Kazakhstan Needs to Cut Investment Barriers to Boost Mining

By Karan Kumar — Exclusive to Chromium Investing News

The Central Asian country of Kazakhstan is the second-biggest producer of chromium in the world after South Africa, mining about 3.9 million tons in 2011, according the US Geological Survey. But miners in the country are being deterred by a lack of clarity from the government and are growing frustrated with bureaucracy. Foreign investors too are finding it tough to get licenses and permission to open new deposits.

The steppe nation of more than 16 million people saw veteran leader Nursultan Nazarbayev win elections in April, securing him another five years in office. He is challenged at home and abroad for his authoritarian methods. While he has built warm ties with China and Russia, the most important question for investors in the mid- to long-term future is: who will succeed Nazarbayev?

Eurasian Natural Resources Corp. (ENRC) (LSE:ENRC), a diversified natural resources group, operates in Kazakhstan, China, Russia, Brazil, and Africa, employing 65,000 of its 70,000 workers in Kazakhstan. Its Kazchrome unit is one of the world’s largest ferrochrome producers.

ENRC has close links to government

In its IPO prospectus, published in 2007, ENRC stated: “[s]ince the acquisition of the Group’s assets through the privatisation process in the mid-1990s, the Group and its Founders have had, and continue to have, close links with the Government of Kazakhstan (including the President). The Group could face enhanced risk and uncertainty upon a change in government or a change in the political climate. For example, a new government with whom the Group may not have as close links may be more likely to seek to re-nationalise the group’s assets, terminate the Group’s subsurface contracts and attempt to re-open or challenge the tax, legal or other arrangements affecting the Group’s operations, which could have a material adverse effect.”

While the company may still have five more years with the same government, it seems that even currently it is having problems getting permission for new deposits. A company official told Reuters that it has been easier for ENRC to secure licenses in Brazil and the Democratic Republic of the Congo than in its home country of Kazakhstan, where ENRC has most of its assets.

“It takes three months, without any problems, to receive state permission to open up new deposits in Brazil or the…Congo,” Nariman Aripov, Director of ENRC Kazakhstan’s mining department, said. “In Kazakhstan, where we have been working for many years, there’s a moratorium and we are not permitted to do this.”

Red tape, lack of clarity

Not only chromium but also other mining sectors, such as uranium – Kazakhstan’s uranium reserves are second only to Australia’s – copper, zinc, iron ore, and bauxite are suffering from red tape and a lack of clarity.

“A lack of transparency in the tender process means that foreign investors do not feel confident they can get a fair hearing,” said Chris Welton, Rio Tinto‘s (LSE:RIO) general manager for exploration in Central Asia. “The decision on awarding tenders is driven solely on the signing bonus and the social contribution, with no consideration of the technical competence of the winner or the winner’s ability to develop that project.”

The government of Kazakhstan has said it will work to simplify the process of granting mining exploration licenses.

Government meddling in private sector

Engineering and Mining Journal reported that the greatest concerns regarding investment in Kazakhstan’s mining sector are “increasing levels of government interference in private sector enterprise, local content requirements, bureaucratic and micromanaging approaches to project approvals and monitoring, as well as what would be regarded by international standards as an exceptionally harsh approach to dealing with infringements of the law. Suspected speculation on mining properties is a particular area of Kazakh law investors should be very much aware of. As a result of these factors, mining output in Kazakhstan remains significantly below the country’s potential given its vast mineral resource endowment and ideal proximity to some of the world’s major emerging markets for commodities demand.”

Kazakhstan receives less than one percent of global investment in metals exploration, and the government says that less than 15 percent of Kazakhstan’s explored metals reserves are currently in production.

Clarity in Kazakhstan’s foreign investment regime could help chromite mining in the country at a time when the threat of China is rising. While Southern Africa and Kazakhstan geographically account for nearly 95 percent of the world’s chromium resources, and China produces no chromium, the country is exporting about 50 percent of its chrome ore from South Africa. Miners in South Africa are concerned that China is stockpiling chrome, sourced mainly from South Africa, to dictate future market prices.

Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.