Focus on Ñounter-Ñyclical Model
Kazakhstan’s mining industry has all the chances not only to overcome the crisis, but also to strengthen its positions in the global market. For this purpose, it is necessary to improve legislation, to continue investments to development of the resource base and to increase productivity, as well as to adopt a more aggressive growth strategy. It was the summary, made by the participants of VI Astana Mining Congress.
The Astana Mining & Metallurgy Congress-2015 brought together about 600 delegates from 18 countries. The speakers of the event were the leaders of national companies, large metallurgical enterprises and international agencies, representatives of science and business from Afghanistan, Australia, Britain, Canada, China, Kazakhstan, Kyrgyzstan, Turkey and France.
The main topic at the Congress was defined as "Mining Industrial Policy: Investments, Modernization, Production. During the Congress, the most urgent issues were discussed: investments in the mining and metallurgy sector, governmental support and development programs, advanced techniques in exploration, energy efficiency and safety at the workplace, dynamics of global prices and demand in metals, development of manufacturing industry in order to ensure the sustainability of the economy against the backdrop of the worsening situation at the global commodities markets.
In addition, the exhibition was held within the frameworks of the event, gathering up to 40 companies from 9 countries. This year the exhibition has a new section – "Made in Kazakhstan for Mining Industry”, showing the products of the local manufacturers.
When opening the plenary session of the AMM, the First Deputy Prime Minister of Kazakhstan Bakytzhan Sagintayev stressed out that the mining-and-metallurgical complex remains one of the key sectors of Kazakhstan's economy. It accounts for 19% of GDP, and the industry employs 300 thousand people. In the face of recent challenges, related to the deterioration of the situation in the global metal markets, declining exports, volatility of exchange rates, the Government was doing everything possible to ensure the competitiveness of domestic metallurgical products. So, last year the first five-year industrialization period was completed; within its frameworks, 60 new plants worth $2.5 billion are commissioned in the mining industry and more than 16 thousand permanent jobs are created. 6 more projects will be launched in the current year.
Further, the policy of the State in the mining industry will be connected with the Program of Industrial & Innovative Development for 2015–2019, which stipulate the black and nonferrous metallurgy as the priority areas. According to Mr. Sagintaev, the main challenges for the steelmakers will be the capacity expansion by the existing enterprises, creation of new metal production facilities and subsequent processing, increasing the productivity, provision of infrastructure for the investment projects, as well as stimulating the export and local demands. For its part, the State promises to continue raising investment attractiveness of the sector. "From the legislative viewpoint, it was already stipulated to introduce new incentives for the investors, to extend the investment preferences and other measures. Due to the timely adoption of the Government plan of action for supporting the industrial enterprises in 2015, we were able to maintain and increase production in the mining and metallurgical industry.
Set of systematic and focused measures, ensuring the state support for the major companies can stimulate the related small and medium-sized production facilities by providing raw materials and purchasing their products. These measures are already giving the results. According to Mr. Sagintayev, based on the results of 5 months of the current year, compared with the same period of the last year, production of metal ores increased by 3.6%, while the volume of metal production increased by 15.6%.
Another challenge was identified in the frameworks of 100 concrete steps for carrying out the institutional reforms in Kazakhstan, declared by the President. It involves engaging the globally recognized transnational corporations into the local mining industry. Moreover, the Government intends to strengthen the development of Kazakhstani brands in the industry, in particular, to increase the share of local titanium in the world’s segment from current 11% up to 20%.
The mining industry shall pass to a simplified method of granting the subsoil use rights, based on the model of Western Australia, using the "first come-first received” principle. The process of implementing the international system of mineral reserve reporting standards CRIRSCO started, as well as an active development of the Subsoil use code.
In conclusion of his speech, Mr.Sagintayev recalled that Kazakhstan is now preparing for the World Mining Congress in Astana, to be held in 2018, which will showcase the results of all the identified tasks.
Meanwhile, some of the initiatives of our officials were implemented directly at the site of the Congress. So, the Chairman of the Board of Kazgeology JSC Galym Nurzhanov and Vice President of "Korea Resources Corporation (KORES)” Shin Kim Hym have signed a memorandum of understanding on the implementation of joint projects in the East Kazakhstan region, identifying new fields with reserves of polymetallic ores. In addition, the Head of Kazgeology informed that in the current year, the exploration of polymetallic ores will be started at Dyussembay area, Karaganda region.
