TRANSITION TO KAZRC STANDARDS - EXPECTATIONS AND RISKS (MINEX 2023)

Freiman G.G., Urazaeva S.B., Enshin N.V.
 

1. Current status of implementation of the KAZRC Code.

The important role of the transition to international reporting standards for the assessment of mineral resources and reserves to increase the flow of investment into the geological and mining industries of Kazakhstan was recognized at all levels of government in the country back in 2012 in the Concept for the Development of the Geological Industry until 2030.

Over the past decade, a lot of and very complex work has been done in this direction, valuable experience has been gained and fundamentally important results have been achieved.

These include in particular:

• recognition in 2016 of the Kazakhstan code of standards KAZRC by the international Committee on Public Reporting Standards for Mineral Resources and Reserves CRIRSCO, as well as its updated version in 2021;
• recognition of PONEN by the international committee of CRIRSCO, as well as individually by its members;
• legislative consolidation of the application by subsoil users of KAZRC standards in the Code “On Subsoil and Subsoil Use” of the Republic of Kazakhstan (hereinafter KoNiN) when preparing reports on the assessment of mineral resources and reserves of solid minerals and uranium during the transition to the production stage;
• inclusion of KAZRC standards in the listing rules of both Kazakhstan stock exchanges (KASE and AIX AIFC);
• increase in the number of PONEN members to 325 people as of April 1, 2023, of which 106 people are self-certified Competent Persons (hereinafter referred to as CP). (Fig. 1, 2);

Fig. 1 Number of PONEN members (distributed by region) as of 04/01/2023

• as of the end of 2022, the Geology Committee had accepted 80 reports prepared in accordance with the KAZRC Code, both by members of PONEN and members of other internationally recognized professional organizations (RPO) (Fig. 3);
• development of “Methodological recommendations for the preparation of KAZRC reports”, as well as annexes - Recommendations on types of geological exploration work in 2022 in order to improve the quality of reports (Fig. 4);
• implementation of the Regulations for conducting preliminary interviews for candidates for Competent Persons of PONEN in order to increase the requirements for their self-certification starting from the current year. Candidates for the CL must demonstrate compliance with their understanding of the statutory documents of PONEN and the requirements of the KAZRC Code (standards adopted by the international committee CRIRSCO) and responsibility for their compliance (Fig. 2);
• introduction of the practice of verifying KAZRC reports from 2022, similar to how this is carried out in most RPOs - SAMREC - South Africa, JORC - Australia, CIM - Canada, etc. The verification is carried out by the Commission of the PONEN Executive Committee for the preparation of KAZRC reports with the involvement of experienced Competent persons according to approved Regulations regulating the procedure for conducting such inspections. The purpose of the inspections is to improve the quality of reports of Competent Persons of PONEN.

Fig.2 Competent persons of PONEN

Based on the results of checks of reports, many of them were returned for revision. The reason for this is that most Kazakhstan Competent Persons do not yet have sufficient experience in preparing reports to international standards.

The fundamental aspects of returning reports for revision include insufficient reconnaissance data (low confirmability of historical reconnaissance results, insufficient volume of certification work), unsatisfactory (or insufficient) quality control data and reliability of sampling and analytical data, etc. (Fig. 3). A review of the reports compiled by the Competent Persons led to the conclusion that the simplification of the format for preparing reports (the absence of requirements for attaching a large volume of graphical applications on paper, as well as many volumes of counting tabular applications), and a significant reduction in the procedure for accepting KAZRC reports by the Geology Committee, individual Kazakhstan CLs were were also perceived as a basis for reducing the requirements for the validity of the information presented in the report, which is an obvious misconception and certainly leads to a deterioration in the quality of reports.
Fig.3 Distribution of KAZRC reports by types of minerals and main critical issues

Fig.4 Methodological recommendations for preparing KAZRC reports and recommendations for types of geological exploration work

The key task for explaining KAZRC standards to industry specialists, including representatives of government agencies, universities, and research institutes, is to regularly conduct training seminars in offline and online formats on the topics of global best practices in geological exploration and reporting. In this work, active assistance from the KAZRC Association and PONEN is provided by the specialized department of KazNRTU named after. K.I. Satpayeva. In total, during 2016-2022, 782 specialists were trained, mainly from subsoil user companies.

