Despite boasting one of the most diversified economies in the region, Uzbekistan’s mining and metals sector still contributes a huge share of economic production. The Ministry of Economic Development and Poverty Reduction estimates that mining companies account for 50% to 60% of value added in GDP. Even before the pandemic sent demand for gold soaring, the precious metal represented around 25% of total Uzbek exports. The country was the eight-largest gold producer in 2020, the fifth largest producer of uranium and claims the world’s eighth-largest copper reserves. The country’s state-owned mining giants play a vital role in reaching new export markets.
But the government recognises that the sector could and should be larger, more efficient and more productive. To this end, the authorities have begun a wholesale transformation that has parallels in other industries like energy. Over the past five years, a steady stream of legal acts has laid out the road ahead for mining and metals. Specific presidential decrees dedicated to overall reform, improving exploration, transitioning to market conditions and attracting international investment have all been published.
Sound regulatory architecture will provide the foundation for sustainable development, and the government is determined to get this right from the outset. Created in 1991, the State Committee for Geology and Mineral Resources (Goskomgeology) holds numerous mineral deposits and is the entity with which most foreign firms have signed joint ventures. But Goskomgeology has now evolved into a regulator with an almost exclusive focus on policy. Many of its deposits are being transferred to the state-owned mining giants, which are themselves being modernised and reformed to function as joint stock companies. A host of smaller exploration entities previously under Goskomgeology have been spun off to form one huge state-owned exploration unit — Uzbekgeologorazvedka. With the help of international consultants and financial institutions, the government hopes to place shares in the new entity with local and international investors in 2025.
Goskomgeology is now dedicated to helping the government improve policy across sustainability, supervision, investment, training and qualifications. Licences and permits are being introduced for the use of groundwater, strategic metals, nonmetallic raw materials and artisanal mining. The European Bank for Reconstruction and Development, Boston Consulting Group and the World Bank all contributed recommendations to a new version of the law “on subsoil”. This key piece of legislation will introduce new industry-wide standards, rationalise the use of land through a block system for exploration and reduce royalties and licence payments.
“We have had a practice of production sharing agreement joint-ventures, but we see that many countries are moving to a licence-based allocation for fields,” says Bobur Abdinazarov, Deputy Minister of Economy and Poverty Reduction. “We are planning to move to a system where every company — local or foreign — pays the same taxes and the licence fee would vary depending on the field.”
The licencing system will be open, transparent and supported by new mechanisms for assigning rights, free access to geological information and the digitization of data. A new online platform “E-auksion” will go live later this year, with the first auctions scheduled for November 30th.
“We will be putting up for auction the rights to 31 geological sites, which will be provided to investors under a licence agreement giving them 100% control over management,” says Bobir Islamov, chairman, Goskomgeology.
Moving up the value chain
Exploration is key to identifying new deposits for both domestic and international firms to access, and for estimating the value of existing discoveries. Although state-owned Uzbekgeologorazvedka has a temporary monopoly on exploration, this will not last for long. The government plans to hold competitive tenders for future exploration programmes. Islamov says that new equipment and technology is already allowing exploration at new depths and across wider areas.
“Initial exploration increased 35% in 2019-20, and we’ve already identified 12 promising new areas,” he says. “The foundation is being laid for further increases in the coming years.”
There are already a host of successful partnerships between Uzbekistan’s state-owned firms and foreign miners. In 2018, Russian company Rosgeoperspektiva agreed to work with Goskomgeology to explore for copper and gold. In 2019, French firm Orano formed a joint venture with Goskomgeology to work on Uranium mining. The Japan Oil, Gas and Metals National Corporation is working on uranium and other metals. Turkish firms are mining for gold and tungsten.
“At present there are more than $600m worth of projects involving international mining firms underway,” says Islamov. “There are projects in the discussion stage where the investment portfolio exceeds $1bn.”
The government is by no means relying on international firms to ensure more efficient and productive activity across the sector. Shifting towards value-added production and processed products is a key part of the industry’s growth. The government recently announced plans for a new value-added copper industry cluster, which will be followed in the future by similar clusters for other strategic minerals and metals.
In many ways, the project represents industry reform in microcosm. The cluster will use new types of equipment and technology, it will take advantage of fresh regulatory standards and new interactions between science and manufacturing. Foreign consultants and advisors will help prepare a draft concept, and there is great scope for foreign manufacturers and investors to take part.
The country’s copper miner — Almalyk Mining and Metallurgical Combinat (AMMC) — has a huge role to play in the cluster. AMMC is working to dramatically improve processing of cathode copper, which will be the only raw material for all high value-added finished products in the country. The complex is already engaged in deep processing of cathode copper to produce pipes, wire and enamel wire.
