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Shifting dynamics in Kazakhstan’s mining and metals industry

The year 2024 promises a flurry of activity with upcoming MINEX Forum events in Kazakhstan, Kyrgyzstan, Europe, and the UK. Preparations are underway for the 14th MINEX Kazakhstan Mining and Exploration Forum, scheduled for 17 and 18 April 2024 in Astana. This presents an appropriate moment to offer a subjective overview of the current state of the mining industry in Kazakhstan.  This review is a blend of emerging trends and recent developments and aims to provide nuanced insights into the shifting dynamics in the industry. It is worth noting that all the facts and figures can be easily corroborated through open sources.

As organisers of the MINEX Forum in Kazakhstan since 2010, we’ve observed a notable transformation in the market, creating enticing prospects for international investors, mining, and technology firms. Kazakhstan is traditionally appraised for its predictability, long-term vision, and commitment to reforming the mining sector to adhere to the best international norms and practices. However, recent initiatives carried out under the banner of building “New Kazakhstan” have stirred questions and concerns among both local and international companies operating in the country.

The upcoming MINEX Kazakhstan Mining and Exploration Forum in Astana will serve as a platform for discussing the latest developments, shedding light on the evolving landscape, and offering insights into future scenarios.

For more information and registration details, please visit 2024.minexkazakhstan.com

Key tasks for the mining industry outlined in Kazakhstan’s National Development Plan

On 5 February 2024, the Government published the  National Development Plan of the Republic of Kazakhstan until 2029. Kazakhstan aims to increase mineral production by 40% by 2029 according to its new National Development Plan. However, the mining industry faces challenges like resource depletion, decreasing competitiveness due to high energy intensity, rising labour costs, and complex logistics.

Despite having mineral deposits, there is a shortage of fields ready for development. Production of copper, chromium, and iron is expected to decline, while the potential for nickel, cobalt, lithium, and other rare metals remains untapped.

To address these issues, the government plans to:

• Conduct geological and geophysical exploration over 400,000 square kilometres (comparable to the size of Paraguay, Iraq, or Uzbekistan) and replace 20–50% of reserves for critical metals.
• Encourage geological exploration through co-financing, VAT exemption, and 25% depreciation of expenses.
• Establish infrastructure for the storage and processing of geomaterials by constructing a storage facility and core storage facilities.
• Reconsider the tax rate for investors developing man-made mineral formations.

Kazakhstan’s Mining Investment Potential is yet to be explored

For Mining Companies, Strategic Investors, or Private Equity firms seeking portfolio diversification, an often-unnoticed gem is emerging: Kazakhstan.

For companies pursuing high-quality, cost-effective mining assets, Kazakhstan stands out as a compelling opportunity. This Central Asian nation boasts the world’s largest reserves of chrome, iron ore, lead, and zinc, and the second-largest reserves of uranium, silver, and copper. Empowered by a pro-business government actively encouraging foreign investment and partnerships, Kazakhstan’s mining sector is on the brink of substantial growth. While challenges persist in this developing market, the potential rewards for early engagement in major mining ventures are significant. With vast untapped mineral deposits and a government eager to attract foreign mining enterprises, this overlooked emerging market may house your next major investment.

On 19 January 2024, President Tokaev urged businesses to cooperate in the extraction and processing of critical raw materials.  According to recent estimates, there are over 5,000 unexplored deposits still present in Kazakhstan valued at a staggering 46 trillion dollars. Currently, the country produces 19 out of 34 critical raw materials important for the Green Transition economy. Deposits for 9 more like cobalt, tungsten, lithium, and others can be exploited with the necessary investment.

Kazakhstan’s Mining Advantage

Kazakhstan’s mining industry enjoys cost-effectiveness due to several factors. Abundant natural resources provide an array of valuable deposits for development. Labour and tax costs are notably lower than in other mining jurisdictions, with salaries for mining professionals up to five times lower than in Australia or Canada. A competitive corporate tax rate of 20% contributes to high-profit margins. There are currently 55 tax treaties in force that provide for a reduced rate of branch profit tax. The well-developed infrastructure, including reliable road, rail, air, and port networks, further supports efficient operations. Additionally, connectivity to China’s Belt and Road Initiative expands market access across Eurasia.

