In the mid of April, Astana hosted the Forth Mining Forum "Minex Central Asia 2013", attended by over 500 industry experts from the CIS countries and abroad. Such a broad range of delegates representing their countries at the forum that has been held this year under the motto "The Promotion of Partnership, Diversification and Investment," made it possible to outline and effectively discuss a number of key issues the mining sector of Kazakhstan faces.
The fact that the President of Kazakhstan Nursultan Nazarbayev for the first time sent a greeting to the delegates of the forum that was organized by Advantix Ltd under support of the Ministry of Industry and New Technologies, says volumes for the topicality of the agenda for the economic development of our country.
In his welcoming speech at the forum delivered on behalf of the Government, Deputy Prime Minister of Kazakhstan Kairat Kelimbetov cited the words of the President that Kazakhstan is moving to a new state policy in the area of mineral production, the main focus of which is the exchange of up to-date technologies. "At the moment, particular efforts are being made to encourage investment in the sector. We will adopt a five-year program aimed at the development of the mineral resources sector. The program will provide for the increased financing of exploration activities from apriority list and the construction of a center for geological research. The law "On Mineral Resources and Mineral Production” will be amended accordingly, aimed to radically simplify the procedures for granting exploration rights. In this regard, Kazakhstan is striving to introduce global best practices. I am sure that open debates in the course of the Forum will further our understanding of the challenges the mining industry faces, as well as will strengthen cooperation with our business partners and investors, and will help reach an arrangement on new projects. I hope that this will result in specific recommendations on how to attract new people and investment in the mining and metallurgical sectors of Kazakhstan."
From his side, Mr. Kelimbetov noted that despite the leading positions the country occupies in terms of the number and variety of mineral resources, today the domestic mining sector is experiencing the lack of replenishment of extracted resources – the situation that leads to the excess of consumption over production. As a result, the acute questions are the provision of the operating enterprises with proven reserves and the expediency of organizing new production facilities. "The growing demand for industrial mineral raw materials, against the backdrop of their lower quality and depletion of mineral resources, require the integrated development of SMEs, in particular, the discovery of new large mineral-bearing deposits, and the involvement in production of non-traditional types of minerals in Kazakhstan."
Considering that, our country has an acute need for new investment that isnecessary not only to finance the mining projects in operation, but to develop high-tech productions that will engage in discovery and exploration of new deposits with their subsequent development, enrichment of raw materials, and production of high value added products.
With this, Deputy Prime Minister admitted that the economic recession caused the government not only to revise many of the stereotypes, but also to raise issues that were remaining unresolved in the last 10-15 years. "For example, among the main stereotypes is the notion that the state should not be actively involved in the market operation processes. However, today the whole world recognizes that the market and the state should actively interact, and the government should actively assist in addressing the challenges the business faces by overseeing the financial sector and the good economic policies. "In our case, the matter concerns, among other things, the significant strengthening of the role of the state in geological exploration. With this purpose, the national exploration company Kazgeologiya was set up in 2011, the goal of which is to rehabilitate and strengthen SMEs. According to Mr. Kelimbetov, to do this, the most modern equipment is being purchased and a 10-fold increase in financing is expected.
However, judging by data provided by the Vice-Minister of Industry and New Technologies Nurlan Sauranbaev, a sharp increase in investment from the budget in exploration is not a matter of the near future. For example, in 2012 the funding of the state geological survey was 7.3 billion tenge, while in the current year this figure will be just a little bit higher – 7.7 billion tenge.
The good thing is that "the work to control the fulfillment by mineral producers of their contractual obligations was put in order." According to Mr. Sauranbaev, earlier the companies, when developing their work programs, artificially understated the scope of work by 2-3 times and, therefore, the same was for contractual obligations. "We had put the system in order, and, as a result, in the last year alone, additional commitments were to the amount of $12.5 billion. Another $15 billion of commitments were recorded with the central committee and now they should also be reflected in the contracts ... This is not some additional enforcement, it is to bring the work programs in line with the current financial obligations."
Speaking of the immediate tasks, the Vice Minister also mentioned the development of a program to advance the mineral resources sector for 2015-2019, as well as the establishment of a Center for Geological Research in accordance with the best international practices. "It will be a center of competence that will collect new technologies and introduce the best of them into practice." The center also plans to train personnel in order to develop the "new geology." Now the Ministry of Industry, jointly with the Association of Petroleum Geologists, the Nazarbayev University, and the Colorado School of Mining are working together on how to rehabilitate the human resources potential of the industry.
