An interview with Moazzam Husain: We ‘discovered’ iron ore – what now?

The reserve quantity of the iron ore is quite sizeable and can make a big impact on the Pakistani economy.

While serving on the Punjab Board of Investment and Trade, Moazzam Husain led a small team of experts, businessmen and stakeholders to develop a technical and commercial strategy to harness Punjab’s iron ore resources. The first draft of that road-map was published in April 2010. Then following further rigorous consultations in August 2010, Chief Minister Shahbaz Sharif approved the strategy for implementation.

I caught up with Mr Moazzam Husain in Karachi to discuss the recent developments around Punjab iron ore.

Moazzam Husain

Erum Shaikh (ES): According to media reports, the Punjab iron ore resources were identified decades ago. Yet we are being told they have just been discovered. What is going on?

Moazzam Husain (MH): We have known about the existence of these iron ore deposits for a very long time. When dealing with underground natural and mineral resources we are dealing in degrees of certainty. So when we were preparing the high level iron ore development road-map, the question really was what do we do with these bits and fragments of geological data which are telling us about the presence of a resource in substantial quantities? And our first recommendation was that we need a full blown techno-economic study; one that follows an internationally accepted methodology and gets the resource classified to an internationally acceptable standard of proven reserves.

The question is, why it took the government five years to complete it when such studies are done within 12 months elsewhere in the world? Anyways, so what has happened last week is that the study has been finally completed. It also means we know far more about the characteristics and structure of the ore seam than we did previously; how deep the seam lies, how thick is it, how much of the surface is rock and how much is soil, where the water tables are located. How big are they etcetera. So we can go about thinking about ways and means to extract it. We call this a “bankable study”.

ES: So is this project economically viable from international standards?

MH: That remains to be seen. Now that the existence of the reserves has been authenticated, the economic viability of extracting it should be established. I had recommended for the TOR’s of the study to include mining strategy and costing. The study cost millions of dollars, I haven’t yet seen it but if the costing hasn’t been done, it can and should be done without wasting further time.

ES: Will the iron ore so found be enough to have some positive impact on the economy?

MH: Yes. Like I said, once the costing is done and if it is viable to extract, the reserve quantity is quite sizeable so it can make some impact on the economy. Let’s say we can start with producing one million tons a year, and say over a 10-year period, build up the mine production rate to 10 million tons a year. Supposing the price is $60 per ton then one million tons in Year 1 comes to $60 million. And 10 million tons in Year 10 translates to $600 million in revenue. Production costs will have to be subtracted from this to arrive at profit per ton. Then depending on what share the government keeps in this, the resulting government revenues can be quite sizeable in future years.

In addition, the government will earn 30% corporate tax on the profits as well. Some months ago, the international prices were twice that, so with higher prices, it would have a greater positive impact on the economy.

A miner holds a lump of iron ore at a mine located in the Pilbara region of Western Australia. Photo: Reuters

ES: Recently, the PM declared that we were searching for iron and got gold and copper instead. He said that now we would repay all our debts and would be granting loans instead of begging for loans. In a picture that appeared in the press, the PM was even shown holding a gold plate.

MH: (Chuckles) Well, we should not get carried away by such spin that comes from politicians. But indeed gold and copper may be present in trace quantities and it remains to be seen whether their extraction is technically and financially feasible. Gold is also present in seawater. It doesn’t mean you start extracting it… (chuckles) unless you develop a nanotechnology solution.

The mine business model has to be determined whether iron ore or copper or indeed gold should be optimised. This means that from each ton of ore would you rather extract one gram of gold or 600 kilograms of iron? Once again, the study should provide that answer. The prevailing international prices of these commodities will also have to be taken into account. Extraction costs would also play a role. The extraction processes are entirely different for iron, copper and gold. Choosing which one will depend on what is more profitable.

ES: When you were leading the initiative to develop these resources back in 2010, what kinds of issues did you have to deal with? Are they still relevant?

MH: Well, primarily we had this resource and everybody around the table knew about its existence, and that it had been around for years. We were now looking for a way in which Pakistan could harness this for national economic benefit. The questions in everybody’s mind were: What would it take to have this classified as a proven reserve? And afterwards, who would invest in this mega mining project? What should be the terms of the transaction between an international mining company and the Punjab government? What kind of mining methodology would be required? What kind of logistic and transport infrastructure would be needed to remove earth to the depth of a 30-storey building and then haul the millions of tons of excavated ore? How would we depopulate the hundreds of acres of farmland and villages — underneath which the ore was located? What would we do with the iron ore? Could we convert some of it to steel? If so, where would the energy come from in an already energy-starved country? Could we also sell some of the raw iron ore? And yes absolutely, these questions are still very much relevant today.

