NOVA ZINC DRIVES TO SUCCESS
By Mukhit Zhanasov, Chairman of the Supervisory Board, NOVA ZINC LLP
Kazakhstan, a country with rich natural resources and a highly skilled workforce, is experiencing an acute need for the efficient management of its huge potential. The resolution of this problem is largely associated with the attraction of outside capital into Kazakhstan’s mineral sector.
Although Kazakhstan has created a reasonably transparent and effective system for mineral resource extraction and disposal, based generally on effective laws and regulations, both the government and people of Kazakhstan are often dissatisfied with the results achieved by companies involving foreign participation. There are, however, several joint ventures within the industry which have successfully conducted and expanded their business in 1997-98, despite the drop in international raw material prices. One such company is the Nova Zinc joint venture.
In January 1997, the Swiss company Nova Trading & Commerce AG bought its Akzhal property from the Kazakhstan State Committee for Privatisation. In February 1997, a subsidiary company, Nova Zinc, was established to mine the Akzhal lead and zinc deposit.
Nova Zinc took over Akzhal when the Kazakhstani company was in a very sorry state: the main facilities had been idle for over six months; there was no power or communications provision, and no contracts with consumers of concentrates were in force. Added to this was a growing tension within the local community, which depended heavily on the company. In order to improve the situation, Nova Trading & Commerce AG began paying Akzhal’s wage arrears even before signing the contract with the government, under preliminary agreements with the authorised body.
The considerable wear and tear on Akzhal’s basic assets, and the critical state of the local infrastructure, both industrial and social, caused power supply interruptions and forced the joint venture to begin an urgent rehabilitation of its purchase. First of all, it repaired the boiler and damaged sections of the water main, thus securing uninterrupted operation of the company’s main workshops, and normal life in the town of Akzhal.
Then Nova Zinc bought a siding in Agadyr railway yard, new drilling equipment, quarrying machinery and trucks. A mechanical repair shop and an explosives production shop were built. New computer equipment was installed in Nova Zinc’s office in Akzhal. The mine rehabilitation programme cost the company $12 million.
These measures allowed Nova Zinc to report positive financial results as early as 1998, and then improve on them in 1999. It has no debts either to the national budget, or to its suppliers. Nova Zinc pays some 140-300 million tenge annually to the national budget in tax.
Currently, the Akzhal mine employs around one thousand people. The company has concluded a wage agreement with a local trade union. The wages are paid on time. Nova Zinc has introduced a health care programme with regular health examinations for its employees. In 1999, the Kazakhstan National Paediatric and Child Surgery Centre (Almaty) provided medical examinations and treatment for about 1000 children. Another contribution to community life by Nova Zinc is that Akzhal people can now make use of satellite communications.
Despite the fact that the contract signed with the government provided for the purchase of the Akzhal property without any social liabilities, the joint venture is helping people to overcome their problems. For example, Nova Zinc has granted interest-free credit to allow the company’s employees to move into the town of Akzhal.
Nova Zinc provided 15 million tenge to renovate the local school and purchase new school furniture and sports equipment. Last summer, the joint venture re-opened a summer camp for schoolchildren, having spent 4.9 million tenge for the purpose. It has also organised free school meals for children from families on low income.
In general, the company supports all the local low-income families; it pays for the higher education of local students; and it has helped farms in the Shetsky district to carry out a sowing operation, having provided a 2 million tenge credit. The company has purchased computers for the local internal affairs department. The total financial aid provided by Nova Zinc amounts to 35 million tenge.
Akzhal people are happy to live and work in the town, and trading partners are pleased with the quality of Nova Zinc products. The concentrates have a high mineral content without harmful admixtures. As a result, sales are sustainable and bring in good revenue. A number of foreign and local companies are willing to write long-term contracts for purchasing the concentrate, but the capacity of the mine is limited to 5110 tons of lead and 32,223 tons of zinc in concentrate.
In order to ensure further growth, Nova Zinc has begun construction of a heavy suspension facility for low-grade ores. This project will call for $2.5-3 million.
Overburden operations at the mine are being carried out at a rapid pace. According to the company’s experts, commissioning of the new facility in 2001 would increase the mill’s output by 50%, and processing of low-grade and unexplored ores would allow the life of the mine to be extended by 18 years. The joint venture is prepared to fund geological exploration in order to increase its mineral base.
Nova Zinc hopes that the government will appreciate the company’s efforts in constructing new facilities and will make a gesture toward the mining business by exempting it from income tax, duty payable on imported equipment and technology, and on any materials used for the production process which are not produced in Kazakhstan. These measures would ease the re-equipment not only of Nova Zinc’s production facilities, but also of the entire mining sector in Kazakhstan.
Growing production implies a growing market for selling the products. Initially, the company has supplied its concentrate to CIS consumers, and that proved to be sufficiently profitable. However, imperfections in the tax system have forced the company to re-orient itself toward the domestic market.
The lost CIS market, especially in Russia, is a contrary factor for all the local exporters. In our opinion, tax on exports to CIS countries should be fixed at a zero rate by a special agreement within the CIS framework. That would provide uniform conditions for exporters to both ‘far off’ and ‘nearby’ foreign countries. One such agreement, signed between the Uzbek and Kazakhstan governments in November 1999, has already smoothed the passage of freight between the two countries.
Further development of the mine is being hampered by a number of factors common to the industry in general. In this respect, special attention should be drawn to volatile tax laws: the tax code was amended four times last year. Another negative factor affecting the company’s financial stability is the uncontrollable tariff increases for services provided by large monopolies. Environmental costs also continue to rise.
These problems, crucial for local and foreign investors, and for the investment climate in general, await immediate steps from the Kazakhstan government. The mining sector has always been among the major sources of revenue for the country. In the event of the government taking the following measures, the mining sector will be able to ensure a stronger level of support to the nation:
• Rights and obligations assumed under a contract shall remain unchanged during the entire period of the contract. They shall remain constant even in the event of changes to the laws which govern the contract.
• More favourable royalty schedules for mining enterprises. The royalties shall be fixed and be determined in accordance with the value and recovery level of a deposit with the maximum rate of 1% of the sales. The royalties shall fall due after the sale of the finished products.
• Release from excise duty for goods used for production purposes by industrial companies.
• Reduced customs duties for imported goods. Exemption from duties on new machines and materials which are not produced in Kazakhstan and are brought into the country.
• Exemption of exports to CIS countries from VAT.
• Improved investor protection system and an improved mechanism for out-of-court settlement of disputes.
• Introduction of incentives for companies to develop small and medium-sized mineral deposits, e.g. reduced income tax.
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