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Metals and Mining in Russia and the CIS
Review of trends in the metals and mining industry
2011 Foreword
We are pleased to present the third edition of Metals and Mining in Russia and the CIS, a special PwC review of industry trends published on an annual basis.
As in previous editions, this year’s The 2011 edition is no exception, review includes our financial analysis and features a wealth of informative of the largest Russian, Ukrainian and and exclusive content. This includes Kazakh metals and mining companies articles covering the mineral resource that report under globally accepted base and industry development trends, standards (US GAAP or IFRS). as well as in-depth “Country in focus” Summarising their financial data has coverage of the investment helped us draw a general picture of environment in both Kazakhstan how the industry has developed over and Uzbekistan (the 2010 edition’s the past two-and-a-half years, from “Country in focus” was Ukraine). early-2009 to mid-2011. We selected We also feature two articles on highly John Campbell these companies because their relevant technical topics: practical financial statements are publicly project financing methods for exploring PwC Partner available and thus provide balanced and developing solid mineral deposits, Metals & Mining Leader and transparent data for analysis. with a focus on the early stages; for CEE and a new value driver modelling This year, we reviewed the financial methodology for resource extraction/ statements of 25 companies, versus processing that PwC specialists have 20 last year. Our survey now covers used successfully in their work with a number of the industry’s largest Australian mining industry clients. players in Russia and the CIS, such as Metalloinvest and KOKS Group, whose The editors of this year’s review have consolidated financial statements carefully selected content to address became publicly available only a wide range of critical and topical recently. We believe that expanding issues of interest to everyone involved the range of companies within our in the industry. coverage universe has helped us make this year’s review more informative We hope that you find this year’s and objective. edition of Metals and Mining in Russia and the CIS to be engaging and The results of our regional review informative. We would appreciate are in line with overall global metals hearing your comments, questions and mining trends, and reflect the or feedback about this publication, Alexei Smirnov industry’s global shift toward recovery as well as suggestions for future PwC Partner following the financial crisis. PwC publications. Metals & Mining Leader for Russia In addition to our financial analysis of the largest Russian and CIS metals and mining companies, we have traditionally featured expert articles on diverse topics of interest to everyone who works in or follows this critical industry. Table of contents
Financial analysis of the Russian and CIS metals and mining industry 4
Overview of trends in 2010-2011 5
Review of financial data points 8
Consolidated profit & loss statement 9
Prospects for the industry 12
Consolidated balance sheet 14
Consolidated cash flow statement 16
Articles 18
Debt financing options for mining projects in Russia and the CIS 19
Value driver modelling for mining operations (the Australian experience) 24
Country in focus: Kazakhstan Metals and mining in Kazakhstan 28
Country in focus: Uzbekistan - Metals and mining in Uzbekistan 34
Appendix 38
2011 Metals and Mining in Russia and the CIS 3 Financial analysis of the Russian and CIS metals and mining industry
4 Metals and Mining in Russia and the CIS 2011 Prices and demand for commodities began to recover in 2H09, a trend that continued in 2010. This has enabled the CIS metals and mining sector to regain sustainable profitability. In terms of financials, revenues and profits started to rise in 2H09, although FY10 results for Overview of trends the 25 companies in our coverage in 2010-2011 universe mostly came in below the record highs seen in 2007-2008. The sector recovery has continued to take hold in 2011, however, making our industry outlook upbeat
In PwC’s previous report In our last global mining report Metals & Mining in Russia and the CIS (Mine©, PwC, May 2011), we noted (November 2010), we pointed out that that in 2010 global macroeconomic and the decline in demand and prices for political trends changed the industry key commodities that began in 2008 landscape, which also affected Russia and continued into 2009 resulted and other CIS countries. Although in a significant reduction in revenues emerging markets have been leading and profits for CIS-based metals and in forecasts of long-term demand, there mining companies. Across the board, are still constraints on demand. companies reacted by lowering Moreover, the situation is further production, cutting exploration projects aggravated by the deterioration in and investment programmes, quality of mineral reserves and the need containing operating costs and to explore and develop even more restructuring loan debt. Alongside remote deposits. Given the rising cost government financial support curve, it is still a challenge for the programmes, these measures enabled industry to maintain financial stability. most companies to avoid bankruptcy, Yet, new players continue to appear mass redundancies and excessive and various stakeholders are showing inventory. increased interest in the industry.
2011 Metals and Mining in Russia and the CIS 5 7000
6000
5000
4000
3000
2000
1000
Overview of trends 0 in 2010-2011 11.01.200911.03.200911.05.200911.07.200911.09.200911.11.200911.01.201011.03.201011.05.201011.07.201011.09.201011.11.2010
MICEX Metals
* Source: Micex.ru The MICEX Metals Index includes market valuations of 10 companies: Polymetal, Norilsk Nickel, Severstal, Mechel, NLMK, Rusal, MMK, TMK, Raspadskaya, and VSMPO-AVISMA.
Taking the lead in overcoming the crisis Although the market has not completely recovered yet since the 2008 crisis, global mining companies still outperformed the market overall and were among the first to recoup their pre-crisis levels.
Commodity prices Compared to 2009 levels, 2010 was marked by a rally in virtually all commodity prices.
Commodity prices (2003 = 1)
6.000
5.000
2.000 Nickel Aluminium 1.000
0 2003 2004 2005 2006 2007 2008 2008 2009 2009 2010 2010 (Avg) (Avg) (Avg) (Avg) (Avg) (Avg) (Close) (Avg) (Close) (Avg) (Close)
Copper Gold Nickel Aluminium
Source: Bloomberg, AME overview
6 Metals and Mining in Russia and the CIS 2011 Market prices for basic commodities: 2003-2011
Copper Gold Nickel Aluminium USD/tonne USD/oz USD/tonne USD/tonne 2003 (Aug) 1,789 364 9,616 1,431 2004 (Aug) 2,868 410 13,840 1,717 2005 (Aug) 3,684 445 14,747 1,900 2006 (Aug) 6,725 604 24,270 2,568 2007 (Aug) 7,124 697 37,225 2,638 2008 (Aug) 6,938 872 21,048 2,567 2008 (Close) 2,902 862 10,808 1,454 2009 (Aug) 5,164 974 14,712 1,671 2009 (Aug) 7,346 1,097 18,712 2,197 2010 (Aug) 7,535 1,223 21,805 2,169 2010 (Close) 9,147 1,387 24,111 2,351 2011 (Jan-July) 9,433 1,463 25,333 2,546
Prices for many commodities grew steadily The average annual nickel price grew 29% throughout 2010 and have continued to do so year over year to USD 24,111 per tonne. in 2011. In 2010, strong demand from Asian Asian markets showed the strongest growth consumers lent support to the global metals in nickel consumption. As in previous years, market. Meanwhile, demand for physical stainless steel manufacturers remain the metal from consumers in developed countries main nickel consumers. In 2010, however, continued to recover, although it still lags the purchases from even these consumers pre-crisis level. One of the key reasons for were extremely unstable. This was due to higher metal prices has been the revitalised extremely high raw material prices and demand among global investors for related uncertainty among consumers about the derivative securities. prospects and pace of demand recovery. As a result, the volume of short-term Copper contracts with primary nickel consumers In 2010, copper prices grew steadily, in part grew. due to increased demand from the two most metal-intensive segments: electrical Aluminium engineering and non-ferrous metals In 2010, aluminium prices rallied up processing. In 1H10, copper prices fluctuated to USD 2,351 per tonne, representing between USD 6,500 and 8,000 per tonne. 40% yoy growth. For the past several years, However, after the resistance level of USD 8,000 China has taken the lead in global aluminium per tonne was broken in 2H10, prices began to production and consumption. In 2010, global grow steadily, exceeding USD 9,100 per tonne aluminium demand continued to recover, in late December to reach an average price of mostly thanks to improved economic activity USD 9,433 per tonne over January-July 2011. in Germany, South America and Asia, as a According to many metals analysts, demand result of expansion in auto and machinery for copper may remain strong for a long time, manufacturing, as well as growing sales of largely thanks to Asian demand. Global copper consumer goods sales that use aluminium consumption increases every year, largely due cans and packaging. to infrastructure development, as well as the auto and machinery industries. So, many Gold analysts expect that copper will be in short Gold remains the only commodity among the supply over the short to medium term. metals we cover that has seen a virtually uninterrupted price rise since 2003. Gold is Nickel traditionally considered a relatively safe Demand for nickel started to rebound, which commodity during downturns. In 2009-2010, has pushed global prices higher. Average the gold price remained between USD 1,000 monthly nickel prices in 2010 ranged from and USD 1,380 per oz and continued to grow USD 18,400 to USD 26,000 per tonne. in 2011, reaching USD 1,700 per oz.
