The Mining Congress. The Reason to Contemplate

At the end of June Almaty hosted the second Central Asia Mining Congress-2009. The forum was organized by Terrapinn, a Singapore-based firm, while the Eurasian Natural Resources Corporation became the title sponsor. This conference, unlike last-years event, was organized in difficult times for the mining sector; nonetheless, the composition of members has not lost its high status. Today’s largest dialogue area of Central Asian mining industry leaders gathered the representatives of state structures, mining and geological prospecting companies, global investors and financiers.       

The government presents new player

The congress started off with the first international presentation of the Tauken-Samruk National Mining Company, a new key player of the Kazakhstani mining sector. Unlike the oil industry, where the state interests were actively represented by KazMunayGas national company from the very beginning, up until recently the mining sector has been developing thanks to private capital. Thus in 2000-2007 private business invested about $17 billion in the subsoil use of solid and popular natural resources. In this period the republic has witnessed the emergence of large, export-oriented mining corporations that, today, hold leading positions not only in the regional, but also global scale.

However, the influence of the financial crisis led to a diminished demand for ferrous and nonferrous metals and, as a result, their overproduction and dramatic drop of prices in 2008. In these conditions in January of 2009 the government of Kazakhstan made a decision to establish the JSC National Mining Company Tauken-Samruk, the national operator for processing of ore and non-metallic solid minerals (SM).

Giving a speech at the forum, Murat Murtazaev, the CEO of Tauken-Samruk informed that the company will run active operations in the field of exploration, development, production, processing and sale of SM as well as reproduction of the mineral and raw material base. At the same time, Tauken-Samruk aims at both the implementation of certain projects and management of governmental stakes in the companies, operating in the domestic mining sector. Specifically, Tauken-Samruk will manage governmental holding of stock in such companies as ENRC, Kazakhmys, Maykain-Zoloto, Alash, and others.

According to article 71 of the Law On subsoil use, the National mining company gets the priority rights for acquisition of alienated subsoil use right and participating shares of legal entities, having the subsoil use right in Kazakhstan.

Further on, Mr. Murtazaev reminded that prior to the establishment of Tauken-Samruk the right for conducting direct negotiations with the competent authority on acquisition of subsoil use rights was granted to social-entrepreneurship corporations (SEC) and some of them already started the development of a number of SM fields. From now on, these projects will be managed by Tauken-Samruk.

"Today, numerous amendments in the acts of the President and RK Government are initiated in order to differentiate the functions of Tauken-Samruk and SEC. It is expected the SEC will concentrate on the development of popular minerals while the national company will operate in SM sector as well as process the anthropogenic mineral formations".

It is also clear that by establishing a national operation in mining sector, first of all, the government was going to consolidate the assets of the mineral and raw material sector and strengthen its positions in this strategic industry for Kazakhstan. The new company openly admits its interest in the establishment of joint ventures with strategic investors for the implementation of large investment projects. According to Mr. Murtazaev, the company has already initiated the organization of direct negotiations on such projects as production and processing of iron ore at the Southern-Lomonosov field, the development of the Chernigov field chisel coal by the method of underground gasification in the Kostanai Oblast as well as the Zhetymshoky copper field in the Karaganda Oblast. The CEO of Tauken-Samruk also said that, today, the company signed the memorandum of cooperation with such international companies and financial institutions as Renaissance Capital, national mineral resource company of South Korea etc.

Also, Tauken-Samruk carries another, sort of anti-crisis, function. The company is studying the opportunity to acquire participating shares in mining enterprises, facing financial difficulties, including the issues with floating funds, the completion of earlier initiated investment programs or the launch of production, repayment of debt on loans etc.

"Today, there are a number of projects in Kazakhstan with 50 or more percent of completion. We can support their further development through the Development Bank of Kazakhstan, which is also a member of the Samruk-Kazyna foundation", Mr. Murtazaev concluded.

The raw material constitution of Kazakhstan

Our country that has advanced way ahead of our neighbors in terms of the development of subsoil legislation continues the reforms. Bulat Uzhkenov, the Chairman of the Committee for geology and mineral resources under RK Ministry of Energy and Mineral Resources, presented a new draft law On Subsoil and Subsoil Use to the congress participants that must substitute both same-name Law and the Law On Oil.

According to Mr. Uzhkenov, this important draft law, initiated last year, produced many debate rounds. Several times it was discussed by market participants, legal and consulting companies. It was presented in parliament, government and industrial conferences. Today, the law has already been examined by Mazhilis. In November it will be considered by the Senate while in December it will be directed to the President.

