Ready Metal Products – as the Pay for Subsoil Use
In expectation of positive changes in the economy, the Kazakhstan government is going to toughen requirements to foreign mining companies in taxation and expansion of product range.
The Cabinet of Ministers is planning to soon toughen requirements to foreign companies producing raw material in Kazakhstan. Those engaged in subsurface mineral production will be charged extra taxes and be bound to set up new industrial sites in the republic. The proposed measures are connected to basic metal prices restoration and the anticipated way out of the world economic recession.
This unpleasant to foreign investors news was delivered by Kazakhstan’s head of the government Karim Masimov and the Minister of Industry and Trade Aset Isekeshev at the second congress of mining & metallurgy sector participants held on December 10, 2009 in Astana.
“The mineral resources belong to Kazakhstan’s nation. They are given to you in temporary use. They are not your property. Thus, in the condition of the crisis, the taxation was reduced’, Kazakhstani leading news agencies cite Mr. Masimov’s words. – Let’s admit the fact the measures were taken, and the existing pressure was removed. When prices are at the peak, part of the rent will be cut by the government due to increasing taxation of mineral producers”.
According to the forecast of Kazakhstan’s Prime Minister, the prices will be at a peak in one-two years. “In 2010 the situation is expected to be fluctuating, but not as much as in 2009, while in 2011–2012 we will see growth again. Perhaps, in the coming decade another crisis is likely”, he summised.
To survive all this successfully, Mr. Masimov proposed the investors to count on what is the customary specialization of the country. “We are already battle-hardened, as we have experienced the USSR dissolution and the aftermath of this and the current world economic crisis. I think that one of the most important lessons is that the countries should sustain their customary sectors, which they see as the locomotives at the time of crisis”.
According to Mr. Masimov, these sectors in Kazakhstan are mining & metallurgy, the oil & gas industry, and agriculture: “We have to focus a lot on these sectors and provide more beneficial conditions for their development in the coming years”. Among these conditions the Prime Minister pointed out the arrangements with Russia regarding the proposed reduction in railway tariffs for transportation through its territory of products of the mining & metallurgy sector of Kazakhstan and the opening of new railway routes through China and Turkmenistan.
Minister of Industry and Trade Aset Isekeshev added to the list of “favorable conditions”, proposing to bind the mining companies to produce basic metals right in the republic. In his opinion, “if required industrial facilities are available to carry out further processing to create the chain of products in Kazakhstan, it is expedient to counter-stimulate the export of raw material, such as ore and concentrates”. To implement the above-said measure, Mr. Isekeshev considers it necessary to amend the legislative acts accordingly. In particular, he proposed to provide in the mineral production contracts for the requirement to organize production of basic metals.
The Minister explained that at the initial stage the given innovation will relate only to the companies that are developing large metalliferous deposits.
Also, he proposed to transfer to the Ministry of Industry the functions on approval of mining plans in the part of solid minerals production, “since the working out and implementation of the government policy on the mining & metallurgy sector’s development is within the competence of our ministry”.
Along with that, the experts believe that not all mining companies in Kazakhstan will be able to organize production of basic metals on its territory. In particular, according to Mining Capital Ltd.’s Managing Director Almas Kudaibergen, “large investments are required to set up such production, the problem which small and medium companies will not be able to cope with in the coming few years due to the crisis”.
Commenting on the government initiative, he noted that “the given requirement is the timely and natural response of state agencies to the actions of mining companies, since a big share of raw material goes for export to overseas countries”. However, not all large companies will be able to meet these requirements. Besides, in the opinion of Mr. Kudaibergen, “the requirement on organization of basic metals production is quite tough, which, in its turn, can lead to reduction of investment attractiveness of the mining sector”.
It is fair to note that our government’s expectations of a favorable price situation are approved by the estimate of leading world experts.
Thus, the analysts of Australia’s Macquarie Group Ltd. raised the forecast of ferrous and precious metals value for 2010. Copper, coking coal, and iron ore are at the top of list of their recommendations. The increase in estimate is based, as before, on the boom in the China’s economy. The major motive power of the forecast for these raw materials is the anticipated growth of Chinese imports.
According to the Macquarie Group’s experts, the average price of aluminum in 2010 is expected at $0.9 per pound that is up 12.5% more than that of the previous forecast. This relates to the anticipated increase in expenses for electric power. They also raised their forecast of lead value by 9% to $0.93 per pound.