2011 Metals and Mining in Russia and the CIS 7 Review of financial data points
8 МеталлургическаяMetals and Mining in Russia и горнодобывающая and the CIS 2011 промышленность в России и СНГ 2010 Consolidated profit & loss statement, млн долл. США
2010 2009 Change Change, %
Revenue 119,686 83,127 36,559 44% Operating expenses (80,966) (61,568) (19,399) 32% Adjusted EBITDA* 38,719 21,559 17,160 80% Amortisation, depreciation (7,050) (6,910) (140) 2% Impairment (98) (528) 430 -81% PBIT 31,571 14,122 17,449 124% Net interest cost (5,040) (3,735) (1,305) 35% PBT 26,531 10,387 16,144 155% Income tax expense (5,731) (2,505) (3,226) 129% Net profit 20,800 7,882 12,918 164%
* EBITDA, not including asset impairment losses
Revenues the industry’s main players and the related production growth. These Consolidated profit Aggregate revenues rose from USD 83 companies’ efforts to reduce operating billion in 2009 to USD 120 billion in & loss statement costs in 2009 by cutting payrolls and 2010, largely due to rising global other cost items did help somewhat to demand and prices for metals and improve operating margins. In mining products. Stronger corporate particular, in 2010 revenue climbed revenues are attributable to higher 44%, versus 32% opex growth, which commodity prices and increased pushed adjusted EBITDA higher. commodity production and sales.. Asset impairment losses Net operating costs Asset impairment losses decreased Operating expenses grew 32%, from considerably, which reflects the USD 62 billion in 2009 to USD 81 billion investment and operating efficiency of in 2010 due to expanded activity among companies as a result of recovered commodity prices and heightened confidence in future demand for products. This data point declined from USD 11 billion in 2008 to almost zero in 2010. This underscores a final revaluing of assets in the mining and steel industries after a sustained investment boom, and the market capitalisation growth in these industries, which saw significant adjustments in 2008.
2011 Metals and Mining in Russia and the CIS 9 Top five by total revenue
Название 2010 2009 2010 2009 компании USD bn USD bn Net margin % Net margin %
Severstal * 13,6 9,6 11% 0% Evraz 13,4 9,8 4% -3% Norilsk Nickel * 12,8 8,5 41% 29% Rusal ** 11,0 8,2 13% -1% Mechel 9,7 6,3 2% 1%
* The data do not include revenues from discontinued activity.
** Rusal’s net margin, not including profit from recovery of earlier recognised losses from a decline in value of its investment in Norilsk Nickel.
In the past few years, Severstal, Evraz growth was the rise in steel sales Consolidated profit and Norilsk Nickel have been leaders in from 14.3 million tonnes in 2009 to terms of total revenue, and have been 15.5 million tonnes in 2010 (up & loss statement recognised as the top three companies approximately 8%). Higher steel sales in the industry. reflect higher demand for construction and railway products in Russia, and Severstal posted significant revenue stronger total sales in kind on the growth, up 41% from USD 9.6 billion Russian market. Demand and sales on in 2009 to USD 13.6 billion in 2010. international markets improved as well, However, the 2010 figure is still below contributing USD 1.8 billion to the the company’s all-time high. In 2008, company’s 2010 revenue. Severstal posted revenues of USD 16.6 billion, even though sales of rolled This was not the first year that Norilsk products (its main product line) in kind Nickel outperformed its peers among in 2010 outpaced the same indicators Russian metal and mining companies. for both 2009 and 2008. The main In 2010, the company’s revenues soared reason for this divergence was the 50% to USD 12.8 billion, from average annual rolled product price, USD 8.5 billion in 2009. This was which failed to reach average annual mainly attributable to a significant rise price levels for 2008. Average annual in average prices for nickel, copper, prices for rolled products were palladium and platinum. Furthermore, USD 711 per tonne in 2010, USD 588 metal sales grew an average of 3-5% per tonne in 2009 and USD 996 per in 2010, whereas copper sales actually tonne in 2008. declined 6%. It’s notable overall that throughout the 2008-2009 crisis the In 2010, Evraz’s consolidated revenues company’s profit margin remained advanced 37%, to USD 13.4 billion rather high and among the best in the from USD 9.8 billion in 2009. Such sector. These achievements are robust growth is largely attributable to attributable primarily to stronger the higher average price for steel control over production costs and a lack products, which stood at USD 812 per of asset impairment losses in both 2009 tonne in 2010, up 25% from USD 650 and 2010. per tonne in 2009. Another factor in this
10 Metals and Mining in Russia and the CIS 2011 In the CIS, the top five metals and mining companies account for a significant portion (over 50%) of total industry revenues
In 2010, Rusal’s consolidated revenue alloy prices, as well as special anti-crisis climbed 34% to USD 11 billion, from cost-cutting measures taken in 2008- USD 8.2 billion in 2009. This growth 2009. These included an effort to reduce was primarily secured by a 36% rise utilisation of the least efficient facilities, in the average aluminium selling price arranging raw materials and electricity compared to 2009. In addition, sales supplies more efficiently, and reducing grew 0.4% to 4.1 million tonnes administrative expenses. in 2010 from 4 million tonnes in 2009. Mechel’s revenue grew 56% to USD 9.7 Alumina sales also soared, due to both billion in 2010 from USD 6.2 billion in the average selling price and stronger 2009. This is largely attributable to output capacity in tonnes. Rusal’s net higher coal and metal prices, and an margin remains among the strongest in increase in sales in kind. the industry. This success is primarily due to high aluminium and aluminium
2011 Metals and Mining in Russia and the CIS 11 20092009 revenue Re distributionvenue dist rbyibu segmentstion by segments Revenue2010 distributionRevenue dbyis segmentstribution by segments of the metal and mining industry - 2010 and 2009
3% 3% 8% 3% 8% 3% Steel Steel 3% Aluminium 4% Aluminium 3% 4% Nickel Nickel Gold Gold 10% 54% Copper 11% 53% Copper Diamonds Diamonds Coal Coal 15% Other 15% Other
Steel Over the past three years, more than 50% of revenue in the CIS metals and The CIS steel industry is made up mining sector was generated by steel largely of vertically integrated producers. In 2010, the steel segment companies. Most large steel accounted for 61% of total revenues manufacturers own their coal mines posted by the top five companies and iron ore deposits, providing them in the sector as a whole. In addition, with a steady supply of raw materials three of the top five companies were for their own steel mills. Prospects steel manufacturers. The steel segment Several CIS mining companies consists of large companies that operate of the industry generate significant revenue from the predominantly within Russia. The steel operations of their fuel and energy manufacturers’ share of total steel assets. In particular, ENRC, Mechel segment revenues did not change, with and, until recently, Norilsk Nickel have 23% each going to Severstal and Evraz, large electricity generating assets. while the remaining companies had individual shares of between 9% and 15%.
