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Timur Toktabayev: The Entire Subsoil Code is aimed at attracting an Investor

Timur Toktabayev: The Entire Subsoil Code is aimed at attracting an Investor

The conference of mining metallurgical specialists will take place in Astana on November 18 with the Ministry of Investment and Development engaged. Kommersant learned about the issues and supportive measures of mining metallurgical industry currently solved and implemented by the government from the interview with the Vice Minister of Investment and Development Mr. Timur Toktabayev.

“Timur Serikovich, what problematic issues are planned to be discussed and presented by the relevant ministry at the Miners Conference?”

“Many experts of the Ministry have been working on the event. The main topic is the Code; we plan to adopt it, present it to the Majilis in September 2017 and we hope it will become effective from 2018. Therefore, many deputies are now working in working groups beforehand, at the stage of drafting the code and concept. We have recently gone to Aktobe as a part of the Subsoil Committee, conducted an extended meeting with local executive authorities engaged; a lot of deputies were there. We were quite plain in discussing many issues; we presented the concept of the new Code on Subsoil and Subsoil Use. Therefore we expect to discuss in details the issues interesting for the business, branch organizations, association at the today’s meeting.”

“Does it mean that it is implementation of the order made by Prime Minister Bakytzhan Sagintayev, i.e. public discussion of the Subsoil Code?”

“Yes, you are right. Why? Because the text is actually ready. There is currently intense competition in subsoil use in the world. Look, investor is very selective; if investor doesn’t like anything, many countries can offer the same conditions as in Kazakhstan, in particular, with regard to geological perspectives, therefore many companies go to Africa; Mongolia has been actively opening its resources for investors. We have to survive the competition, because the deposits were mainly discovered in the Soviet time. There are some new deposits discovered within the independence period, but the number is insufficient. The main issue is that there is a struggle in the world for the quality of raw materials. It enables reducing cost of the products to make our enterprises competitive. Therefore we have to discover deposits of good quality, rather than just big as in the Soviet time. And we have some issues here, because content of minerals is much higher in other countries.
There are such deposits in Kazakhstan and 90% of them are still expected to be discovered, but they usually occur deep. The Soviet technologies generally allowed drilling to 200 meters deep. For sure, there were deeper wells on the sites with detailed exploration. In general, the territory was explored near the deposit surface. The current perspectives are mainly related to great depths. New technologies have already appeared. The previous geological technologies have been improved. Such technologies now allow exploration 800 meters deep; such technologies have already been used in Kazakhstan and implemented in geological sector. There are technologies with subsoil exploration up to 2 kilometers deep from the plane. While flying by such plane, it is possible to discover an abnormal mineral deposit by airborne geophysics. Can you imagine what it means? Kazakhstan has never been explored like that, but nature has prepared a lot of gifts we should discover. From the data we receive, we can see the quality is improving; this rule is well known in geology and we hope for discovery of large deposits with high content; this is our objective.

The entire Code is aimed at attracting an investor. Drilling, depth exploration cost a lot. The government cannot fund it or they will have to cancel many programs and fund geologic exploration only, however, it is risky as the discover probability rate is no more than 15%. Therefore it is better for the government to encourage an investor than to take risk itself. Investor is ready to come, e.g. capitalization at Australian and Canadian stock exchanges is more than $58 billion composed of junior companies. Accordingly, this is the small business, a stratum of enthusiasts, small companies that will be engaged in exploration of perspective territories, acquiring initial data to attract bigger players and transnational companies in future. This is the market to establish. There are 15,000 such companies in Australia and just 80 in Kazakhstan; therefore, we hope all the measures, novelties, standards provided for by the Code will reinvigorate the market and therefore ensure launch of new sites.”

“Minister of Investment and Development of Kazakhstan Mr. Zhenis Kassymbek has recently said that geological prospecting will be funded 4-5 times less next year vs last year. How will geological prospecting be encouraged? It is widely stated that a patent is issued to a company to get a separate site or right to sell exclusive information. How will it work here?”

