Papua New Guinea – Gold Trading in a Time of Lockdown
By AGC Staff - April 23, 2020
Papua New Guinea (PNG) is an isolated island nation in the South Pacific, home to some 60,000 artisanal miners who produce nearly 4 tonnes of gold per year. COVID-19 arrived in PNG only in late March with currently 8 reported cases. PNG’s health care system is fragile, underfunded and already overburdened with high rates of infectious diseases such as malaria and tuberculosis. Access to adequate healthcare is challenging for 80% of the population living outside urban centres. “A large-scale outbreak of COVID-19 could have disastrous consequences for the country. Therefore, the government is taking hard measures to prevent the spread of the diseases” said Dr. Mareike Kroll, the Artisanal Gold Council’s health expert. The full and stringent lockdown ordered by PNG authorities has driven down prices and made it difficult for miners, gold buyers and exporters to keep working. But one local gold exporter has found a way to keep the gold flowing…
Papua New Guinea
Papua New Guinea is an isolated island archipelago located in the South Pacific. Due to its geographic isolation, gold – the country’s economic mainstay – wasn’t exploited in a big way until the 1930s, when the country was still ruled from Australia under a League of Nations mandate. While a good deal of gold was taken out during the colonial era, a great deal more remains. In 2018, PNG’s large-scale mines produced nearly 65 tonnes of gold, worth US$1.4 billion. The same year artisanal miners – or alluvial miners, as they are known in PNG – produced an estimated 3.7 tonnes of gold, bringing in about US$ 126 million. But the alluvial money gets injected deep into rural communities and is an essential contributor to rural health and economic development.
When COVID-19 made its way into the wider world, PNG’s paucity of air connections served to partially protect the country (there are flights to the capital only from Brisbane, Cairns, Manila, Singapore, and Jakarta). Through January and February, as China went in and then out of lockdown, through to early March as the virus took hold in Italy and Spain and dozens of cases were reported in New Zealand and Australia, Papua New Guinea remained one of the few places on the world map without a single reported case.
That all changed March 20, when confirmation arrived that an expatriate mine worker had tested positive for the coronavirus. The patient had travelled extensively within PNG before being diagnosed, by air from Port Moresby to the industrial city of Lae and then inland to a gold mine in the Bulolo River watershed. When the diagnosis was confirmed, the PNG government reacted swiftly, declaring a state of emergency beginning March 24. The land border with Indonesia was closed. International and domestic flights were suspended. Domestic travel between provinces by land and sea was suspended except for essential cargo and police/military personnel. Military checkpoints were established to limit travel within provinces and citizens were told to shelter in place.
The government reaction was at least partly predicated on a recognition that PNG’s health system would have difficulty dealing with a pandemic. PNG’s health care system is fragile, underfunded, and already overburdened with high rates of infectious diseases such as malaria and tuberculosis. Access to adequate healthcare is challenging for 80% of the population living outside urban centres. “A large-scale outbreak of COVID-19 could have disastrous consequences for the country. Therefore, the government is taking hard measures to prevent the spread of the diseases” said Dr. Mareike Kroll, the Artisanal Gold Council’s health expert.
Dr. Kroll visited several clinics in PNG during a three-week field work stay in March 2020 just before the COVID-19 virus arrived in PNG, and found that small clinics in remote areas in the ASGM sector are poorly equipped to manage a COVID-19 outbreak. In view of the inability of the healthcare sector to respond to an outbreak, the World Bank has committed to provide $20 million as emergency aid to protect health workers, scale up testing and strengthen public education.
The initial shut down of two weeks was extended on April 2 for another 60 days, but the PNG parliament has relaxed some of travel restrictions with some domestic flights resuming. Passengers can travel between provinces, provided they can prove necessity and obtain individual written permission from the State of Emergency authorities set up in each province. Travel within provinces is subject to approval by local police departments and controlled by roadblocks on major highways.
The measures appear to have largely confined the spread of the coronavirus. Up to April 20, PNG reported only six more cases of COVID-19, all of them since isolated.
