Mining in Central Asia. Investors Like It Hot
Until recently, Kazakhstan was regarded as leader in Central Asia in terms of investment in the mining industry. However, under the present circumstances where the domestic mining industry has been significantly consolidated, overregulated and is shared between several major players, our regional neighbours with big and undeveloped minefields are evidently being underestimated. Offering “hot” investment projects, they have every opportunity to become more attractive to foreign capital.
The last few decades have been marked with rampant growth in the economies of developing countries. An increase of industry in Asian giants like China and India has stirred up demand for mineral raw materials, which resulted in the mining industry investment boom. The global financial crisis, which broke out last year, did nothing but activate these processes. In similar circumstances, investors usually escape from stock markets to raw material markets, which will provoke further growth in the cost of metals and hydrocarbons.
Keeping this in mind, Central Asia (the immediate neighbour of Russia, China and India and very rich in raw material resources), is fast becoming one of the “hottest” regions on the global investment map. This is supported by the increasing interest that the first Central Asian Mining Congress aroused in international mining companies and investors. Representatives from over 40 major geological prospecting and ore mining companies in the world, including such companies as Ivanhoe Mines, Uranium One and Rio Tinto, attended this forum, which was organised by Singapore’s Terrapinn company in Almaty in July.
In addition to institutional investors, the 220 delegates to the congress included financiers, consumers of mineral resources, law counsels, experts in risk control and trade from Asia, Europe, the Middle East, Australia and North America. The governments of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan supported this event. Significantly, official representatives from Mongolia attended the forum. The discussions focused on topics such as prospects for exploring minerals, legal bases for the use of mineral resources, trends in the privatisation of sites belonging to the mineral and raw material industry, political risks, investment interests and the financial opportunities of the region.
On the whole, the investors were offered a good opportunity to compare the strengths and weaknesses of each Central Asian country and to voice their determining criteria when choosing a country to invest their capital in.
It is unlikely that someone could dispute Kazakhstan’s regional leadership in attracting investment today. Investors note that our country remains the most “understandable” among post-Soviet countries in terms of legal rules, the development of the local infrastructure, and economic and political stability.
The chairman of the MEMR’s Geology and Subsoil Use Committee, Bulat Uzhkenov, said that total private capital inflow in the sector of minerals and raw materials in Kazakhstan over the last 10 years amounted to $87.5bn. In comparison with 1996, investment in this area has increased 10 fold, reaching $17.8bn in late 2007, including $1.9bn in geological prospecting operations (GPO).
The MEMR predicts that in 2008 this indicator should be standing at $18.9bn, including $2bn in GPO.
In addition, the basic investment direction in mineral and raw material complex is to hydrocarbon deposits – 73 per cent of the total investments were made in this sector in 2007. The ore-mining sector accounts for 24 per cent. The reasons for this are clear – independent Kazakhstan’s oil sector was built from scratch but we inherited the powerful ore-mining sector from Soviet times, when the main deposits were opened and major metallurgic productions were set up. As a result of the general privatisation in the mid-1990s, big private players, including companies such as ENRC, Kazzink, the Kazakhmys corporation, Bogatyr Acces Komir, ArcelorMittal, are now firmly settled in each sector of the ore-mining complex. Only the uranium industry is under the control of the state-run Kazatomprom national atomic company. This situation gives scarce opportunity for new players to come to the market.
At the same time, our government is interested in preserving investors’ interest in the use of mineral resources in Kazakhstan, especially in the area of geological prospecting. For example, today the country is in dire need of geological prospecting to meet their demands for non-ferrous metallurgy, whose reserves are only enough for 20-25 years. Investments in the tungsten-molybdenum (we hold a leading position in the world in terms of molybdenum reserves) and cobalt-nickel sub-sectors will have good potential. In addition, the country has considerable reserves of gold ore, whose deposits are in virtually all of the country’s regions. Uzhkenov said that the heap leaching method would allow a very large number of new deposits to be put into operation.
Our southern neighbour is also in the list of countries rich in mineral raw materials. In terms of reserves and expected reserves of minerals such as gold, uranium, copper, potassium salts and phosphorites, Uzbekistan holds one of the leading positions in the world. For instance, the Eurasian continent’s biggest stockwork gold-quartz deposit is Muruntau, where about 80 per cent of the annual Uzbek gold is mined. In all, the country has claimed to have over 3,000 deposits of mineral resources, 1,500 of which have already been proven. These include 57 precious metals, 44 nonferrous, rare and radioactive metals, 4 coal mines and many others. The chairman of the Uzbek State Committee for Geology and Mineral Resources, Ilkhombay Turamuratov, said that the reserves of all types of proven minerals were estimated at $1.9 trillion and the country’s total raw mineral potential at more than $10.9 trillion.
