Oct 5, 2006
China digs Pakistan into a hole
By Syed Fazl-e-Haider
QUETTA, Balochistan -
The Rs18 billion (US$297 million) Saindak copper-gold project in the Pakistani province of Balochistan has been run by a Chinese contractor on a 10-year lease without any independent monitoring for the past three years.
Higher-than-anticipated production of blister copper at the site in the Chaghi district may reduce the estimated 19-year life of the mine. If the rate of mining continues unchecked, the Chinese contractors will exploit all the resource within the 10-year lease period, leaving no copper or gold for Pakistan to mine from Saindak after the lease contract comes to an end.
Is the project really yielding a prudent return to Pakistan in the absence of any monitoring mechanism? Technical calculations and financial data need to be maintained about the project's return in terms of production and metal sales. Only on the basis of these data can one decide who is the real beneficiary of the Saindak project, China or Pakistan. Yet the Pakistani government has failed to find an independent monitor.
According to best estimates before the lease was signed, Pakistan should have nine more years for mining copper and gold from the Saindak project after the Chinese hand it back. But if there is nothing left to mine, Pakistan will be the ultimate loser.
The Saindak project was based on estimated ore reserves of 412 million tonnes containing on average 0.5 gram of gold per tonne and 1.5 grams of silver per tonne. The mine is reported to have produced about 50,000 tonnes since October 2003. According to official estimates, the project has the capacity to produce 15,800 tonnes of blister copper annually, containing 1.5 tonnes of gold and 2.8 tonnes of silver. The reported production results, however, have generally remained on average more than 2,000 tonnes per month, which means that more than production of 24,000 tonnes per year has been taking place.
The discovery of copper deposits at Saindak was made in the 1970s in collaboration with a Chinese engineering firm. The Saindak copper-gold project was set up by Saindak Metals Ltd (SML), a company wholly owned by the government of Pakistan, by the end of 1995 at a cost of Rs13.5 billion.
It was financed through Pakistani investment and guaranteed borrowings. The project was put on trial production
during the period from August 1995 to January 1996, and it achieved the designed production capacity and quality. It produced 1,541 tonnes of blister copper containing 12 kilograms of gold and 198kg of silver during trial operations, which sere sold in the international market at a price of Rs280 million. The project was then shut down in February 1996 because of a lack of working capital.
The Bank of America and ABN Amro had agreed to lend Rs15 billion as working capital against guarantees of Islamabad. The two banks, however, backed out of their commitment because of the economic sanctions that were imposed against Pakistan after its May 1998 nuclear tests. This once again threw the project into abeyance. Then the Chinese contractors who had been involved with the project since its inception offered to take over the project's management. The Chinese proposals injected new life into the long-neglected project.
About Rs1.3 billion was put into the project in the late 1990s under the military government of President General Pervez Musharraf to revive the mine and the operation was leased to the Chinese company Metallurgical Construction Corp (MCC) for 10 years in September 2002. Pakistan and China signed a formal contract worth $350 million for development of Saindak copper/gold project. Under the lease agreement, MCC was to run the project on an annual rent of $500,000 plus a 50% share of copper sales to the Pakistani government.
It is primarily a fault on the part of those drafting the lease contract with MCC that they neglected to identify and discuss the issues relating to excessive mining or a monitoring mechanism to check and evaluate the production from Saindak. A technical body for monitoring and evaluation of the production and export of copper, gold and silver at the Saindak project should have been constituted before the copper and gold assets were handed over to Chinese.
An effort was reportedly made in 2004 to appoint a technical firm for this purpose, but only a single non-responsive bid was received and the Pakistani government had to cancel the bidding results. Officials say that the poor response for a monitoring contract was due to a lack of base-metal analyzing technology in the country. The option of engaging some international firm for the scheme was not considered because of high costs.
Bids were reportedly invited from financial institutions to undertake technical and financial monitoring of the project, which was not practical because such institutions did not have the capacity to monitor a highly technical project such as Saindak for a period of 10 years, and hence technical firms failed to meet the bid criteria. At present, two non-executive directors of the Saindak board are responsible for monitoring activities. As they are based in Islamabad, however, it is not practical for them to monitor the project.
The Chinese, simultaneously the producers and buyers of Saindak copper, are pioneers in transferring technology in metal mining, mainly in copper. They face few problems since they built the whole plant. They are committed to train Pakistanis by offering them on-the-job training facilities. The Chinese companies prefer to import copper from Chaghi, which is currently meeting the Chinese demand.
Since August 2003, a subsidiary of MCC has been operating in the Saindak project, with an initial investment of $26 million, and it had produced 18,000 tonnes of blister copper by September 2004. Such a high rate of production may end the life of the mine, previously estimated at 19 years, before the 10-year lease of the Chinese firm expires if excessive mining goes unchecked.
China's demand for copper has increased greatly because of rapid economic development and big expansion of infrastructure construction. According to one estimate, China's appetite in the past decade grew by more than 9% annually. In 2003, China consumed 2.5 million tonnes of copper, accounting for 16.5% of the world's total, ranking second after the United States. It was because of the strong demand from China that Chile's copper-export income doubled in October 2004 from the same month in 2003 to $1.4 billion.
Today China is a big market for Pakistani copper. The Saindak project produced about $70 million worth of copper during the last financial year and contributed about $10 million to Islamabad in export and royalty earnings. It was earlier estimated that the project would generate annual revenue of about $65 million. Copper exports from Saindak began in 2004 when Pakistan exported copper worth more than $30 million to China during four months, from July to October.
Pakistan is also bearing the environmental costs of the projects, as the production of copper is a long and dangerous process. The smelting of the copper ore emits arsenic and carbon monoxide, which pollutes the air and water near the mines. The copper is heated at high temperatures several times before the metal is ready for export. The impact of copper production on the country's environment is bound to grow at an alarming rate in the next seven years of the lease contract. Most threatened is the atmosphere in the immediate vicinity of the copper mine.
Asia Times Online :: South Asia news - China benefits from mining in Balochistan
