Canberra, 19 September 1969
I am writing to you regarding the offer by Bougainville Copper Pty. Ltd. for the Administration of Papua and New Guinea to take up a 20% shareholding in the Bougainville copper project. Attached is a copy of a Submission I had prepared for Cabinet but, on your advice, have now withdrawn.
The Company’s arrangements for loan finance with the Bank of America are contingent on the Administration’s acceptance of the equity offer before 31st October this year. A delay in a decision on this matter until after the elections could have serious implications for the project.
The proposed Submission to Cabinet was agreed between the Department of External Territories and the Treasury with regard both to the facts of the situation and to the recommendations.
Following our discussion I am now writing to ask whether you agree to the recommendations set out in that Submission.
I am also asking the Prime Minister whether he agrees that if you concur it would be in order to proceed as proposed.
The recommendations set out in the Submission are:—
(i) that the Administration take up the option on 20% of the equity capital in Bougainville Copper Pty. Ltd. at a cost of $25m on the understanding that half may be provided in each of this and the next financial years.
(ii) that the method of financing the equity be left to the Treasurer and the Minister for External Territories having in mind that some or all of the funds for taking up the equity may have to be provided by the Commonwealth.
I am sending a copy of this letter to Mr. McEwen for his information.
Attachment
SUBMISSION, BARNES TO CABINET
Canberra, 18 September 1969
Confidential
Territory of Papua and New Guinea Bougainville copper project
Purpose
The purpose of this submission is to seek Cabinet approval for the Administration of Papua and New Guinea to take up an offer of 20% equity of the capital in Bougainville Copper Pty Ltd, the CRA subsidiary company developing the copper deposits at Bougainville.
Background
2. Under the terms of the Bougainville Copper Agreement of 1967 Bougainville Copper Pty Ltd is required to offer the Administration 20% of its equity share capital.
The Government has decided (Cabinet Decision No. 258 of 18th April 1967) to ensure that the option over equity capital is taken up provided it is satisfied that the venture is sound and offers reasonable prospects of profitable operation.1 In Submission No. 654 of 19th August 1969, the Minister for External Territories advised Cabinet that the Company was expected to offer 20% of the equity capital to the Administration later this year.2 This offer has now been received
Feasibility and prospects of profitable operation
3. The final report of a detailed feasibility study of the project undertaken by consultants (Bechtel – Western Knapp Engineering) on behalf of Bougainville Copper Pty. Ltd. is now available. The study estimates the total capital cost of the project (including interest and financing charges) to be approximately $362m.
4. Total equity capital is to be $125m. It has been estimated that, on the basis of the figures supplied by the Company and on an assumed copper price of US45 cents per pound (current price is US67 cents) cash available for distribution to shareholders up to 1982 (the latest year for which estimates are available) would be of the order of $630m. On this basis average annual earnings of the order of 40% could be expected. Using a discounted cash flow technique (which unlike conventional accounting practice allows for the passage of time) this represents a return on capital of almost 25% per annum. In my view these data indicate that the project is sound and offers reasonable prospects of profitable operation, and thus meets the criteria laid down by the Government. I therefore consider the offer of 20% equity should be taken up by the Administration. As the equity would be taken up at par there would be considerable prospects for early capital appreciation of the Administration’s equity holding.
5. The evaluation report has been made available to the Departments of the Treasury and National Development. They agree that on the basis of the information supplied by the Company the project meets the criteria laid down by the Government for taking up the option.
6. The Company has concluded the principal arrangements for the financing of the project. A Credit Agreement has been signed with the Bank of America for loans of up to $US246.4m. The Credit Agreement also provides that total borrowing from all sources excluding working capital should not exceed $US270m. A cash loan of $US30m. from Japanese sources is still being negotiated.
7. If the Administration takes up equity in the Company it will be necessary for it to become a signatory to the Security Agreement with the Bank of America. Under the Agreement both the Administration and the Company will be required to pledge their shares in Bougainville Copper Pty. Ltd. as security for the loan. The Security Agreement has been examined by Attorney-General’s Department who see no legal reasons why the Administration should not become a signatory.
Finance for Purchase of Equity Capital
8. In my previous submission I indicated that equity capital would probably be of the order of $100m. The Company has now decided that equity capital should be $125m. Exercise of the Administration’s option will require a subscription of $25m. By arrangement with the Company the Administration may provide 50% of its share of the equity capital in each of the financial years 1969/70 and 1970/71. The Company would prefer the 1969/70 contribution to be made in October 1969 but under the terms of the Bougainville Copper Agreement the Administration has six months from the date of offer to make a decision on the option over equity and payment of the $12½m. for 1969/70 could be deferred until 1st March, 1970.
9. It has always been clear that the Administration would not be able to provide the funds necessary to take up the equity from its ordinary budget and that some special arrangements would need to be made by the Government. There are a number of possible ways in which the funds could be provided:—
(a) A loan from the International Bank for Reconstruction and Development.
(b) A loan raised by the Administration.
(c) From the Commonwealth Government:—
- by way of grant
- by way of repayable loan.
It may be possible to provide the funds by a combination of these methods.
10. While it has not in the past been the practice of the IBRD to make loans specifically for the purpose of acquiring equity in companies, the Bank may be prepared to consider proposals of this nature.
11. A loan to the Administration by the Government would represent a departure from established policy which has called for Australian aid to the Territory to be by way of grant. If the Administration share of the equity capital were to be financed by an Administration loan it would probably be necessary for it to attempt to tap new sources of funds e.g. by way of an approach to the Australian loan market. Such a loan might in effect be underwritten by the Commonwealth agreeing to provide by way of loan any funds which the Administration was not able to raise from the market.
