UPDATE 1-PNG's Ok Tedi mine nears shutdown due to drought

Tue Dec 4, 2012 3:11am EST

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* Ok Tedi copper mine in Papua New Guinea hit by drought

* Two more weeks without rain could lead to suspension, MD says

By James Regan

SYDNEY, Dec 4 (Reuters) - The Ok Tedi mine, one of Papua New Guinea's largest operating copper mines, is two weeks away from temporarily shutting down due to a drought that has brought river transport to a halt and cut off fuel supplies, a company official said on Tuesday.

The mine, which produces about 150,000 tonnes of copper in concentrate a year, ships the material by a pipeline and barges more than 1,000 km (600 miles) to silo vessels in the Gulf of Papua, before it is loaded on to freighters.

Dry conditions have caused problems to shipping from Ok Tedi a number of times in the past.

"We have maybe 14 days before halting production," Nigel Parker, managing director of Ok Tedi Pty Ltd, told Reuters. "We've already slowed down."

However, Parker said, the situation had yet to reach a stage where the company needed to invoke the contractual clause of force majeure to release it from the obligation to deliver concentrate to buyers on time.

Ok Tedi sells the ore to 10 smelting companies in Asia and Europe. "We haven't declared force majeure, not yet," he said.

Low water levels on the Fly River have stopped both the transport of concentrate and the delivery of diesel fuel supplies to the mine, Parker added. "We're still producing concentrate, so our storage sheds are filling up."

In 2011, the mine, majority-owned by the PNG Sustainable Development Program Ltd, was shut for a total of five weeks due to separate incidents when a worker was killed and a pipeline transporting concentrate ruptured.

Separately, Parker said Ok Tedi was close to signing off on a plan to extend until 2025 the life of the mine, which is now scheduled to shut permanently in 2014.

An extension, enabling the mine to produce at two-thirds its current capacity, requires nine separate community groups representing 150,000 residents around the operation to sign off on compensation and other agreements.

Seven of the groups had already approved and the last two were voting this week, according to Parker.

"We have no doubt this will go ahead," he said. "We've already started working on the extension.

Ok Tedi was also looking at ways to acquire the neighbouring undeveloped Frieda River copper project, which world number 4 copper producer Xstrata is considering to sell outright or in part rather than develop, according to Parker.

"As (Ok Tedi) managing director I would love to (acquire Frieda River), but there's a long way to go," Parker said. "It makes sense geographically and I am pursuing that."

He said Frieda River represented a "national asset" for Papua New Guinea that should not be allowed to wither.

Like other major miners under pressure to conserve capital amid uncertainty over global growth, rising costs and falling commodity prices, Xstrata flagged in June that it could slow project spending.

Chinese companies, possibly including Metallurgical Corp of China (MCC), could be interested in Xstrata's stake, analysts have speculated.

Frieda River has an estimated resource of 12 million tonnes of copper and 18.5 million ounces of gold, and could produce 246,000 tonnes of copper a year, according to a pre-feasibility study in 2010.

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