In addition, Uzbekistan’s mining and metallurgical industry is highly developed. The Navoi mining and metallurgical complex, which consists of three major metallurgical plants, produces up to 59 tonnes of gold and over 2,000 tonnes of uranium per annum. The Almalyk complex is another Uzbek metallurgical giant. It annually produces more than 115,000 tonnes of refined copper, 90 per cent of silver and 20 per cent of gold. It is significant that the enterprise exports 70 per cent of its total output. The porphyry copper reserves of the Almalyk group will allow the complex to operate stably for more than 60 years.
Apart from this, Uzbekistan is paying close attention to studying and developing uranium-bearing black shale deposits, whose reserves and prospected resources stand at approximately 100,000 tonnes. Companies from South Korea, Japan and China have already voiced their intention to take part in their development.
In addition to gold and uranium, which are rated as strategic, the country has over 700 deposits of 43 types of solid minerals that are ready for development, whose reserves are estimated at $630bn. At present, foreign investors can take part in developing 400 of them. These are the deposits of metal (lithium, tungsten, strontium), crude ore (vein quartz and quartzite for extracting silicon, kaolin, graphite, barytes, feldspar and fluorspar), mining and chemical, fireproof and ceramic raw materials and construction materials.
In particular, Mr Turamuratov noted that these types of minerals had high priority in Uzbekistan’s mining industry. The total reserve of only natural facing stones stand at 86 million m3 and are estimated at $42.7bn.
It is clear that fluorspar, for instance, is not quite the same as gold or uranium, and that is why the government is trying to improve the investment climate in the mineral and raw material industry as much as possible. Today Uzbekistan is offering investors guarantees from nationalisation, guarantees for using and free transfer of funds, the property rights to extracted products, guarantees for the return of foreign investments if investment activities stop, etc. Additional guarantees and security measures can be provided for investing in priority sectors and projects. Reductions of up to 50 per cent are provided for enterprises and exporters depending on their share of exports. In addition, tax exemptions are provided for goods, works, services and technological equipment that investors import for their own production needs, and for products investors export based on production sharing agreements. It is worth noting that Uzbekistan gives additional tax, customs and other privileges to enterprises with foreign participation only for a strictly specified period, which cannot have an indefinite term.
Genghis Khan’s treasure
Perhaps, Mongolia can be regarded as “the best tidbit” in the region. There are now over 600 operating and more than 6,500 proven deposits there. These include economically significant deposits of copper and nonferrous metals, coking and steam coal, uranium, oil, phosphorites, molybdenum, tungsten, spar, sulphate, sodium and precious and rare metals. Mongolia ranks fourth in the world in terms of fluorspar extraction, eighth in molybdenum, and ninth in gold and tungsten extraction.
In 1991, the country adopted a law on foreign investments for the first time, later amending it in 2001 and 2002. With a view to encouraging investments, the Mongolian government signed “stability” agreements, offered exemption from customs tax and VAT for importing technological equipment and considerable income tax privileges and reductions.
This favorable investment climate helped to unfold a wide-scale campaign to search and develop new deposits jointly with foreign investors in Mongolia. Companies with famous brands such as VALE/CVRD, BHP Billiton, Rio Tinto, ArcelorMittal, Jindal Steel, Centrerra Gold, Mitsui, and others have opened their agencies in the country. As a result, Mongolia entered the top ten countries in terms of investment in geological prospecting in 2004 and 2006. The head of the mining department of Mongolia’s minerals and oil directorate, Mr Batbayar, said that the country is paying special attention to this sphere, maintaining a policy of constantly increasing mineral reserves. In 1998, only $7.9m was spent on geological prospecting, whereas now this figure has increased to $280m. It is clear that the mining sector’s influence on Mongolia’s economy cannot easily be overstated today. Back in 2003, the mining sector accounted for 12.7 per cent of GDP and 54.9 per cent of the industrial production. These figures stood at 33 and 70.3 per cent respectively in 2007. During this period, the mining industry’s contribution to total exports grew from 57.5 per cent to 78.4 per cent. The country’s biggest mining company, Erdenet, provides approximately half of currency revenues and almost 25 per cent of the state’s budget. This Mongolian-Russian joint venture extracts copper and molybdenum ore and produces copper and molybdenum concentrates.
At the same time, the opening of new world-class deposits, which includes fields such as the Oyu Tolgoi field (with 32m tonnes of copper and 1,000 tonnes of gold reserves), Tavan Tolgoi (7 billion tonnes of high-quality coal), the Asgat silver field, the Mardai uranium field and the Burenkhaan phosphorite field, are opening new prospects for exporting minerals from Mongolia. When the Oyu Tolgoi field (66 per cent of which belongs to Ivanhoe Mines and 34 per cent to the Mongolian government) is put into operation in 2010, the country will be able to become the world’s third biggest holder of copper reserves (over 90 million tonnes) within the next three years, and the annual amount of gold mined will increase by two fold (up to 40 tonnes). Thanks to the development of the Tavan Tolgoi field, coal mining is expected to grow significantly from the current 10 million to 50–80 million tonnes per annum. In all, experts have estimated that Mongolia’s geological coal resources are about 152bn tonnes.