Revenue Distribution within Top 5 companies Revenue distribution by segment of the metal and mining industry in 2010 for the top five companies by revenue
18%
Steel Aluminium Nickel 21% 61%
12 Metals and Mining in Russia and the CIS 2011 Revenue distribution within major Revenue distribution within major steel producers
15000
10000 2010 5000 2009
0 Severstal Evraz Mechel NLMK MMK TMK
Other commodities Russian steel prices, USD/tonne Russian steel prices, $/ton In 2010, revenues in the metals and mining sector (except for the steel 1,900 segment) increased 44% compared 1,700 to 2009, largely as a result of a rise in commodity prices, in particular, for 1,500 aluminium, nickel, gold and copper. 1,300 The bulk of revenues in this segment come from aluminium sales. As a result 1,100 of rising aluminium prices, revenues 900 soared 47% yoy in 2010. The economic crisis that began in 2008 700 has affected diamond prices. In 2010, 500 revenues of Alrosa, Russia’s diamond monopoly which accounts for about 3% 300 of overall metals and mining sector revenues, grew 45% as a result of the post-crisis rally in diamond prices. July 2011 July 2010 July 2009 July 2008 May 2011 May 2010 May 2009 Alrosa has been the world’s largest May 2008 March 2011 March 2010 March 2009 diamond producer (in carats) for several March 2008 January 2011 January 2010 January 2009 January 2008 Noveber 2009 years already, having squeezed De Beers Noveber 2008 November 2010 September 2010 September 2009 out from the top position in 2009. September 2008 Hot rolled coil (HRC) Cold rolled coil (CRC) Rebar
Sales of other commodities (%) Other sales analysis (%)
35% 30% 25% 20% 2010 15% 10% 2009 5% 0% Aluminium Nickel Gold Coal Diamonds Copper Other
2011 Metals and Mining in Russia and the CIS 13
11 Consolidated balance sheet
2010 2009 Change Change USD bn USD bn USD bn % CURRENT ASSETS
Cash and cash equivalents 17,350 15,055 2,295 15% Inventories 21,436 18,492 2,944 16% Receivables 13,184 12,136 1,047 9% Assets held for sale 7,269 2,324 4,945 213% Other current assets 6,660 6,131 529 9% Total current assets 65,899 54,138 11,761 22%
NON-CURRENT ASSETS Investments 24,231 20,833 3,398 16% Consolidated Property, plant and equipment 96,170 91,741 4,429 5% balance sheet Goodwill 11,162 11,225 (63) -1% Other non-current assets 20,033 16,809 3,224 19% Total non-current assets 151,596 140,608 10,988 8%
TOTAL ASSETS 217,495 194,747 22,749 12%
CURRENT LIABILITIES Payables (12,984) (13,882) 899 -6% Borrowings (13,656) (22,649) 8,993 -40% Liabilities held for sale (3,530) (174) (3,356) 19.26% Other current liabilities (3,992) (2,873) (1,118) 39% Total current liabilities (34,162) (39,579) 5,417 -14%
NON-CURRENT LIABILITIES Borrowings (51,421) (44,201) (7,220) 16% Deferred taxation liabilities (9,830) (8,757) (1,073) 12% Other non-current liabilities (5,709) (5,533) (177) 3% Total non-current liabilities (66,961) (58,491) (8,470) 14%
Total equity (116,373) (96,677) (19,696) 20%
TOTAL EQUITY & LIABILITIES (217,496) (194,747) (22,749) 12%
Ratios 2010 2009 Gearing 30% 34% Current (times) 1.93 1.37 Quick (times) 1.52 1.15 Net debt (USD million) (47,727) (51,795)
14 Metals and Mining in Russia and the CIS 2011 96,7 млрд долл. США В 2010 году чистые активы компаний металлургического горнодобывающего 2009 г. сектора СНГ увеличились на 20%, или на 19 млрд долл. США, что отражает ускорение процесса восстановления отрасли 116,4 млрд долл. США 2010 г.
Key balance sheet indicators and by Norilsk Nickel of investments in OGK-3 as assets and liabilities held for Stronger demand for metals and mining sale. The sale of Lucchini may positively products and the subsequent rise in prices impact Severstal’s profit margin and debt and sales in kind strengthened the level. Norilsk Nickel continues to divest balance sheet indicators of the companies non-core assets and focus exclusively on in our coverage universe. As a result, manufacturing metals. the financial standing and liquidity of companies in the industry improved Almost all the companies managed to compared to 2009 across almost all reduce their total debt level during 2010. indicators. The share of short-term indebtedness declined 40% in 2010, as during this In 2010, net assets grew 20%, or by period companies refinanced their debt USD 19 billion, reflecting an accelerated liabilities and many of them focused on recovery. In particular, net assets rose restructuring short-term liabilities. 11% in 2009 following a 14% decline in 2008. During prior periods, write-offs Alrosa has successfully placed a USD 1.9 related to asset impairment losses billion long-term Eurobond, while Evraz produced a significant negative impact placed a long-term RUB-denominated on companies’ balance sheets. bond worth USD 1 billion. Growth of such asset components as In 2010, several companies held public accounts receivable, inventories and offerings largely to convert part of their accounts payable reflects a general rise debt into equity or repay certain in operating activity in 2010. liabilities. Rusal floated the largest additional share issue, worth USD 2.2 Assets and liabilities held for sale billion, with its placement of an 11% increased significantly. This is largely due equity stake on the Hong Kong Stock to the recording by Severstal of their Exchange. Lucchini steel manufacturing division
2011 Metals and Mining in Russia and the CIS 15 Consolidated cash flow statement
2010 2009 Change Change USD bn USD bn USD bn % Net operating cash flows 22,427 16,775 5,651 34%
Cash flows related to investing activities Purchases of property, plant and equipment (14,928) (11,221) (4,916) 44% Purchase of investments excluding controlled (2,908) (2,299) (609) 26% entities, including advances Purchases of (or increased investment in) (1,378) (2,429) 1,051 -43% controlled entities Purchases of financial assets (1,286) (1,258) (28) 2% Other proceeds (1,011) (869) (142) 16% Proceeds from sale of PP&E 375 309 66 21% Consolidated cash Proceeds from sale of investments 2,053 2,603 (550) -21% flow statement Proceeds from financial assets 961 2,012 (1,051) -52% Other proceeds 925 2,246 (1,321) -59% Net investing cash flows (18,406) (10,906) (7,500) 69%
Cash flows related to financing activity Proceeds from ordinary shares issue and 4,146 2,627 1,520 58% treasury shares sales Proceeds from interest bearing liabilities 44,323 35,168 9,155 26% and borrowings Repayment of interest bearing liabilities (47,494) (41,441) (6,053) 15% and finance leases Transactions with shareholders: Dividends paid (2,904) (749) (2,155) 288% Share buybacks and other distributions to (529) (219) (310) 142% shareholders Other (125) (1,319) 1,193 -90% Net financing cash flows (1,169) (5,934) 4,765 -80%
Net increase/decrease in cash and cash 2,852 (65) 2,917 -4488% equivalents Cash and cash equivalents at beginning of 15,055 15,865 (810) -5% the period Effect of foreign currency exchange rate (557) (745) 188 -25% changes on cash and cash equivalents Cash and cash equivalents at the end of 17,350 15,055 2,917 15% the period