In his turn, Mr. Shin Kim Hym, commenting on the achieved agreements, expressed the readiness of his Corporation to contribute to the industrialization of Kazakhstan through the formation of an international competitive business model, which is an instrument of global cooperation between KORES and its partners. "KORES can share success story of industrialization of Korea and invite the leading private Korean companies in the relevant sectors, to contribute to this process. Korea is ready to become not just a business partner, but also a true friend who passes the experience and culture, based on mutual trust and understanding. "
Base for Metallurgists
This way the metallurgy is among the priorities of industrialization for the next five years. As to the mining segment, according to Vice Minister for investments and development Albert Rau, the task number one is to provide our metallurgists with reliable and sustainable resource base.
As part of the Integrated Plan for the development of mining and metallurgical industry in 2014–2018, 27 investment projects in this area will be implemented, totaling to more than $7 billion, which should be launched by the subsoil users at the expense of own and borrowed funds. "Presently, there are already 4 implemented projects: development of the ore bodies at the lower horizons of Tishinsky mine (Kazzinc LLP), construction of gold extraction plant with a capacity of 2.4 tons of the gold cathode per year (AK Altynalmas JSC) and Taskoryn gold extraction plant (Taskara LLP), as well as production and processing up to 450 thousand tons of gold-bearing ores to produce Dore gold in Zhitikara town (Brendt LLP). The amount of investment for these projects amounted to about $122 million for 2014–2015.
Speaking about the most significant projects under implementation, Mr. Rau highlighted the construction of Aktogai and Bozshakol Mining Plant, upgrading technologies at Zhezkazgan group of the copper deposits, exploration of polymetallic ores at Shalkiya, polymetallic ores at Alaigyr deposit, as well as Massalskoye iron ore deposit.
They all focus on introduction of modern technologies and the maximum production efficiency. "When we are saying how difficult is to operate in the absence of direct access to the world markets, high transport costs, etc., everyone shall understand that there is only one solution: increase productivity, reduce energy intensity, improve the quality of our products.
The best example in this regard is the project of Bozshakol Mining Plant: "I would like to stress out that Kazakhmys Corporation produced about 35 million tons, given the number of workers, reaching 45 thousand. Now Bozshakol will employ 1 500 people, with a comparable volume of 30 million tons of production. These are results of introducing the advanced technologies, which led to a significant improvement in labor efficiency.
The role of the national company Tau-Ken Samruk is clearly reflected in the plan. It will act as the operator of technologically complex and large-scale projects for the difficult-to-process ores, which proved to be too tough for the private business. At this point, they include the already mentioned Shalkiya, Massalskoe and Alaigyr deposits, which require prior preparation and public funding to involve the investors.
Completely new projects for Kazakhstan will also be developed. They include Gornostaevskoe cobalt&nickel deposit, developed by SAT & Company. "It will be one of the world's first plants for processing the poor oxidized cobalt-nickel ores with the release of nickel matte and cobalt”.
The Chinese investors have great plans for our mining industry: they are considering participation in 14 joint projects in this area.
In conclusion, Mr. Rau said that the implementation of the comprehensive plan will provide work volumes for the domestic metal enterprises and it will allow expanding the export destinations: "Taking into account completion of the exploration and development of new deposits, we are ready to consider your suggestions for updating the plan. On behalf of the Government, we can say that we will not allow depleting the ore base in any sector or sub-sector thereof, ensuring the balanced development of mining industry-from exploration and production to subsequent processing”.
The Code Again
One of the central themes of the AMM is the adoption of the code of subsoil use in Kazakhstan. The works are conducted from September 2013 onwards, when the corresponding task was set by the President. The preliminary version of the document is ready; the final text is scheduled to finalize in the autumn and it shall be submitted for consideration in the Parliament in October.
Meanwhile, Nikolay Radostovets, Executive Director of the Association of Mining and Metallurgical Enterprises, the representatives of mining industry still insist on adoption of a separate mining code: "Recently we held a round table with participation of the Association and the majority of experts believe that the miners should have their own code... It was a matter of principle, because we cannot have a common understanding with the oil companies on many issues, since we have very different specializations”.
