Mining in Oman to see streamlined permitting, and improved port infrastructure and logistics

More than 100 delegates from 18 countries converged in Muscat in October 2017 for the country’s second annual international conference of mining investors and service providers. The growing interest in the conference is testament to both the great potential of the country’s mining and quarrying sectors, and of the priority accorded to the sector under the sultanate’s economic diversification programme.

Oman boasts an extensive and largely untapped mineral resource base that includes large deposits of metallic minerals, such as copper and chromite, and industrial minerals, namely limestone and marble. The country is the first GCC producer and exporter of ferro-chrome, and produces large quantities of non-metallic minerals, including limestone, gypsum and marble, that support construction and infrastructure development projects around the world. Mining activities and the contribution of the sector to the economy are set to increase over the coming years, buoyed by government efforts to attract investment in mineral exploration, production, value addition and export activities from both foreign and local operators.

GROWTH: The Omani mining sector struggled through a difficult year in 2017, with revenues impacted by downward pressure on international market prices, declining limestone demand from India and increased competition in cheaper gypsum production from Iran.

This modest downturn followed 2016 production declines in industrial minerals which saw limestone output drop 18.8% to 9.9m tonnes, down from 12.1m tonnes a year earlier. Gypsum, a basic raw material which also has wide application in the plasterboard and cement industries, dipped 9.4% to 5.4m tonnes from 6m tonnes in 2015. Broadly mirroring the global commodity price slump, production of aggregates used in the construction sector fell by 47% to 37m tonnes in 2016, down from 70m tonnes in 2015. The estimated total value of the minerals produced in the sultanate stood at OR116.6m ($302.8m) in 2016, according to the Central Bank of Oman, down from OR136.4m ($354.2m) a year earlier. Furthermore, at the end of 2016 there were 234 valid permissions for conducting mineral exploration and production in Oman.

Despite this short-term market contraction, the long-term outlook for Oman’s mining sector is good, driven by rising demand for construction materials in Asia and East Africa. India remains Oman’s largest market, generating significant and enduring demand for minerals like gypsum and limestone in construction and development projects. At a regional level Qatar has also gained new prominence as an export market following the political crisis that resulted in that country’s blockade by Saudi Arabia, the UAE, Bahrain and Egypt. Qatar had previously sourced most of its limestone and marble from the UAE, but began looking to Oman in 2017 to source the materials required to sustain a construction boom in the build up to the 2022 FIFA World Cup, which will take place in Qatar.

SECTOR STRUCTURE: The state in Oman owns all naturally occurring surface, subsurface and subsea minerals. Regulations and policymaking in the mining sector are tasked to the Public Authority for Mining (PAM), established by royal decree in 2014 to achieve optimal exploitation of mineral resources in a manner that best serves the country’s development goals. In early 2016 four state-owned investment branches collaborated to launch a mining development company – Minerals Development Oman (MDO) – aimed at stimulating the country’s mining sector and establishing vehicles for investment in upstream and downstream activities. A total of 60% of MDO’s initial share capital of $260m will be floated by the group, with the remaining 40% stake to be offered to the public via an initial public offering on the Muscat Securities Market. The schedule and terms for the public listing have not yet been disclosed.

GOVERNMENT ROLE: The formation of a public mining development company for the sector is in line with the government’s strategy for mining and four other non-oil sectors outlined in Oman’s ninth five-year development plan, which covers 2016-20, and in the National Programme for Enhancing Economic Diversification, also known as the Tanfeedh. The government is strongly committed to diversifying its economy to reduce its reliance on oil exports, and views accelerated development of the nation’s mineral resources as an integral part of these diversification efforts. To these ends, the government is looking to involve the private sector more in major economic development projects, underscoring the utility of public-private partnerships in the most recent five-year plan.

At a local level, government is facilitating development by establishing companies to promote mineral-based industrial activities and manage activities related to mining and quarrying in specific areas. For example, the Duqm Quarries Company was launched in the Duqm Special Economic Zone Authority (SEZAD) in 2017 to prepare investment contracts and feasibility studies for companies considering investment in the area. The company also operates sand and gravel mines, and supervises activities related to the exploitation of quarries for construction and filling materials required to support the infrastructure projects under way at SEZAD. Total raw material requirements are estimated at roughly 500-1,000 tonnes per hour, Ali bin Abdullah al Zadjali, manager at Duqm Quarries Company, told local media in October 2017.