16 Metals and Mining in Russia and the CIS 2011 Operating cash flows Financing cash flows In 2010, companies in the industry In 2010, cash outflow from financing recovered from the consequences of the activity reduced significantly, largely as global financial crisis. Operating cash a result of reduced repayment of interest- flows grew by USD 5.6 billion (or 34%) bearing liabilities. As a result, net outflow compared to 2009. related to liabilities movement dropped 49% from USD 6.2 billion in 2009 to USD 3.1 billion in 2010. Investing cash flows The global financial crisis has also affected As expected, companies continued to the companies we have analysed in terms allocate resources to establish or acquire of shareholder relations, since dividend fixed assets. Investments allocated to payouts have been reduced significantly. implement organic growth In 2010, the situation began to stabilise opportunities account for 87% of net and the first improvements are already cash flows related to investment activity. apparent. In 2010, the amount of dividends The M&A market is gaining momentum, paid out to shareholders advanced nearly with M&A allocations having risen 26% four times. The amount of share buybacks in 2010. However, while the number of also grew. In 2010, Rusal and transactions in 2010 grew year over Petropavlovsk held additional share issues year, their total value was still much to improve their financial standing, and lower than the record highs seen in Norilsk Nickel sold a large equity stake 2007-2008, since it is still difficult to worth USD 1.7 billion that it had previously execute very large transactions. bought back from the shareholders
2011 Metals and Mining in Russia and the CIS 17 Articles
18 Metals and Mining in Russia and the CIS 2011 With their strong focus on natural Finding the “right” project resources development, most prospering Debt financing Each project has its own financial case CIS economies have benefitted greatly based on the total required capital options for mining over the past decade from the rising expenditures, expected revenue, and high prices of raw materials in projects in Russia the extent of risks associated with the international markets. Given the rising target profit. In general, the market can demand for these finite resources, the and the CIS be divided into two broad categories: industry is constantly exploring new on the higher end, there are large-scale fields for diverse natural resources, from projects that require funding of rare ores like tantalum to vast coal USD 1 billion and above, while on the fields. lower end there are projects requiring Raw materials are the backbone of the less than USD 1 billion. Large projects economies of Russia, Kazakhstan and are scarce as they require a field with other CIS countries, and their significant stock, which is rare. In development attracts not only political contrast, there are a lot of smaller fields attention but also creates fierce that require less investment, but are competition between market capable of producing the same or higher participants for the best opportunities. rate of return. Good fields can mean substantial While large projects require the ability returns, but opening, exploring and to raise correspondingly substantial developing these fields, funding, smaller ones attract a variety not to mention extracting the materials of sponsors that do not necessarily have themselves, is highly capital intensive. their roots in the mining sector and It requires considerable early-stage often are unable to support financing investments. Sponsors must first with the same amount of equity as large investigate the field to identify the conglomerates can. As a result, sponsors quality and density of the material try to join forces with different parties before they can assess the excavation for projects, thus making use of the costs. Additionally, fields can be located entire range of available financial in regions requiring substantial products. investment in transport and energy infrastructure, making careful financial planning and a strong, reliable financial structure for the project essential.
2011 Metals and Mining in Russia and the CIS 19 A question of perspective: including the debt market, which can risk versus return make substantial funding available. Sponsors take the equity position and At the same time, the focus shifts away focus on the profitability of a field and from questions of whether the field will its value. This implies that any external be profitable, and sponsors become financing party expects the sponsor to more confident that the project will be able to actually shoulder the early- actually generate the predicted cash stage risks. Given a positive outcome in flows and the associated risks. the initial phases (securing all the There are several criteria for a project to necessary rights to exploit the field, meet the requirements and demands of geological investigation and the debt market. These are listed in the categorisation of the deposit, and following table: planning the mining operations), more financing options become available,
Criteria Go No go
Cash flows • (Partially) producing assets • Significant up-front cash-outs not covered by • Long-term offtakes the sponsor • Significant size of the mine (both • High production costs projected time period and profit) • Lack of equity or other financial support by the sponsor Risk • Licence without issues or non-strategic • Unmitigated environmental minerals issues • Transparent shareholding and project • Negative track record structure around previous investors • Reputable sponsor, sharing risk by • Pending licensing issues investing own funds as equity • Poor financial controls • Best practice advise on technical, legal, tax and financial issues • Political capital Asset value • Western reserve audit • Open licence issues • Access to well-developed infrastructure
Profitability • Experienced management team • Low production costs
20 Metals and Mining in Russia and the CIS 2011 Risks: perception and reality A successful and profit-generating Apart from the general risks associated mining operation is in the interest of with mining projects, international regional governments, and they should (debt) investors consider the operational be kept up-to-date on the project’s risks in Russia to be greater than those progress. To attract external financing, in other regions, and thus often apply good relations between the sponsor and haircuts to the project value. One of the local authorities should be confirmed most frequently quoted risks is the use during site visits or in other early of outdated, inefficient and unsafe communications. In addition, external techniques in constructing and funding partners will always request operating mines. Market transparency proof that their interest is equal to the is perceived to be poor, and fear of sponsor’s. Sponsors have to show that political influence and an unpredictable, they have a sizeable stake in the project, dependent judiciary lead to concerns which will be at risk for the same that projected cash flows may not reasons and at the same time, if not materialise. Ultimately, debtors fear earlier, than the external parties’ expropriation, or that external parties capital. A project that aims to be funded will manage to redirect some portion of purely with debt and without any the project revenues. investment from the sponsors is unlikely to meet the debt providers’ standards. Mitigants: overcome the hurdles Debt providers also pay attention to To overcome concerns about political mechanisms that will ensure that the influence on business and its potentially capital will not or cannot be withdrawn, disastrous effects, some simple rules so that the equity investors are just as should be followed. First, a good working committed to the project’s well-being as relationship between the sponsor and the debt providers. the local administration is a must.
2011 Metals and Mining in Russia and the CIS 21 Funding options
Generally, proper planning and a high- possible proposals for investment, before quality communication strategy are approaching them the following areas extremely important. Since potential need attention and should be addressed funding partners often have a variety of using creative solutions:
Exploration • Provide the results of geological analysis on time to enable investment decisions • Control the local management and operations team
Legal • Ensure a proper licence is obtained without issues or non-strategic minerals • Comply with lender’s regulations (codes of conduct, sustainability conditions, etc.)
