KAZAKHSTAN: a 'market economy' - InfoMine

COUNTRY FOCUS – Kazakhstan

KAZAKHSTAN: a ‘market economy’ With a Standard and Poor’s ‘investment grade’ credit rating, Kazakhstan is considered a model transition economy, in overcoming the legacy of the Soviet centralised command economy. John Chadwick reports on the significant achievements of its mining sector

Hambledon Mining operates the Sekisovskoye open-pit gold mine and a 850,000 t/y plant, and owns the Ognevka processing plant, both of which are close to Ust Kamenogorsk in East Kazakhstan

T

he US Department of Commerce graduated Kazakhstan to market economy status in recognition of its economic reforms and openness to foreign investment, etc. In September 2002, it became the first country in the former Soviet Union to receive an investment-grade credit rating from a major international credit rating agency. Kazakhstan is a constitutional republic in Central Asia – the ninth largest country in the

world and the second largest country in the former Soviet Union. Its location, between Russia and China, and its low-risk status as a stable and economically developed state in the Central Asian region mean that it is well situated to develop the rich natural resources of the region and serve the growing Chinese market. It is developing into a prosperous and modern Eurasian nation. The country is a significant metal producer with metals accounting for 20% of jobs in Kazakhstan's

industrial sector, and more than a quarter of total exports. Kazakhstan possesses enormous oil and gas reserves as well as plentiful supplies of other minerals and metals, including chrome, ironore, alumina, lead, zinc, copper and manganese and precious metals. The country is also a major producer of coal. The extraction and production of oil and gas and the extraction and processing of minerals are the most significant industries in the

COUNTRY FOCUS – Kazakhstan Kazakhstan economy. Foreign direct investment, which reached 7.7% of GDP in 2004, remains overwhelmingly concentrated in these sectors. Precious metals production is increasing significantly with 5,975 kg of refined gold and 387,660 kg of refined silver produced in the January to July period of this year 2009, 26.9% and 5.8% respectively more than for the same period of last year, the National Statistics Agency told Interfax. Last year the Kazakhstan Government became a major shareholder in Kazakhmys, the world's No.10 copper producer, through an exchange of shares. The government transferred to Kazakhmys a part of the state’s stake in Eurasian Natural Resources Corp (ENRC), one of the world’s top ferrochrome producers, in return for an additional issue of Kazakhmys shares. Thus, the state became a

The principal Kazakhmys operations are in Kazakhstan, but with precious metal mine/projects in Tajikistan and Kyrgyzstan. This map shows the principal mining areas

major shareholder in both the largest Kazakhstan-based mining companies listed on the London Stock Exchange. It holds 11.65% of ENRC and 15% in Kazakhmys. The copper division of Kazakhmys consists

of 20 mines - 14 underground and six open pits. The mineral reserves and resources of these mines are sufficient to support projected production for at least 20 years. The ore mined is processed in 10 concentrators and thence two smelters. This division is divided into four administrative areas, Zhezkazgan complex, Balkhash complex, Karaganda region and East region. In addition to producing copper, the division produces significant quantities of zinc, silver and gold, which are sold as byproducts. Zhezkazgan is the biggest operation – a fully integrated facility, including mining, processing, smelting and refining. At one time it was the largest mining and processing complex in the Soviet Union and today it is one of the most technically advanced complexes in the CIS. In 2008, Zhezkazgan

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COUNTRY FOCUS – Kazakhstan World ferrochrome leader

Kazakhmys operates 20 copper mines - 14 underground and 6 open pits

was responsible for 68% of Group mined ore output and 48% of Group's cathode output. There are six underground mines (primarily room and pillar) – South, Stepnoy, East, West, Annensky and Zhomart (formerly ZhamanAybat) and the North open pit. To extract copper concentrate there are the Zhezkazgan No. 1 and No. 2 and Satpaev concentrators. First half 2009 cash costs were significantly lower than 2008 with net cash costs of $0.76/lb, compared to $1.16/lb for the full year 2008. Cost reductions, lower input prices, currency devaluation and higher volumes in copper and by-products all contributed to this. However, the average realised copper price of $4,024/t in first half 2009 was 51% below the average realised copper price for first half 2008. The price at the time of reporting was $6,305/t, recovering from $2,902/t at the end of 2008. Kazakhmys Copper produces significant volumes of other metals, including zinc, silver and gold. In 2008, it produced 48,000 t of zinc metal and 137,000 t of zinc concentrate. Kazakhmys is the fourth largest silver producer in the world (17 Moz produced in 2008). In 2008 Kazakhmys increased its holding in ENRC and became the largest shareholder with a 26% stake. Vladimir Kim, Chairman of Kazakhmys, explained: “ENRC is a major mining company, listed in London, but operating in Kazakhstan. They have a different suite of metals from us, producing iron ore, aluminium and ferrochrome. Longer term, we believe that this holding diversifies our earnings and presents us with strategic options.” Its 2008 revenue was dominated by ferroalloys 61%