Two promising mining regions in Kazakhstan are the Rudny Altai polymetallic belt and the Central Kazakhstan Tectonic Zone. The Rudny Altai belt houses significant reserves of copper, lead, zinc, gold, and silver, while the Central Kazakhstan Tectonic Zone boasts sizable deposits of gold, copper, and iron ore.

Kazakhstan’s Role in Energy Transition

Kazakhstan is keen on playing a key role as a strategic supplier of materials fundamental for Energy Transition and paving the way for a more sustainable future.

The global energy landscape is undergoing a transformative shift, and Kazakhstan is strategically positioned to capitalise on it. The agreements reached in 2023 at COP28 in Dubai have paved the way for nations to reconsider their reliance on traditional energy sources. With the world rapidly transitioning to renewable energy, Kazakhstan, the country traditionally relied on oil and gas, is poised to leverage its extensive mineral reserves as a viable alternative.

Until 2020, a significant portion of Kazakh exports was tied to fossil fuels. However, recent data from the International Energy Agency suggests a paradigm shift. The global demand for specific raw materials, including lithium crucial for battery production, is projected to soar by up to 1000% by 2030. Kazakhstan’s undiscovered lithium reserves add a layer of intrigue, potentially propelling this nation into a new era where its lithium industry rivals its well-established oil sector. Kazakhstan, with its abundant chromium reserves, secures the fifth position globally in zinc reserves and the eighth in gold. Furthermore, it ranks among the top twenty nations for copper and bauxite reserves, showcasing its diverse and extensive mineral resources.

Kazakhstan and EU Touchpoints in Critical Mineral Development and Climate Change

Over the past two decades, the European Union and Kazakhstan have developed a deepening relationship on critical raw materials (CRMs), driven by a growing mutual recognition of their common interests.  The signing of the Memorandum of Understanding (MoU) on Strategic Partnerships on Sustainable Raw Materials, Batteries, and Renewable Hydrogen Value Chains in 2022 has significantly fortified the bond between Kazakhstan and the EU. This strategic alliance has not only deepened their cooperation but has also paved the way for innovative solutions in the energy sector.

Out of the 34 critical materials listed by the EU, Kazakhstan produces 18. These include bismuth, gallium, rare earth elements, silicon, vanadium, tungsten, tin, tantalum, niobium, magnesium, lithium, indium, graphite, and cobalt.  These minerals are essential for producing various products, such as electronics and renewable energy technologies. Kazakhstan is also the world’s 10th largest copper producer and is working on a large expansion program, according to Kazakhstan’s Minister of Industry and Construction, Kanat Sharlapayev.

As a global leader in uranium mining, contributing 42% to the world’s production, and with the Kazatomprom National Atomic Company holding a substantial 22%, Kazakhstan stands as the largest uranium producer globally. This has captured the attention of EU nations, particularly France, demonstrating the far-reaching impact of Kazakhstan’s resources on the international stage. The uranium demand is linked to the development of the nuclear industry, particularly for the development of modular reactors instead of conventional nuclear power stations.

Beyond a mere exchange of raw materials, the partnership between the EU and Kazakhstan is underscored by mutual benefit. The EU is playing a pivotal role by offering technical assistance and support for sustainable mining practices, positioning both entities as key players in the global raw materials industry.

Kazakhstan’s climate change agenda aligns with the European Green Deal, a set of policy initiatives of the European Commission aimed at making the European Union climate-neutral by 2050. Step by step, Kazakhstan is also implementing green solutions. In 2023, the country introduced the carbon neutrality strategy by 2060. In 2021, it adopted the new Environmental Code, and in 2022, it registered its first green party.