12. There are some special features of the financing of the Administration’s equity in the project which could provide grounds for departing from current practice of providing Commonwealth assistance to the Administration by way of grant:—
(a) Participation provides prospects of substantial capital gains.
(b) Investment will yield substantial income to the Administration. Any loan could therefore be repaid either out of income or by the proceeds from eventual sale of part of the equity to Papuans and New Guineans.
13. The alternative methods of financing the equity are at present under study and a clearer picture will emerge when advice is available concerning the possibility of an IBRD loan.
[ matter omitted ]3
[NAA: Al209, 1969/7961]
Bougainville: the problem of rock waste and tailings disposal
The Australian Government’s endorsement of the copper project’s feasibility—as embodied in the decision to take up 20% equity1 —was given before agreement with CRA on the means of dispensing with waste from the mine. In mid-September, CRA forwarded to the Administration proposals on waste disposal, to which a response was promised within a month.2 This deadline, and the many assumptions on which the company’s reports were based, prompted Government officials to consider the possibility of holding CRA liable for damage should its predictions prove false.3 There was also an attempt to push for rapid technical appreciations of the reports by Australian Government agencies.
In early October, the Department of Works informed DOET that it would be unable to provide an assessment with such little warning, though it did note that the ‘effect that these waste products could have on the surrounding countryside and coast are of considerable importance and magnitude’.4 Meanwhile, the Snowy Mountains Hydro-Electric Authority (SMA) indicated that its early reaction was that the proposals were ‘extremely poor and … a substantial cost problem and possible delay could emerge’.5 The Administration suggested that the waste rock dumps would become unstable after 10 years and that ‘the tailings would all be flushed into the sea and that the effect would be akin to the Markham River’.6
The one month deadline was not met. A Snowy Mountains official assigned to assess the proposals—a process which involved travel to Bougainville—was continuing to investigate, but the pressure for quick results remained. Mentz observed that the official, N.M Worner, ‘seemed likely’ to furnish a report that would ‘not be entirely favourable’ and ‘could be most unfavourable’—and he remarked that the possibility of having to be ‘difficult’ with CRA ‘makes it important that we don’t delay unnecessarily in bringing the position to their notice’.7
On 22 October, the company was informally advised of the Administration’s position. It was said that CRA’s ‘preferred disposal method’ would be favoured but that the Administration would be ‘prescribing conditions relating to certain technical arrangements [and] … to the welfare of affected peoples and their land’.8 There was also some doubt about the legality of the scheme envisaged and it was suggested by an Administration legal officer that ‘there could be a need to amend the Water Resources Ordinance with the intention of providing authority for the … pollution of water courses in particular circumstances’. A later opinion was that CRA could simply be granted a licence under the ordinance to deposit tailings in the river.
The SMA report was perhaps less critical than expected. It judged that the company’s recommendations ‘are generally technically acceptable provided certain precautions in design and monitoring of stream and dump behaviour are taken’.9 Moreover, CRA’s proposals were ‘much less costly than alternatives which would minimise damage to property or adverse effects on the livelihood of inhabitants in the affected river systems’—yet such savings would ‘have to be weighed against potential compensation claims or sociological difficulties’, a ‘matter for the Administration to evaluate’. In a subsequent letter to CRA, Hay approved the methods forwarded by the company, subject to various technical adjustments, monitoring arrangements and rehabilitation schemes.10 He also specified that CRA ‘co-ordinate … negotiations in respect to compensation to be given to … natives’ and that it be responsible for organising and paying for resettlement.
1 See Document 106.
2 See Document 291.
3 Matter omitted includes the recommendations cited in Barnes’ letter to McMahon. McMahon concurred (letter, McMahon to Barnes, 25 September 1969, NAA: A452, 1969/5683) as did Gorton (letter, Gorton to Barnes, 14 October 1969, ibid.). By year’s end, it was clear that it would be impossible to negotiate a loan from the IBRD to cover the first payment for the purchase of equity—due in February 1970—though Treasury officials were continuing to speak with the IBRD about possible later loans. In the interim, it was thought that the February instalment might be paid by means of a public loan, private loan, or a grant or loan from the Commonwealth (memorandum, DOET (Warwick Smith) to Administration, 9 December 1969, ibid.).
1 See footnote 3, Document 317.
2 Minute, Gregory to Ballard, 22 September 1969, NAA: A452, 1969/4502. Under the Bougainville Copper Agreement, the Administration had two months in which to consider the reports, but a shorter period was accepted ‘because of timing considerations in the project’ (memorandum, DOET (Gregory) to Department of National Development, 23 September 1969, ibid.).
3 Note for file by Gregory, 23 September 1969, ibid.
4 Letter, A.S. Reiher (Director-General, Department of Works) to Warwick Smith, 9 October 1969, ibid:
5 Note for file by Mentz, 30 September 1969, ibid.
6 Note for file by Gregory, 30 September 1969, ibid.
7 Briefing note by Mentz, 17 October 1969, ibid.
8 Telex 9612, W.F. Carter (Director, Posts and Telegraphs, PNG) to Richardson, 31 October 1969, ibid. In a report of the same day, Ellis and W.L. Conroy (Director, Agriculture, Stock and Fisheries, PNG) wrote that settlements along the Jaba River would have to be moved. They recommended ‘early preliminary talks and subsequent negotiation’ to prevent ‘any atmosphere of confrontation’ developing with villagers (ibid.).
9 Letter, H.E. Dann (Commissioner, SMA) to L.F. Bott (Secretary, Department of National Development), 12 November 1969, ibid. Womer’s final report is attached to this letter.
10 See draft letter, Hay to Espie, attached to memorandum, Administration (Hay) to DOET, 28 November 1969, ibid. The draft letter was approved by Territories (see telex 11823, Newman to Richardson, 16 December 1969, ibid.).