10 International Mining OCTOBER 2009

followed by iron ore 22%, alumina 13% and energy 3%. In the first half of 2009, Kazakhmys production was 170,000 t of copper cathode equivalent from its own material, an increase of 8% on first half 2008. Production benefited from more efficient management of production facilities and processing of materials, including processing of stockpiled ore, raised output at two mines (South and Nurkazgan West) and improvements made in equipment availability and recovery rates. Byproduct output also benefited from a reduction of work in progress and increased recovery rates at concentrators. Gold production was 67,900 oz, an 8% increase compared to first half 2008, silver production increased 10% to 9.145 Moz and zinc in concentrate output increased 15% to 76,000 t. ENRC's operations around the country

ENRC is the world’s largest ferrochrome producer (by chrome content). In 2008 it mined 3.55 Mt of chrome ore and just over 1 Mt of manganese ore. The current known chrome ore mine life is 44 years. It is also one of the world’s significant exporters of iron ore by volume, with a known iron ore mining life of 38 years. Output is around 40 Mt/y. For the first half of 2009, production volumes remained below the comparable period of 2008. The respective decreases were 17.2% for saleable chrome ore, 29.2% for saleable manganese concentrate and 17.9% for total ferroalloys, with silicomanganese production broadly steady. Ferrochrome production decreased by 10.6%, reflecting previously announced production cutbacks for the division, but increased 35.8% from first quarter 2009. Serov added saleable chrome ore production of 11,000 t and total ferroalloys production of 25,000 t. Tuoli's output was minimal in second quarter 2009, with one furnace restarted at the end of June. ENRC, recent buyer of CAMEC, is the world’s ninth largest supplier of traded alumina, by volume. Bauxite production in 2008 was 5.16 Mt and 1.6 Mt of alumina were produced. The known bauxite mine life of the company is 37 years. In the first half of 2009, bauxite extraction and production volumes of saleable alumina remained stable, with an increase of 0.3% compared to the second quarter of 2008. The division produced 30,000 t of aluminium, in line with the Phase 1 run rate capacity. Its current capital expenditure projects in progress in the ferroalloys sector include a 700,000 t/y chrome pelletiser, expected to cost $110 million and be completed this year. There is also a $590 million, 440,000 t/y replacement

COUNTRY FOCUS – Kazakhstan production up to 2.25 Mt/y of ore. Average ore grades are Zn 7.5%, Cu 2.3%, Pb 1.3%, Au 0.75 g/t and Ag 75 g/t, with proven reserves sufficient to sustain production at current rates for the next 18 years. It is a trackless mine employing sublevel stoping with backfill. It accounts for the majority of Kazzinc's zinc and copper concentrate production, the former supplying the entire smelter feed at the Ust-Kamenogorsk zinc plant, and the latter supplying 85% of the company's total copper concentrate production. Maleevsky lies 18 km east of the town of Zyrianovsk.

Varvarinskoye sale

Belaz trucks are widely used throughout Kazakhstan

and expansion of Aktobe’s smelting capacity to be completed in 2012. Phase 2 of a 125,000 t/y aluminium smelter, costing some $305 million, is due for completion in 2010. Also a $200 million anode plant should be completed in 2011. While in the power sector, ENRC is spending some $85 million on overburden stripping equipment for its coal mines. In June this year KAS Ingot became the first Kazakhstani Primar Aluminium available via the LME London. The London Metal Exchange (LME) approved with immediate effect the listing of primary aluminium ingots produced at ENRC's aluminium smelter, Kazakhstan Aluminium Smelter (KAS), located in Pavlodar. The construction of KAS, the first state-oftheart aluminium smelter in the Republic, started in May 2005 and was completed within just 27 months, in December 2007, on budget and ahead of schedule. The smelter reached its full Phase 1 annual production capacity of 125,000 t in the first half of 2008, well ahead of its 2008 year end deadline, and in Phase 2 its capacity is set to double to 250,000 t in 2010. The Group's Iron Ore Division is one of the world's significant exporters of iron ore and its operating company, SSGPO, is one of the largest companies in Kazakhstan and employs some 18,000 people. SSGPO is a vertically integrated business. It comprises: primary mining operations that produce iron ore; ancillary mining operations that produce limestone, dolomite and bentonite-clay; an iron ore processing plant; and a power plantthat supplies it with the majority of its