The process of implementing KAZRC standards, which began in 2016 from the moment Kazakhstan joined the international committee CRIRSCO, is steadily supported by the Head of State, which is reflected in a number of his direct instructions. In particular, in the Decree of the President of the Republic of Kazakhstan dated September 13, 2021 No. 659. On measures to implement the Address of the Head of State to the people of Kazakhstan dated September 1, 2021, in P.10, the task of “Implementing an international system of reporting standards for resources and reserves of solid minerals according to CRIRSCO template and the first application principle for issuing subsoil use licenses throughout the territory of the Republic of Kazakhstan.”

According to KoNiN, at the end of this year the transition period to KAZRC standards ends and in this regard, some representatives of the industry and government agencies, fearing a complete abandonment of the usual system of the Soviet GKZ classification and taxation regime, are actively initiating the issue of extending the transition period to KAZRC standards and, accordingly, extending the coexistence of the two reporting standards. The main argument at numerous meetings in professional associations and the Authorized State Agency was concerns about a possible decrease in tax revenues to the budget. At the same time, no calculations or comparisons were provided to substantiate the concerns they voiced.

The KAZRC Association and the PONEN Executive Committee, on the contrary, emphasize that the principle of taxation (MET or Royalty) is one of many modifying factors that are analyzed and applied when developing a feasibility study at different stages of project assessment. The application of either MET or Royalty does not in any way affect the amount of Resources and Reserves when assessed according to KAZRC standards and, accordingly, the amount of tax revenue. The volume of tax revenue is determined by the rates set by the state.

At the same time, the KAZRC Association and PONEN have repeatedly drawn attention to the fact that after the end of the transition period, mining facilities that are developed on the basis of reserves approved by the State Reserves Committee, and for which there is no need to re-evaluate Mineral Resources and Reserves according to KAZRC standards, can, like first, be reflected in the state balance sheet in the section of the State Reserves Reserves until they are fully developed, or until the subsoil user himself makes a decision on the revaluation of mineral resources and reserves according to KAZRC.

Taking into account the need to strengthen interaction between government bodies, industry associations AGMP, APGO, KAZRC, PONEN, and subsoil users to resolve existing problematic issues and to successfully complete the transition period, a “Roadmap for a complete transition to KAZRC from 01/01/2024” was developed, three Working Groups were created groups in various areas of the final stage of the transition period.

 

2. Expectations and risks

In the context of fierce competition for investments in the global mineral market, any extension of the transition period until the full implementation of the KAZRC code will definitely be perceived by potential investors as a change in government policy regarding the integration of Kazakhstan into the international system and the desire of the Geology Committee to preserve the GKZ system in order to control both the process, and the results of the assessment of mineral resources and reserves.

The GKZ system, which reliably served the industry under Soviet state planning, is hopelessly outdated in the new realities. The 30-year gradual degradation of the GKZ system, due to the departure of a huge number of experienced specialists, led to the actual loss of quality control. For example: neither the GKZ/MKZ employees nor the independent experts of the State Reserves Committee ever check the coordinates, wells, or samples that are involved in calculating reserves. Therefore, the current GKZ system can allow any deviations (even falsifications) related to both the quality and the very fact of the existence of the object. Investors are well aware of this and therefore not a single foreign company trusts the results of exploration if it was conducted in accordance with the practice of the State Reserves Committee that has developed over the past 30 years. It must be emphasized that the current state of the GKZ system is radically different from the Soviet-style GKZ system, where quality control was even stricter and cost more than quality control by international standards costs today. In this regard, it is enough to mention at least one strict requirement of the Soviet State Reserves Committee, the fulfillment of which was mandatory when exploring deposits of the third group in terms of the complexity of the geological structure - certification of drilling data by excavation of heavy-type underground mine workings (shafts, adits) on at least two horizons, with mandatory taking dozens of bulk samples weighing several tons each.