Properly structured financial • Underpin the funding needs with a proper financial case model and reasonable assumptions from the very beginning • Send technical advisors to perform early site visits
Information and negotiation • Appropriate fronting of an investment opportunity process • Secure the confidentiality of all information • Adjust values and expectations • Set up workable investment structures
22 Metals and Mining in Russia and the CIS 2011 If a project can overcome these hurdles, This said, each financial product has as well as meet a range of other its peculiarities and using one for the conditions beyond the scope of this wrong purpose can put the project’s report, a broad universe of funding entire financing structure at risk. options will become available.
Debt Mezzanine Bonds Senior Loan
• no/subordinated • potentially long term securities • long term • open for project finance • lower capital costs than • strong market appetite structures equity • local currency (RUR) • combination with • long-term maturity government guarantees
ADVANTAGE ADVANTAGE • no sharing of control • no sharing of control (decree 1016, ECAs) • high flexibility • no sharing of control
• capital market • cost and time • thin local banking market requirements • capital market • covenants • limited availability requirements • collateral requirements • strict covenants DISADVANTAGE
Conclusion
A successful mining operation is the but ultimately its main purpose is to result of combining natural resources provide a stable basis for leverage, which with a variety of engineering and financial will, in turn, accelerate the return and solutions. The financing should be as make the project highly attractive to important as the technical aspects. sponsors. In this regard, the market is There is a range of solutions that can be sufficiently developed and open to small- used when assembling the financial and medium-sized projects, if they are structure, but it is always important that prepared and presented by a seasoned the sponsor have available equity. professional. The equity can come in different forms,
2011 Metals and Mining in Russia and the CIS 23 As mine operators face slumping VDMs can be used to report a Value driver commodity prices, it is now more critical combination of operational and than ever that they fully understand the financial performance data covering all modelling for complex linkages between operational aspects of a mining operation. The key mining operations variables and the financial performance difference with more conventional of their mine sites. Building an accurate reporting is that a VDM can present (the Australian operational model, where all operating performance in a logical components link to the predicted cascading model structure, experience) production cost, is the most disaggregating high-level reported straightforward way of combining financial performance into the lower operations and finance. level operational elements driving it. Using a flexible VDM, mine operators The best models provide a cascading can calculate expected costs under top-down view of operations. They link different production levels and high-level financial outputs to their key operating performance scenarios. operational drivers, such as production Value driver models can thus help in performance metrics and the prioritising potential EBIT disaggregated operating costs of each improvements by considering variations major process or asset. Such an of many different operational approach is known as a value driver configurations. model (VDM).
Figure 1. Example of value driver reporting
24 Metals and Mining in Russia and the CIS 2011 Using VDMs in the budget cycle Optimising mining operations Mining companies typically have proven across the production value chain ‘life of mine’ planning processes and For those mining companies that have well-defined budgeting cycles, which successfully linked operations and use the production life contained in the finance at the mine site level, the next ‘life of mine’ plan as a key input. challenge becomes extending those However, the standard costs used in the linkages across the production value budgeting process are typically chain. Although the production value developed only once per year as part of chain is often described as a ‘pit-to-port’ the annual budgeting cycle. Moreover, operation, in reality it involves all they usually apply only to a specific aspects of the supply chain from mineral production plan and are thus valid over extraction at the mine site through only a small range of targeted delivery of the mineral to customers. production. Typically, there is no Only a few mining companies have financial link between the annual implemented a planning process that budget and the ‘life of mine’ plan. optimises operations across the full Significant changes in target production production chain from the mine site to usually involve a lengthy process the customer. Most mining companies involving several exchanges of focus primarily on achieving operational information between mine and cost efficiency improvements at the management, which produces new asset mine site level. However, the effects on configurations, and the finance team, the extended supply chain are often which costs them. overlooked, or crude financial estimates A properly configured VDM can help are made by extending the nominal cost determine the financial implications of saving to other parts of the value chain. radical ‘“what if”’ scenarios very quickly, Sometimes it can take many months, giving senior management the ability to right up to the financial year-end, to assess significant changes in production measure the real financial impact of levels or a wider operational operational efficiency programmes. configuration without the need for Typically, mining companies prioritise lengthy consultations between mine the optimisation of those parts of their managers and the finance team. supply chain that seem to have the Production scenarios that normally can largest operational cost, usually in take weeks or months to cost can now be isolation from the rest of the supply accomplished in a matter of hours using chain. However, optimising the a VDM. PwC has also found that a value operational efficiency of just one supply driver model, once implemented, can chain component may have little or no typically provide the output used as the effect on overall cost efficiency, starting point for the next planning and particularly if the constraints of the budgeting cycle. supply chain are to be found elsewhere.
2011 Metals and Mining in Russia and the CIS 25 Figure 2. VDM for extended mining operations
Rejects from crusher Rejects
Rejects from CHPP 1 CHPP 1 tonnes 838,725 838,725 Crusher 1 Rejects RAW 1 Mine 1 Tonnes 168,549 168,549 Tailings from CHPP 1 ROM RAW 1 Stockpile tonnes 209,681 209,681 Opening Bal. 20,000 20,000 CHPP 1 Production Mine 1 Production Mine 1 ROM Stockpile Rejects Closing Bal. - - Product t 2,576,244 2,576,244 ROM t 3,560,005 3,560,005 Opening Bal. 10,000 10,000 Tailings Closing Bal. 10,000 10,000 Truck Vol - Product produced from plant to Push to Raw 2 Stockpile CHPP 1 Crusher 1 ROM t 68,668 68,668 produce stockpile Mine 2 Product ROM
Mine 2 Production Mine 2 ROM Stockpile ROM t 4,874,008 4,874,008 Opening Bal. 10,000 10,000 Crusher 1 Production Closing Bal. - - RAW t out 4,705,459 4,705,459 Truck Vol - RAW 2
Load RAW 2 Stockpile CHPP 2 Product Railed Out Rail Weighbridge Opening Bal. - - Product 1 - - Product Bin Closing Bal. - - Product 2 3,091,306 3,091,306 Opening and closing Run of Run of mine CHPP 2 Product Stockpile Product 3 4,908,694 4,908,694 Mine stockpile balances feed to crusher Opening Bal. 83,908 83,908 Total 8,000,000 8,000,000 Closing Bal. - -
Product railed by commodity type
Push to Raw 2 Stockpile RAW t - - CHPP 2 Production Product t 5,916,770 5,916,770
Crusher 2 Rejects Mine 3 Tonnes 169,744 169,744 Rejects ROM Rejects
CHPP 2 Rejects from CHPP 2 Mine 3 Production Mine 3 ROM Stockpile Rejects ROM t 7,693,043 7,693,043 Opening Bal. 103,661 103,661 tonnes 1,865,999 1,865,999 Closing Bal. - - Tailings from CHPP 2 Truck Vol - tonnes 466,500 466,500
Tailings Crusher 2 RAW 3
Mine 4 ROM RAW 3 Stockpile Opening Bal. 327,107 327,107 Mine 4 Production Mine 4 ROM Stockpile Crusher 2 Production Closing Bal. - - ROM t 5,372,585 5,372,585 Opening Bal. 83,908 83,908 RAW t 7,362,897 7,362,897 Rejects and tailings Closing Bal. - - Truck Vol - from plant
Monthly production Opening and closing Conveyor feed to from coal mines Raw stockpile processing plant balances and dozer push between stockpiles
With operations and their assumptions meaningless for costing Beyond the major differences between interdependencies incorporated into new production levels. This allows open cut and underground mining one model, management can quickly management to answer such questions operations, the mining value chain estimate the impact of a single variable as, ‘What should our production features a fairly standard set of assets change on the entire portfolio. This portfolio look like if prices rise 20%?’, and processes. PwC has developed capability extends to operational, or ‘Where should we cut production if a Microsoft Excel-based software tool capital and strategic decision-making. customer demand falls 35%?’ named Archimedes FACX, which Having a portfolio view of operations contains a library of mining activities, allows a mining company to align its A tool for rapidly building VDMs assets and charts of accounts that can be production capacity with overall Building a complete value driver used to build a base model for any mine demand at an optimum cost. A portfolio hierarchy for all assets and activities site as well as asset portfolios. level view of operations and related in a given mine, and then allocating all Archimedes FACX uses a structured operating costs gives management the fixed and variable costs to these assets VDM build process and runs from a tools to make portfolio decisions about and activities, is a time-intensive process. graphic user interface allowing rapid production levels. It can take about 6-12 weeks to build construction of a prototype VDM. This is particularly important when new a VDM from a zero base for a new mine Customisation of any element of a mine target production is significantly above site, or longer for extended mining operation that differs from standard or below budgeted production, which operations or when dealing with a new mining processes can be undertaken often renders budgeted cost accounting system. in minutes.