In the gold sector, large scale mines were immediately categorized as an essential service, and were exempted from interprovincial travel restrictions. The artisanal sector got no such recognition despite its importance to rural economies. In the first weeks of the lockdown, alluvial miners saw local gold prices fall and many buying shops close altogether.
Effects on artisanal gold mining
The Bulolo River watershed of Morobe Province was hit particularly hard. There are over 60,000 alluvial miners working throughout Papua New Guinea, but the heart of the alluvial sector remains centred on the Bulolo River and its tributaries and the towns of Wau and Bulolo. This is where alluvial mining began in the ‘20s and ‘30s. In the decades since, alluvial miners in the watershed have ‘professionalised.’ While artisanal miners in other parts of PNG often farm for a living and do mining for extra income, miners in the Wau-Bulolo area mine as their primary occupation. The forced cessation of the sector means no income.
The impacts of the government’s state of emergency measures showed up almost immediately in the prices being offered by local gold buyers. At the only operating buying house in Wau, prices for artisanal gold from different locations (and thus different purities) fell by close to 10% across the board, from a typical average of 75% of LBMA (world) price to about 65% of LBMA. Table 1 shows the price drops for gold from these four areas. Table 2 shows the actual gold prices for the four areas before and after the COVID-19 lockdown.
|Table 1: Price Drops pre and during lockdown at Wau Buying Depot|
|No||Gold Production Area||% drop|
Source: AGC, MRA
|Table 2: Prices at Wau Buying Depot pre and during lockdown|
|No||Date of Interview||Area||Purity||Price||Type||Fine Gold Price||Fine Gold Price||Fine Gold Price|
|3||10-Mar-20||Wara Bulolo||60%||86||Hg||143||$ 40.90||76.70%|
|4||10-Mar-20||Mt. Kaindi||53%||76||Hg||143||$ 40.92||76.73%|
|No||Date of Interview||Area||Purity||Price||Type||Fine Gold Price||Fine Gold Price||Fine Gold Price|
Source: AGC, MRA
Many buyers ran out of money and stopped buying gold altogether. Papua New Guinea’s gold supply chain -at least at the domestic level- is dominated by independent operators, field buyers who use their own capital to purchase gold from miners or other traders and then convey that gold to one of a dozen or so licensed exporters, most of whom maintain offices in the port city of Lae, the capital of Morobe province. With the freeze on movement, many of these traders now find it impossible to travel to Lae to sell their gold, and so cannot replenish their source of buying cash.
At the export level, PNG’s gold trade is dominated by two big players: Golden Valley Enterprises and Italpreziosi (ISPL). These two exporters control upwards of 80% of the legal export market, with the other dozen exporters moving the remainder. Even before the lockdown, ISPL had been struggling with a supply chain that terminated at a refinery in northern Italy, exactly the region where the COVID-19 pandemic had hit Italy hardest. With the state of emergency lockdown, ISPL found itself unable to operate and temporarily shut down altogether. That left only one significant player in the market, Golden Valley Enterprises.
Golden valley: trading in a time of lockdown
“We had some advantages over our competitors in dealing with all of this,” said Luke van Boehm, Golden Valley’s Managing Director. “That’s probably what has let us stay open.”
The first of these advantages was liquidity. The company sent out a gold shipment of about 60 kg just before the country went into lockdown. The gold went out via the company’s normal route to the Perth Mint in Western Australia, though for this shipment van Boehm held off selling the gold in speculation that gold prices, which had slumped in mid-March as the crisis took hold, would recover again. Late in March gold prices recovered and then reached new heights, so in early April GVE sold the gold.
“That gave us a good cash cushion to see things through,” said van Boehm. “If you don’t have cash, you can’t buy. On the other hand, if you can’t move gold out you also can’t buy.”
While the gold sale gave the company the liquidity to purchase, the real challenge lay in connecting physically with miners and traders in a country where travel even from one town to another had become impaired due to roadblocks and police permits.