Therefore, he urged his colleagues to speak with one voice and to support this idea. "We clearly understand that already in 2016 the industry would have another legislative and tax field and, generally, another understanding of the prospects of its development. Considering the tasks, set by the President, not only the mechanism of permit issue is simplified, but the attitudes are changing, too".
Mr. Radostovets invited the delegates to discuss a number of issues that should be incorporated into the new Code. The first of them is a clear conceptions and terminology: "It is a must to determine such concepts as primary processing, subsurface use, geological exploration, enrichment, following extraction. Presently they are not determined and we have problems and disputes with tax authorities all the time.
The second issue, which first and foremost is sensible for the big players, is a threat of renegotiation of the existing contracts for subsoil use, due to transition to the new licensing model. According to Mr. Radostovets, the rules of the game shall be kept for the projects, which are already under implementation and they shall remain unchanged until the expiration of the contracts. Besides, he proposed to continue the practice of concluding contracts for particularly large, strategic assets and deposits.
The next point is how to keep stability of subsoil use terms and conditions. "If a licence will stipulate the stability, but the tax code will change, whether these changes will apply to us? If suddenly, the Government will propose to increase the tax on natural resources production or something else. We would like to have a clear protection of the investments and stability of the tax regime for subsoil use. Mining and metallurgical business is not trading; the contracts and reimbursement of investments often take decades and it is required to clearly understand that in five or six years, there will be a stable support for us.
Another cause for our concerns is whether the new Code will abolish the priority right of the State to acquire the transferred rights to subsoil use. Let us remind that a proposal to exclude such a rule, while retaining the permissive mode of transfer of rights, is among the recommendations of the OECD experts for Kazakhstan. However, while the Government was inclined to retain the commercial interests in the part of strategic deposits, which is not inspiring for the investors.
Of course, the main lobbyist of the miners and steelmakers could not ignore the tax issues. In his opinion, the financial and tax authorities finally realised a very important thing: "Representatives of the ministries of economy and finance acknowledged that in recent years they overcharged the subsoil use sector. When creating incentives for individual entrepreneurs, everyone hoped that the SME will develop rapidly, but the result was not achieved. Therefore, now its time to decide how to liberate the subsoil use sector from its burden and to give it greater incentives. The internal return in the mining projects of Kazakhstan is smaller than in the countries, which experience we adopt”.
In this connection, Mr Radostovets spoke of number of provisions, which must be consolidated in the new Code. Firstly, to abandon initiatives on blurring the tax boundaries between the subsurface use and business activities in general. Secondly, to stop the practice of charging the Corporate tax from losses of subsoil users, providing a possibility to deduce the exploration costs. Thirdly, to cancel VAT for exploration, payment signing bonus and bonus of commercial discovery, simplify VAT refund on turnover at a zero rate, as well as to solve all issues, related to the historical costs.
The last point is especially critical for the subsoil users in connection with the request of the President to consider the possibility of VAT replacing by the sales tax. "We need to keep VAT for the subsoil use, since the practice of sales tax is, firstly, not clear for us. Secondly, everyone asks the same question: if the State adapts a different system, then what will happen with the historical debts- maybe all the related discussions will be terminated?"
In conclusion, the head of the Association emphasized that a difficult economic situation in China and Russia significantly reduced the possibilities of domestic exporters, and, therefore, an issue of more effective competitiveness of the mining industry shall become the number one priority.
However, some other speakers didn’t share the pessimism of Mr.Radostovets regarding the external situation. For example, the Chairman of the Board of KAZ Minerals Plc Oleg Novachuk is convinced that in the next ten years, the copper market will be the most promising one.
As an argument, he cited the plans of the Chinese Government to relocate around 340 million ethnic Chinese from South-East to the West of the country. A year and a half ago, it was decided to construct more than 150 cities with a population exceeding 2 million people until 2030. "It means construction of power lines, and use of various materials for the pipes, air conditioning and much more. Despite the present price fluctuations, the copper consumption in China in the medium term is just unprecedented". This copper would be demanded by the North and West China, where the main smelting plants are located. Whereas, the concentrate from Chile, Australia, South Africa comes to the ports in the South-East. The deliveries through the country will result in enormous transport costs, as well as the necessity to build new infrastructure and roads, which is very expensive, too. In this regard, Kazakhstan becomes one of the most profitable suppliers of copper for Northwest China projects. This prediction was taken by the management of KAZ Minerals for the investments to exploration of Bozshakol and Aktogai. By the way, according to the statistics, currently these 2 projects accounts for 68% anticipated growth of probable copper production in the CIS and 23% – compared to the rest of the world.