26 Metals and Mining in Russia and the CIS 2011 Figure 3. Using Archimedes FACX in building a VDM
Archimedes FACX reduces the average Benchmarking operational can be used for comparative external time required to build a VDM from and financial performance benchmarking. These operational and 6-12 weeks down to 1-4 weeks. In turn, Once key value drivers have been financial benchmarks, which were this significantly shortens the time identified, benchmarking can also be collated over several years during necessary to produce initial results, done across a company’s other mining operational improvement projects for which often translates into immediate operations as well as against comparable top-tier Australian mining companies, cost savings. mining companies. PwC has compiled are also contained within the |a library of operational and financial Archimedes FACX software tool. metrics for large mining operations that
Figure 4. Benchmark performance against other mining operations
140
120
100
80
60
40 Benchmarks Development Cost ($ per metre) 20 Mine being modelled
0 0 1 2 3 4 5 6 7 8 9 10
Production (’000 tonnes per annum)
Conclusion regardless of the business cycle. significantly through the development Building VDMs for extended mining of libraries of mining assets, processes In response to a new era of rapidly operations is a reliable way of quickly and cost elements, which allow for fluctuating prices and demand, mining identifying potential cost reductions or rapidly configuring models of new companies must now be considerably EBIT-maximising opportunities across mining operations. more flexible in their approach to the extended mining supply chain. operational cost optimisation. Robust cost and value modelling across a The time required to a build a value mining company’s extended operations driver model for extended mining is a key tool for maximising value operations can also be reduced
2011 Metals and Mining in Russia and the CIS 27 With a population of over 16 million, reasonably prospected uranium-bearing Country in focus: Kazakhstan is the second largest CIS minerals, giving the country the second nation and has the ninth largest largest uranium reserves in the world. Metals and mining territory in the world. The country has Data from Kazakhstan’s Association abundant deposits of various minerals of Miners and Smelters, published in in Kazakhstan (see Figure 1), including reserves of April 2011, show that the country’s coal chromium (30% of the world’s supply), reserves amount to about 34 billion manganese (25%), lead and zinc (13%), tonnes, or roughly 13% of the CIS states’ and copper and iron (10%). Moreover, aggregate coal reserves. Kazakhstan has 1.6 million tonnes of
Figure 1. Kazakhstan’s reserves against overall global reserves
35% 30% 25% 20% 15% 10% 5% 0%
Zinc Iron Lead Coal Copper Chromium Manganese
Kazakhstan is the thirteenth largest The Kazakhstan Statistics Agency mineral producer from among the reports that in 1H 2011 the metals world’s 70 mining countries. Since and mining industry (including coal Kazakhstan gained its independence, and metal production, smelting and the country’s metals and mining metalware manufacturing) produced industry has grown to become a key 19.95% of the country’s overall economic sector that is highly industrial output (see details in Figures competitive and developing rapidly. 2 and 3).
28 Metals and Mining in Russia and the CIS 2011 Kazakhstan is the 13 th largest mineral producer from among the world’s 70 mining countries.
Figure 2. Production in 1H 2011 (‘000 tonnes)
18 000 16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0
Zinc Iron Copper Chromium Manganese Aluminium
2011 Metals and Mining in Russia and the CIS 29 The Kazakhstan metals and mining The country’s leading smelters are: industry supplies the bulk of the • AO ArselorMittalTemirtau (producing minerals produced and end products for cast iron, steel and metal castings) export. In particular, Kazakhstan’s exports of metals and metalware for the • AO Ust Kamenogorsk Titanium- first five months of 2011 amounted to Magnesium Plant (producing spongy USD 4.267 million, representing 12.2% titanium and magnesium) of the country’s total exports. A • AO Temirtau Electrometallurgy Plant preliminary analysis found that about (producing ferroalloys and calcium 24% of these products were exported to carbide) CIS countries. • TOO Taraz Metal Works (producing Kazakhstan’s metals and mining ferroalloys and anode paste) industry has two major holding companies. They are Eurasian Industrial Rio Tinto, Mechel, Glencore, Vale and Resource Corporation (ENRC), which is Ivanhoe, among others, are the largest the leading producer of marketable iron foreign companies operating in ore, ferrous alloys, pellets and Kazakhstan’s metals and mining aluminium, and TOO Kazakhmys industry. Corporation, which is the main copper producer (90% of the copper produced In 2010, the government of Kazakhstan in the country). TOO Kazzinc is the adopted the 2010-2014 Boosted country’s largest zinc producer, and Industrial and Innovation Development AO NAK KazAtomProm is the leading Plan to achieve sustainable and producer of uranium and rare metals. balanced growth through diversification TOO Kazphosphate dominates the and increased competitiveness. The phosphate production industry and is industry-specific 2010-2014 Kazakhstan the leading producer of phosphorus- Metals and Mining Development Plan containing products in the CIS. (the “Industry-Specific Plan”) was adopted in 2010 as part of a larger national plan. The Industry-Specific Plan is aimed at re-focusing Kazakhstan’s economic development on diversified manufacturing, shifting away from the current emphasis on exports of raw materials and primary metals. The Industry-Specific Plan outlines a comprehensive series of steps to encourage large companies to produce base metals, and to promote manufacturing of high-tech end products from base metals by small and medium-sized companies.