“Governmental cost of a square kilometer is the main criteria of geological prospecting in the world. The current volume of investment in Kazakhstan, including private investment is $7 per square kilometers; Australia spends $167 for it, and Canada spends $203. Can you imagine how much we are behind! 20 and more times. It means we have to increase funding for the entire business 20 times in addition to increasing governmental funding. How can we do that? This is a very challenging task. We have to catch up with the countries in order to become as competitive as they are. Therefore, the government does the following: there are four stages of geological prospecting; first, major areal acquisition. Possible resources, prospects are discovered within the vast areas. The dynamics of the ancient geological processes provides evidence of perspective discovery of certain deposits. This is the huge entire area. Then the second stage where specific ore fields are discovered, e.g. an area containing gold or copper and detailed areal acquisition has already been in process there. Then they identify the sites, so called anomalies, i.e. big mineral outcrops; however, it is unclear where the body extends. These – large area, smaller area, three stages – shall be funded by the government. Because an investor will come and tell you “guys, I am ready to drill, but you should tell me where roughly”. In order to tell them roughly where, prepare geological data, provide information for materials – this is the task to be fulfilled by the government; it takes no less than 10% of total expenses for deposit discovery. 90% consist of detailed exploration, laboratory tests. Let’s see large areas; these are thousands of square kilometers, they are regional operations. Areas for exploration stretch for 100 kilometers. Then the site with anomalies of 10 square kilometers and then specific deposits with small spots of several kilometers. The latter should be drilled and explored in details to identify how thick the formation is, what the content is, outline it in order to avoid losing anything, etc. The government shall fund regional and prospecting operations. Budget and business funds can be engaged in prospect evaluation survey where a preliminary estimate of the resources and reserves can be conducted. Prospecting sites to be transferred to acquisition are performed at the expense of private investment.”

“Ok, how much does the government plan to allocate for geological prospecting from the budget next year vs last year?”

“The government allocated 4.3 billion Tenge in 2011; 8.7 billion in 2012; 9.4 billion in 2013; 9.1 billion in 2014; 11.4 billion Tenge in 2015. This year 8.2 billion Tenge has only been allocated in spite of the fact that the five-year program for the period from 2014 to 2019 was adopted allowing for 30 billion Tenge to be allocated per year, i.e. geologic exploration was underfunded. The Minister told about it at the governmental meeting. At least five times more funds shall be allocated for that compared to the currently allocated amount. This is taking devaluation event in account. If we compare the amount allocated for 2017 (8.2 billion Tenge) and 11 billion in 2015, we can see that the number is twice less. 30 billion before devaluation was equal to $200M. The government cannot afford to spend such amount today. No funds available. Therefore we have to find mechanisms, fund something, work more with investors, prepare the sites. The Code is aimed at simplification of the procedure to provide the right to subsoil use, all procedural issues in geological prospecting. This is our task and the leader of the country gave instructions and started the work.”

“Which specific incentives will be applied? Patents?”

“Licenses. Look, the contract is effective for 18 months. Who will wait for such a period? 18 months is quite a long period, and it is only for exploration. 24 months for production. People want to have title to the site; obviously, they should execute technical documents, pass inspection by environmental and emergency authorities, etc. in order to proceed to subsoil use. After that you may directly start the operations on the field. However, the contract is not signed unless the entire process has been passed. It is quite inconvenient. A person has to invest a lot in designing, preparation with no final titles or an assigned site. There are only auction minutes or minutes of direct negotiations, but not the contract itself. And if you talk to serious legal companies assessing your legal risks of entering Kazakhstan, they will say, “yes, this document gives some relative rights, however, it does not confirm your titles to the site”. Therefore the entire world strives to provide a person with the right, license within three days – that’s it. After that, such person gets design ready, etc. However, the government is currently interfering with the processes a lot. Foreign governments do not interfere so much, because there is a presumption of good faith; it should apply to the business, the government should trust the investor, and the investor should trust the government that it will not cheat the investor. And the government expects the investor to invest; it is the major requirement – you invest and no claims are filed against you, you make required payments and here you go. Geological exploration requires only two payments – a payment to the government and the minimum program of $10,000 per two square kilometers. These are clear demands to the investor – you came, paid and work – nobody will disturb you. Now subsoil users are constantly disturbed – various inspections, approvals; investors don’t like it. We have fallen behind a lot in the global rating and we should rise. We have the most problematic issues with respect to regulatory legal framework, trade barriers, quality of geological information, duplication, inconsistent legislation, and taxes among them.