Here Golden Valley’s second advantage came into play – a network of buying depots spread throughout the country. Some of these, like the buying depot in Porgera, Enga province in north-central PNG, the company was forced to close. The Porgera depot had become inaccessible by air anda journey by road involved crossing several provincial boundaries, each requiring a different signed travel document.
Fortunately, the company’s two buying depots covering the Bulolo River watershed remained viable. Located in the towns of Wau and Bulolo, these depots typically buy about 10 kg of gold per month in normal times. More gold normally comes in from the area directly to GVE’s two buying points in Lae. But with roads now closed to artisanal miners, the depots became the primary conduit for gold from the entire watershed.
Sales at the two depots carried on and even increased despite the lockdown since miners and small traders, it turned out, could still make it into town to sell their gold. But how to operate these depots with road transport restricted to ‘essential’ travel?
Here another advantage came into play, according to van Boehm, which is the company’s connections with local political leaders.
“Morobe’s a small place,” said van Boehm. “We’ve been here a long time and we’ve gotten to know everyone important. So, we’ve been able to make the case to them that if miners aren’t working, it’s just going to lead to trouble. And the truth is they have more important things to worry about. So, they’ve been very understanding.” Understanding enough to issue appropriate permissions to allow Golden Valley’s vehicles to regularly transport each depot’s stock of purchased gold to Lae and resupply the Wau and Bulolo gold depots with buying cash.
The new system is more expensive. Social distancing measures mean that only half as many people can occupy a Landcruiser. Two vehicles are now required for the journey in place of one. And prices have gone down under the new system. According to van Boehm, Golden Valley has increased its margin 10% to cover the expenses, which led to the 10% price drop noted at the Bulolo depot. But a more significant reason for the price drop is not the new expenses, but the uncertainty in the downstream selling price.
“We don’t know in this new world how long we’re going to have to hold the gold,” said van Boehm, “or how we’re going to get it out, and when we’re going to be able to sell it. That leaves us exposed to fluctuations in the market. So, the margin, that’s us building in a factor to protect ourselves.”
One reason the price drop was not larger is due to another Golden Valley advantage – a relatively short and simple supply chain. From Lae, GVE gold is normally flown to Port Moresby and then air freighted to Australia, final destination the Perth Mint refinery. The shutdown in domestic air travel during the first two weeks of the lockdown left the company with no way to complete the first leg of that journey. According to van Boehm, they considered an air charter, but found a $10,000 price tag for a less-than-one-hour flight. Blessed with cash from good timing, the company opted to wait for domestic flights to return, which they did on April 12.
International passenger travel between PNG and other parts of the world remains highly restricted, but air freight remains possible, though with reduced routes and longer lead times. “It’s going to take us longer. It’s not our regular route. But it’ll get there,” said van Boehm. The company’s first gold shipment during lockdown is planned for mid-to-late April.
The final question for Golden Valley is, of course, why didn’t lower prices even further? As the only game in town, it could likely have offered almost any price and still found sellers. That has certainly been the case in parts of Africa such as Burkina Faso and the DRC.
According to van Boehm, it’s partly a question of local ownership – the company is PNG-owned – and partly a matter of taking a longer-term view.
“If people think you’re taking advantage, that can come back on you,” said van Boehm. “We’re here for the long term. We want to be buying their gold a year from now.”
The AGC is executing a two year project in Papua New Guinea (2019-2021), funded by USDoS. This project is assisting PNG authorities to understand where current knowledge gaps in the ASGM sector exist; conduct ongoing inventories of the sector and produce reliable and policy-oriented data; develop a database to track trends in the sector over time; improve inter-institutional coordination to regulate mercury use; increase capacity among health care professionals and others to understand health impacts of mercury use in ASGM; and conduct knowledge exchange on mercury management within PNG and the international community.
 Statement of the Prime Minister 22 March 2020 https://covid19.info.gov.pg/files/Official%20Statement%20from%20PM%20-%20220320.pdf.pdf