Mining Review: Our Response to the Crisis
Steel and ferro-alloys production
According to the Statistics Agency, Kazakhstan produced 3.81 million tonnes of raw steel over 10 months of 2008, which is 3.9% less than in the same period of 2007. The production of flat-rolled products in the same period was 2.46 million tonnes (-14.3%), including 160,127 tones of tin-plate and tinned flat products (-9.9%), as well as 439,972 tonnes (-10.8%) of galvanised mill products. Ferro-alloys production reached 1.45 million tonnes, which is 2.8% higher than in January-October 2007.
Precious and nonferrous metals production
Over ten months of this year 6,547 kg (-7.3%) of fine gold and 557,149 kg (-3.2%) of fine silver were produced. Over this period 1,425,676 tonnes (+11.1%) of alumina and 303,905 tonnes (+2.4%) of raw zinc were produced. In addition to that, refined cooper production (billets), except for sintered, rolled, extruded and forged bodies, increased by up to 330,610 tonnes (+1.5%). Production of lead concentrate decreased to 32,500 tonnes (-4.4%), and production of zinc concentrate increased by up to 324,800 tonnes (+2.7%).
Over ten months of 2008, Kazakhstan’s coal output totalled 90,875,300 tonnes, which is 16.5% more than in the same period last year.
National Welfare Fund has been established
Kazakh President Nursultan Nazarbayev authorised the government to establish the Samruk-Kazyna National Welfare Fund. The head of the country signed the corresponding decree “On certain measures to guarantee competitive and stable national economy” on 13 October 2008, which entered into force that very day.
According to the decree, the Samruk-Kazyna National Welfare Fund is a merger of the Samruk Holding for Management of State Assets and the Kazyna Sustainable Development Fund. The president authorized the government to approve the memorandum of the fund’s basic principles within two weeks as well as the list of joint-stock companies, whose state share would be transferred to the authorized capital of Samruk-Kazyna.
In particular, the list should contain the following companies: National Atomic Company Kazatomprom, Eurasian Natural Resources Corporation (ENRC), Kazakhmys, Kazakh Mortgage Company, Kazakhstan Mortgage Guarantee Fund, as well as all seven operating social entrepreneurial corporations. In addition to that, the decree provides that the Construction Saving Bank of Kazakhstan will be placed into trust with the further transfer to the fund’s authorised capital.
The document emphasises that the main activity of the fund will be “to manage its shares in national development institutions, national companies and other legal entities”.
The president also authorised the government “to provide relative amendments and addenda to the acting statutory acts within a month”. The president’s administration will control the enforcement of this decree.
To capitalise the new fund, they planned to spend $5bn from $10bn, which will be allocated in 2008-2009 from the National Fund to minimise the influence of the world financial crisis on the country’s economy and guarantee the steady social and economic development of Kazakhstan.
Kairat Kelimbetov has been appointed chairman of the board of the Samruk-Kazyna National Welfare Fund. Earlier he headed the president’s administration. Prime-Minister Karim Massimov headed the fund’s board of directors.
The prime minister appointed Arman Dunayev and Timur Kulibayev the deputy chairmen of the board of Samruk-Kazyna. Arman Dunayev occupied the position of the chairman of the board of the Kazyna Sustainalbe Development Fund from January 2008 and Timur Kulibayev is the chairman of the board of KazEnergy.
The Minister of Economy and Budget Planning, Bakhyt Sultanov; the Minister of Industry and Trade, Vladimir Shkolnik; the Minister of Finance, Bolat Zhamishev; the Minister of Energy and Mineral Resources, Sauat Mynbayev; and the Aid to the President for Economic Policy, Aset Isekeshev; were all appointed members of the board of directors of Samruk-Kazyna.
Aleksandr Mirchev and Richard Evans have been elected independent directors of the Samruk-Kazyna Fund. Earlier, they headed the boards of directors of Kazyna and Samruk.
