Solomons' gold mine set to reshape South Pacific nation

HONIARA, Solomon Islands Fri Apr 29, 2011 9:49am EDT

1 of 5. Equipment is readied for the reopening of the Gold Ridge minein the Solomon Islands March 4, 2011.

Credit: Reuters/James Regan

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HONIARA, Solomon Islands (Reuters) - Elijah David traipsed the 55 km in plastic sandals from his home in Guadalcanal province to the only gold mine in Solomon Islands, hoping to find work that may transform his life and that of his South Pacific island nation, for better or perhaps worse.

It had taken a decade to rebuild the mine after warring tribespeople from another province, bent on maintaining an agrarian society in Solomon Islands, chased workers away with machetes and destroyed just about everything in sight.

When it opened last month with a workforce of around 550, mostly local people, the mine's Australian owner predicted it would soon account for nearly a third of Solomon Islands Gross Domestic Product. Skeptics, however, point to cautionary tales following mining booms in the South Pacific.

Take the nearby Republic of Nauru, the South Pacific's poster child for a mining frenzy gone wrong. After decades of phosphate mining Nauru had the world's highest GDP per capita, only to go broke once its reserves were mined out, leaving a legacy of widespread squalor and a mostly unemployable workforce.

Nothing that drastic is likely to happen to the Solomon Islands, home to nearly 1,000 islands and 523,000 people.

Solomon Islands can still count on strong demand for palm oil and copra -- the dried white flesh of the coconut used to make coconut oil -- even as its exports of timber and fish wane.

On his journey, David passed the reminders of that economy and a subsistence lifestyle that persists 33 years after independence from Britain. Women cook yellow fish and burned-black potatoes smoldering in roadside umu pits; men weighed down with coconuts and pineapples trek to village markets.

"Everybody here fishes or grows food. It's how we make our living," said David, who grows pineapples.

But decades of logging and the steady depletion of fish stocks have led the prime minister, Danny Philip, to single out mining as the new growth engine.

Philip couldn't have picked a better time. Gold prices have never been higher and industrial staples such as copper, zinc and nickel have also soared thanks to a seemingly insatiable appetite for raw materials to feed the mass urbanization half an ocean away in Asia.

The Solomons Ministry of Mines, Energy and Rural Electrification has warned "dormant mines and mineral investors" to demonstrate a willingness to invest in the sector or have their licenses revoked and handed out to others.

"Now is the time to make hay in the mining sector," says Mine Life analyst Gavin Wendt. "China is buying all the metal it can and demand is strong elsewhere too."

FOUR OPEN PITS

The Gold Ridge mine consists of four open pits in the jungle-draped hills southeast of the port capital of Honiara. The mine, which reopened last month, meant relocating and building new homes for people in 27 villages in the area, said the mine's operator Allied Gold Ltd.

"We see opportunities in the South Pacific which I believe has been under-explored over the years," Allied Gold Executive Chairman Mark Caruso told Reuters in an interview in the Solomons.

"The Solomon Islands has never received the same attention as some of its neighbors. We're hoping our mine will signal the country is open for business, but we'll have to wait and see if that's true," Caruso said.

Allied Gold, which has a market capitalization of about

A$700 million, also has a mining operation in neighboring Papua New Guinea. It is listed on stock exchanges in Australia, Canada and Britain.

Allied says it aims to produce 120,000 ounces a year from the Gold Ridge mine -- that would come to about $183.6 million at current gold prices -- and expects the mine to run for at least 10 years. The company says it is also exploring for new deposits of gold as well as copper that could extend the life of the Gold Ridge mine.

The government and landowners around the mine stand to benefit from royalty payments that are still being negotiated with Allied. Caruso said the mine would still turn a profit even if gold prices dropped to half what they are today.

Gold Ridge was discovered in 1931 by an Australian botanist and was worked briefly in 1999-2000 before being left to rot after islanders from the nearby province of Malaita overran the site.

In 2006, riots aimed at running Chinese businesses out of the capital Honiara caused renewed concerns about security among foreign investors. Only after tensions eased for a second time did Allied agree to purchase the mine, spending $150 million to bring it back into service.

"We wanted that reassurance that this would not happen again," Caruso said.

