Equity Analysis /

Pakistan: OGDC and PPL venture into the promising Reko Diq mining project

  • The government has reached a settlement with the counterparties of Reko Diq mine

  • OGDC and PPL will participate and contribute in settling the truncated fine of US$900mn

  • The diversification opportunity for the two E&Ps is big, but it can entail some strain on their cash-flows near-term

Intermarket Securities
21 March 2022

A reconstituted project…

Oil & Gas Development Co. (OGDC) and Pakistan Petroleum Ltd (PPL) have entered into a non-binding agreement with the Government of Pakistan (GoP), Government of Baluchistan (GoB) and Barrick Gold Corporation to participate in the reconstituted Reko Diq project. As per the arrangement, Barrick Gold will have 50% stake in the project – along with being the operator and manager of the mining field. The remaining 50% stake will be divided among the GoB – 10% as free-carry (not contributing in initial investment and future capex) and another 15% stake (investment borne by the GoP) – while 25% stake will be equally divided (8.33% each) among three state-owned E&Ps, OGDC, PPL and Government Holdings Pvt. Ltd (GHPL). Importantly, the agreement is pending approvals from parliament and Supreme Court of Pakistan. 

…potentially ends a long-standing dispute

In 2006, GoB awarded the mining license of Reko Diq mine (in Baluchistan) to Tethyan Copper Company (TCC) – a JV between Barrick Gold Corporation of Canada and Antofagasta of Chile (with 37.5% stake each; GoB 25%). By 2011, the agreement was suspended due to a dispute over the legality of its licensing process. In subsequent years, the International Court of Arbitration and the London Court of Arbitration separately leveled a US$6.4bn and US$4bn fine, respectively, on the Government of Pakistan. Since 2019, the PTI led government has been negotiating with the aggrieved parties for a settlement. The above reconstituted agreement is the outcome of those negotiations, by which Pakistan will pay a truncated fine of US$900mn to TCC and Antofagasta will exit the project.   

OGDC and PPL will contribute US$187.5mn each of the penalty

Contrary to news reports, we understand that PPL and OGDC will make an initial payment of US$187.5mn each (not one-third of US$900mn). This is because the penalty will be divided among the GoP (on behalf of the 15% stake of GoB) and state-owned E&Ps (cumulative 25% stake) by ratio of their stake in the 40% ownership of the project. Therefore, US$337.5mn (15:40 of US$900mn) will be paid by GoP and the remaining US$562.5mn by the three E&Ps, equally divided (25:40). Hence, PPL has notified an initial entry fee of US$187.5mn. But note that this payment will be made only after the finalization of the agreement. 

A potentially lucrative opportunity for the two E&Ps

As per the press release by Barrick Gold, Reko Diq holds one of the world’s largest undeveloped copper-gold reserves, and it could be in production in about five to six years’ time. From the standpoint of OGDC and PPL, this offers an excellent opportunity to diversify their oil and gas operations in the long term; though PPL is already involved in exploration and mining of barytes in Baluchistan (through its subsidiary, Bolan Mining Enterprises). The project may also complement their exploratory activity in the province (home to most of the frontier blocks), where recently they have concentrated their exploratory activities. 

In the near term, however, the payment (equivalent to c.PKR34bn) can be a strain on the balance sheets of the two E&Ps. By December 2022, OGDC and PPL had c.PKR70bn and c.PKR95bn of cash and equivalents, respectively. Also, the government is relying on (unpaid) dividends from the two to finance the recent relief package. But, we understand that final approvals may take about a year’s time, after which the penalty will be settled. A political transition can delay the timelines further. Therefore, the cash outflow from OGDC and PPL may not happen in the next 12 months, in our view.

We have a buy rating on OGDC and PPL with the TP of PKR165/sh and PKR155/sh, respectively.