Nevertheless, the nation’s existing reliance on extensive reservoirs of low-cost coal poses a significant challenge to realising these goals.  Kazakhstan has one of the highest rates of household coal use in the world. Kazakhstan’s coal reserves are among the largest in the world and relatively inexpensive to mine. Coal currently accounts for around 50% of Kazakhstan’s energy supply, over 70% of its electricity generation and over 20% of final consumption.

Strategic Partnership with China

China, recognising Kazakhstan’s mining potential, has significantly increased its cooperation with the nation in recent years. The unveiling of China’s Belt and Road Initiative in Kazakhstan in 2013 marked the beginning of a robust partnership. By 2019, Kazakhstan became the second-largest exporter of chromium to China, and the period from 2017 to 2020 witnessed a remarkable 444% growth in molybdenum exports to Beijing. Molybdenum, a vital component in constructing wind turbines, underscores the importance of this cooperative approach, aligning with the sustainable initiatives undertaken by national governments.

New FDI platform and prospects for investment growth in Kazakhstan

As the country is trying to diversify its economy from traditional oil and gas, Prime Minister Alikhan Smailov revealed that foreign investments will be the main drive to Kazakhstan’s economic growth. By 2029, the country plans to double its GDP and attract at least $150 billion in foreign direct investment (FDI).

The Kazakh government actively seeks joint ventures with foreign mining companies to exploit untapped mineral resources. This mutually beneficial arrangement grants international firms access to Kazakhstan’s mineral wealth while enabling the government to benefit from foreign investment, expertise, and technology transfer. For mining companies, Kazakhstan represents a gateway to an emerging market with substantial upside potential.

The National Digital Investment Platform launched in January 2024 serves as a comprehensive roadmap to attract and onboard investors. This platform adopts the “one window” principle, integrating consulting and information services for both projects and investors. Employing integral information panels (dashboards), it acts as a robust tool for monitoring investment activities within the country, enhancing the quality of interaction among participants in the investment process. Digitalisation is expected to significantly reduce the implementation time of investment projects. The structure of the national digital investment platform includes key entities such as the Foreign Ministry, Kazakh Invest national company, domestic development institutions and funds, quasi-sector companies, as well as central state and local executive bodies. Any pertinent issues faced by investors during project execution will be addressed in meetings of the Investment Headquarters, chaired by the Prime Minister of Kazakhstan.

Tax Reforms and Strategic Investments

In a strategic move to bolster its economic resilience, Kazakhstan is gearing up for a significant shift in its fiscal policies. At the end of 2023, Kazakhstan increased the mining tax and VAT, aiming to chart a new course for economic growth. This move aligns with a broader strategy to ensure that the nation’s resource wealth contributes substantively to sustainable development goals. This change includes a 50% increase in the rate of Mineral Extraction Tax (MET) for exchange-traded metals and a 30% hike for other solid minerals. The tax increase is poised to have profound implications not only for the mining sector but also for the broader economic landscape.

By recalibrating the fiscal obligations of extractive industries, the government aims to strike a balance between industry profitability and societal well-being.  The goal is to create a symbiotic relationship where the industry prospers, and the nation reaps the benefits of its resource endowment. Clarity on the rationale behind the tax adjustments is pivotal in ensuring that the business community perceives these changes as a strategic move rather than a hurdle.  The success of these fiscal changes hinges on robust collaboration between the government and the mining industry. Stakeholder dialogues, policy consultations, and an open communication channel will be instrumental in navigating potential challenges.

Local Content 2.0 – A Paradigm Shift in Subsoil Management

In a groundbreaking development at the Kazakhstan-Produced Content 2.0 Forum held in Astana on 16 November 2023, the largest mining companies, including industry giants such as Eurasian Resources Group (ERG), Kazakhmys, Kazzinc, and KAZ Minerals, inked offtake contracts, long-term agreements, and memorandums totalling a substantial 58 billion tenge ($124.9 million) with Kazakh producers. This move signified a stride towards bolstering the nation’s economy and fostering collaboration between domestic producers and industry leaders. Notably, offtake contracts with quasi-public companies and those with international ratings of BB- are now recognised as firm collateral for loans.