CHALLENGES: Although the government is taking steps to ameliorate some of the issues that have hindered growth in the sector in recent years, many of the challenges facing the industry remain. These originate in, and are compounded by, overly burdensome regulation and delays in licensing and the issuing of permits. Certain requests have to progress through as many as eight ministries for approval, or “no objection“ rulings, and current delays on routine permits have been reported to extend to over a year in some cases.

Fiscal measures taken by the government to address the growing budget deficit have also impacted the industry, including a 2016 doubling of the mining royalty rate from 5% to 10%, and a 2017 hike in corporate income tax from 12% to 15%. The net effect of these measures has been to cut into profitability for companies seeking to gain a foothold in the Omani minerals market. At the same time, the sector is under pressure to increase the value added of raw, unprocessed minerals. To this end, the government has been pushing exporters of certain minerals to add value in commercialised finished products, including plaster and cement. For example, raw exports of marble were banned in 2016. More abundant minerals like limestone are permitted to be partially exported in raw form. New regulations being introduced in 2018 are expected to include guidance that may require factory production as a condition of licensing. A related issue identified by operators in the country is the need for a centralised marketing agency to regulate exports for key bulk mineral products. In the absence of such an agency, marginal suppliers have the effect of undercutting prices for major products like gypsum and limestone.

MDO plans to act as a concentrator in this regard, increasing the leverage of Omani operators by marketing to traders on their behalf. PAM also plays a role, regulating the minimum export price of minerals to prevent price undercutting. In late 2016 the authority fixed a minimum export free-on-board price for raw gypsum at $12.50 per tonne. Consequently, Omani gypsum exporters are barred from exporting raw gypsum below this designated price.

NATIONAL MINING STRATEGY: A new national mining strategy that is expected to be unveiled in the first quarter of 2018 is currently under development by PAM in collaboration with a consortium of international firms, including the UK-based mining industry specialist SRK Consulting, legal firm Mayer Brown and consultancy firm Wood Mackenzie. The strategy is expected to provide a 10-year development framework for the mining sector and will reportedly be based on PAM’s 12 pillars, which include a focus on investment, social contribution, the environment and the development of human resources. All commodities in the mining industry are within the scope of the strategy, which includes a review of the resource potential of different areas in the country where data could be improved to encourage exploration and investment.

In a related effort, Oman’s Ministry of Environment and Climate Affairs (MECA) has initiated steps to revamp its environmental licensing and permitting procedures in order to make them more investor-friendly. These changes will embed environmental issues associated with mining and extractive industrial activities in a new all-encompassing regulatory framework. MECA is reportedly planning to roll out the first phases of the framework in early 2018, with further amendments and additional legislation likely to be introduced over a period of roughly two years.

MINING LAW: After years of delays, a new mining law is expected to come into effect in 2018, overhauling Oman’s mining regulations by increasing transparency, boosting investment incentives and streamlining the permitting process, specifically the process of obtaining mining licenses. The law has been drafted by PAM in consultation with both public and private stakeholders, and was reportedly in the final stages of review by Parliament and the Cabinet in October 2017.

“The new law has benefitted from the fact that private-sector stakeholders were adequately consulted,” Mohammed Yahya Al Shabib, vice-chairman of Gulf Mining Materials, told OBG. “We especially appreciate reforms clarifying the differences between concessions and ownership, and those elongating licences.”

Upon implementation, the law should largely address investor concerns with licence duration. Until now these have been issued for five-year periods and subject to mandatory annual renewal. The new law is likely to include extensions to licence periods, with the objective of boosting investor confidence in the sector. The sultanate is also working towards offering ready-to-invest mining blocks to make it easier for investors to obtain mining licences. Historically this has required companies to secure regulatory approval for operating permits from up to eight different ministries. To these ends, PAM is coordinating with other government agencies to approve mining blocks that will then be divided into smaller concessions and allocated to investors.

COUNTRY LOGISTICS: Oman’s strength in mining lies in its strategic location – at the centre of a developing region with an immense appetite for cement and steel. From an operational perspective, the sultanate supports mineral exporters with natural gas, free zones, tax exemptions, relatively low corporate tax rates and high-quality infrastructure – including roads, ports and airports. Domestic freight costs for mineral exporters have nevertheless gone up since 2016 on the back of regulations that reduced the permitted weight of truck haulage from 50 to 40 tonnes, as well as a 50% increase in diesel costs following the removal of subsidies in 2016. As a result, transport costs account for up to one-third of operating costs for some mining companies in the country, up to 40% of that on fuel costs alone.