It is clear that in development of exploration projects, the government primarily relies on private investment. This is exactly the reason why the four year moratorium to organize the bids for granting mineral production rights was canceled, and amendments to the law "On Mineral Resources and Mineral Production" were prepared, which will be introduced to Parliament for consideration later this year.
It is quite possible that after the adoption of these amendments, investors will be given a number of fiscal incentives, including the abolition of VAT for geological prospecting. As a result, the government expects a significant inflow of private investment. For example, by estimates of Bazarbai Nurabaev, the Chairman of the Committee for Geology and Mineral Production of MINT, investments in geological exploration of mineral resources in the next two years are expected to exceed 500 billion tenge. The mining sector and solid minerals require higher attention, and thus, investments in this sector are predicted at 248 billion tenge in 2013 and 255 billion tenge in 2014. For comparison, about 100 billion tenge was spent last year for geological exploration. As for the past decade, in 2003-2012 this indicator was 2.3 trillion tenge. Of this amount, the greater portion was directed not to solid minerals, but to hydrocarbon-producing facilities.
"We understand that foreign investment will go to the countries with attractive geology, effective legislation and favorable taxation. Also, we believe that at the moment in Kazakhstan the development of the mining sector is the most promising area in the industrial and economic policies. "According to Mr. Nurabaev, the state financing of geological exploration has to also increase, with the main emphasis made on the replenishment of golden reserves, non-ferrous and rare metals reserves, and reserves of methane in coal seams.
Along with that, independent experts and representatives of mineral producers believe that, despite theincreased attention to the mining and metallurgical sectors from the government, the pace of carrying out reforms in them often lags behind the markets development pace. The state does not fully take into account the sharp decline in investment activity in the global mining industry caused by the protracted global economic recession. In their opinion, to increase the investment attractiveness and competitiveness, the mining industry of Kazakhstan needs to make more cardinal efforts.
In particular, the Executive Director of the Republican Association of Mining and Metallurgical Enterprises (AMME) Nikolai Radostovets made a focus on adoption of a long-term mining sector development strategy till 2030 as a key task, which has to be developed on the basis of a master plan proposed by AMME and a number of consulting organizations. This document is expected to set the vector of further development of the sector, to lay the foundations and principles of the policy in the area of mining and metallurgy, as well as to be a guide for potential investors.
A second key issue is the development and adoption of the Code "On Mineral Resources". In itself, this idea is not new. However, if last summer Mr. Radostovets was talking about a separate Mining Code, now the miners have decided to act together with the petroleum sector employees.
At the moment, the AMME and KAZENERGY Association are developing a Code on Mineral Resources, which will contain general and special parts – separately for the petroleum and mining sectors. "We will insist that the Code will be declared as a priority document. Lately we have seen an increasing understanding of this issue by the government. We will not be satisfied with just amending the Law on Mineral Resources. For example, procurement regulations alone for the mineral producers were under consideration for about a year only because the miners and the petroleum sector workers have different specifics in work. In practice, we need to delimit our spheres, as they are different on a very large number of issues. "Taking this opportunity, the head the AMME urged international investors to move from a simple critique of the current legislation to real help in changing the situation. In particular, they can provide experts to take part in development of the new Code.
Moreover, he raised the question of stability of the tax legislation related to the area of mining and metallurgy. "Every year we are faced with the same risk. When the government is short of money, it starts talking about revision of the tax laws or legislation on payments. We would ask to fix in general the stability of the Tax Code for 10–15 years. This is needed so that no alterations would be on issues related to mineral production and operation of the mining and metallurgy sectors. The current Tax Code reflects the international requirements. It allows the state to very effectively participate in a sharing of revenues. With prices going up, revenues also grow."
Here a question arises how the wishes of Mr. Radostovets match the intention of the Government to adopt tax privileges on VAT for geological exploration projects?
The next point that drew attention of the head of the AMME is that the environmental legislation got complicated the last year. Moreover, there were serious risks from man-made mineral formations and greenhouse gas emissions. "We support the issues raised by the government, but we should understand that the environmental policy has to be encouraging, but now in Kazakhstan its nature is rather more punishing than encouraging."