Mr. Uzhkenov notes that the major goal of the new law is to simplify the state regulation procedures in the field of subsoil use, based on maximum consideration of state and subsoil users’ interests as well as to establish a transparent system of relations between them. The new law must ensure the observance of the direct action principle along with minimization of blanket (reference) rules. For instance, the current Law on Oil contains 42 blanket norms in its 55 articles.

Among other major innovations of the draft law there is the abolishment of contracts for joint exploration and production of mineral resources as well as cancellation of subsoil use contracts division in PSA, concessional, service and mixed. Instead, a new classification is introduced based on operations, the contract is offered for; specifically – this is the contract for exploration, the contract for production and the contract for construction or exploitation of underground structures, not related to the exploration or production.

At the same time, the draft law clearly regulates the issue of transferring from the exploration phase to production. The subsoil user, which discovered and estimated the field, based on the exploration contract, will have an exclusive right to sign the contract for production without public bids. At the same time, the term of exploration contract is limited to six years without the possibility of extension. Additional time is provided only in the case of successful discoveries of the field for evaluation of its reserves. In the opinion of Mr. Uzhkenov, this will allow accelerating research and evaluation works and industrial launch.

The list of criteria, defining the selection of the winner, was reduced to three positions in order to simplify the procedure of offering the subsoil use right. These are the declared subscription bonus, the size of transfers in the local budget for socio-economic development of the region and infrastructure, as well as the volume of Kazakhstani participation. The payment of the subscription bonus is also altered. In the past it was paid immediately after signing the contract; from now on, the company, winning the bids, will pay 50% immediately and 50% after signing the contract. The total period, offered for signing the contract, will be limited to 18 months since the date of tender results announcement for exploration contracts and 24 months for production contracts. The initiators of the draft law believe that this is enough time in order to prepare and approve the contract, based on project decisions.

By the way, according to the new law the basis for running subsoil use operations will be specifically the project documents and strict observance of made decisions. At the same time, in order to minimize the number of various authorization documents the yearly work programs will be cancelled since they totally duplicate the project decisions that served as the basis for signing the contract. "The purpose of this law is to put the project decisions as priority. If the subsoil user follows them we have no claims against him", Mr. Uzhkenov commented on the innovative approach.

The last point, raised by the Head of the geological department, is related to the issue of ensuring the economic security of the state. The draft law indicates a detailed procedure for the use of government’s priority right for acquisition of subsoil rights, its shares, stakes and holdings of stocks. At the same time, the decisions will be made, based on the proposals of a special consulting and advisory body – the interdepartmental commission for exercise of government’s priority right.

Mr. Uzhkenov also points out that this measure will help counteract corruption since "the decisions on specific issues in the field of subsoil use will be made not only on the basis of a single opinion of the state body, but to be built on collectively prepared proposals".

It is worth mentioning that the last postulate is not ideal at all. Thus, it is not quite clear how the responsibility for this "collective decisions" is shared in case they were made by mistake.

Kyrgyzstan changes the rule of games

The radical changes in the legislation, regulating subsoil use, are also planned by our closest neighbor. According to Kapar Kurmanaliyev, the Chairman of the State Agency for Geology and Mineral Resources of Kyrgyzstan, 14 large fields in this country had been prepared for development in the Soviet Union. However, except for actively operating Kumtor, the other projects have not been developed by the investors.

At the same time, the two-year negotiations with CenterraGold (major shareholder of Kumtor Gold Company) on increasing state participation in this largest gold production project gave the government "enough experience in order to process deep and accelerated reforms". In accordance with the KR Presidential decree, dated June 12, within the next 6 month the legislation on subsoil, subsoil protection, concession, mining concession and PSA will be totally revised; in addition, appropriate amendments in the Tax code are going to be introduced. Besides, Mr. Kurmanaliyev confirmed that the new legislation considers economic, legal and organizational principles, reached in the agreement over Kumtor. It has to be noted that the reforms of the mining sector are directly controlled by the President of Kyrgyzstan so that new laws could be passed out of turn.

The main concept of these innovations is the introduction of economic methods of industry regulation. Thus, three concepts were introduced: royalty for extracted mineral resources; bonuses, to be paid for the subsoil use right upon its granting; payment for retention of licenses.

"The payments will work on the certain mineral resource with geometrical progression increase from the first to the fifth year; further on, they are going to be increased by 20%. In the first two years these will be rather symbolic numbers. In the third and fourth years there will be a significant increase. In the fifth year this is going to be quite serious amounts. Speaking of a license for the development of the mineral resource field they will reach about 25% of projected royalty".