The forecast increased by 13% to $18 per ounce for silver, by 14% to $1,150 for gold, by 14% to $1,413 for platinum, by 8% to $338 for palladium, and by 50% to $3,000 per ounce for rhodium. At the same time, the expectations for uranium prices decreased by 6.5% to $54 per pound.
The coking coal, by estimate of Macquarie Group, will cost $180 per tonne, compared to the earlier expected $160. They increased the forecast for energy coal from $70 to $85 per tonne.
The analysts of Royal Bank of Scotland Group Plc (RBS) increased the aluminum and precious metals price forecast for 2010–2011. In their opinion, the average aluminum price in 2010 will be $2,200 per tonne (+10% to the previous estimate) while in 2011 it is expected at $2,400 per tonne (+9%). They increased the palladium price forecast to $400 per ounce for 2010 (+14%) and to $450 per ounce (+13%) for 2011. The gold in 2011 is expected to cost in average $1,075 per ounce (+10%). Along with that, the RBS experts decreased the uranium price forecast. In their opinion, the average price of the uranium oxide (uranium dioxide) concentrate (intermediate product of natural uranium processing into nuclear fuel) forecasted at $51 per pound (-13% to the previous estimate) for 2010 and $63 per pound (-24%) for 2011.
RBS says that the greater part of investors in 2010 will give preference to raw material assets, which are seen to be the basis of their investment portfolios. According to the poll conducted by RBS, 40% of 320 respondents told that they were going to invest their funds in raw material assets, mainly in energy carriers and metals, but stocks and financial instruments with the fixed yield. 15% more respondents said that they will invest funds in the stock market, while 12% of the others in the currency market. This is not of surprise, since from the beginning of 2009 the copper price has increased more than twice, oil has risen in price by 59%, while the S&P 500 index has increased by only 23%.
Concerning the attractiveness of certain precious metals, their hierarchy is as follows: Copper comes first, then lead, aluminum, zinc, and nickel. At the same time, according to the RBS analysts, the situation with the platinum and palladium prices is seen to be more promising in the future than that with the gold and silver prices.
As they said in The Mining Company LLC on December 21, 2009, which is the subsidiary of The National Atomic Company Kazatomprom JSC, the yearly plan of natural uranium production in Kazakhstan is already fulfilled: These are 13,500 tonnes (not less than 400 tonnes more is to be produced till the end of the year). Along with that, according to the consulting agency Ux Consulting, they expect that our major competitors, Canada and Australia, will produce 9,934 tonnes and 8,022 tonnes of natural uranium in 2009, accordingly. Thus, based on the 2009 year results, Kazakhstan will be ranking first in terms of uranium production in the world.
Compared to 2008, the domestic uranium production grew by 63%. This became possible due to putting into operation of new mines and increasing the industrial capacity of operating enterprises. Today, 21 uranium mines operate in the republic.
According to Kazatomprom’s Vice President Nurlan Ryspanov, despite the existing technological problems and large difficulties with supplying sulfuric acid for the industry in 2008 and early 2009, they managed “to overcome these hardships and reach the planned indicators owing to the efforts of the company’s staff and the organization of coordinated work with the Kazzinc and Kazakhmys Companies in the second half of 2009”. They expect in the company that with the development of atomic power engineering and reduction in supplies from secondary sources, a shortage of natural uranium will occur in the world from 2016. In connection with that, it is already planned in 2010 to increase uranium production in Kazakhstan to 18,000 tonnes.
Meanwhile, on December 16, 2009, following the increased forecast for the sovereign rating of Kazakhstan (“BBB-“/forecast “Stable”), Fitch Ratings changed its forecast of Kazatomprom’s rating from “Negative” to “Stable”. Also, it confirmed the long-term issuer’s default rating (the “IDR”) in foreign currency at “BBB-“ and the short-term IDR at “F3” for the National Atomic Company Kazatomprom.
By estimate of the Fitch experts, the company’s ratings reflect its strong position on the world uranium market. The favorable factor is that that the planned uranium production in 2009–2012 will be carried out in the framework of long-term contracts. The other positive movement is the high barriers to access, inherent to this sector, in which tough requirements to licensing and intergovernmental control operate.
The ratings take into account the ability of the company to successfully implement its large-scale expansion strategy with maintaining good indicators of creditworthiness. Thus, profitability on EBITDAR at the level of 28.9% and overall leverage of 2.1x in 2008 match the data on comparable companies, representing the extracting and atomic industries.