Taxes and tax regime are not the best way here either. Let me explain to you using an example. We currently offer the working group to implement royalty on sales following the example of foreign taxation. What is the difference? The difference is that we impose tax for mineral production right after production. That means you have just produced mineral raw materials and paid all the money. But you have sold nothing yet. Therefore, you have spent money on production and the government has immediately charged taxes. In such a case, the company may show no working assets, spend everything. Three to four months later, when the ore has been sold, you will receive money for such ore; it may be sold even now, but you will receive money for it later. The same situation exists in the world – you pay taxes after you have sold it. This is a fair system for subsoil users, but it is more complicated to administrate. You should understand – it is easier to charge tax immediately. For example, it is more complicated to trace the entire chain – when it was sold, processed, however, it is fairer. Otherwise, companies have to have no working assets available. They will have to take a bank loan, replenish working capital, agree to high interest, some ugly things happen. And it results from the fact that we charge tax three months earlier than we should. It doesn’t make any sense. We should just change the order of some requirements

This is the first case; the second case is as follows. The tax for mineral production is time-expanded. Both production, direct production to the surface and initial reprocessing refer to subsoil use operations. For example, you have produced ore at a cost of $ 100. But if you reprocessed and concentrated it, it costs $300, but the tax is the same. Why should subsoil user be encouraged to perform advanced processing? If we talk that we strive for advanced processing in Kazakhstan, we have no tax incentives in this respect; McKinsey told the working group about it and the Ministry of Economy know about it. We have been taking an active part in that; we do our best to support such innovation, e.g. Australia impose 7.5% tax on ore, 5% on concentrated ore and 2.5% on metal. It means, the deeper the processing is the lower the tax is. It is clear that the selling price is increasing; the government has higher income from 2.5% on metal than initial 7.5%. It is also more profitable for reprocessing subsoil user as such subsoil user has already got high value-added product and it is ok to pay more to the government as the profit will be higher as well. These are the economic incentives.

Therefore we do our best to get it; we offer it. Of course, there are some administration issues and how to implement it in the legislation, how to avoid misusing such standards, etc. For sure, we are working on it. Therefore, we have instructions to harmonize the Code on Subsoil and Subsoil Use with the Tax Code.”

“Generally, geologic exploration was said to be exempt from VAT, some expenses would be compensated, wasn’t it?”

“What added value can be found from the geological prospecting? Geological prospecting is recognized as a loss all over the world. Figuratively speaking, you are a CEO, you spent five million dollars on geologic prospecting and recognize such expenses as a loss, as you have buried the money. And you have to pay tax on the amount. Is it logical? It’s not. Because subsoil users didn’t pay it before, no VAT was imposed on prospecting, it came into effect in 2009. It was difficult, subsoil user had to come and prove to inspector that the user had really performed geological prospecting; all that required inspection; the subsoil user had to perform a reconciliation check sometimes for compensation purposes. So, they made up their mind to stop “suffering” and cancelled compensation for VAT expenses in geological prospecting. Well, they didn’t have opportunities and desire to be engaged in complicated tax administration issues. Therefore it is clear that ensuring of the budget revenue side is very important and the wish to collect taxes as soon as possible is nature, however, we should not create economic conditions inconvenient for subsoil users. We should identify the balance of interests – it is what we are currently doing. We have a lot of suggestions with respect to subsoil taxation, I believe the Ministry of the National Economy will tell you about that in details; there are separate groups and we take part in such groups. As a branch department, we stand for geological companies, junior companies, subsoil users, therefore we do our best to provide for the conditions for them in the Code.”

“Have foreign companies, which operate in Kazakhstan, e.g. Iluka Resources, RioTinto, received any guarantees there or they work via Kazgeology? If they discovered something, e.g. a large copper deposit in Karaganda Region, how would they exercise their right to subsoil use?”

