Subsea Mining: Solwara Update

The first adjudication date for the dispute between Nautilus Minerals and the Government of Papua New Guinea has been set for June 20, and the company issued an optimistic update on April 4th in which they announced going ahead with a rights offering, positive early discussions with the PNG government, and interest in joint ventures and SSMS projects outside of Solwara.

It remains to be seen if unproductive economic nationalism on the part of PNG scuttles a potentially groundbreaking project for which the environmental safeguards had already been mutually agreed.  The bigger question, as always, is the future market prices for the constituent minerals, as some observers are now forecasting a broad decline in global mineral prices due to slowing Chinese growth, substitution, and a dampening of financial speculation.

Subsea Mining and Papua New Guinea

Nautilus Minerals's project to develop subsea massive sulphides in the territorial waters of Papua New Guinea has been put in jeopardy because of a dispute with the government of Papua New Guinea.  According to a longstanding agreement, the PNG government chose to exercise an option on a 30% interest in the joint venture in exchange for covering a pro-rata share of the development costs.  To its credit, Nautilus has even lined up a Chinese customer for the output of the project, and this delay has put in jeopardy the acquisition of the mining vessel required to move the project into development and production.  After announcing the option exercise, the PNG government disputed some performance aspects of the work to-date, failed to pay its commitment, and has also failed to arrive at a negotiated settlement.

A comment I received suggested that this was an example of the risks associated with operating under the Law of the Sea Treaty.  This is not a treaty risk because this project is clearly within PNG's territorial waters. The issue is clearly a conventional, commercial dispute.  It seems that the PNG government wants to renegotiate its long standing deal, in a move typical of many emerging market governments. PNG's share of the development costs might amount to $47 million according to the company.  It really doesn't help the climate for international investment to deal with corporate partners in this way, particularly those which have worked well right up to the option exercise date.  The matter was discussed in a recent company conference call.

So, this isn't an example which might support the Rumsfeld argument for not entering into multinational treaty agreements.  It's just business, which is complicated enough on its own.