Melbourne, 24 February 1967
Our company has discovered and is presently testing a large low grade copper deposit on Bougainville which would cost more than $100 million to develop.
Compared with the location of most existing low grade copper mines, the Bougainville deposit faces certain economic and political disadvantages which demand special consideration if an operation there is to have any chance of being financed and becoming a reality within the next few years.
We believe it is the desire of all concerned with this potential development project to find means of offsetting these economic and political disadvantages in the minds of the financiers.
Economic feasibility is adversely influenced by the very difficult terrain in an extremely high rainfall area which is also subject to seismic activity. Established means of communication are entirely lacking. Also, prospects are not helped by the movement towards an over supply position for copper which will inevitably depress future prices. The world wide resources that are available to C.R.A. and its related companies and consultants are being brought to bear on these problems. In the most detailed and costly study we have yet undertaken in relation to any deposit, over $4 million has already been spent in order to assess the deposit and investigate ways and means of overcoming the disabilities inherent in it, but inevitably they will result in lower profit expectations than would apply if the deposit were on the mainland.
Political factors also are already affecting us. Of far more importance, however, is the expectation that some form of independence or self government will apply in the Territory of Papua and New Guinea before the loan monies will have been repaid. This will be a major factor affecting the decision of the financial organisations from whom we will need to borrow some two thirds of the capital outlay. We are well aware of the work the Commonwealth is doing and are hopeful that the transition to independence will be made smoothly. We must expect, however, that bankers and large financial institutions, properly concerned with the security of very substantial sums of money, will recall and be influenced by the rather unfortunate history of many African and Asian countries which have attained independence in recent years.
Clearly, major financing will not be possible unless the cash flow expectations are satisfactory and there is an assurance that world currencies generated by the project can be used for loan repayment. It is also necessary to demonstrate that the company has satisfactory long term prospects of operating under stable conditions through an agreement likely to endure.
Bearing these various requirements in mind, including the need to include benefits for the Territory and its peoples, we have sought in our agreement with the New Guinea Administration the following particular conditions. Some of these may not be necessary in Australia but we regard them as vital if the operation is to proceed on Bougainville.
To improve economic feasibility and increase the cash flow
A three year tax holiday.
An assurance that capital expenditure involved in the operation, including expenditure on treatment plant, roads, town, power plant and port will qualify as a deduction for the purposes of Division 10 of the New Guinea Tax Ordinance.
Retention of the 20% exemption on income from the mining of ores of copper.
To safeguard availability of world currencies
A clause in the agreement (which would operate only after exchange control powers had passed to the New Guinea Administration or Legislature) to ensure to the company the right to retain and use currency from loans and proceeds of the sale of its products for loan repayments, dividend payments, imports and the like.
To aid long term stability
Financial participation by the Administration—an option is offered whereby at or about the time of taking up the leases the Administration may take 20% of the equity of the company at par. We are keen to see this participation eventuate and consider it is important that, should this option be exercised, it will continue to be held by and for the benefit of the Administration or the indigenous inhabitants of the Territory.
A profit sharing formula under which from the time the company starts to pay income tax its total contribution will rise rapidly to 50% of taxable income, and the Administration will receive from the company taxes in excess of those payable by other companies. In .return it is proposed that the company shall be assured that this percentage will operate as a ceiling on all imposts, other than municipal rates, until the twenty-fifth year of operation and thereafter may, according to the formula, rise further.
Without incorporation of these measures, we believe it is unlikely that borrowed monies of the order required could be obtained, even in favourable financing situations. Unless we can be satisfied financing will be possible, continuation of our investigations ceases to have real purpose.
There are in addition a number of other reasons not directly concerned with financing why the measures as proposed should be adopted.
For instance, it is our firm conviction that in view of the cost of exploration (our diamond drilling costs to date at Bougainville are of the order of seven times those in Queensland), the marked difference between operating costs in the Territories and Australia and the contribution that mining would make to the development of the Territories, a three year tax holiday should be introduced not only for our Bougainville operation but for all mining in Papua and New Guinea. This action would without doubt greatly increase the interest in exploration in these areas.
Also, in the proposals that are now made we have accepted that in return for what is sought for this particular operation the company will, once it becomes taxable, bear a relatively heavy tax burden and be relieved of the major fear in a newly formed state, namely selective and unreasonably high taxes in the future. For this reason we have stressed for some months the vital importance of the tax ceiling to safeguard the operation in the days which follow independence or self government.
As evidence of the good faith of our companies in this matter, they are at present incurring expenditure at the rate of several hundred thousand dollars each month on this project. In doing so they are proceeding on the belief that the Government will accept the potential value of this operation to the economy of the Territory and that it will take the necessary steps to enable this to be undertaken. 1
[NAA: A452, 1967/3211]
1 Barnes acknowledged receipt of Mawby’s letter on 14 March, and on the same date copied the CRA letter to Holt, McMahon and John McEwen (Minister for Trade and Industry) noting that he intended ‘to submit recommendations to Cabinet shortly regarding the major terms of a proposed agreement between C.R.A. Ltd. and the Papua and New Guinea Administration’ (NAA: A452, 1967/1333).