Simple numerical examples very clearly show the chronological change in the quantitative (and parallel qualitative) state of the State Reserves Committee. At the time of the creation of the State Reserves Committee of the Republic of Kazakhstan in 1993, the number of full-time employees of this division of the Ministry of Geology and Subsoil Protection was more than 40 specialists. The most experienced geologists in the areas who had extensive experience in exploration of deposits and calculation of reserves with approval by the State Reserves Committee of the USSR were recruited as heads of the State Reserves Committee, as well as heads of departments and chief specialists. As of 1990 (and according to the plan for 1991), the annual volume of government funding for the geological study of the subsoil of Kazakhstan was 1.0 billion US dollars, the implementation of which was ensured by 80 thousand workers who worked as part of 52 geological expeditions of our country. Accordingly, the number of high-level specialists was approximately two orders of magnitude greater than what remains today. At the same time, it must also be borne in mind that these statistics do not include mining industry specialists.

After a series of very destructive industry reorganizations at the end of the last and beginning of the current century, the State Reserves Committee lost significantly both in numbers and in qualifications. Further, even more unproductive sectoral transformations finally lowered the status of this division of the authorized body. As a result of this destructive process, the concepts of the modern GKZ and the GKZ of the Soviet period were replaced, and therefore tools were created to manipulate the concept of the GKZ. The advantages of the GKZ, which actually existed in the Soviet past, have completely ceased to exist. This is, first of all, 100% state funding of all geological exploration work, the presence of a huge number of highly qualified specialists, which ensured increases in reserves and new discoveries, etc. The modern State Reserves Committee, due to the gradual decline in the professional level of all participants in the preparation of reports and their consideration, over the years has turned into a system of collective irresponsibility, which, coupled with the lack of their own practical experience in preparing reports with calculation of reserves by current employees of the State Reserves Committee, as well as the insufficient qualifications of many authors of the reports, the presence The practice of affiliation and contractual reporting poses a major threat to the further development of the industry.

In the current situation, unfortunately, the evolutionary path proposed by some experts is completely unproductive. Every year, alas, those who knew the best practices of the domestic industry past are physically becoming fewer and fewer. At the same time, a large number of young geologists are appearing who work both in foreign and leading Kazakh companies, where advanced international experience is being actively introduced. Thus, in our opinion, today the best global practice for conducting geological exploration is becoming more accessible than the practice of the GKZ standard (in the sense of the distant past). And since the new generation of specialists who do not have experience in the practice of GKZ (in the best understanding of this standard) quantitatively already sharply prevails over specialists of the old school, this transition for them does not represent such a difficult psychological task as the older generation faces. In the current situation, prolongation of the combined coexistence of two different standards will be a serious obstacle to the widespread implementation of the best global industry practice.

In the context of discussing the issue of introducing international reporting standards in Kazakhstan, it is worth recalling that many fields, primarily with foreign participation, over the past 20-25 years, were simultaneously assessed according to the JORC code, both for internal use (to ensure an understanding of the current potential of the deposit) and for entering the stock exchange.

Many enterprises and companies in Kazakhstan have already completely switched to the practice of preparing reports according to KAZRC, which is essentially equivalent to JORC / NI 43-101, so the majority of subsoil users in Kazakhstan are almost ready for a complete transition to international standards. For example, the companies Kazzinc and Altynalmas have already revalued all their facilities according to the KAZRC standard, both mining and exploration, and the Polymetal Eurasia company plans to do this this year. It is possible to identify a very limited list of enterprises for which it is difficult to assess KAZRC resources in high categories due to the many decades of work history at the sites and the lack of complete and reliable data on exploration and mining (which is associated with poor-quality geological exploration), or generally due to their loss . But, on the other hand, for example, for such large fields as Ridder-Sokolnoye and Zhezkazgan, at one time, the database was collected for at least 10 years, because a huge amount of data necessary for revaluation of reserves was accumulated. Until this moment, even with all the desire, it would have been impossible to update the reserves of these deposits according to any of the standards.
 

Based on a study of the best global practices in the mining industry, showing that more than 80% of investments in geological exploration of solid minerals fall on projects that apply international CRIRSCO standards, it can be confidently stated that only a complete transition to the KAZRC standard, starting from 01.01. 2024, the cessation of the practice of double standards (KAZRC and at the same time the State Reserves Committee), with the further development of the corps of Kazakhstani Competent Persons, will ensure a significant increase in investment activity in geological exploration in Kazakhstan, which, in turn, will lead to the discovery of new fields.