Oman looks to fast-track the extraction sector

Announced in January 2016, Oman’s ninth five-year plan is the final component of Vision 2020 and includes mining as one of five pillars of non-petroleum economic diversification currently being fast-tracked by the sultanate. With the government targeting 6% annual growth in the sector, and major regulatory initiatives attracting increased investor interest, mining is poised to surge in 2017-18.

“The drop in oil prices may work for the benefit of the mining industry, as everyone is starting to understand the potential of mining in Oman,” Sreekumar Nair, CEO of Al Fajar Al Alamia, an Omani commercial explosives company, told OBG. “If the industry can take advantage of this newfound energy, we could see some great things in the coming years.”

Production & Exploration

The contribution of Oman’s mining and quarrying activities to GDP in 2015 reached OR141.7m ($368m), according to the Central Bank of Oman, growing at an annual rate of 13.8%, faster than any other non-petroleum industrial activity. Preliminary figures released by the National Centre for Statistics and Information indicate that the building materials segment continued to dominate the mining and quarrying sector in 2015, with production rising by 12% on 2014 to reach 72m tonnes. Building materials were followed by limestone at 12.2m tonnes, an annual increase of 39.3%; and gypsum at 6.2m tonnes, constituting growth of 78.6% year-on-year. Exploration in the sultanate is fairly well developed, especially in bulk commodities, metals and ferrous metals. The Public Authority for Mining (PAM) issued eight new licences for the exploration and production of a variety of minerals in 2015. As of end-2015, there were a total of 290 valid permissions for conducting mineral explorations and operations across the sultanate.

Metallic Minerals

Oman has a substantial mineral resource base that remains largely untapped, with significant deposits of metals and metallic minerals, including chromite, laterite, manganese and copper along the Al Batinah coast. Metals projects in Oman tend to be relatively small and have long mine lives, typically lasting 20 to 30 years. Mine life length is determined by a decrease in viability as technologies become more expensive and ore grades decrease. Of the country’s metallic minerals, copper ore is among the more promising market segments, with strong growth potential and an estimated 50m tonnes of ore still awaiting development.

Mawarid Mining, a wholly owned subsidiary of Oman-registered MB Holding Company, is focused on exploration, development and operation of mining projects both in the country and internationally. The firm has been Oman’s dominant player in the copper segment for several years, and its interests include exploration Blocks 1 and 2 in the north of the sultanate. The copper deposit is located at Ghuzayn, which has reserves of 6.45m tonnes, and output is processed at the Lasail copper concentrator.

A more recent joint venture with significant promise is the Al Hadeetha Copper-Gold Project in the Al Dakhiliyah Governorate, around 160 km south-east of Muscat. Australia-based Alara Resources holds a 70% stake in the project through a joint-venture arrangement with Oman’s Al Hadeetha Investment Services. The focus of the partnership is the commercialisation and processing of copper deposits and associated gold ore across three exploration licences – Washihi, Mullaq and Al Ajal – covering a total surface area of around 105 sq km. A feasibility study completed for the Washihi deposit in early 2016 determined that the project is capable of producing 77,000 tonnes of copper and 18,000 oz of gold, returning a cash flow of around $430m over the first decade of operations, according to estimates. Additional exploration targets identified outside the current resource envelope in June 2016 may increase the mining inventory of the project.

In conversation with the Times of Oman, Justin Richard, the CEO of Alara Resources, described the project as the largest single publicly declared copper deposit in the country’s history. The company has already invested $9m and plans to begin construction of the $50m Al Hadeetha project at Washihi in the fourth quarter of 2016, pending approval by PAM of a mining licence application covering the Washihi deposit. Production is scheduled to commence in the third quarter of 2017.

Non-Metallic Minerals

The current concentration of investment in mining and quarrying activities is focused on the construction materials segment of the industry, primarily limestone and marble, dolomite, gypsum, gabbro rocks and quartzite rocks.

Export-oriented construction materials, such as gypsum, limestone and lime, among others, represent a major growth area for Omani operators trading into Pacific Asian markets. Oman limestone, in particular, has already been established as among the best in the world owing to its combination of both chemical and physical characteristics.

As Dean Cunningham, CEO of Kunooz Oman Holding, told OBG, “We are well positioned in some of the biggest growth areas in the global economy, including India, Indonesia and the east coast of Africa – all in excess of 4% growth, with expansion in India forecast at 7%.” As the subcontinent urbanises, demand is expected to rise for bulk commodities, particularly limestone and gypsum. “India is on Oman’s doorstep, and rapid urbanisation and infrastructure development make it a very promising market for our products,” Cunningham added.