According to the analysis made by the AMME, in situation of full compliance with the current legislation, in 2013 a number of enterprises implementing projects under the state program of AIID are likely to pay fines for greenhouse gas emissions in the amount equal to up to 25% of their investment. And yet, according to Mr. Radostovets, the government heeded the arguments – the Code of Administrative Violations will be amended and, most likely, no penalties for greenhouse gas emissions will be charged in 2014. However, still remains the problem of giving a legal definition to the concept of TMO, since "some regional environmental protection agencies insist on payment for these emissions as industrial waste."
Mr. Radostovets also proposed a new way to consider the training of personnel, taking into consideration the experience of petroleum sector workers. The matter concerns the creation of a public fund, which would accumulate a certain portion of mandatory tax payments to the state budget, paid by mineral producers, and which would use these funds for development and funding of special education programs for the mining and metallurgy sectors. "It is important that MINT is ready to delegate a number of issues to our association. That is, we find the government's support in the mechanisms aimed to strengthen self-government, self-regulation and self-organization of the mining sector.
In conclusion, the head of the AMME shared his vision of the role of the National Mining Company Tau-Ken Samruk in development of the mining industry. He believes that with the transferring of the state stakes of companies such as ENRC and Kazakhmys in management to the national player, the latter shall not act as their supervisor, but real partner, helping with intra-industry cooperation and business development. "If there is a deterioration of the situation, and the company cannot cope with the market situation, the state needs to look for mechanisms to assist. And I think that Tau-Ken Samruk could manage to do that.
Maximize it Quite interesting were statements of Vice President of JSC Kazakhstan Institute for Industry Development Seytkali Galiyev, who shared with delegates of the forum the information gathered when working out a master plan for development of the domestic mining and metallurgy sector.
According to him, the global mining production volumes have a steady upward trend. Over the past 30 years, they have increased from 10 billion tons to 15 billion tons, and in the middle term (before 2030) this figure could rise to 20 billion tons. It is worthy of noting that the greater part, namely 60%, of the global total is the share of Asia. Here, Kazakhstan ranks third after China and Russia. In 2005-2009 Kazakhstan ranked eleventh-twelfth in the world in terms of mining production; in 2010 the country ranked tenth, lagging just behind China, the U.S.A, the Russian Federation, Australia, Canada, India, Indonesia, South Africa and Brazil.
Along with that, despite the fact that the revenues of the industry in the last 2–3 years were growing at a considerable pace, we actually had a zero dynamics of production in real terms, i.e. our indicators completely depend on the ups and downs of the world prices of metals.
According to an expert, today Kazakhstan, exporting about 90% of products of the mining and metallurgy sector, is capable to generate revenue of $70 billion to $80 billion. However, if we supply products of higher added value abroad, we have a chance to increase revenue ten times to a range of $700 billion to $3 trillion. In the meantime, as the analysis of the Industrialization Map shows, 83% of all costs for new mining and metallurgical projects go for production of products with high added value of the 1–3 grades.
And here's another point of growth. According to Kazakh scientists, about 17 mineral components contain in the ores of a mean deposit of non-ferrous, precious or rare metals are under developed. To ensure their full extraction, it is possible to extend the life of the deposit for another 40–50 years.
Thus, Kazakhstan has huge potential to enhance mineral extraction in the mining and metallurgy sector, but in order to uncover it we need to create an appropriate system of national administration of the sector, the mechanisms of scientific and technical support, and to adapt the regulatory framework.
By the way, Mr. Galiyev brought another interesting example by which one can assess the adequacy of public funding for exploration. According to world practice, to ensure sustainable growth and replenishment of SMEs, the government should subsidize to 10% of the total expenditures on exploration. For comparison, this figure for Kazakhstan is currently less than 1%. In this regard, a recommendation was included in the master plan to increase the funding of exploration to 5% of the mineral extraction tax, which will amount to about 30 billion tenge against the current 7 billion tenge.
In his speech, President of JSC Yuzhpolimetal Tursunbek Asambaev shared quite a radical approach of how to maximize profits from the mining and metallurgy sector. According to him, the lion's share of the proceeds from selling of futures contracts goes through the London Metal Exchange. "Brokerages companies of Western countries dictate the terms to global manufacturers of metals, including Kazakhstan. Our country annually loses more than $400 million, using the services of the international stock exchanges."
