawerong river.

A question from the Administration on what would be the effect of depositing a thousand tons of tailings per hour in the Kawerong could not be answered, particularly as we do not yet have contour maps of the area. We realise that this poses a further problem in the resumption of native land to cover the area over which the tailings will spill out fanshaped from the mountains on the flat swamp land towards the west coast. We feel that definite opinions on the behaviour of these tailings is a matter for experts and perhaps even extensive model tests. The company indicated its willingness to obtain expert opinion as soon as possible.

Other minerals

It was considered appropriate that the company should have rights to mine all minerals found within its leases on the understanding that it made a reasonable attempt to work these mineral deposits where economic.

Adjacent areas

For some months the company has refrained from work on the adjacent areas of Minoki, Karato and Dharatui on the advice of the Administration.

A recent incident in which natives from Onovi had attempted to interfere with a party establishing a survey station on an adjacent mountain top was mentioned, and the importance of pushing ahead at Minoki, Karato and Dharatui was discussed. The company pointed out that work at Panguna was well advanced and the lack of work in these other areas could cause the company acute embarrassment for having advanced so far at Panguna, if one of the other areas subsequently proved to be more attractive than Panguna. For this reason the company is keen to push ahead with geochemical sampling and perhaps drilling in these areas before further expanding the work at Panguna.

Port

The company felt it was unlikely a port would be built on the west coast but rather on the east coast between say Kieta Peninsula and Rorovana Bay. A number of sites would provide the necessary shelter for a specialised bulk loading terminal and the requisite storage facilities. The storage land would be part of the 4,000 acres mentioned under the heading of ‘Land’. The company would wish to control this terminal.

Power

The company is investigating the use of hydro, diesel, coal and atomic energy as a source of power. At this stage we would anticipate a diesel power station with oil unloaded from the bulk loading terminal wharf and the station built on the 4,000 acres already mentioned but in the event of it being decided to use hydro-electric power the company would require access to adequate water resources.

Town

The Administration is facing the problem of the move of the capital of Bougainville from Sohano to Kieta and it asked for some detail on the location and type of the company town. We indicated that as the company intended to own the houses of its employees we would wish to have these houses on our land, but that we would not wish to involve ourselves in the shops, garages and offices of people not employed by the company who would be servicing the town’s people. As the Administration said that the company town could initially be larger than their new capital, the company’s plan is of considerable importance to them in their planning. At this stage we would expect our concentrator and town to be in the Kawerong Valley adjacent to Panguna, but as a result of further drilling we may wish to establish the town and/or the concentrator on the slopes of the Crown Prince Range adjacent to Kieta.

Under these circumstances there could be an advantage in locating the new Government town and company town on adjoining sites, leaving Kieta to develop as a Government port providing facilities for our incoming goods as well as the inward and outward traffic for the town and hinterland.

Water

The company would require leases of land to enable it to catch, store and transport sufficient water for its industrial and town needs.

Stream gaugings will commence in the near future to allow us to give more detail of these land requirements.

Timber

At the suggestion of the Administration we are planning to purchase a cheap saw for our immediate needs and to arrange through the Department of Forests for local natives to lease the saw and sell us the timber. In a small way this would increase native participation in our work.

Hospitals

The company indicated that it would be its policy to support the Government’s programme to improve the hospital already established in Kieta in preference to maintaining a separate hospital.

Education

The Education Department has offered to staff a native junior technical school built by the company but at present there would not be enough pupils from our labour force to warrant a school built by the company. The company will be interested in the establishment and growth of a local technical school, particularly if the company town is reasonably close to the new capital.

Compensation on resumption

Arrangements must be made to provide for compensation

- if the shares in the mining company are taken over

or

- if its assets are resumed.

Such arrangements will be essential for any fund raising required to bring the mineral deposits into production.

The basis and method of assessment of compensation will have to be determined in detail as also the events upon which compensation will become payable.

A provision will have to be included defining ‘creeping expropriation’2 and setting out a basis of compensation …

Rights of third parties to use of road

The company understands the importance of the access road to the general development of the area for primary producers. Where the terrain allows the ready construction of a two way highway, the company sees no objection to the general use of the road by small farmers, but would expect some contribution by any major user.

In places where the terrain demanded the construction of a one way highway with control of up and down traffic, the company would expect to have the right to allocate the times and type of usage by third parties. The company would make every effort to accommodate the small farmer but would of necessity be forced to take priority over any user.

[NAA: A452, 1966/1445]

1 See Document 11.

2 That is, a series of discriminatory acts by a host government vis-a-vis the original rights of a foreign investor.