Identifying growth potential in new export markets is particularly important in light of the impact a Chinese slowdown has had on the Omani mining sector. Banks in China have tightened liquidity following the devaluation of the currency, and many smaller steelmakers have been forced to close shop in the current market environment. To take one example of the impact on demand, Gulf Mining Group had been shipping 14,000-15,000 tonnes of ferrochrome per month to China before mid-2015. These figures dropped to 2000 tonnes by the end of the year, and in January 2016 they fell to zero.

“External market forces – and in particular weaker commodities demand from China – curbed the sector’s performance last year,” Mohammed Al Shabibi, Gulf Mining Group’s CEO, told OBG. “China had been relying on cheap credit to buy up raw materials, but Chinese banks have been tightening liquidity, causing a decline in demand. It now appears the Chinese market has bottomed out, and the Indian market continues to grow rapidly. Such positive developments among the world’s two largest mineral commodity consumers have helped to improve the overall market conditions of raw materials mining.”

Gypsum Poised For Growth

Growth across Asia and southern and eastern Africa is fuelling a surge in production and exports of high-grade natural gypsum – a basic raw material for cement and gypsum board manufacturing.

Currently ranked as the seventh-largest producer in the world, with annual output of roughly 5.85m tonnes as of the end of 2015, Oman is projected to raise its gypsum production to around 7m tonnes by the end of 2016, before topping 10m tonnes per annum in 2018. Export volumes have already jumped nearly 20-fold in the past five years, up from 300,000 tonnes in 2010. Online news portal Trade Arabia reported in June 2016 that this growth is expected to make the country the leading exporter of gypsum in the world as soon as 2018.

The dynamics expected to drive global gypsum supply and demand in the long term bode well for Omani exports, with high growth anticipated in urbanisation and infrastructure development in India, Africa and the GCC, and global demand projected to reach 870m tonnes by 2026. With gypsum reserves estimated in excess of 1bn tonnes, Oman is well positioned to meet demand for the commodity.

New Authority

With powers and prerogatives inherited from the Ministry of Commerce and Industry, PAM was set up as the regulator and policymaker for the Omani mining and minerals industry by Royal Decree No. 49 in September 2014.

The authority is responsible for granting licences for exploration and mining activities, and for supervising all mining-related activities once a licence has been granted. Broader responsibilities in the sector include improving the overall investment environment in mining and providing clarity for investors.

One of the first tasks undertaken by PAM after its establishment was to begin drafting a new mining law to replace the outdated sector legislation established under Royal Decree No. 27/2003 and subsequently amended in 2010 and 2013. The draft law submitted by PAM — currently under ministerial review — is chiefly aimed at addressing the factors that have historically hindered foreign investment in the Omani mining sector. The principal impediment in this context is bureaucracy. Licences for exploration or appraisal need to be sent to eight government bodies to receive a “no objection” ruling, a process universally criticised for resulting in inconsistent rulings and cumbersome bureaucratic delays.

To address this issue, PAM is in the process of securing pre-approval to take large tracts of land owned by these government bodies and split them into smaller “investment-ready” mining concessions to offer to serious investors in competitive tenders. “All of the required permits and no objections from the relevant government departments will be arranged up-front and in a professional way, thereby enabling potential investors to step in and commence their business right away,” said Hilal bin Mohammed Al Busaidy, PAM’s CEO, speaking to local media in April 2016. Commenting on the position of industry, Gulf Mining Group’s Al Shabibi told OBG that the centralised process should be capable of meeting international standards for sector development. “The sector would really benefit from the implementation of a one-stop-shop approach as seen in other sectors,” he said.

General industry sentiment favours investment-ready mining blocks, and supports efforts to rationalise the tendering and licensing process. However, some industry stakeholders have raised questions about how the strategy will be applied in practice, particularly where government development plans are not aligned to corporate strategies.

MDO

Other major recent regulatory developments include the establishment in early 2016 of Mining Development Oman (MDO), a new holding company that will serve as the executive arm of PAM. MDO has share capital of OR100m ($259.7m), and 60% of its equity is owned by four government entities: the State General Reserve Fund, Oman Investment Fund, Oman Oil Company and the Oman National Investments Development Company (Tanmia). The remaining 40% will be offered for public subscription via an initial public offering. According to Abdullah bin Salem Al Salmi, executive president of the Capital Market Authority, shares are expected to be floated on the Muscat Securities Market in early 2017.