However, Fitch recognizes that the $1.5 billion intensive investment program of Kazatomprom for 2009–2012, most likely, will be partly financed from extra borrowings that can lead to a negative cash flow and exert pressure on the company’s creditworthiness indicators.
Besides, the Kazatomprom’s ratings take into account the limited diversification of business risks and high level risks on raw material commodities in view that the company is dependent on the volatile uranium prices. The given aspects can be smoothed to a certain extent due to anticipated vertical integration, shifting the accent in the future on the product of higher value added level in the value chain, and the current company’s strong position on the market.
The Fitch Ratings’s experts believe that since the Kazatomprom’s strategy is aimed at participating in all phases of nuclear fuel production, including the construction of nuclear power plants in Kazakhstan, this will allow strengthening the company’s strategic and operational importance to the state.
The Mining Company LLC is a 100% subsidiary of The National Atomic Company Kazatomprom JSC. Its major goal is the extraction and production of natural uranium and concentrate. The company operates at mines, which are in full ownership of Kazatomprom, and manages its participating interests in joint ventures based in the Southern Kazakhstan Oblast, Kyzylorda Oblast, and Akmola Oblast in Kazakhstan.
Based on the 2009 year results, Joint Venture Bogatur Komir is planning to produce 34.8 million tonnes of coal. Compared to 2008, the coal output reduced by almost 20%. The reduction took place affected by the competitive environment. Also the purchases by the regular company’s partners, the Ekibastuz hydroelectric power station-1 and the Reftinskaya hydroelectric power station, reduced considerably.
To ensure the steady operation in this condition, the company took a series of measures allowing working without loss and ensuring the necessary output. Thus, in the first quarter of 2009 the overburden operations at the Northern (Severny) open-cast mine were suspended for a half a year, while in June of 2009 the production and shipment of coal at the Bogatyr open-cast mine was suspended for a month.
Currently, Bogatyr Komir is implementing the program of renewal of mining equipment at the overburden complex. Having assessed the situation, the management of the company concluded that in the condition of the crisis it is more profitable to carry out a major overhaul and modernization of the excavators in operation than to buy new ones.
Industrial statistics for January – November
According to the Statistics Agency, in January – November of 2009, 3,739,000 tonnes of crude steel was produced in Kazakhstan that is by 7.2% less than in the first 11 months of 2008. Also, for the same period 2,730,000 tonnes of flat section (104.1% to the level of January – November of 2008) was produced, including 180,400 tonnes of tinned sheet iron and tinned plate (107%), and 528,700 tonnes of galvanized sheet metal (105.4%). Moreover, 1,318,000 tonnes of ferroalloy (85.9%) was produced.
Also, 4,714,900 tonnes (99%) of aluminum ore (bauxite), 1,579,000 tonnes (100.7%) of alumina, and 301,674 tonnes (90.2%) of raw zinc was produced.
Along with that, in the first 11 months 20.353 million tonnes of iron ore (100.5%), 28.562 million tonnes of copper ore (95%), 4.654 million tonnes of copper-zinc ore (101.8%), 6.556 million tonnes of lead-zinc ore (88.8%), 2.288 million tonnes of manganese ore (96.5%), and 3.755 million tonnes of chrome ore (94.3%) was produced.
354,800 tonnes (93%) of copper in concentrate, 36,800 tonnes (101.9%) of lead in concentrate, 385,900 tonnes (108.5%) of zinc in concentrate, and 5.437 million tonnes (79.4%) of iron ore pellets were produced. 329,921 tonnes of refined copper in the form blanks was produced, besides the sintered blanks, articles exposed to rolling, extrusion, and forging (less by 10%).
The output of refined gold and silver increased to 9.533 tonnes and 611.458 tonnes that is up by 30.1% and 7.4% more, accordingly, than in January – November of 2008.
The coal production in the first 11 months reduced to 90.604 million tonnes that is by 10% less than in the analogous period of 2008.
It is worthy noting that the mining industry in 2009 remained one of the priority sectors for investment. According to the statistical data, investments in the fixed capital in Kazakhstan in January – November of 2009 were KZT3,897.1 billion that is by 2.3% more than in same period of 2008. The mining & metallurgy sector was 33.1% of the aggregate output. Then comes transport & communications, holding a 25% share. Major investments were made by large enterprises; their share is KZT1,830.2 billion that is up by 7.7% more than in same period of the last year.