This week I sent the following document to the Australian Securities and Investments Commission, the Financial Conduct Authority of the United Kingdom, and the U.S. Securities and Exchange Commission. I would welcome each of you to read it, consider it in light of this post, and inform others about the need to make a simple proposal: if Mabo and Wik establish the legal framework to put a stake through the heart of the Roman conquest doctrine of terra nullius than isn’t it time for the doctrine to be retired once and for all?
Think about it.
An Open Letter to the ASIC, FSA, and SEC Re: Rio Tinto and Bougainville Copper Ltd.
Copied to Global Reporting Initiative, Transparency International, International Council on Mining and Metals, World Bank, and IFC
August 15, 2013
Sirs,
I have had two opportunities in the past 12 months to visit the Panguna Mine, the Arawa village and the Six Mine Lease Areas (SMLA) of the property formerly operated by Bougainville Copper Ltd (‘BCL’, majority owned by Rio Tinto with 53.8% of the issued shares). Most recently, I spent two days at the mine on August 12-13, 2013. Given the fact that both BCL and Rio Tinto report to their shareholders that, since 1989, they have not been capable of accessing the mine site for security reasons, I felt that it would be helpful to provide you and their shareholders with information that may be helpful clarification to material statements made by both companies.
Rio Tinto’s 2012 Annual Report has a footnote on the BCL project on page 206 which indicates that it’s incapable of safely accessing the mine site. Rio’s Annual Report preamble statements about The Way We Work (page 14) are inconsistent with direct observations made during my visit to the mine, overburden deposition, and tailings discharge in the only major western riverbed at the Panguna Mine in the Autonomous Region of Bougainville, Papua New Guinea. Dislocated communities, significant health and safety issues, and profound environmental degradation are evident everywhere. While it would be convenient for the companies to attribute this to the conflict and post-conflict incapacity to manage conditions at the mine, the physical evidence of mining practice suggests that pre-conflict operations neglected to take appropriate consideration of Rio’s own stated standards.
Figure 1. An aerial view of the BCL Panguna mine site. From the mine pit to the end of the lower tailings is approximately 18km and at its widest is about .75km. The diversion of the river around the mine site rejoins the former natural river bed below the Overburden primary deposition and diverts not more than 40% of the natural river flow (which now runs blue with copper beneath the overburden and through the tailings).
The following footnote is reproduced from Rio Tinto’s 2012 Annual Report.
43 Bougainville Copper Limited (BCL)
Mining has been suspended at the Panguna mine since 1989. Safe mine access by company employees has not been possible since that time and an accurate assessment of the condition of the assets cannot therefore be made. Considerable funding would be required to recommence operations to the level which applied at the time of the mine’s closure in 1989. An Order of Magnitude study undertaken in 2008 indicates that costs in a range of US$2 billion to US$4 billion would be required to reopen the mine assuming all site infrastructure is replaced. The directors consider that the Group does not currently realise a benefit from its interest in BCL and therefore BCL information continues to be excluded from the financial statements. BCL reported a net loss of US$2 million for the financial year (2011: net loss of US$2 million). This is based upon actual transactions for the financial year. The aggregate amount of capital and reserves reported by BCL as at 31 December 2012 was US$137 million (2011: US$139 million).
The Group owns 215,920,089 shares in BCL, representing 53.8 per cent of the issued share capital. The investment of US$195 million was fully provided against in 1991. At 31 December 2012, the number of shares in BCL held by the Group, multiplied by the share price as quoted in the Australian Securities Exchange, resulted in an amount of US$111 million (2011: US$164 million).
This footnote represents the only material disclosure regarding BCL in the Annual Report. As is evident, no mention is made of any liabilities that may arise from a closer examination of several important facts surrounding the Panguna Mine’s operation and cessation of operations. These include:
a. Unquantified environmental remediation costs. To consider re-opening the mine under rudimentary compliance with global environmental best practices would entail reclamation of land that could far exceed the estimated costs in the 2008 Order of Magnitude study. Given the affected watershed, surface and groundwater damage covers an excess of 18km at depths of over 100m in many locations (Figure 2).
Figure 2. The Middle tailings deposit completely filling the valley and riverbed. The riverbed field of view in this image is approximately 3km.
b. Management of landowner claims. To date, the landowners and ex-combatants have identified several claims against the companies that have not been adjudicated by any court of competent jurisdiction. In the event that BCL or Rio Tinto are exposed to prosecution for these matters, civil and criminal liabilities arising therefrom could represent material impact on performance.
c. The legality and corporate complicity with the formation of the 1967 Bougainville Copper Act which exists as a supra-Constitutional agreement affording Bougainville Copper Ltd rights in direct conflict with the Constitution of the Independent State of Papua New Guinea. As evidenced in related cases (including inquiries into Indigenous Rights in Australia), this unilateral agreement benefiting BCL’s interests over those of the right holders under the Organic Law of Papua New Guinea could be subject to challenge potentially opening inquiries into Fraudulent Inducement. This observation is made from both the facts surrounding the establishment of the Act as well as the incapacity for local landowners to fully understand the structure and consequences of the Agreements into which they entered. Should improprieties be found, BCL and its shareholders could be liable for considerable financial damages including, but not limited to, complete remediation of the sites impacted by the mine.
d. Securities reporting compliance. Shareholders have been inadequately informed as to the nature of the assets of BCL and may have economic harm arising therefrom.
At present, the Autonomous Bougainville Government is being advised on its proposed new Mining Act by Australians (including ANU's AusAID funded Anthony Regan) who are advocating for many of the status quo pre-conflict conditions and the possible reinstitution of the conditions similar to the 1967 Bougainville Copper Act. With no capacity to consider this advice in light of global best practices (another risk of Fraudulent Inducement), the interests of the companies are being advocated at the expense of a fully transparent, globally informed process. Most problematic is the fact that the negotiations including the companies are being done without competent and complete understanding of the facts on the ground. A simple example of this is the reported Asset Value of property at the mine. No single building on the mine site is intact. No operational equipment remains on the mine site. The 2010 Annual Report estimated Plant & Machinery depreciated value of PNG K 296,094,000 is grossly inflated. The most intact building on the site is pictured in Figure 3 below. Metal is being sold as scrap and infrastructure damage (including considerable landslides) make the asset estimates grossly inflated.
Figure 3. A view of the location of ball crushers and concentrators. At this location, only one defunct crusher remains on its stand with the others destroyed for metal salvage. Twenty four years of metal salvage has left the remaining structures damaged beyond reasonable repair.
Setting aside the considerable questions surrounding the establishment, operation, and violent cessation of operations of the Panguna Mine, it is important to note that the companies and their shareholders can now benefit from direct, on the ground observations and photo documentation. As such, in accordance with the reporting standards set forth by Australian, United Kingdom and United States regulators, it is important for the companies to more accurately state their condition with respect to the Panguna Mine and offer a more realistic assessment of their asset and liability condition.
Given the recent trading activity stimulated by press statements regarding the possible re-opening of the Panguna Mine, it is important that regulators closely monitor this situation. While regulators and the corporations involved may continue to seek refuge in the reasonability of their defense of misleading and erroneous statements due to their limited access, the availability of that access to an independent third party severely curtails the assertion of insufficient visibility.
I would strongly recommend that an independent inquiry into the matters articulated above be commenced as failure to do so may lead to further damage to shareholders’ interests and those of the affected communities. I will be delighted to offer a more detailed assessment as and when required.
Respectfully Yours,
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