In response to concerns that the sector has not been capitalised to its potential, MDO envisions a major role for itself in attracting international investment and technical know-how in the monetisation of the sultanate’s mineral resources.

Options being considered by MDO include acquiring new concession areas or existing companies, exploring assets for potential commercialisation, investing in large-scale commercial mining, and investing in infrastructure and logistics to accelerate the development of productive mineral sites.

Royalty Fees

Companies engaged in mining and mineral processing in Oman face a measure of uncertainty when it comes to the application of the mining royalty rate. In July 2015 PAM doubled the rate from 5% to 10% – reversing a 2010 move to halve the rate to encourage investment in the sector. “The current royalty system is based on fixed prices rather than spot prices, so it does not follow market movements. This is simply illogical and is difficult when commodities are down,” Al Shabibi told OBG.

The use of fixed prices rather than spot prices is an issue that will be addressed in the draft law currently awaiting government approval. The new law is reported to purposefully leave out any fixed royalties or tax rates to ensure flexibility – offering lower rates to encourage investment during periods of low commodity prices (see analysis).

Logistics

Bulk commodities, including limestone and gypsum, are very sensitive to logistics and movement costs. Narrow margins in this market segment make the cost of transportation critical to turning a profit. As an example, at current prices fuel represents roughly 30-35% of the total cost of transporting gypsum to the Port of Salalah, according to Kunooz Oman Holding’s Cunningham. The decision to abandon subsidies and free float the price of fuel thus significantly affects financial models for the firm and similar companies in bulk mining.

The industry also faces a lack of clarity on regulations restricting the weight of trucks on certain roads. New legislation reduces load limits from about 70-80 tonnes to 50 tonnes, increasing the number of trucks that companies must operate, and thus raising costs. Without industry-specific road or rail connections, this amounts to a significant drag on industry players. “The government needs to look along the whole value chain by reducing the tonnage. More trucks, diesel usage, risk on the roads and pollution results in higher unit costs and makes the industry uncompetitive,” Cunningham told OBG.

Ports

Export infrastructure in the mining sector also requires additional investment, with some port machinery in need of updating. Al Fajar Al Alamia’s Nair observes that “while the country has made substantial investment into export infrastructure, the ports could use some upgrading, as they are not capable of handling all of the mineral and rock exports from the country”.

Until fairly recently, Sohar Port did not offer bulk shipping for mineral products, requiring minerals to be containerised in a costlier process. This is now being addressed with the development of the Sohar Dry Bulk Logistics Corridor, a joint venture between Vale Oman, Sohar Port and Freezone, and Tanmia. Building on Vale’s existing dry bulk infrastructure at Sohar – currently used to import and export millions of tonnes of iron ore and pellets – the corridor will enable the export of minerals that are mined and processed in Oman to international markets.

The Port of Duqm is also expected to play a key role as a catalyst in the commercialisation of the potentially vast mineral resources of the Al Wusta Governorate. Key projects include mineral processing and refining facilities in the industrial zone, and already established facilities for a break bulk terminal that exported its inaugural shipment of 50,000 tonnes of dolomite in February 2016. Capacity will increase over time, according to PAM, building to 5m tonnes per year of commodities. Furthermore, the Oman Daily Observer reported in late October 2016 that the authorities were considering rail connections between the Port of Duqm and mineral deposits at Nimr, Shuwaymiyah and Thumrait. The line is part of a broader plan to leverage rail-based freight transport to attract investors to the Duqm Special Economic Zone (SEZ) at the Al Wusta Governorate, Anwar Kahlan Al Battashi, urban planning manager at the Duqm SEZ Authority, told the paper.

Outlook

The Omani non-petroleum industrial sector faced increased pressure in 2015/16 from reduced government spending and an ongoing economic downturn. While this introduced a period of austerity for Oman, with a significant decline in government spending that rippled through the economy, mining is one of the industries for which the government is expected to develop innovative approaches to fill its revenue gap and finance major development and infrastructure schemes.

From an investment perspective, clarity that the government is moving forward on regulatory reform and infrastructure development is expected to attract investor interest, though there remains room for greater transparency in this regard.

Many companies are bracing for a downturn, anticipating a general slowdown and project delays. In this context, government investments in some of the forward-looking programmes in Vision 2020 remain especially vulnerable. At the same time, the economic diversification programme under way in the sultanate has opened up investment opportunities in infrastructure, tourism, retail and residential schemes that support long-term growth prospects in the construction, manufacturing and mining sectors.