Reko Diq

In the early 1990s, Pakistan’s biggest gold and copper reserve was discovered at Reko Diq in Chaghai District of Balochistan. Two international world-class mining companies - Barrick Gold Company and Antofagasta - entered into a joint venture agreement with the governments of Balochistan and Pakistan in July 1993. The international companies spent US$240 million in mineral exploration and feasibility studies until 2011.

Feasibility studies found commercial-level gold and copper reserves in Reko Diq. One of the largest undeveloped copper-gold projects in the world, Reko Diq, is owned 50% by Barrick, 25% by three federal state-owned enterprises, 15% by the Province of Balochistan on a fully funded basis, and 10% by the Province of Balochistan on a free-loan basis.

The billions of tonnes of copper ore and gold reserves in the Reko Diq field stand alongside the Thar Coal fields as Pakistan’s two major natural resources. With green technologies fast replacing conventional energy sources, it is estimated that by 2050, the world will need 650 million metric tonnes of copper annually for use mainly in storage batteries, the electricity grid, and other renewable energy applications.

Annual production from the Reko Diq field is expected to reach 80 million metric tonnes starting in 2032, and Pakistan’s copper deposits can play an even bigger role in meeting a part of global demand for several decades.

The Reko Diq success story can be replicated by identifying and assessing the metal and mineral resources of Balochistan and entering into more value-added-based deals for their development, production, and export. This is important because a new phase is dawning whereby “future materials” like cobalt, lithium, silica, nickel, copper, aluminum, and others are going to become far more precious than oil. If these economic priorities are to be pursued, a workforce with the skills needed in the coming decades will have to be developed.

For example, farmers may be given training and financial support to promote sustainable agriculture and develop drip irrigation systems that result in efficient water use and can also be used for the timely delivery of nutrients and pesticides. Furthermore, the project is expected to add USD 3–4 billion to the country’s total exports from 2026–27, supporting diversification of exports, which should cushion the current account and help stabilize the Pak Rupee against external pressures.

On the other hand, if we talk about the cost of the project, the project is divided into two phases, with a total estimated CAPEX requirement of $7 billion ($4 billion for the first phase and $3 billion for the second phase). Additionally, the cumulative entry amount for the project is $2.2 billion, which makes the total size of the project $9–10 billion.

Moreover, the contract details reveal that the project bifurcates into a debt-to-equity ratio of 50:50. The construction period is expected to last four years from the financial close. With an immediate settlement, the project could achieve financial closure within a year.

The total lease area of the exploration licence will be 350–400 sq. km. While the mining lease area is expected to be 80–120 sq. km, the remaining land will be used for technical and feasibility studies besides seismic activities. It is estimated that the total copper and gold reserves at Riko Diq are approximately 27,173 million lbs and 16,098koz, with a mine life of around 40-45 years.

The estimated annual copper production is approximately 650-700 million lbs per year for the first 10 years and is expected to grow to between 800 and 850 million lbs after the completion of Phase 2. For gold, it is likely to be 300koz to 350koz for the first 10 years (Phase 1) and is expected to increase to 450koz to 500koz after expansion.

Furthermore, if we can talk about revenue, this is estimated to be 80 percent copper and 20 percent gold, assuming that the conservative copper and gold prices are based on the last 10-year average of $3.5 per pound ($7,000 per tonne) and $1,446 per ounce, respectively. The total average revenue for the first 10 years is likely to be $2.9 billion and is expected to increase to $3.7 billion when Phase 2 ends.

Conclusively, as per the report, OGDCL and PPL will have an annualized earnings impact of Rs. 5.56 per share and Rs. 8.80 per share, respectively, during the first phase of the project, and the impact will increase to Rs. 7.10 per share and Rs. 11.22 per share post completion of phase two of the project.

Furthermore, OGDCL and PPL have receivables from Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) through the GOP that amount to Rs. 267 billion and Rs. 275 billion, and any settlement of the same could also pave the way to further support the funding of this project. Other sectors could also potentially benefit from the Reko Diq project.

It is estimated that over 60-65 percent of the total project capital expenditure will be foreign-denominated, and 35-40 percent will be sourced locally.

It is expected that construction and allied demand will grow during the EPC phase, along with the civil works of the project, while a housing colony will also have to be constructed to support the staff once the project is put online.

The aforementioned deal is expected to be a breakthrough in the mining sector, whereby the revival of the project will lead to significant FDI inflows.

The project is expected to contribute significantly to Pakistan’s overall exports later on. Additionally, with a 50 percent local stake (previously 25 percent), the deal will have a significant impact on the listed companies, including OGDCL, PPL, and others, in terms of their profitability and multiple re-ratings.

(The writer is an Accountant & Economic Analyst)

Copyright Business Recorder, 2023