ES: So exactly how substantial are these reserves?

MH: 500 million tons are quite substantial for Pakistan, especially given that this is not the end and there is promise of further discovery around that region. On a world scale though, these are not that big. Australian mining giant BHP Billiton produces that much iron ore in little over two years. The three biggest iron ore production countries in the world are China, Australia and Brazil. There the deposits are in the tens of billions of tons. And then there are many other countries that have multiple mines the size of the one discovered in Punjab, including some in India. Afghanistan next door has 1.7 billion tons reserve at Hajigak, Bamyan province.

Workers walk past an iron ore storage site at Yingkou Port, one of China's biggest ports for the import of the commodity, Liaoning province. Photo: Reuters

The BHP Billiton Mount Whaleback iron ore mine, in Western Australia. Photo: Reuters

An overview of Ferro Carajas mine, operated by Brazil's company Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State. Photo: Reuters

ES: But will this be a big mining opportunity?

MH: For us, yes. This would require an operation on a scale we have not seen before in Pakistan. The biggest ones I reckon were the earthworks projects for building Mangla and Tarbela dams. And the earthworks involved here are larger by an order or two of magnitude. But having said that, I do not think this would be a large enough opportunity for any of the world’s three big mining companies - viz BHP, Vale and Rio Tinto. We may need to approach second or even third tier mining companies to get them interested in this opportunity.

ES: Why do we need international companies? Can’t Pakistan get it out itself? Don’t we have experts in these areas?

MH: In which areas specifically? There are many areas here. Like I said, mining on this scale has not been seen in Pakistan. So we’d be hard pressed to find experts with any real experience other than theoretical knowledge of earth sciences subjects. And it’s not just expertise and know how – this requires an organised effort, a level and scale of effort that can only be governed under a corporatised structure. And preferably a structure that has worked before and has previous experience of similar undertakings. What we’re really beginning to define here is a large mining company with international operations and experience.  And of course lots of cash to invest.

ES: And what are the main challenges in getting it out?

MH: Well to start with, remember this is a deep deposit not a surface deposit. So one needs to rip open a few kilometres of the countryside to get to the ore seam. Secondly, we have the Chenab River, nearby. That may pose hydraulic challenges during excavation. My apprehension is that we could be looking at a relatively expensive mining solution.

That would make the Punjab iron ore project marginal on a world scale. Any investor will look at a range of comparable mines in the world’s ore-producing regions and compare the extraction costs per ton. And in the presently oversupplied world market, many marginal mines have become dormant and are available for sale or lease. It’s just like with any other asset. Like any real estate. There’s always choice, there’s a market and there are buyers and sellers.

Then getting the land cleared would pose a challenge for the Punjab government. The land acquisition for the Mangla reservoir expansion took years.

Finally, structuring a mining concession, while the Reko Diq fiasco is still fresh in people’s minds will pose another challenge.

ES: And what happens once mining starts. What happens to the ore that comes out after extraction?

That is a major challenge. One option is you can make steel on site. That means establishing a large steel mill. But then the government will have to think about ways to provide energy — either coking coal or gas at the site. Small quantities of ore can also be provided to Punjab’s steel rerolling industry but they would need to retrofit their furnaces. The government would need to announce a special policy for that.

Finally, to move ore (and even steel) through overland transport to our steel mills and ports requires a modern, heavy haul rail system. I would imagine that ought to constitute part of the mining concession agreement.

An iron ore core sample is passed at on iron ore mines near Port Hedland, north of Perth, Australia. Photo: Reuters

ES: What do you estimate the socio-economic effects will be if this is successfully done?

Steelmaking is a basic industry upon which depend other industries. So it is an industry of industries. If we had set our goals right, Pakistan could have greatly industrialised much earlier and trained its ample human resource while creating large scale employment in the manufacturing sector. By now, we would have been a middle income country with a smaller but more skilled population. Still, even today, I say we can get started. As they say “Der aye, durust aye” (a little late is better than never)!

ES: What is your biggest apprehension?

 In my experience, our politicians and bureaucrats have little understanding of the global mining business. And there is an absence of clear thinking. We can’t organise things neither seem to be able to make them work. There is a major deficit of government capacity. There are bottlenecks at the policy level. My worst apprehension is that they will be unable to make this work; that they will bungle it up. End up with another Reko Dik, another Kalabagh Dam. And this is one apprehension I hope is proved wrong.

Moazzam Husain has served on the Punjab Board of Investment & Trade as Director General; a position from which he led the initiative of the Punjab iron ore development road map. He tweets @moazzamhusain