A new regulatory policy has already eradicated 9,000 irrelevant requirements, with another thousand sets to be removed by year-end. Additionally, an automated risk management system, launched on 1 January 2024, aims to cut inspections by half, eliminating the human factor from the process. The Government eliminated cumbersome CT-KZ and industrial certificates, replacing them with an accessible online register detailing manufacturers and their products, streamlining processes for businesses. The Prime Minister underlined the decision to completely exclude non-standardised goods from trading on exchanges, with details to be announced later.

To stimulate investment activity among large businesses, Kazakhstan’s Prime Minister Alikhan Smailov announced a tax exemption for new projects in the mineral extraction sector for five years and three years for the manufacturing sector, as per the new Tax Code effective from 2025. This move aims to encourage innovation and economic expansion in key industries.

Proposal of Export Restrictions for Mineral Resources

In a recent development, the Kazakhstan Chamber of Mines has expressed concerns over potential changes in legislation related to the extraction of mineral resources. In December 2023, the Mazhilis approved amendments proposing a ban on the export of “raw materials” without a clear definition of this term. This could impose restrictions on mining companies and create unfavourable conditions for investors.

The Chamber argues that while supporting local industries is important, the mechanisms outlined in the proposed amendments lack clarity, and the introduction of a complete export ban is deemed excessive. The adoption of these amendments without consulting the industry raises serious concerns.

The Chamber suggests exploring alternative methods, such as granting local producers preferential rights to purchase at market prices. They caution against potential unintended consequences that may arise from the export ban on critical mineral resources, including the risk of corruption, loss of revenue and tax revenue reduction, impact on the mining industry, undermining investor trust, affecting international trade relations, stimulating illegal trade, and hindering economic diversification.

This development comes in the wake of a global trend of natural resource export bans, which are seen as potentially harmful to domestic economies and international trade relations.

The Chamber’s letter to Minister Sharlapayev underscores the need for a balanced approach to legislation that supports local industries without adversely affecting investors and the broader industry.

Local Content 2.0 takeaways

Economic Surge and SME Growth:

• Kazakhstan’s economy experienced significant growth, with SMEs contributing 36.4% to GDP.
• Employment in the SME sector increased by 14% to reach 4.3 million.

Reducing Import Dependence and Presidential Goals:

• To decrease import reliance, President Tokayev aims to achieve a 60% local content target within three years.

Mining Sector Share and Comparative Analysis:

• The mining sector holds a 15% share of purchased goods, in contrast to 75% in the oil and gas industry.
• Mechanical engineering stands at 13.5%, and pharmaceuticals at 20%.

Systematic Business Contacts and SME Development:

• Stress on establishing systematic work to facilitate business contacts between manufacturers and large entrepreneurs.
• Focus on fostering SME sector development around significant enterprises.

Enterprise Initiatives and Local Content Programs:

• Large enterprises are encouraged to adopt local content development programs.
• Emphasis on the need for domestic personnel development to replace foreign specialists.

Education and Employment Nexus:

• Call for large enterprises to support educational institutions, promoting subsequent employment of graduates.

In summary, Kazakhstan’s 2.0 local content policies aim to enhance domestic economic contributions, reduce import dependence, and foster collaboration between enterprises, with a specific focus on the mining industry and associated sectors. 

Navigating Geopolitical Influences

To truly unlock Kazakhstan’s mining potential, several key areas require focused attention:

Streamlining Regulations and Permitting Processes: Investors often face bureaucratic hurdles and complex regulations. Simplifying permit issuance and harmonising regulatory frameworks will attract more investment.

Enhancing Transparency and Legal Certainty: A transparent and predictable legal environment is crucial for investor confidence. Strengthening the rule of law and ensuring contract sanctity will provide much-needed assurance.

Addressing Infrastructure Bottlenecks: Limited transportation infrastructure can hinder logistical efficiency and increase operational costs. Developing infrastructure, including roads, railways, and power grids, will unlock remote mineral deposits and enhance project viability.