energy needs. The operations are centred around the town of Rudni, which was established to support the iron ore operations, which in turn is located some 45 km southwest of the city of Kostanai in the north. KAS represents the largest private capital investment in the metals and mining industry in the Republic to date, at a total construction cost of $900 million. It is a key element of a significant future aluminium cluster being developed by ENRC within the country, in keeping with the government’s ambitions to promote further domestic processing activity and the production of higher value added products. Kazzinc is a major fully integrated zinc producer with considerable copper, precious metals and lead credits. Most of its operations are in east Kazakhstan. The company was established in 1997 through the merger of Eastern Kazakhstan's three main non-ferrous metals companies - “Ust-Kamenogorsk Lead and Zinc Combinate”, “Leninogorsk Polymetallic Combinate” and “Zyrianovsk Lead Combinate”. All three producers were majority-owned by the Government of Kazakhstan. The controlling block of shares in Kazzinc has since been sold off by the state to the private sector, with Glencore International becoming the company's main investor. In the years since its creation, Kazzinc has significantly increased production capacity and output on all fronts. The company continues to develop, seeking to have its stable position among the world’s five lowest cost producers in its industry. The Maleevsky mine is Kazzinc's largest underground operation, commissioned by the company in June 2000. By the end of 2001 the mine had been expanded, bringing

Located in northwest Kazakhstan, Orsu Metal’s 100% owned Varvarinskoye mine commenced production of gold doré in December 2007 and copper-gold concentrate in March 2008. During the year ended 31 December 2008, the mine produced a total of 40,629 oz of gold and 4,494 t of copper recovered to concentrate. Production during the first quarter of 2009 was reported as 13,599 oz of gold and 1,743 t of copper. In mid-June this year Orsu signed a definitive sale and purchase agreement (SPA) to sell Varvarinskoye to OJSC Polymetal. The total consideration for the sale of Varvarinskoye is about $235 million. One of the projects that Orsu intends this money to help advance is the Karchiga copper deposit in Kazakhstan. The 47.3 km2 Karchiga exploration and mining licence contains the Karchiga VMS deposit. This copper-gold deposit is located in the extreme northeast of the Republic, within 40 km of the Chinese border and within the Rudny Altai belt which is ranked in the top four VMS belts in the world. In April 2008, the company released an NI 43-101 mineral resource estimate. At a 0.50% copper cutoff, the Indicated mineral resource is 4.75 Mt @ 2.46% Cu while the Inferred mineral resources total 2.81 Mt @ 1.81% Cu. The primary scope of the on-going 2008 to 2009 exploration program is designed to upgrade the previously reported mineral resource estimate to Measured and Indicated categories under NI 43-101. Frontier Mining owns two licences in Kazakhstan. They are the Naimanjal exploration and mining licence, held by whollyowned subsidiary FML Kazakhstan, and 50% of U.S. Megatech BVI which holds the Benkala licence. Frontier has one producing gold mine, Naimanjal; one prefeasibility stage gold project, Koskuduk; and the recently acquired 50% interest in the Benkala copper mine. The Benkala copper porphyry project,

COUNTRY FOCUS – Kazakhstan

Wellfield, South-Inkai, which is owned 100% by the Betpak-Dala Joint Venture, in which Uranium One has a 70% interest. The balance of the interest in the JV is owned by KazAtomProm, the Kazakh State uranium company