During the first meeting, the fund’s board of directors approved the plan of top-priority measures, including regulatory legal acts and a separate draft law providing its efficacy and ordered the chairman to implement it. In particular, the board of directors ordered the managing board to propose a draft memorandum on the fund’s main activities during the next meeting and to develop and propose to the Ministry of Economy the list of priority projects to launch financing by a transfer from the National Fund in the current year.
Astana will support the national mining sector
During the government’s meeting on 28 October, the Minister of Industry and Trade, Vladimir Shkolnik, announced measures to stabilise and support Kazakhstan’s mining sector.
According to Shkolnik, in October 2008, almost all Kazakh mining companies decreased their sales while keeping the production the same. The minister thinks that, taking into account the crisis in the world economy, the situation is likely to worsen and will cause many companies in this sector to decrease the production.
Kazzinc, for instance, may stop completely or partially limit its production, in case the selling prices of its products keep decreasing in 2009. Vladimir Shkolnik said that the Ministry based its calculations on the following forecast of London Metal Exchange: zinc $1,750; lead $1,790; and refined copper $6,700 per tonne. The minister said that in case the metal prices kept within the forecasts, Kazzinc would be able to implement the programme of capital construction of main strategic facilities “with partial loan resources”. In case the prices increase by 30-40% of the forecast, the company can perform capital construction using its own means.
In addition to that, he added that if the prices decreased by 25-30%, Kazzinc would have to decline the services of contractors, including for repair and maintenance of buildings and equipment.
Meanwhile, the minister stated that some enterprises in this sector had already started decreasing their production. In particular, ArcelorMittal Temirtau reduced its metal production by 60%. Because of it, Minister Shkolnik announced some measures to stabilise the situation in the Kazakh mining sector. He believes that “it is necessary to come back to the law on transfer pricing and to establish flexible and more reasonable ways of price fixing in unstable periods”. He proposed to recognise contracts with independent end consumers of Kazakh products as an information source about market prices.
Minister Shkolnik thinks it is necessary “to cancel aluminium export customs duties due to the current situation when the prices of the most aluminium plants are lower than their expenses”. In addition to that, he proposes to “refund all due VAT to exporters from the state budget and to prevent further non-payments”.
Also, the minister demanded to solve “certain issues initiated by large producers under subsoil use contracts, including contracts prolongations and expanding the contract territories”. In the last resort he proposed that Samruk-Kazyna Fund should provide state financial support to those mining companies, which would not have their own sufficient funds.
The measures proposed will allow the support of the sector’s investment appeal and will have positive social and economic influence on instable world markets.
Meanwhile, on 28 October in Astana, the Ministry of Industry and Trade, and several mining companies, signed a memorandum on fulfilling social obligations towards the employees of this sector in terms of economic risks. In particular, five sides memoranda (whose members are the districts’ akimats, trade-unions and Samruk-Kazyna Fund) were signed with Sokolovsk-Sarbaisk Mining Production Association, ArcelorMittal Temirtau and Kazakhmys. Under the memoranda, the companies obliged themselves to continue all investment projects. Moreover, they reached agreements that all not-occupied workers would be engaged into additional mining and development operations. Some of them would be retrained, while others would get another profession.
Vladimir Shkolnik emphasised that the same agreements would be signed with other large enterprises of the sector in the near future.
The board of directors of Tobol social entrepreneurial corporation approved the project for developing the iron ore deposits Ayatskoye in Taranovsk district of the Kostanai Oblast on October 2008. The project includes construction of an opencast, a сconcentration plant, and a metallising house, as well as a steel and rolling plant. Their final products will be iron concentrate, oxygenated and iron-rich pellet, steel and rolled steel.
The estimated capacity of the mining facility under development is 9 million tonnes of ore and 1.5 million tonnes of rolled products per year. The period of the project from the beginning of investments totalling $600m until the facility reaches its design capacity is five years.
Ayatskoye prospective resources exceed 10 billion tonnes of iron ore. They plan to use new technologies to clean iron ore from detrimental impurities, which will allow decreasing production expenses.
Kazakhstan Mineral Resources Mining Company will be the partner of Tobol in this project. It will create more than seven thousand working places. They plan to construct a camp for the workers with social infrastructure close to Ayatskoye deposit.
