Joint mining project at Reko Diq: OGDC, PPL issue material notifications on PSX

KARACHI: The Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL) on Monday issued material notifications at PSX for the joint mining project at Reko Diq, located in Chagai District of Balochistan.

Both OGDC and PPL along with Government Holding (Private) Limited (GHPL) will represent federal government stake of 25 percent, thus each company contributing an equal stake of 8.3 percent (i.e. $833 million each). Thus, in the new framework agreement, Barrick Gold of Canada will continue to own 50 percent stake in the project while the remaining 25 percent will be owned by government of Balochistan.

The total cost of the project is estimated to be around $10 billion which is likely to be completed over a period of 5-6 years, once the process of legislation is approved, according to CEO of Barrick Gold. Though the details of the settlement agreement have yet to be revealed, there are reports that the out of court settlement is contingent upon the penalty of $900 million which will be disbursed to previous company Antofagasta, Farhan Mahmood at Sherman Securities said. In the notifications by OGDC and PPL, it seems that the penalty would be paid by the federal government via these three SOEs, he added.

“We believe that this amount will be paid upfront while the remaining contribution will be invested over a period of 5-6 years,” Farhan Mahmood said.

Unlike previous agreements on Reko Diq, it seems that the new framework will be passed through the parliament and Supreme Court since both provincial and federal government enjoy higher share in the project (combined stake of 50 percent) against earlier share of 25 percent.

Previously, it was feared that the net dollar inflows via copper-gold exports may be marginal due to thin stake by government of Pakistan. According to various sources, Pakistan has 5.9 billion tons of copper and 4.1 million ounces of gold reserves. However, inferred reserves (according to SMEC) would be around 12.3 million tons of copper and 20.9 million ounces of gold.

“We believe that final reserve studies will be carried out by Barrick Gold which is the main operator of the mining project,” he said. Considering the track records of the mining companies, they usually operate at 10-20 percent production ratio against their inferred reserve size. Based on inferred size of copper-gold reserves and lower production ratio of 3.0 percent, it is estimated that $5.0 billion worth of copper-gold seems to be logical target for the project companies in initial phase (against total copper-gold reserve size of over $150 billion at current price) which will largely be exported and benefit Pakistan through dollar inflows.

The expedition is new for Pakistan and there is no proper study on local copper-gold mining and thus, no benchmark available, Farhan Mahmood said. However, considering the recent financial report by Barrick Gold, the operator has been in this field quite a long time and recent numbers revealed that the gold mining is a profitable business since company posted EBITDA margin of 61 percent in 2021 while gross margin was close to 41 percent, he added.

For local E&Ps, though margins are currently higher in oil and gas business, but given volatility in international oil prices, circular debt risk and declining production, the mining venture seems more profitable in the longer run, he said.

“Our back of the envelope working suggest that if the project is able to extract only 3.0 percent of the inferred copper-gold reserve, OGDC’s and PPL’s earnings would improve by around Rs15 billion each on net basis i.e. after taking account opportunity cost (pre-tax EPS impact OGDC Rs4.0, PPL Rs 6.0 at current price of gold and copper),” he said adding that this may re-rate long-term stock valuation of both the entities.

“However, OGDC and PPL share of investment would be around Rs30 billion each on an annualised basis which we believe would be easily invested if the government ensures raising local gas prices which will help in curtailing circular debt and liquidity issues.

OGDC, in material information sent to PSX said that the board of directors of the Company has, on the basis of directions issued by the Federal Government, resolved to enter into a non-binding framework agreement with: the President of Islamic Republic of Pakistan on behalf of the Islamic Republic of Pakistan, the Governor Balochistan on behalf of the province of Balochistan, Pakistan Petroleum Limited (PPL), Government Holding (Private) Limited (GHPL) and Barrick Gold Corporation, which sets out inter alia the ownership/transaction structure, rights, obligations and common objectives of the parties towards facilitating the implementation of the reconstitution of a joint mining project at Reko Diq, on an expedited basis (the Project).

Through the Framework Agreement, the Company has, in principle, agreed to participate in 8.33 percent equity (which may be held through onshore or offshore holding companies) along with PPL GHPL, in aggregate amounting to 25 percent of equity in the Project divided equally amongst the Company, PPL and GHPL. 50 percent of the equity will be held by Barrick who shall also have management and operator rights and remaining 25 percent of the equity will be held by the Government of Balochistan directly and/or through any of its owned entity, of which 10 percent shall be free carry of the Government of Balochistan, the material information said.

To the extent of agreed initial entry fee attributable to the Company, the Company has, on the basis of directions issued by the Federal Cabinet, agreed to support the Government of Pakistan (through cash collateral, contribution of funds or availing such other funded or unfunded facilities) with respect to payment obligations of the Government of Pakistan in respect of settlement of the historic Reko Diq dispute, it said.

The Company’s participation in the Project remains subject to, inter alia, receipt of internal and corporate approvals, regulatory approvals, execution of definitive long form agreements and other conditions precedent agreed in the Framework Agreement, it added.

“The Company shall continue to notify the Pakistan Stock Exchange / Securities and Exchange Commission of Pakistan of any material information or developments that may arise with respect to the Company’s participation in the Project,” OGDC said.

Copyright Business Recorder, 2022