Kazakhstan's new mining frontiers

By bne IntelliNews June 7, 2013

Clare Nuttall in Astana -

With Kazakhstan about to start issuing its first mineral exploration licences in four years, there is a growing emphasis on metals and mining in the country and the Central Asian region as technological advances and changes in global demand make it worthwhile to develop previously overlooked deposits and explore new areas.

Before independence two decades ago, Kazakhstan had a greater focus on mining than hydrocarbons, but the launch of production at the offshore Tengiz oilfield marked a fundamental change in the country's economic structure. The lion's share of investment is now directed at the oil and gas sector, and oil makes up the bulk of Kazakhstan's export revenues.

Attention did, however, return to mining with the launch of the state industrialisation programme in early 2010. As Kazakhstan emerged from the financial crisis, the programme was intended to reduce the dependence on oil and gas, and develop new sectors of the economy. Officials are now drawing up a development plan for the mineral resources sector for 2015-2019 - they are preparing the first new licences following a four-year suspension, which are due to be issued in the near future, while also drawing up a new tax code. Astana is also planning to set up a new geological exploration centre in order to remove the twin bottlenecks of lack of support infrastructure and training facilities for mining companies in the country; at present many companies have to send their specialists to Russia or even Kyrgyzstan for certification.

New reserves

Recently, officials have also started sounding the alarm about the need for more minerals exploration, warning that at current production rates Kazakhstan could run out of some of its main commodities if new deposits are not discovered. Several major new projects are underway, including Kazakhmys' huge greenfield copper projects at Bozshakol and Aktogay, but the government wants more to be done to prevent a future falling off in production.

Speaking during the Minex conference in Astana on April 18, Kazakhstan Deputy Prime Minister Kairat Kelimbetov warned that: "The lack of replenishment of mineral resources is not helpful for development. We need to explore for more reserves. The growing needs in mineral resource markets worldwide requires us to develop the mining industry on a larger scale, find new deposits and possibly employ non-traditional methods of exploration and mining."

Just a few days later, the director-general of the Kazenergy industry association, Asset Magauov, followed this up with a warning that Kazakhstan may deplete its uranium reserves within 80 years at current production levels, sooner if production isn't stepped up as planned. Kazakhstan has been "very slow" to replenish its mineral resources base, Magauov said, according to the Primeminister.kz website.

Development of new technologies and new areas of demand has led to a new hunt for value in the mining sector, not just in Kazakhstan but the whole of Central Asia. The regional industrial powerhouses China and India have driven demand for metals such as copper and iron ore, while Central Asia also has the potential to supply rare earths that are increasingly used in electronics, defence, hybrid cars and wind turbines. Rising prices mean that transport costs from the landlocked region are no longer the barrier they once were.

"Mining is becoming more and more important, not only in Kazakhstan but in the whole region comprising Mongolia, Kyrgyzstan, Uzbekistan and other countries. This is largely due to better technology," Siddharth Saxena, director of the Cambridge Kazakhstan Centre, told bne on the sidelines of the Astana Economic Forum on May 23. "Technologies are now coming to a stage where metals can be extracted in a different way, which will make them cost-effective. Kazakhstan is in a tough neighbourhood - you can't simply send products on a train to the coast. Even when exporting to China, it's a long journey because most of the demand is in coastal China."

Mongolia's Erdenes Tavan Tolgoi (ETT) found this to its cost. Having signed a $250m contract to supply coal to the Aluminum Corp. of China Ltd. (Chalco) in July 2012, ETT announced in January that it had suspended exports since it cost more to extract the coal and transport it to the Chinese border than the $53 per tonne Chalco was paying. Exports only resumed in April, after three months of talks between the Mongolian government and Chalco.

There are also issues with global demand at present, with the slowdown in China already affecting Kazakhstan and Mongolia. The European Bank for Reconstruction and Development (EBRD) has already downgraded its 2013 forecast for Kazakhstan's GDP growth from 6.0% to 4.9%, while Mongolia's economic growth slowed dramatically in the first quarter of 2013, due to lower coal prices and demand from China. The economy grew by just 7.2% in January-March, compared with 16.7% in the same period of 2012.

However, over the longer term the picture is better. AQM Copper forecasts a steady increase in demand for copper, with global demand rising from 18.1m tonnes of refined copper in 2007 to 37.9m tonnes in 2030, with much of this demand driven by growth in India and China. International mining company Rio Tinto forecasts that Chinese steel consumption will peak at around 1bn tonnes a year by 2030 as the country transits from an investor to a consumer driven economy. Demand for rare earths is also increasing steadily.

But despite the investments into the mining sector, oil and gas will remain the main story in Kazakhstan. "Mining is growing, but it doesn't represent a challenge to the oil and gas sector's dominance of the economy, since there are so many ongoing projects, not just in production but in refineries and other areas," says Jean-Christophe Lermusiaux, managing director and head of research at Visor Capital. "However, the two are not mutually exclusive."

The expected launch of production at the offshore Kashagan oilfield this year will help catapult Kazakhstan into the world's top oil exporters. With an expected ramping up of production at two other mega-fields, Tengiz and Karachaganak, in the next decade, Kazakhstan could become one of the top-five oil exporters in the near future, and is expected to hold this position for several decades.

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