30 Metals and Mining in Russia and the CIS 2011 USD 31.5 billion in 2013 Estimates based on the work already completed show that the Industry-Specific Plan will increase the value of Kazakhstan’s mining industry to USD 31.5 billion in 2013, compared to just USD 18.5 billion in 2009. USD 18,5 billion in 2009
The Industry-Specific Plan gives That said, entities operating under the detailed descriptions of 20 new Plan are supposed to finance themselves investment projects, including so-called principally from their own funds. To niche investment projects, which this end, the government grants certain involve ferrous, non-ferrous and rare benefits to entities implementing metals. It also includes numerous projects under the Plan; these include modernisation and development loan guarantees, subsidies and subsidies programmes for existing mining for loan commission, among other projects. things, obtained by such entities from second-tier banks, and other incentives. • Metallurgy of ferrous metals: In addition, the Industry-Specific Plan construction of a state-of-the-art presupposes the active involvement of electric-furnace steelmaking plant; Kazakhstan’s key institutions, including steel works; construction and set-up the National Fund of the Republic of of certain plants and units producing Kazakhstan, AO Bank for Kazakhstan special sheet steel, railings, line Development, AO Investment Fund of pipes, fittings, refractory materials, Kazakhstan and AO National ferrous alloys, and ferromanganese; Investment Fund, in financing these and a number of other projects entities. • Metallurgy of non-ferrous metals: The 2010 pilot trials under the Industry- construction of a plant producing Specific Plan showed that over 30 metallic aluminium metalware, projects were ready to implement, refined zinc and refined copper; and including building innovative set-up of plants that recycle primary enterprises that can create more than aluminium and produce fine gold 12,000 jobs, including construction of a • Metallurgy of rare metals: projects to copper-smelting and electrolysis plants set up production of titanium in Ust Kamenogorsk worth over USD dioxide, niobium, ferroniobium, 800 million. Estimates based on the tantalum powder, molybdenum ores work already completed show that the and concentrates Industry-Specific Plan will increase the value of Kazakhstan’s mining industry On preliminary estimates, the overall to USD 31.5 billion in 2013, compared financing of the Industry-Specific Plan to just USD 18.5 billion in 2009. from all sources is about USD 7.8 billion.
2011 Metals and Mining in Russia and the CIS 31 Legal framework for investing that the government can exercise its in Kazakhstan’s metals and pre-emptive right. The investor should mining industry keep close track of the date by which the transaction must be completed, as Kazakhstan’s laws on subsoil use obtaining the MINT’s consent or a require that cooperation between the notification that the government has government and investors be based on waived its pre-emptive right can be a contracts outlining fundamental terms, rather lengthy process. such as the sources of financing, tax treatment, local support, exploration The government can also demand early and production expenses, etc. The termination of a contract if the subsoil Kazakhstan Ministry of Industry and user violates at least two provisions of New Technology (MINT) is the mining the contract, or transfers its right to industry’s primary regulatory authority. subsoil use without authorisation. Kazakhstan law provides that a contract AO National Mining Company Tau-Ken can be obtained from the government, Samruk is the national operator of another subsoil user or in legal Kazakhstan’s state-owned mining succession. A contract may be obtained assets. The company has several critical from the government through direct prerogatives, including the right to negotiations with the MINT or by conduct direct negotiations with the winning a tender for the right to subsoil relevant government authority on use. subsoil use, and to exercise the government’s pre-emptive right to Certain legal requirements must be met acquire alienated rights to subsoil use or when the right to subsoil use is equity interest in subsoil users. transferred to third parties, such as when the right itself or the things it Tau-Ken Samruk and the MINT are also covers are alienated in civil actively involved in direct negotiations transactions. In particular, the investor with potential foreign investors and must obtain the MINT’s preliminary participate in the majority of new consent to conduct such a transaction projects to produce solid minerals. when required by law. Moreover, note
32 Metals and Mining in Russia and the CIS 2011 Tax treatment Table 1. Table 1 shows the main taxes imposed on metals and mining companies Ta x Rate Notes in Kazakhstan. Tables 2 and 3 give VAT 12% details on specific taxes: Corporate income tax 20%
Property tax 1.5% The tax base is considered the average annual book value of taxable properties determined on the basis of financial accounting records
Mineral resource From 0% to 22% For details on rates, see Table 2 extraction tax (MRET) Excess profits tax see Table 3
Table 2.
Name of mineral resources Rate Bituminous coal, brown coal, and oil shale 0% Mineral resource Chromium ore (concentrate) 16.2% extraction tax Manganese, iron and manganese ore (concentrate) 2.5% (MRET) Lead 8%
Zinc 7% Uranium (product solution, mining technology) 22% Iron ore (concentrate, pellets) 2.8%
Table 3. Excess profits tax2
Net income distribution percentage Percentage used to calculate Rate for calculating excess profits tax, net income threshold for excess percentage of deductions profits tax purposes 25 Not Below or equal to 25% provided From 25% to 30%, inclusive 5 10% From 30% to 40%, inclusive 10 20% From 40% to 50%, inclusive 10 30% From 50% to 60%, inclusive 10 40% From 60% to 70%, inclusive 10 50% According to Article 350.2, par. 2 60% Above 70% of the Kazakhstan Tax Code
2 Subsurface users are liable to pay excess profit tax on net income for a reporting period. For excess profits tax purposes, the amount of net income is calculated as the difference between the total annual income received on subsurface contracts and the allowed deductions. The deductions include corporate income tax deductions and the cost of fixed assets and capital repairs. Excess profits tax applies to the portion of net income exceeding 25% of deductions. Excess profit tax is based on a progressive sliding scale where the maximum tax rate of 60% applies to amounts of net income exceeding 70% deductions
2011 Metals and Mining in Russia and the CIS 33 Uzbekistan boasts extensive production Shale oil is a potential source of gas and Country in focus: capabilities and rich deposits of natural oil products and certain non-ferrous resources, including diverse minerals. and rare metals. Geological research in Metals and mining The country has the world’s fourth the Syr-Darya and Amu-Darya shale oil largest gold deposits and is the seventh accretion areas, parts of which also in Uzbekistan largest gold producer worldwide. extend into the neighbouring countries In addition, it has the world’s tenth- of Tajikistan, Turkmenistan and eleventh largest copper reserves and the Kazakhstan, has indicated the presence seventh-eighth largest uranium of large deposits. These shale oil reserves, and is the eleventh-twelfth deposits have been estimated to hold largest uranium producer. 93 billion tonnes, including 47 billion tones in Uzbekistan alone. The Qizilqum (Muruntau, etc.) and Samarqand fields, as well as the The Central Kyzyl Kum region has Tashkent Region, represent the core of proven phosphate deposits comparable Uzbekistan’s gold sector. to those found in Morocco. Fifty-three million tonnes of phosphoric anhydride Silver reserves have been found have been produced at the Dzheroy in 26 fields. These are mainly in the Syr-Darya field, which has a projected Kalmakyr, Baraqali, Uchkulach and capacity of up to 100 million tonnes. Khandiza deposits (80.4%); the Kochbulaq, Kyzylalmasay, Muruntau gold mines (among others); and the Nukrakon, Kosmanachi and Okzhetpes silver deposits (19.6%). Base copper reserves are found in the copper and porphyry fields of the Olmaliq mining district. About 20% of these reserves have been developed since mining began. In addition to copper, the Olmaliq mines contain large deposits of gold, silver, sulphur, tellurium, selenium and rhenium. The current value of these deposits is estimated to represent up to half the total value of those minerals that have already been produced. Tungsten deposits are well represented by the tungsten-bearing fields at Lyangar, Ingichke, Koitash, Yakhton and Sargardon, among others, as well as the Sautbai reserves and the recently discovered Sarytau prospect.
