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The Reko Diq disaster

THE drama that has surrounded the grant of a mining lease for the Reko Diq copper and gold mine has refused to subside, and the biggest loser in the affair is, unfortunately, the economy of Pakistan. Mining leases are always a controversial affair, particularly in third world countries that lack the geological and financial expertise to be able to independently price mineral resources. Pakistan has a poor track record in its minerals sector, which is largely controlled by small-scale contractors who operate more like racketeers than professional mining concerns. This is the reason why coal reserves in Thar have lain untapped ever since they were discovered, why rich mineral mines in Balochistan are either shut, or operated by crude contractors who use highly destructive extraction techniques. This is also the reason why outlandish claims suddenly find wide circulation in our public discourse, such as when the prime minister showed up in Bahawalpur claiming that enough gold has been discovered there to solve all our problems, or when the government plowed billions of rupees into a scam of a coal gasification project in Thar.

So it was almost inevitable that when a mining lease was granted in Reko Diq, it would become controversial from the outset. Without a sound geological profession in Pakistan, and with practically no expertise in pricing underground mineral resources, any claim by anybody with a morsel of information could be used to drive the controversy. So we were told that the equity sharing relationship in the transaction is all wrong, that the royalty negotiated is far too low, that the value of the reserves in the area is far higher than what we are being led to believe. Confusion was easily generated when the original company to which the lease was given sold its stake to another company rumoured to be a ‘front’ for another massive international gold-mining giant.

Yet the central fact at play here is that minerals in the ground are utterly worthless if they are not extracted, refined, and brought to the market. Pakistan clearly lacks the expertise to do this by itself, so there is no choice but to reach out to international players. As soon as we do that, we enter into a world that is profoundly unfamiliar to us. The logical thing to do would be to hire the expertise that is needed to negotiate a good contract. But once given, contracts have to be honoured unless strong evidence exists of wrongdoing. At the moment, the government appears to be losing its battle to regain Reko Diq from the Tethyan Copper Company because it cannot produce strong evidence of wrongdoing. This episode will either discourage other investors from dealing with Pakistan, or drive up the cost due to enhanced ‘country risk’. It is always worth bearing this in mind when proceeding against a foreign investor.

Published in Dawn, March 26th, 2017

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