“Working on rare and hard alloys will require new scientific and technological facilities in the cluster,” says Abdulla Khursanov, chairman, AMMC. “Almalyk has a pipeline of 19 investment projects totalling over $75m.”
AMMC is studying the potential for producing copper products for electric motors and graphite brushes. Longer term plans include producing the types of copper cable products used in electric vehicles and components in renewable energy engineering. The search for new value chains and export opportunities is taking place elsewhere in the metals and mining sector. Goskomgeology is working with state-owned lender Uzpromstroybank and the country’s building materials association on a strategy to develop building materials for domestic use and a value-added production chain focussed on exports.
“With the advent of new technologies there is wild demand for metals and our challenge is to take advantage of these new opportunities,” says Islamov.
Uzbek firms have long been regular attendees at international exhibitions and conferences, seeking to highlight their production quality to new markets. Increasingly, they are working with industry bodies and exchanges to secure accreditation. After many years of attending the London Metal Exchange (LME) Week, AMMC is now in talks with the LME to earn a brand A designation for copper.
“This will expand our sales reach,” says Khursanov. “We are also going to participate in LME auctions and use their financial instruments for hedging.”
Building self-reliance
When it comes to developing the cluster project, although the government will negotiate contracts with foreign firms, the cost of developing the cluster will be covered by AMMC and other state-owned companies like Navoi Mining and Metallurgical Combinat (NMMC). As newly incorporated joint stock companies, the mining giants are moving away from a reliance on state funding. AMMC received its first credit rating from S&P Global in 2020, and is hoping to open credit lines with several European lenders. An IPO is scheduled for 2023 and the capital markets will offer yet another funding option.
“Taking into account the need to finance investment projects as well as the great interest in the complex from foreign investors and businesses, we expect to successfully issue Eurobonds in the next few years,” says Khursanov.
In order to make the company more attractive to foreign capital AMMC has worked with potential investors, international financial institutions and SRK Consulting. This has allowed the complex to recalculate the reserves of key deposits including the huge copper sites at Kalmakyr and Yoshlik-I. Preparation for an IPO has meant shifting to modern standards of accounting, financial reporting and auditing with help from some of the ‘big four’ accounting firms.
NMMC is going through a similar corporate conversion. Despite being one of the largest gold producers in the world, the combinat is also a major uranium producer. On the one hand, the country’s deep deposits of uranium ore will allow it to create a thriving domestic nuclear power industry. On the other hand, the uranium operation has made it hard for NMMC to attract foreign investors only interested in gold. In addition, NMMC and AMMC have a large number of non-industrial assets and facilities that they are responsible for, which makes their products more expensive and again hampers outside investment.
“Privatising the big mining complexes is a complicated process,” says Karen Srapionov, partner at Avesta Investment Group. “These complexes are like entire cities. You have social assets like kindergartens, housing, or even a football team. All this needs to be assessed and separated before an IPO.”
The mining giants are also reconsidering what ancillary industrial activities should be part of their operations. AMMC, for example, expects to save over $10m a year by constructing a machine-building plant to allow it to produce its own crushers, mills, spare parts and other maintenance products. At the same time, it has scheduled a phased transition to outsource numerous other aspects of its operations — including transport, ICT and repairs — to reduce the costs of finished products.
NMMC’s uranium mining operations have already been spun off into a separate entity named Navoiuran. Another entity — Navoi Mining and Metallurgical Combinat Fund — will handle social obligations. That leaves NMMC free to focus on gold mining and attracting international investment through an IPO scheduled for 2023. Like AMMC, the combinat is also looking into Eurobonds and international credit lines to fund its capital intensive projects. NMMC’s overarching strategy is a billion dollar investment programme that will boost gold production by 30% between 2016 and 2026.
“McKinsey will be involved in helping NMMC improve operational efficiency and carry out its billion dollar investment strategy,” says Kurbanmurat Taparov, NMMC’s deputy general director. “UK-based consultant Alvares & Marsal will help NMMC build out an international standard procurement system.”
Before AMMC and NMMC conduct their respective IPOs, another mining firm is scheduled to go first. The government plans to conduct primary and secondary share sales for Uzmetkombinat — the country’s leading steel maker — in 2022. The sectoral transformation will take years, but the myriad reforms already in place leave no doubts as to the government’s commitment. Investors eager for a stake in an industry preparing to reach world-class status will soon be spoilt for choice.