The head of the Canadian Ivanhoe Mines company, Robert Friedlanad, said that the fact that Mongolia neighbours the Chinese market makes it particularly attractive to investment offers in the country’s mining projects. Ten years ago, China only accounted for 10 per cent of the world’s demand for base metals, whereas now it consumes 25-30 per cent. The acute shortage of coking coal in China has already led to a fall in steel production this year. In this situation, Mongolia will play the same role for China as Canada does for the USA. Pushed by the raw materials’ shortage, the Celestial country has already become the biggest investor in Mongolia’s economy.
Like foreign investors, the Mongolian government is no less aware of its competitive advantages in this area. This is why the country adopted amendments in the mining law in 2006, legally increasing the country’s share in developing strategically important deposits from 34 per cent to 50. Payments for licence holders were increased and excess profit tax was introduced for gold and copper mining. The rate of 68 per cent is applied to revenues gained from raising the gold price to $500 per ounce (in the Mongolian bank) and silver price to $2,600 per tonne (on the LSE). However, Mr Friedland optimistically told the forum that his profits from investing in Oyu Tolgoi were outweighing the losses caused by the worsening investment climate.
Where it is narrow
Foreign investors are more alarmed by the political instability. For instance, following the parliamentary elections in Mongolia, political parties got stuck in internal disputes, and the matter about correct and rational use of natural resources was a stumbling stone. When a company risks facing a drastic change of game rules by the government, one does not have to speak about stability.
Similar problems are observed in Kyrgyzstan, where internal contradictions, tearing apart the ruling elite, are endangering the implementation of international mining projects. First of all, the matter concerns the biggest gold ore deposit Kumtor that the Canadian company Centerra Gold Inc. is developing. The country’s government managed to increase Kyrgyzstan’s share in the project to 30.6 per cent in August last year as a result of long negotiations with the Centerra Gold’s major shareholder, the Cameco company. However, parliament refused to ratify this peaceful agreement in February. Some deputies are insisting on the nationalisation of the company. As a result, as Kumtor Gold Company president Andrey Sazanov put it, Centerra Gold Inc., whose shares are listed at the Toronto stock exchange, lost $2.5bn of its market capitalisation since April of this year. This included $340m of Kyrgyzstan’s pure losses.
At the same time, the executive director of the Chaarat Gold company (which is also involved in the development of the Kyrgyz gold mine), Dekel Golan, believes that situations similar to that at Kumtor are not rare at all – not only in Central Asia but anywhere in the world. Any company that has earlier acquired exclusive conditions may come under the threat of political speculations and the state’s revision of conditions at any time in case of a change of power. In his opinion, it is unlikely that these risks will threaten investors who are starting projects from scratch and on a general basis in Kyrgyzstan today.
Stable Kazakhstan has also got it in the neck in political terms, but for a different reason. According to experts, the latest changes in our legislation include risks that are no less alarming to investors. For example, the law On Subsoil and Subsoil Use now includes provisions that require every deal with shares or capital contribution of a subsoil user, or a company, which is able to influence its activities, to be approved by state bodies. In addition, Kazakhstan legally established its priority right to participate in contracts and to introduce amendments to contracts if subsoil user’s operations “considerably change Kazakhstan’s economic interests, threatening the national security”. However, a specific list of cases of changing economic interests is not provided. Analysts believe that these conditions are creating additional risks for investments in subsoil development and do not fully comply with stock market practice. They are increasing risks for companies allocating shares at the stock exchange and the parent company crediting the subsoil user – the debtor.
The current draft Tax Code is also giving rise to serious debates. Apart from anything else, it will regulate future taxation schemes for subsoil users. This draft code provides for the unification of rates that were fixed in mining contracts, the tax on mining minerals, and a reduction in corporate income tax, but keeps excess profit tax.
Mr Uzhkenov said that “the tax on mining minerals will be set depending on their types and world prices, and will provide subsoil users with acceptable profitability rate at each deposit.” In addition to this, Kazakhstan is considering the question of introducing export duties. Mr Uzhkenov said that all of these reforms were being discussed with investors and subsoil users, and, therefore, the final decision should satisfy all of the concerned parties. For their part, investors recall that, for the state, an enterprise’s profitability is no more important than the performance of its tax liabilities.
Today we have to repeat that practically all of the Central Asian countries are demonstrating attempts to increase state influence and control in the mining industry this way or another. Considering the present state of world market, this kind of aspiration is quite clear and justified. The main thing one has to bear in mind is that an investor is rather flexible when searching for an alternative and will choose a country that will provide him with the optimum combination of favourable investment climate, high profitability and maximum security of capital investments. One thing is clear – Kazakhstan has already won back its advantage as the country of “first choice”, and therefore the government should look for new instruments to “warm up” foreign investors’ interest in our mining industry.
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