“They already have a contract at place. They work in cooperation with Kazgeology. Kazgeology even does some subcontracting works. So, Kazgeology is a serious company: they purchased cutting-edge equipment, engaged the best airborne geophysical technologies from a Canadian firm. As a result, Rio Tinto did not have to bring anything, they purchased services here; Kazgeology provided a part of services for them. But there are also domestic companies providing high quality of works; they have also been engaged by Rio Tinto as subcontractors. The Australian company operates under the contract; it has an exclusive right to transfer to production stage for everything they find.”

“It means, if you want to conduct prospecting, you have to work whether via Kazgeology or via budget-allocated tenders, doesn’t it?”

“There are a lot of local issues for many large global companies, such as official registration of the land lot, interaction with governmental authorities, environmental agency, emergency agency, local population, etc. For such purpose, it is very convenient to have a partner represented by a national company, it is a globally recognized practice. Japanese national companies enter different countries, overcome all bureaucratic barriers, execute contracts, bring the projects to the highest degree of completion, and only after that they transfer such projects to Japanese private companies. It is easier for the national companies to reach an agreement with the state bodies on an official level and win a contract and then the business enters. However, Rio Tinto has entered Kazakhstan on its own, without governmental support. Kazgeology National Company will ensure signing the contract, execution of required documents, a full set for commencement of works, and Rio Tinto performs operations as they are good at it.”

“How will CRIRSCO and SRC (State Reserves Commission – editorial note) go along in the Code?”

“They won’t. There will be a transitional period while SRC still exists, and we guarantee stability of the contracts. That means the contracts that will not be eager to change to the new conditions will be able to use the previous legislation under guaranteed conditions, therefore, SRC will remain to serve them, for sure.”

“During what period, roughly?”

“I believe for three years maximum after the adoption of the Code. After that we will do our best to perform complete transition. It is convenient; we have already had self-regulating organizations available to undertake this function in full. The business community is interested; there will be no chance to double-check all the time. For instance, there is a situation – you are a bank, I’ve come to get a loan from you. You double-check the reserves, SRC double-checks the reserves. You go to the stock exchange the other day, and the stock exchange double-checks, private investors – everyone double-checks due to mistrust. Indeed, the transitional period, old systems of reserves evaluation, Soviet approach sometimes, and imperfect legislation resulted in some moments where not quite reliable reserves are disclosed and investment decisions were made using such disclosure. When investing subsoil user burnt their fingers on such a case, they started check all information thoroughly, including historic information. You know that there are always unfair people, in any business, who use fraud schemes. This new system will provide an opportunity to avoid the above issues. Competent Person will play a major role here. Such Competent Person will get a good remuneration for it as all over the world. A person of such high level is a professional, such professional values his/her reputation and signs any report in person. That means brand people in geology are responsible for reserves estimation. Such person may act as an advisor depending on the wish, however, if such competent person makes a mistake, the self-regulating organization will expel him/her forever. Such person will never be able to do this work or earn big money for his/her work. It is a really profitable job, it is what we count on.”

“When will training of competent persons as a part of CRIRSCO implementation be completed?”

“It should complete within the transitional period. Some of them have already received certificates; the most important thing is that they should be confirmed by an international organization. If domestic experts will have not have such high qualifications, or they will not want it or they will charge an exorbitant price, then anyone will always have a chance to buy such service from international experts in calculations. Also international experts charge big money for their services and almost all such amounts leave Kazakhstan for such reserves confirmation, in future such money will be kept in Kazakhstan. That means domestic companies, our nationals will be able to ensure audit of reserves on an international level.”

“Galym Nurzhanov (CEO of Kazgeology NC JSC – editorial note) said that they were buying a laboratory, so they will use it for tests, won’t they?”

“Yes, they will. It is one of the components.” .

“Will they buy themselves or use government funding?”