34 Metals and Mining in Russia and the CIS 2011 Non-ferrous and ferrous metallurgy, Precious metals, non-ferrous metals and Kalmakyr ad Sary-Cheku mines and including production of copper, uranium are produced at the Navoiy supply the complex’s copper production. refractory and high-temperature metals Mining and Metallurgical Complex OMMC processes Kalmakyr ores at its and gold, is the leading industrial sector (NMMC) and the Olmaliq Mining and copper refinery (CR), Sary-Cheku ores in Uzbekistan. The metals industry Metallurgical Complex (OMMC), which at its lead and zinc refinery (LZR), and draws on producers, refineries, and are the largest such facilities in the Kalmakyr ore concentrates at its copper raw-material, ferrous and non-ferrous industry. smelting plant. metal processing plants. This sector The Uzbek government is the majority NMMC is 100% state-owned and accounts for 10% of the country’s shareholder in OMMC with a 97.5% processes the country’s key gold and overall industrial output. The equity stake (individuals and corporate uranium deposits, which are located in Uzbekistani Refractory and High- entities account for the remaining the Central Kyzyl Kum region. Temperature Metal Works (located in 2.5%). OMMC’s production capacity the town of Chirchiq) operates on With such a wide range of products, handles the group’s reserves of copper, tungsten and molybdenum discovered NMMC has prioritised the industrial porphyry, lead, zinc, gold and silver, in Uzbekistan. development of its diverse fields with extracted from fields in the provinces of gold and uranium as its main products. In 2010, ferrous and non-ferrous metals Tashkent, Djizak and Namangan. exports made up about 25% of Copper-porphyry, gold and Uzbekistan’s overall exports for a total molybdenum deposits are found in the amount of USD 3.235 billion.
Subsoil use licensing
The Uzbekistan Law “On Subsoil” states the main regulatory agencies with that subsoil usage rights for mineral oversight over the mining industry. production and other industrial Corporate entities and individuals purposes are granted through specific financing geological exploration enjoy permits (licences). The Uzbekistan the prerogative right to obtain a licence Cabinet of Ministers regulates subsoil for developing a proven field. usage licensing and the allocation of mineral blocks. The Public Nature Conservation Committee, the Public Occupational Safety Supervisory Board for Industry and Mining, and the Public Geological and Mineral Resources Committee are
2011 Metals and Mining in Russia and the CIS 35 Tax regime Table 1 shows the basic taxes paid by corporate entities that do not qualify as small businesses: 1
Table 1
Corporate profits tax 9% Value added tax on produce and imports 20% Corporate property tax 3,5% (the tax base is the average annual depreciable value) Tax on site improvement and development of social amenities 8% (the tax base is the after-tax profit) Contributions to the non-budgetary School Education Fund 0,5% (the tax base is the net revenue) Excise tax from 0.5% (applicable to precious gems) Tax on subsoil use 3% to 30% (see Table 2) Contributions to Uzbekistan’s Road Fund 1% to 2.5% (the tax base is the company’s net revenue)
1 A single tax payment of 6% is levied on micro-firms and small miners and smelters with an annual average of 50 or fewer employees and which are classified as small businesses.
Table 2
Name of accounting unit Tax rate (%) Refined copper 8,1 Molybdenum industrial product 4 Concentrated lead 4 Zinc metal 4 Tungsten concentrate 10,4 Uranium 10 Gold 5 Silver 8 Iron 4 Melting spathic concentrate 21,2 Uncut precious, semi-precious and ornamental stones 24
To foster a favourable environment for payment (imposed on small businesses), foreign investors (particularly FDI), and mandatory contributions to Navoiy Province has established a free Uzbekistan’s Road Fund and the School industrial and economic zone (FIEZ). Education Fund, for between 7 and 10 years depending on the volume of the Businesses registered in the FIEZ are direct investments, with a further 50% exempt from land, property and reduction in the corporate profit tax rate corporate profit taxes, as well as the tax for another 5-10 years on site improvement and development of social amenities, the single tax
36 Metals and Mining in Russia and the CIS 2011 Investment projects
Table 3 shows new investment projects partners, determining terms, and in the mining industry currently being locating sources of financing) under developed by the Uzbekistan Economics the Investment Plan of Uzbekistan. Ministry (including selecting foreign
Table 3
Name of project Forecasted Financing Implementation Foreign project cost timeframe partner USD million Own Foreign funds investments Modernising OAO 13,3 7,3 6,0 2011 – 2012 Under Shargunkumir (Stage 1) discussion Modernising OAO 50,0 5,0 45,0 2012 – 2013 Under Shargunkumir (Stage 2) discussion Developing gold 161,4 161,4 2011 – 2023 Under sulphide ores at the discussion Nothern and Cetral Amantaitau fields Re-establishing 50,0 50,0 2011 – 2013 Luxon production of tungsten Energy ores at the Ingichka Holdings Field (Korea) Developing the Sautbai 30,0 30,0 2011 – 2013 Shindong and Yakhton tungsten Resources fields with geological (Korea) prospecting and exploration of their borders
Table 4 outlines the main future planned by the Economics Ministry investment projects in Uzbekistan’s under the Investment Plan. mining sector that are currently being
Table 4
Name of project Forecasted Timeframe project cost (USD million) Development of Muruntau Quarry (V priority) 131,0 2015 – 2020 Development of low-grade ores in the Adjibugut mines 30,0 2015 – 2020 using the heap-leaching method Development of the Birinchi September Field 23,0 2015 – 2020 Set-up of ferrous alloy production of manganese at the 65,0 2012 – 2015 Dautash Field Modernisation of the Angrensky Outcrop Mine (Stage 2) 146,0 2013 – 2015 Development of the uranium deposits of Navoiy Province’s определяется 2012 – 2020 black shale areas Development of the Shavazsai lithium mines to set up 50,0 2011 – 2013 production of rechargeable lithium-ion cells
2011 Metals and Mining in Russia and the CIS 37 Appendix
38 Metals and Mining in Russia and the CIS 2011 The 2009 comparative data have been adjusted since the last issue of In conducting our financial Metals and Mining in Russia and the CIS to include financial data from OAO Metalloinvest, KOKS Group, Central Asia Gold, OAO analysis, we used financial data Atomredmetzoloto and AO KazAtomProm. from 25 companies* operating The companies in our coverage universe are: in the CIS metals and mining AK ALROSA industry. The companies in our Chelyabinsk Zinc Plant coverage universe issue their ENRC public financial reporting under OAO Eurochem either IFRS or US GAAP. Evraz Group Ferrexpo PLC * For all companies in our coverage universe, OAO Metalloinvest Holding Company the financial year ends on 31 December. Highland Gold Mining Ltd. Kazakhmys PLC Magnitogorsk Iron & Steel Works OAO Mechel ОАО MMC Norilsk Nickel OAO Novolipetsky Metallurgical Complex KOKS Group OAO Atomredmetzoloto OAO Polymetal Petropavlovsk PLC OAO Polyus Gold ZAO Raspadskaya UC Rusal AO KazAtomProm OAO Severstal OAO TMK OAO Uralkali Central Asia Gold
2011 Metals and Mining in Russia and the CIS 39 Acknowledgements
This publication would not have been possible without the drive and professional support of PwC Russia’s Mikhail Klubnichkin, who led the project from start to finish. Special thanks also go to the PwC professionals who contributed articles and provided commentary and professional and organisational support: PwC Russia Alexey Korolev, Ilya Golubinskiy, Michael Hoelter, Timur Lidzhiev and Yury Muravlev PwC Kazakhstan Daniyar Issakov, Myrza Sokurov Saltanat Suleimenova and Yekaterina Zhgutova PwC Uzbekistan Saydaziz Saidakhmedov
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