The Tobol company was created in autumn 2007 by the president’s decree and operates in the Kostanai and North Kazakhstan Oblasts. Its main assets are: a mineral resources base of 350 deposits, 8.6 million hectares of land, and state property of 569 legal entities with state participation.
“Kazakhmys doesn’t plan to decrease its production this year and doesn’t need state financial support”, said the chief executive officer, Eduard Ogai, in a meeting with journalists in Astana on 28 October. Answering the question about possible production decrease in the next year, he announced his hope that the company would keep its current production while “the situation on the market allows us to survive”.
But words can stay only words. Actually, a sharp fall in prices on the world market of nonferrous metals made Kazakhmys’ management take certain measures to temporally suspend some of production departments early November 2008 and convert them in the future. In particular, they suspended the work of Konyrat, Belousov and Nurkazgan mines and started repairing Zhezkazgan copper plant.
Kazakhmys specialises in the production of refined copper and copper raw material, other precious and nonferrous metals, and coal output. Kazakhmys owns 20 mines, 10 ore mining and processing mills, and 2 copper plants.
In 2007, the company produced 341,000 tonnes of cathode copper from its own copper, 45,000 tonnes of zinc metal and 133,000 tonnes of zinc concentrate.
Kazakhmys is the fourth largest silver producer in the world (19 million ounces in 2007). Moreover, last year the company produced 146,000 ounces of gold; it owns 2.3 million ounces of estimated and expected resources. Kazakhmys Gold subdivision, which acquired Eurasia Gold Inc in July 2007, currently has some large projects in field development and exploration.
On 16 October, ArcelorMittal Temirtau signed a contract on engineering a metallurgical plant in Temirtau with a capacity of 4 million tonnes of steel per year with Dastur and Co Ltd consulting company.
The contract on the feasibility study was signed by the companies’ representatives in the presence of the Karaganda Oblast’s akim Nurlan Nigmatulin, who said that “the contract was initiated by the president’s order and that despite the world financial crisis, the company not only continues but also develops its large-scale programme, which proves the investment appeal of the president’s economic policy”.
In his turn, General Director of ArcelorMittal Temirtau, Frank Pannier, noted: “the construction of the new plant again proves that the company is serious and stable”. He assured that “from the point of view of ecological safety, the equipment of the new plant will totally meet the safety requirements”.
From 1 November 2008, all the specialists of ArcelorMittal Temirtau, who were earlier furloughed, resumed their work. The heads of the company promised to provide metallurgists and miners of all departments with work.
Frank Pannier said it was planned that the plant would produce 5,500-6,000 tonnes of cast iron per day, and the coal output would be about 900,000 tonnes per month. From November 2008, the company will start a strict economy regime: in particular they plan to increase the consumption of their own raw materials. Saved amounts will be allocated primarily to investment projects to modernise the production facilities.
Now the company is taking some administrative and organisational measures allowing the creation of new divisions based on existing departments, to perform all construction, assembly and repair operations, as well as other measures within new investment projects. In particular, the company plans to start the reconstruction of gas treatment systems, in converter plants, to develop design and estimate documentation, construct a continuous billet casting machine and the second phase of a rolling mill, a third line of strip galvanisation, as well as to expand cogeneration plant-2 and upgrade a cogeneration plant and a steam blower. Only the company’s specialists will participate in these projects.
Nevertheless, due to the new conditions, the planned work will demand special skills from the workers and that is the reason the company plans to re-train almost 2,000 employees in its own facilities at its own expense in the current year. About 9,000 employees will be trained next year.
ArcelorMittal Temirtau is a part of ArcelorMittal transnational steelmaking group of companies. In the middle ‘90s this group acquired Karaganda metallurgical plant, an integrated facility with a capacity of 5.5 million tonnes per year. The company owns 15 coal and iron ore mines. On 1 October 2008, the management of ArcelorMittal Temirtau announced that the company decreased the production by 25-30% and furloughed 4,200 employees.
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