located in the northwest is a potentially worldclass copper project. It is a 50-50 Joint Venture between Frontier and Coville Intercorp, operated through KazCopper and at present, a drilling program is underway with a JORC compliant resources statement for the oxide/supergene zone expected to be completed by first quarter 2010. KazCopper expects to progress towards full feasibility, production and near term-cash flow on the oxide/supergene and mixed sulphide ores at Benkala early 2011 subject to further regulatory, permitting and production approvals. The Benkala project has received technical and regional authority approval to connect electricity to the Benkala site. Construction work for this and other site infrastructure and the foundation works for a 20,000 t/y SX-EW cathode copper plant are planned to commence in third quarter 2009. A report on Benkala completed by Wardell Armstrong International in March 2007 estimates 47.75 Mt at an average grade of 0.36% Cu for the oxide mineralisation, and 873.75 Mt at an average grade of 0.30% Cu for the sulphide mineralisation, representing some 2.8 Mt of contained copper. At a 10% discount rate and a $1.5/lb Cu price, the project has an NPV approaching $500 million. Development of this project is being fast tracked forward towards a prefeasibility study, with a view to beginning production at the end of 2010. Alhambra Resources, through its wholly owned subsidiary, Saga Creek Gold, is in its sixth year of operations in the country. The main asset is its 100% working interest in the 1,093,000 ha Uzboy project located in a prolific gold belt of north central Kazakhstan


which hosts numerous worldclass gold deposits. It lies in the Charsk belt between the Vasilkovoskoe gold deposit on the northwest and the Asku gold deposits on the southeast. Saga Creek commenced commercial operations at its 100% owned Uzboy heap leach mine effective May 1, 2006. Current mining operations are being conducted on the oxide portions of the East zone of the Uzboy gold deposit that extends to a depth of approximately 50 m below surface. The oxide layer is underlain by sulphide gold mineralisation. Central Asia Resources (CVR) has an interest in gold exploration projects which have both Russian and historical unclassified resource estimates. Central Asia has subsequently developed JORC compliant resource statements for most of the prospects within the portfolio.

Mastery in uranium According to Macquarie Research, Kazakh uranium production was 8,500 t U in 2008, up from 6,637 t in 2007. Macquarie notes that “Kazakhstan has been the driver of global uranium production over the past five years – production has risen by ~5,200 t (from 3,300 t to 8,500 t) over the period, taking the Kazakh share of global production from 9% (of 35,600 t U) in 2003 to 19% (of 44,500 t U) in 2008.” Macquarie currently expects Kazakh output to rise to 9,700 t in 2009 and 11,000 t U in 2010. This implies a forecast decline in production growth due to Macquarie’s view that “Kazakh output will run into infrastructure (road, rail, drill rigs, electricity) and as the base of production increases

(dramatically). Current credit/capital market conditions also indicate that investment in new mines and mine ramp-up is unlikely to proceed at prior rapid rates over the medium term.” Kazakhstan hosts a fifth of the known global uranium reserves and state-owned Kazatomprom is on track to become the world’s top producer this year. In June, Uranium One signed a definitive purchase agreement to acquire a 50% interest in the Karatau uranium mine from JSC Atomredmetzoloto (ARMZ), the Russian stateowned uranium mining company. Karatau is part of the Budenovskoye complex and is located in close proximity to the Akdala and South Inkai mines of Uranium One's 70% owned Betpak Dala joint venture. Karatau commenced commercial production in 2008 and produced 1.7 Mlb U3O8 in that year. For 2009, Uranium One expects Karatau to produce approximately 3.3 Mlb U3O8, at a total cash cost sold of approximately $15/lb. Karatau is expected to reach steady state production of 5.2 Mlb/y of U3O8 by 2011. South Inkai and Kharasan are in-situ recovery projects in the Suzak region of the South Kazakhstan Oblast, some 450 km northwest of Shymkent. South Inkai is owned 100% by the Betpak-Dala Joint Venture, in which Uranium One has a 70% interest. The balance of the interest in the Betpak-Dala Joint Venture is owned by KazAtomProm, the Kazakh State uranium company. Kharasan is owned 100% by the Kyzylkum Joint Venture, in which Uranium One has a 30% interest. The balance of the interest in Kyzylkum is owned by KazAtomProm (30%) and a Japanese consortium (40%). The 2009 attributable production (to Uranium One) guidance is 1.5 Mlb and it is ramping up to an attributable production rate of 3.6 Mlb/y in 2011. Kharasan recorded production of 7,600 lb attributable to Uranium One in the first quarter of 2009. It is ramping up to a production rate of 1.6 Mlb/y for 2012. Close by, Akdala is an operating acid in-situ recovery uranium mine located in the Suzak region, approximately 470 km north of Shymkent. Commercial operations commenced in January 2004, following a 2.25 year pilot-plant testing program. Owned by the same Betpak-Dala Joint Venture, Akdala is currently producing at a rate of 1,000 t/y uranium (2.6 Mlb/y U3O8). IM

A fuller version of this article, including consideration of the Kazakh coal industry, appears on IM’s website www.im-mining.com.