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The Reko Diq timeline

Opinion

August 2, 2019

On July 12, an arbitration tribunal of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) awarded a massive $5.976bn (Rs950 billion) in damages to the Tethyan Copper Company (TCC) in arbitration claims it had filed against Pakistan following the denial of a mining lease for the Reko Diq project in Pakistan in 2011.

Reko Diq, which means sandy peak in Balochi, is a small town in district Chagai, Balochistan. Geological literature reveals that the Chagai district is part of a belt called the Tethyan Magmatic Arc, which stretches from Turkey and Iran into Pakistan. The arc is a known reservoir for rare earth metals, and Pakistan’s share lies underneath the region between Chagai and North Waziristan. Reko Diq is said to hold an estimated 5.9 billion tons of mineral resources, with an average copper grade of 0.41 percent and gold grade of 0.22 grams per ton.

Out of a total 5.9 billion tons of ore, only 2.2 billion tons are economically extractable. The total area of the Reko Diq mines is said to be spread over 13,000 square kilometres. With such figures it is believed to hold the world’s fifth largest deposits of copper and gold.

The resources were originally explored in 1993 by an Australian company, BHP Billiton, after signing an agreement with Balochistan’s then caretaker government under the leadership of chief minister Naseer Mengal. Under this agreement, the ‘Chagai Hills Exploration Joint Venture Agreement’ (CHEJVA), BHP had 75 percent interest in the project while the government held the remaining 25 percent share on a joint-investment basis with 2 percent royalty.

It is worth noting that the royalty rate on copper ores varies from 3 to 5 percent worldwide. For instance, in India and Indonesia it is billed at 4.2 percent and 3.8 percent respectively. However, considering the 25 percent share of government in the business, 2 percent royalty and taxes, it is estimated that more than 50 percent of the distributable cash flow over the life of the mine will go to Pakistan.

In April 2000, BHP suspended its exploratory work and handed over its obligations to another Australian company, Mincor Resources. A question that arises here is: why did the government not refuse the transfer of the Reko Diq project from the internationally reputed BHP Billiton to a relatively small mining company Mincor? Due to inefficiency, the then government could not exploit the opportunity to seek fresh offers after BHP had failed to make significant progress on the project.

In 2006, Mincor was acquired by the TCC which is a subsidiary of Mincor and a joint venture between Canadian-Israeli owned Barrick Gold and Antofagasta of Chile. In the same year, the legality of CHEJVA was challenged in the Balochistan High Court. The challengers argued that CHEJVA was executed contrary to the provisions of relevant Pakistani statutes, that the parties failed to properly register CHEJVA, and that the government of Balochistan improperly relaxed local legislation to execute CHEJVA. However, the high court dismissed the challenge and found CHEJVA to be legal and valid.

In 2007, the TCC started a process with the provincial and federal governments for a customized mineral agreement for mine development.

In 2010, the TCC completed a bankable feasibility study establishing the basis for mine development at Reko Diq. According to the TCC feasibility study, 2,100,00 tons of pure copper and 7,962 kgs of pure gold were to be produced over a period of 56 years. However, some other studies (like the one published by the Society of Geologists in 2008) show that the TCC understated the copper deposits by 35 percent and the gold by 25 percent. The ore was to be crushed, converted into slurry, to be transported through a pipeline from Reko Diq to Gwadar and from there to foreign smelters and refineries.

In February 2011, the TCC submitted a Mining Lease Application but it was rejected in November 2011 by the Balochistan government. The major stumbling blocks were that the smelting and refining should be done in Pakistan. The royalty rates should be enhanced, the financial model should be reviewed and there should be more participation of the local population in the project. According to the TCC, it had invested more than $220 million (Rs35 billion) by the time the provincial government unexpectedly refused to grant them the mining lease needed to keep operating.

In 2012, the TCC took the matter to the ICSID to seek compensation for $11.43bn in damages after the Balochistan government turned down a leasing request from the company.

In January 2013, when the case was considered in ICSID, the Supreme Court of Pakistan declared CHEJVA as void and stated that the TCC had no legal rights to explore and mine in Reko Diq.

In July 2017, the ICSID ruled against Pakistan by declaring that there was no wrongdoing in CHEJVA – the ground on which the Supreme Court of Pakistan had terminated the agreement. Eventually the tribunal held that Pakistan was liable to pay damages. The only remaining issue in the case was the final penalty on Pakistan, which has now been announced. In its recent verdict, the ICSID rejected Pakistan’s final defence against liability and confirmed that Pakistan had violated several provisions of its 1998 bilateral investment treaty with Australia, where the TCC is incorporated.

The tribunal decision reflects how badly we dealt with the case, which can send foreign investors a mixed message. We cannot point to international courts as unfair without showing who was responsible for the deal. Without doing so, our action of cancelling the Reko Diq agreement will continue to bleed our financial exchequer needlessly.

The author is a research scholar atUniversity of Reading, UK.

Email: [email protected]

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