"The most encouraging thing for us is that so many companies are being guided by the fact that if the copper price has dropped, the investment should be immediately suspended. Normally, the companies, listed at the international stock exchanges, are forced to adjust to the opinions of their major shareholders and unfortunately, they are focused on very short-term perspectives.
Mr Novachuk recalled that the decision on construction of Aktogai and Bozshakol was taken in 2008, just before the copper prices collapsed from $9 thousand to $3.4 thousand per tonne, causing a real crisis in the industry. "We have experienced tremendous pressure from our foreign shareholders that the project should be shelved, but in spite of this, thanks to the support of our President and Government, we were able to successfully negotiate with China Development Bank and we raised $4.5 billion for the period of 15 years. We will use the money only for construction of these new projects”. According to the Head of KAZ Minerals, such conter-cyclical strategy will allow the company to increase sharply its production during new price peak at the copper market, which, according to his most skeptical forecasts, will occur in 2017–2018.
Super Cycle Lessons
Head of EY Global Practice (audit services for mining and metals companies) Alexey Ivanov shared his vision of new risks for the mining industry, which arose as a result of the completion of the high price super-cycle.
The first one is the increased volatility of both commodity prices and exchange rates. In such circumstances, hedging becomes one of the key elements of long-term planning for the companies.
The second challenge, especially urgent this year, is a need to improve the productivity, which fell considerably over the past 15 years. For example, the coal companies in Australia has this indicator declined by 50%. It is clear that the profitability can be restored at the expense of common downsizing and reorganization of the production chain. This is a fairly easy way, and many players have already done it. However, in future, more large-scale changes will be required, including revising the mining plans, technical overhaul, etc.
The third point is more prudent and judicious use of capital. Now the main indicator of the business efficiency is not the total revenue, but the return on invested capital. And it shall be expressed as a percentage, rather than in absolute values. During the period of constantly rising prices, nobody paid attention to this factor. As a result, nowadays 69% of all major investment projects in the mining and steel industry of the USA faced exceeding cost estimates, dozens of them are behind the schedule. “Similar situation is seen in Russia and Kazakhstan, and these funds mean the losses, including the credit resource losses”.
According to Mr.Ivanov, given the new circumstances, it is required to restore the sales and marketing departments. "Even such apparently non-commercial sector as mining, there are still possibilities to make money. It includes e-commerce, which is now supported by all major mining and metallurgical enterprises, including digitalization.
The next risk is the nationalization of the resource base. During the crisis, an increasing number of states have tightened the rules of the game, using such tools as the principle of “develop or go”, etc. "Of course, all these factors shall be taken into consideration. Another thing that one needs to understand: if you use something against an investor at least once, it will be remembered for many years to come, by dozens of other investors,"-warned the speaker.
According to him, when confronted these or other risks, the global players firstly re-assess their business models, taking volatility, extend terms of strategic planning, increasing investment in research and development into account .
In conclusion, the EY representative voiced some tips for the mining enterprises of Kazakhstan. To attract the investments for exploration and development of junior companies, he proposed to create a junior exchange, following the example of Australia and Canada. The second tip is to tighten requirements in part of enrichment, which would increase value-added production chain. Because the higher the frontier-the more money stays in the country. The third point- stimulating M&A deals and nurturing the national champions. "I think it is required to review the core competencies, to understand where the Kazakh industrial leaders might be on 1st-2nd places worldwide and try to increase their global presence. For example, such examples as the plans to achieve 20% in the titanium market shall be expanded, given that the commodities and production base are available."
The last tip fro, the expert is to ensure a transition to counter-cyclical development model: "Last year, we thought that performance increase is the most important challenge to the mining industry, but our new review of business risk is now focused on the ability to return to a growth strategy. Despite the certain depression, many players began to plan their growth and they plan it based on counter-cyclical model. This kind of thinking will result in greater benefits from the natural resources for the state and companies”, – summarized the speaker.