What next for Reko Diq?

This year, the mighty and much-desired Reko Diq copper-gold deposits celebrate the silver jubilee of their 1992 discovery. But except for the proverbial silver, a generation later there is no gold, nor copper in sight, only dust. A recent arbitration ruling has kicked up the dust again. Before commenting on where this saga is heading, a little background is in order first.

In 1993 the Balochistan Development Authority and BHP Minerals (USA) signed the ‘Chagai Hills Exploration Joint Venture Agreement (CHEJVA). The JV was to prospect for copper and gold reserves in Reko Diq area for what became known as the Reko Diq Copper-Gold Project (RDCGP). BHP had a 75 percent ownership in the project, with the Balochistan Government having the remaining 25 percent.

Over the next ten years, the project changed hands twice. In 2000, BHP allied with Mincor, an Australian firm, after which its RDCGP stake was transferred to a newly-formed subsidiary Tethyan Copper Company (TCC), incorporated in Australia. TCC Pakistan was later registered. In 2006, Barrick Gold (Canada) and Antofagasta (Chile) acquired TCC. The exploration license (EL-5), granted originally for three years in 2002, was renewed two times, until 2011.

By 2009, Balochistan had a new provincial government. TCC Pakistan submitted a feasibility study in August 2010 and a mining lease application in February 2011. The provincial government rejected its application for a mining lease in November that year. Soon after, TCC went into two arbitrations. It approached the World Bank’s International Center for Settlement of Investment Disputes (ICSID) against the federal government. Against the Balochistan government, it approached the International Chamber of Commerce (ICC). In January 2013, Pakistan’s Supreme Court termed CHEJVA null and void.

At the arbitration proceedings, TCC initially contested for its alleged right to mine the Reko Diq deposits and to bar the provincial government from infringing on that right by starting mining operations in the area. That position was turned down by both ICSID and the ICC, back in 2013. Since then, TCC has been contesting for monetary damages.

The latest ICSID ruling is significant in the sense that it accepts the TCC’s right to monetary damages. Subsequent rulings will determine how much it is that the federal government owes to TCC. Damages are expected to be awarded next year. Pakistan will have the right to appeal. That will drag the process further. But it could also open the way for an out-of-court settlement, which suits both parties.

There is speculation over the damages’ quantum. Just after the ICSID decision, a press release quoting CEO of Antofagasta, which is the co-owner of TCC, suggests the penalty could run into billions of dollars: “We expect that, at the conclusion of this phase, Tethyan will receive an award entitling it to the fair market value of the project at the time that the mining lease application was denied.”

The arbitration tribunal may take into account TCC’s actual investments into RDCGP. Media reports put that figure around $400 million; government officials suggest it’s half of that. It’s up to the tribunal to determine the extent of harm done to TCC. Given Pakistan’s forex woes and considering the country’s difficulties with attracting FDI, Islamabad will be stuck between a rock and a hard place if significant damages are awarded to TCC.

The only solace in this saga at this stage is that the Reko Diq real estate has no external lien marked on it: it’s free to be mined. Question is: after lazing since 2013, what are the federal and provincial governments thinking now? They surely don’t have the financial and technological wherewithal to exploit the sandy peak alone.

There may be a solution.

Some ninety miles to the west of Reko Diq, China’s state-owned mining giant, MCC – the only international large-scale mine operator in Pakistan – has been running the Saindak Copper-Gold Project (SCGP) for the past fifteen years. The extended lease is running out this October. Given Pakistan’s lack of options vis-à-vis large-scale mining, it’s tempting to get a little help from our Chinese friends. But before humming this familiar tune, it’s better to analyze the economic pros and cons of the past experience.