With gold fetching record prices, and with an "intervention mission" of Australian, New Zealand and South Pacific military forces assuring security, the mine has been given a second life.

How it will change life in Solomon Islands is another question.

LUKEWARM PROSPECTING

The Asia Development Bank forecasts that Gold Ridge, along with higher sales of copra and palm oil will help accelerate GDP growth in the Solomons to 7.2 percent this year, offsetting declines from logging.

Prime Minister Philip, a former English teacher elected in August, says he is committed to attracting international mining companies to the country, though to date he has seen little more than passing interest.

"Mining is a relatively new industry in Solomon Islands," Philip told an Australia-Solomon Islands business forum, adding that he was considering granting five-year tax holidays to international mining companies as a lure.

But even that may not be enough.

Mining giants such as Newmont, Anglogold Ashanti and Sumitomo are conducting some exploration in the Solomon Islands but are years away from constructing any projects.

In the case of Sumitomo, its rights to a potentially big nickel mine on Santa Isabel Island are being disputed by Axiom Mining of Australia, which claims to hold a joint venture agreement with local landowners over the deposit. The dispute could take years to untangle.

Other international miners, including BHP Billiton and Inco have prospected over the years, only to move on to more promising ground elsewhere.

Security concerns after the tribal conflict a decade ago largely sidelined investment, but concerns about governance were also a factor.

Bob Pollard of Transparency International, which measures corruption worldwide and rates Solomon Islands a dismal 110 out of 178, says he has no doubts corruption was impeding foreign investment in mining, but believes things are improving.

"There are people in parliament now who understand the issues pertaining to corruption and have the integrity to make changes," he said. "But it is going to be very difficult for them, because we've got a large number of people who still hold the power and who are fairly vulnerable."

Mining companies are more attracted to Papua New Guinea or New Caledonia, where some of the world's richest deposits of copper, nickel and gold have been discovered, and where tax incentives are on offer as well.

In Papua New Guinea -- separated at one point from Solomon Islands by no more than a canoe ride -- Harmony Gold of South Africa and Australia's Newcrest are weighing funding options for a new $3 billion copper mine, while ExxonMobil has already started constructing a $16 billion natural gas project.

In New Caledonia, Switzerland's Xstrata, Eramet of France and Brazil's Vale are spending billions of dollars to mine some of the world's richest nickel deposits.

"These projects dwarf anything contemplated for the Solomons," said Sydney-based Eagle Mining Research analyst Keith Goode.

ALL THAT GLITTERS

Former Philippine President Gloria Macapagal Arroyo once said mining was the way to "unshackle the chains of poverty" in the developing world.

Not everyone is convinced.

All but a handful of mineworkers and urban dwellers still live a subsistence lifestyle in Papua New Guinea, where HIV infections have been rising for years and poverty-related crime is rampant.

Former Papua New Guinea Prime Minister Sir Julius Chan this month warned of a "resource curse" linked to mining, which he said drives up the cost of doing business in the country to the point all other sectors of the economy suffer while only the resource sector prospers.

But for people entrenched in poverty gold still sends pulses racing. "Now that the mine is here, maybe more people will come from Australia and look for gold," said Del Wenton, a subsistence farmer near Honiara.

Wenton said her two brothers have little interest in farming or fishing and are envious of the small number of alluvial miners who live in shacks outside the perimeter of the mine and spend their days panning for errant gold dust.

But then she seemed to have second thoughts.

"They tell me gold will make us rich, but I don't know," she said before entering the hustle-bustle of Honiara's Central Market, joining the daily throng of islanders hawking vegetables, fish and other Melanesian staples displayed on long narrow tables. "This seems much easier."

Ironically, it was the quest for gold a world away in Europe that gave Solomon Islands its name.

In 1568 Spanish explorer Alvaro de Mendana de Neyra discovered what he believed to be the 'Land of Ophir', the source of Israeli King Solomon's gold, according to the Old Testament. The explorer named the archipelago 'Isles de Solomon'.

The Spanish found gold, but not much and left. Still the name stuck.

"It's our namesake," says David, the pineapple farmer. "That should count for something."

(Editing by Bill Tarrant)

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