The dynamics of attractiveness

Mining, oil and gas sectors are the major donors of Kazakhstani economy, generating the lion's share of exchange earnings. In this regard, according to Amir Ginatulin, a leading geologist of Geoincentr LLP, a permanent governmental supervision and analysis of geological industry are necessary for investment attractiveness evaluation of specific minerals.

Since the first years of independence the Republic of Kazakhstan permanently attracts the attention of international investors. It is stipulated by the combination of such key factors as rich subsoil, a favourable investment climate, advantageous geographical location, stable political course of the country's leadership and its focus on business cooperation with the global business community.

The growth of investments in all leading sectors of the economy, particularly in the mining, oil and gas sectors, as well as forming the most favourable conditions for investors - this is the main purpose of the Law "On improvement of the investment climate," signed by the President Nursultan Nazarbayev in 2014.
Achieving this goal will be stipulated by multidimensional analysis of the current state and perspectives of mineral resources use, an important element of which is evaluation of specific minerals attractiveness in terms of investing in their production.

This evaluation is impossible without taking into account a set of factors - both those that favour  prospecting and developing deposits, and those that are related to risk factors. Among the first are, for example, a favourable economic and geographical position of the object (deposit), the economic importance of the established or expected reserves of mineral resources, availability of labour resources and well-developed infrastructure (roads, processing plant, distance to consumers, water availability and building materials), etc. Risk factors, in their turn,  may include high seismic activity, political instability, the presence of permafrost, high crime level, damage to the environment during the deposit development, unresolved technical problems with  mineral resources processing, radiation hazard, etc. It is obvious: when evaluating the attractiveness of a specific mineral resources, the degree of manifestation of each of these factors and integral estimation algorithm of their joint attractiveness play an important role on a nationwide scale. In this case it is difficult to assume that there is a general algorithm, suitable for any conditions and different minerals. Probably, it should be about the expert evaluation of attractiveness, which is based on personal experience of one or, often, several high class specialists.

The task of quantitative evaluation of the attractiveness of mineral resources is proposed to be completed on the basis of an axiom: the more part of the country’s known specific mineral reserves (MR) has already been transferred under the contract to subsoil users for exploration and (or) production, the more attractive it is to invest. A numerical expression of the attraction in this context is the reserves share of this MR, constituted as a part of so-called Distributed Fund (DF).

The value of this parameter can vary from 0 (MR are not required by subsoil users) to 100% (all MR have already transferred to specific companies for subsoil use). Thus, it objectively reflects actual attraction of a specific MR at the moment (year). The parameter flexibly reacts to changes in various factors (e.g., market environment, risks, geopolitical situation, etc.). This allows to control the dynamic pattern of specific minerals attractiveness over the time and to anticipate its future changes. As a result, 3 groups of mineral resources can be allocated : 1) with a stable level of attractiveness; 2) with increasing level of attractiveness; 3) with unstable level of attractiveness.

Such analysis, in its turn, allows to see, which MR are currently in high demand and which are in a law one or not in demand (and therefore the Government, probably, needs to take special measures to encourage the prospecting and development of such deposits).

At the beginning of 2015 the most popular were deposits of hydrocarbon raw materials, non-ferrous (copper, lead, zinc, nickel) and black (manganese, chrome, titanium) metals, precious metals (gold, silver), as well as uranium, molybdenum, tin, vanadium, potassium salts, cadmium, barite, rhenium, asbestos, boron, and phosphorite. As it can be seen in Table 2, more than 75% of these discovered MR were in DF.

In turn, the deposits of aluminium, cobalt and dolomite were characterized as deposits with high attraction level (from > 50 to 75% of reserves were distributed). The deposits of bituminous and brown coal, iron, zirconium, tungsten and fluorite are of the moderate interest for investors (no more than 50%), and the deposits of tantalum, niobium, magnesite, zeolites (<25% – in DF) had minimal attractiveness level for investments .

Talking about the change in dynamics of certain mineral attractiveness, as it can be seen in Table 1, in the period from 2008 to 2014, a zinc had the highest level of attractiveness variability (among 18 explored and the most important MR). DF value of it ranged from 55.6% in 2008 to 93.7% in 2012. In other words, if eight years ago just over a half  of known zinc reserves balance was transferred to specific subsoil users for prospecting and (or) production, then in 2012 nearly 94% of reserves had "their owners”. 

