Economic diversification in Saudi Arabia to favour mining development

Increased investment in Saudi Arabia’s mining sector looks set to lift its GDP contributions, as part of an accelerating push to diversify the economy under the Vision 2030 development plan. On April 24, 2017 Prince Khalid Al Faisal Al Saud, the governor of Makkah, formally opened a new gold mine and processing plant – the Ad Duwayhi mine, owned and operated by the Saudi Arabian Mining Company (Ma’aden) – with a production capacity of 180,000 oz per year, making it the country’s largest to date.

Commercial production began in April 2016, and the mine was set to reach 100% capacity by end-2016. While data on its current output has yet to be released, Ma’aden’s profits hit SR275.6m ($73.5m) in the first quarter of 2017, up from SR194.3m ($51.8m) in the same period of 2016, according to a May 2017 statement. An end-2015 company assessment also estimated total gold reserves at 1.9m oz.

Ma’aden said stronger sales, higher prices for gold and aluminium, and tightening operating costs drove first-quarter earnings up 19.68% year-on-year to SR2.7bn ($719.8m). Total investment in Ad Duwayhi reached more than SR1.5bn ($400m) and included a 450-km pipeline to remove processed wastewater from downstream operations and a 117-km road to link the site with the Riyadh-Taif highway.

Tapping Richer Veins

Ad Duwayhi is one of six gold mines operated by Ma’aden, and its opening should create opportunities for a range of firms in the gold extraction industry. Detailed surveys record 600 gold-bearing sites – most in the west – only 29 of which have seen exploratory drilling. Some estimates put the value of domestic gold reserves at $240bn, which alongside extensive reserves of bauxite, copper, uranium and phosphate, bring the value of mineral reserves to as much as $1.3trn.

This potential could appeal to investors as the government moves to open new avenues for foreign investment. During US President Donald Trump’s visit to Saudi Arabia in May 2017, two memoranda of understanding were signed between Ma’aden and its two US-based partners, Alcoa and Mosaic.

The first will assess the feasibility of expanding capacity at its aluminium smelting complex in Ras Al Khair Industrial City by 600,000 tonnes per year, which could create 3000 jobs. The second will seek new areas of collaboration in the phosphate industry. Furthermore, Canadian-owned Barrick Gold invested $220m in a joint-venture copper mine with Ma’aden, which began commercial production in July 2016.

Saudi Aramco Ipo

In May 2017 Crown Prince Mohammed bin Salman Al Saud told local media that the Public Investment Fund (PIF) will put some proceeds of the initial public offering (IPO) of Saudi Aramco towards development of the mining industry. “The fund will have a very large cash flow from Saudi Aramco, and at least 50% and up to 70% of this cash will be used in new sectors inside Saudi Arabia,” he said, singling out mining as an investment target.

While the Saudi Aramco IPO, scheduled for 2018, will offer 5% of the company’s shares to the public, the firm is valued at up to $2trn, implying significant cash flow for the PIF. The Kingdom is finalising a strategy to nearly quadruple mining’s GDP contribution by 2030, from SR64bn ($17bn) to SR240bn ($64bn), according to Khalid Al Falih, minister of energy, industry and mineral resources, and chairman of Saudi Aramco. Increased investment in mining aligns with objectives of Vision 2030, the state’s blueprint for social and economic development. As part of Vision 2030’s first phase, the National Transformation Programme aims to expand the sector to SR97bn ($25.9bn) by 2020 and raise employment from 65,000 to 90,000 jobs, thus maintaining or exceeding annual sector growth of 9.2% over the past decade. This could open many doors, not only for mining companies and investors, but also for service providers and other downstream industries.