“It might be a Public Private Partnership. You see, the most important aspect in laboratories is that when you deliver samples, you encode such samples in order to avoid rigging, because they may gild a sample, it will show high gold content and they will say they have discovered a huge deposit, though they actually won’t. Therefore the entire system has been established. Such system should be internationally recognized. Unfortunately, laboratories in Kazakhstan cannot ensure their laboratory tests to be recognized at the stock exchange. Therefore domestic specialists have to bring samples to Kyrgyzstan as they have an internationally recognized laboratory, to Russia, other places, where they can do it. Mineral reserve complex is a basic industry in Kazakhstan, new industries have just appeared, they are at the development stage. So, we have no laboratory. How come? All the samples, core samples are brought abroad, it’s not right. If you don’t have a stock exchange in plans, then you can get a laboratory test here, include in the State balance sheet, and start production. However, if you want to find a big investor, you will need an international appraisal, bring your reserves to international laboratories where there are systems in place to avoid poor-quality or unreliable tests.”

“Will the laboratory be funded along with the geology center by TNC that will work together with Kazgeology?”

“Such geological centers are formed in clusters around the world, i.e. science concentrates there, because it is possible to implement a new technology, R&D in clusters, as everything develops together. We have a free economic zone – Alatau ITP close to Almaty, with an area of 160 hectares. There is enough space with infrastructure provided by the government to locate the innovative geology cluster there. There are such centers in US, where 8,600 people are employed, in Turkey with 3,200 people and in France with 2,000 people. This issue is of current importance for Kazakhstan, and all the conditions have been created and we plan to establish such.”

“As for an interactive geological map, when will it be completed?”

“The interactive map will enable to see vacancy of territory, register a purchase of geological information or apply for a license. The interactive map will be launched with the Code. The feasibility studies for the map are in the progress; Kazgeology will make it, whether as a PPP or on its own – the decision will soon be made.”

“That means it hasn’t been completed yet. It was said that 60% of date had been missed and SRC representatives had had complaints.”

“No, it hasn’t. The existing map has been developed on a half-altruistic basis, subsoil users provided their assistance, systematized their information. The map shall be integrated into the e-government. It should be fully fixed in the coordinate system, it should have a clear geo-tagging, because contracted territories will be geo-tagged to land lots in future; such land inventory is performed by the Ministry of Agriculture in cooperation with Akimats. We perform on a Republican level with respect to geology, subsoil; definitely, it is impossible without a land lot. Therefore the entire map will be provided with required information in full.”

“How will the Code regulate mine abandonment, processing of man-made mineral formation (MMMF), water management?”

“All these issues will be covered by the Code. There will be a separate section concerning MMMF; the best international and Chili practices and experience in mine abandonment will be described; the World Bank prepared their report concerning this issue. All that will be considered.”

“How will prospecting production be regulated after recent events at Kazakhaltyn?”

“Prospecting production will be provided for a period of one year. It will be easy to get. We will provide all “black” miners with an opportunity to perform operations legally, pay taxes, and the income they will receive will be legal income. Because you know, there is an issue now. Sometimes there is a fourth-generation miner, he has a family, two-three members work. Execution of contracts for 18 months, participation in bidding is beyond their strength. They obtain a seasonal license and that’s it, they complete a site, comply with standards, environmental requirements, etc. That is why the issue will be simplified. Prospecting existed in Soviet period, it provided between 30 and 40% of production, they often established prospectors’ crews in the mines. Unfortunately, we have lost it from a legal point of view. It exists somewhere in practice. There are such companies, a kind of prospectors’ crew, but it is a big market indeed. It may provide a growth of several tons of gold per year.”

“At the last governmental meeting the Minister declared of the new auction for deposits for the next year. What interesting deposits can be found there next year? What metal and content will it be?”

“The auction is a fully transparent system – who pays more. Almost all deposits discovered in Soviet times have been contracted. Production is in the process, the government receives taxes, people work. However, reserves have been slowly petering out; new reserves are required. Almost for all types of basic minerals, everything on the State balance sheet is in production, therefore, they need new ones. Finally, the auction will be 90% dedicated to new prospecting sites, so the auction will be mainly conducted for prospecting.”

“How many deposits will be listed with the sale of right to geological prospecting?”

“We expect one hundred solid mineral deposits. But mainly geological prospecting.”

By Yernar Kaparov

According to