The highest attractiveness (DF is about 100%) and at the same time the lowest level of its variability during this period was characterized by condensate, i.e. the contracts on production of almost all explored balance reserves of condensate in Kazakhstan were concluded with subsoil users.

In general, the analysis of change in dynamics of the Distributed fund shares over the past 7 years has shown that:

• condensate had a stable level  (DF value is from 99 to 100%), nickel (80-97%), titanium (77-79%), uranium (73-77. 6%), coal (33-45.6%), potassium salt (87-97%) and tin (about 89%);
• the dynamic growth of DF was shown by lead (from 47 to 87%), zinc (from 55.6 to 97%) and barite (from 42 to 79%);
• DF value of other mineral resources fluctuated irregularly. 
• the number of MR with the highest level of attractiveness has grown from 19 in 2011 to 24 in 2014. 

It is obvious that the most attractive for investors are those minerals that are not only positioned in a Distributed Fund, but has already been involved in varying degrees of industrial development.

As it can be seen in Table 3, the deposits of serpentine asbestos and chrome had the highest level of this indicator in 2014. The share of its reserves, involved in the development, exceeded 80%. In turn, the deposits of uranium, condensate, titanium and free gas (>50-75%) showed high level of industrial development. Involvement range for deposits of oil, gold, coal, dissolved gas, copper, silver, manganese, zinc, iron, phosphate, aluminium, cadmium and barium totalled from 25% to 50% of the reserves. Brown coal, lead, zeolites, vanadium,        molybdenum and fluorite showed the lowest level of industrial development (<25%) in 2014. 

Finally, the deposits of tungsten, cobalt, tin, nickel,  boron, potassium salts and zirconium, positioning in DF, were not developed at all. It appears, that public authorities, overseeing fulfilment of contract terms by subsoil users, should strengthen control over this field in order to avoid speculative activities. If the object is not involved in development for a long time, it must be transferred to the dutiful subsoil user in accordance with the established procedure.

Positive dynamics of mineral resources attractiveness in Kazakhstan is based on the fact, that our country has learned to compete with foreign mining companies and countries in the battle for investment. In the last years of independence only, a number of activities was implemented, enhancing the investment attractiveness of the whole economy and mineral complex in particular. For example, with a view to creating the most attractive work conditions for subsoil users,  geological information submission period is now reduced to 1 day, and the terms of contract award  to 25 days.

Due to selecting Australian model of subsoil use for its implementation in Kazakhstan, the arrival of junior companies is expected. The auction method for granting the right to subsoil use has been used since 2015. Adoption of the Codex on subsoil and subsoil use  in the coming years should lead to a significant increase in the number of subsoil users and volume of investment for solid minerals prospecting and production.

Forthcoming transition to international CRIRSCO standards for public reporting will further increase the attractiveness of subsoil use in Kazakhstan, because it will contribute to the best understanding between foreign investors and Kazakhstani experts, and Government agencies.

However, the necessity of further attractiveness increase requires addressing many complex tasks. Investors, evaluating the potential of Kazakhstan, as well as the possibility of profit-making in the short and medium term, pay attention to all aspects and conditions of subsoil use.

For example, as it was repeatedly mentioned by Galina Baymahanova, deputy and geologist, requirement for payment of commercial discovery bonus significantly reduces the investment attractiveness of high-risk geological prospecting. This position requires a revision in the legislation, especially in view of the fact that in recent years, as a result of major lack of funding of GPE, there are no discoveries of new deposits.

Large companies, interested in long-term cooperation with Kazakhstan, may be attracted by mineral resources, which can be used for clusters creation, oriented for output of 2-4 conversion products. However, the Kazakhstani scientists should conduct special studies. 

And of course, there is a need to analyse the reasons for the prolonged presence of the bulk of explored reserves, such as molybdenum, lead, boron, potassium salts, nickel, tin, tungsten, etc. in the Distributed fund, which are either weakly involved in industrial development, or are “frozen”             for an indefinite period . The result of such analysis should be concrete proposals for increasing attractiveness of these minerals.    

Table 1. Changes in dynamics of investment attractiveness of mineral resources (Distributed fund (%))

Table 2. Attractiveness evaluation of different Kazakhstani mineral resources in terms of investing

Table 3. 

  The level of actual involvement of major MR into industrial development*

* As at the beginning of 2015.