In this regard, Mr. Asambaev submitted to the executive committee of the Shanghai Cooperation Organization an offer to create the Metal Exchange "SCO Me." He proposes to lay the principles and best practices of brokerage trading in metals of the Shanghai Futures Exchange as the foundation for operation of the new metal exchange. The logic of the "innovator" is quite simple: today the SCO countries produce 50%–60% of all ferrous and non-ferrous metals. With this, China consumes 50% of the global metal output; Kazakhstan is a leading producer of uranium and chromium, while Russia is one of the largest players in the global mining and metals market. All this means that we can make an attempt to change the current game rules.
Mr. Asambaev suggests that the new exchange should have a decentralized structure. "It will be necessary to create three trade floors: in Shanghai for trading in basic nonferrous metals (aluminum, copper, lead, zinc) and precious metals, in St. Petersburg for trading in steel, rolled steel and diamonds, and in Almaty – for trading in uranium, chromium, rare and rare earth metals. "In his opinion, the proximity to the real centers of consumption will help minimize the speculative component of the pricing, having as the foundation the real cost of production and "live" demand for it.
Representatives of international businesses were talking about more "mundane things", mainly referring to the situation in the global mining market. Managing Director of American Appraisal Alexander Lopatnikov was quite optimistic about the long-term prospects for the industry. Metal prices, although they are stabilized, still remain with a trend to go up. The situation with the lull in the market of China, the main consumer of products of the mining and metallurgy sector, does not look dramatic at all. Even if China's economy was to move from the phase of the "double digit growth", which lasted 20 years, to a "one digit growth", yet it is not a fall. That is, in the next 10 years, the consumption of metals by China will double in any case. And someone will have to add just as much to production volumes.
Of course, over the last two or three years the value of shares of mining companies significantly decreased, the profits of servicing companies and traders reduced, who in the 2000s showed a 60% yield." The prices so became stable and reached levels that look more realistic in the long scale... This does not mean that the mining and metallurgy sector has no future. It’s because the time of easy money is coming to an end." According to an expert, the current uncertainty has a particular nature: the matter is not that we will grow at a crazy pace, or that we should expect a sharp fall – the industry cannot find its place in the middle between these two extremes. The given lack of balance results in aspiration of companies to lower costs and the increased difficulty with financing. In this situation, the key parameter for implementation of mining projects is to ensure an acceptable level of return on capital.
In his turn, Phil Nujol, Managing Director of the technical support service at Wardell Armstrong International, expects that the current problems with liquidity can dramatically affect the state of affairs in junior companies. In such circumstances, they will focus only on the most attractive and proven markets. Thus, the Kazakhstan mining sector, which had been for a long time a "terra incognita" for them, risks remaining in the same condition. Among the main reasons for the almost complete lack in our country of international investment in exploration of solid minerals, Mr. Nujol listed the recently elapsed four-year moratorium on issue of new exploration licenses, still insufficient guarantees of mineral rights, the ban on exports of intermediate products, a high proportion of state involvement in projects at quite rational tax rates, cronyism and corruption, and difficulties in obtaining documents and dramatically increased operating costs.
According to Chris Welton, Director of the Division of Geological Exploration in Central Asia of the Rio Tinto Company, the largest single method to improve the attractiveness of Kazakhstan's mining sector can be a change in the approach to provision of geological information. The state should uncover historical data, to conduct large-scale basic geological research throughout the country and to provide free access to the results so gained. He brought South Australia as a successful example of this approach, where any entity today can get detailed geological information on potentially promising areas on-line.
In principle, one can hardly call a revelation those problems which were raised by foreign investors and international consultants at the forum. Our government also recognized the existence of serious problems, and even tried to cope with them. Another thing is that in the condition of the moratorium in effect it was quite difficult to assess both the constraining effect of the factors; the experts were talking about at the forum, and the effectiveness of measures taken by government officials.
However, in the near future we will be able to dot all the "i"s. Toward the close of the Forum, the Minister of Industry and New Technologies Asset Issekeshev officially announced that in May they will start receiving applications from potential investors who wish to take part in the open bids for the provision of solid mineral bearing areas in development. The conducting of the bids is expected later this year. "After the recession, the bids are seen to become a landmark event for potential domestic and foreign investors... We are interested in investment and technologies and intend to take all necessary measures to ensure the boost of operations in geology and the mining industry. We hope that many new projects will appear this year. "Time will tell to what extent the optimism of the Minister is justified.