A Kyrgyz representative noted that payments on license retention are calculated in a way that they do not exceed 1% of total investment volume, necessary for studying the subsoil and field preparation for the commercial launch. However, for the companies, that "are new in the mining industry, lack proper experience and funds for field development, but retain licenses" these payments will be difficult to pay. Their non-payment will be the reason to consider the case in the court and call off the license. "Therefore, the legislation targets at competent investors, having the experience in the mining sector that can take the fields and launch them".

In exchange Kyrgyzstan promises the partners, investing funds in its mining sector, the protection of investment as a private property right. Moreover, all the administrative limits are going to be removed, except for subsoil protection, labor protection, technical and industrial security and ecology. Kyrgyzstan offers an unconditional and exclusive right for transformation of license and right of enjoyment on PSA concession from research to development of the mineral resource fields. Moreover, the investors are offered the right of independent selection of the order of subsoil use, be it license, concession or PSA.

"There will be no disturbance from officials. You either work or leave does not work here. Instead, we have you either pay or leave", Mr. Kurmanaliyev commented on the innovations. He also highlighted that the license for the right to use subsoil, based on concession, will be freely floated. However, upon transferring rights to third parties, the new owner will have to pay bonuses again. "We do not care if there are 10 such license transfers per day. The main thing is that the bonus will be paid to the benefit of state".

Responding to the question on stability, Mr. Kurmanaliyev underlined that it will be regulated by the agreement itself. "The legislation of Kyrgyz Republic is active at the moment of agreement preparation. However, once the contract is signed the regulation of relations between the state and the investor are based on the agreement only. At the same time, there is an option, assuming international jurisdiction right. Entire legislation, except environmental law, industrial security, subsoil and labor protection, will be stabilized either at the moment of issuing the license or signing the concession agreement".

This active legal creativity of the Kyrgyz government in the mining industry is quite reasonable. The Prime-Minister of this country stated that if the current holders of licenses for the 14 main mining fields do not make real steps in the near future then by the end of the year their licenses will called off unconditionally and they will be offered at tenders or auctions. Speaking of the general evaluation of all well-known mining assets in the republic the local geological service says that, overall, $240-260 billion will be needed for their development and exploitation costs. Obviously, foreign investments are vital here.

The investor challenge

Following Kazakhstan and Kyrgyzstan the representatives of Uzbekistan, Turkmenistan and Mongolia also reported the latest amendments in the investment climate and potential investor opportunities at the congress. It is clear that all of them declared openness and attractiveness for capital investment. At the same time, based on the opinion of foreign investors, many aspects of doing business in Central Asia are still very challenging.

For instance, the news about the establishment of the national mining company in Kazakhstan did not produce great optimism from investors. The point is that the experts believe that participation in a JV with state companies bears much more risks in the  view of corruption. According to Alisher Ali Djumanov, the Managing Director of Eurasia Capital Management, the membership in this project as a minority stakeholder gives much less opportunities to control the excessive expenses. Therefore, many foreign players prefer to acquire controlling stakes in private companies or minority shares in companies, whose shares are quoted in international exchanges. Another point, raised by the congress participants, is that state-owned companies sometimes make decisions, based on political reasons and not always oriented at economic output.

Speaking of selection criteria for this or another country as the target for investment the second biggest concern (after profitability) is political stability. "Our company has been working with Kyrgyzstan for 17 years and I have work here for 12 years. I witnessed 10 prime-ministers and 10 ministers councils. The most recent negotiations on Kumtor have lasted more than 2 years and the reason for this delay was the fact that during this period we observed the substitution of four prime-ministers and one parliament. Hence, the evaluation of political stability of the country along with clear investment legislation are major factors that need to be considered when doing business in this region", Andrey Sazanov, the President of Kumtor Gold Company, shared.

In his turn, Mr. Djumanov, having work experience in Uzbekistan, paid attention to the fact that thanks to its economic isolation this republic was barely affected by the crisis. At the same time, he advised to seriously think prior to making a decision to invest in Uzbek mining industry although it has some quite attractive assets there. "The environment is quite problematic. The government has the poor image that it violates the rights of shareholders. The investors need to look for the projects that are politically important such as leasing, insurance, and the consumer sector".

In this concern it is not news that investors still name Kazakhstan as most secure country in Central Asia in terms of capital investment. Nonetheless, the recent situation around Kazatomprom when the legitimacy of a deal with a foreign company, selected by the government, was questioned produced serious resonance. One of the conference participants noted "what is the point of investing in Kazakhstan if even in 5 years someone may show up and say that your property right is not effective anymore".

To memorize, last year none of the guests asked such questions in relation to our country. This means that we have something to contemplate… 

Editorial

KAZAKHSTAN International Business Magazine №3, 2009