To improve domestic freight options, Asyad – a government holding company that consolidates all government investments in ports, free zones, rail, maritime and land transport companies – is currently developing an internal rail network for use in the mining industry. The sultanate had previously been developing a Sohar connection for a planned GCC rail network before progress issues in neighbouring countries suspended work in 2017. Oman Rail is now focused on setting up two domestic rail networks for the mining industry, the first connecting Sohar Port and Dank, and the second connecting Thumrait, Shuwaimiya and Duqm, according to local media. Full commissioning is expected to take at least four years from the time that contracts are awarded, with a final funding decision contingent on mining sector development strategy.

EXPORT TERMINALS: Existing port facilities in the country are improving and broadly considered adequate to support mining and quarrying activities. One notable exception is Sohar Port, where platform capacity has struggled to keep pace with the significant growth in export volumes of rock products required in Qatar, Bangladesh and Iraq. However, the scale and quantity of demand currently exceeds Sohar’s shipping capacity. Nevertheless, port authorities are responding to rising demand, increasing the port’s handling capacity from 400,000 tonnes per month in late 2017 to 600,000 tonnes per month in January 2018, with capacity set to increase to 1m tonnes per month by the beginning of February 2018, according to local media.

South of Sohar, in Duqm, a 300-metre dedicated break bulk terminal is being developed for mineral export with a capacity of up to 5m tonnes per annum. The terminal adds to the attractiveness of Duqm’s location near major shipping lanes with direct connectivity to major export destinations. The first shipment of 50,000 tonnes of dolomite was exported from the port’s commercial quay in February 2016, followed by the first shipment of 55,000 tonnes of limestone to India in May 2017. Duqm Port is equipped to handle these volumes with minimal operational lead time, and is expected to develop into a major international centre for the export of industrial minerals in the coming year.

Investment in logistics will also bring dividends through the commercialisation of the substantial mineral resources of Al Wusta Governorate. Expectations are that the quarry in Duqm, located about 40km from the port, will produce several hundred thousand tonnes of product per month, with a significant percentage exported via the port’s break bulk terminal and feeding important downstream industries in Duqm. Large deposits in the vicinity of the port include dolomite, limestone, gypsum, silica sand and clay.

GYPSUM: Of the minerals present in Oman with the greatest impact on sector growth, gypsum exports – destined primarily for the burgeoning steel and cement sectors of the Indian sub-continent – have the potential to drive growth, supported by the purity of the product, competitive prices and proximity to consumer markets.

According to local media, demand for the material is expected to rise across Asia in the coming years, from 16m tonnes per annum in 2015 to 23m by 2020 and over 36m by 2025, largely driven by strong growth in the cement and gypsum board production segments in Asian countries. With Omani reserves of gypsum ore estimated at more than 1bn tonnes, the sultanate is strongly positioned as an important source of the construction material in a period of rising global demand.

Underscoring the potential contribution of the mineral to the country’s economy, the volume of gypsum ore exports has been growing rapidly in recent years, from just 300,000 tonnes per annum in 2010 to 6.4m tonnes in 2016 and 6.1m tonnes during the first nine months of 2017. By the end of 2017, PAM projected that Oman would surpass Thailand to become the largest exporter of gypsum in the world. These figures are expected to rise again to over 10m tonnes by end-2018.

Buoyed by surging export growth, Gulf Mining Group (GMG) has significantly boosted production of gypsum from 86,000 tonnes per month in 2016 to 150,000 in 2017. Furthermore, GMG is considering plans to set up a processing plant for the manufacture of gypsum board and other related products in Salalah, subject to the availability of electricity and natural gas for the project.

POTASH: Other new investments being pursued by GMG’s to increase its existing portfolio in Oman include a doubling of limestone production from 50,000 to 100,000 tonnes per month, and an initial investment of between $300 and $500m in the sultanate’s largest mining venture, a major project targeting the significant potash reserves located in central Oman.

The initiative is projected to produce 500,000 tonnes of potash per annum, with raw production capacity scalable to 1m tonnes over a five-year period. Exploratory work in central Oman has commenced, and GMG has applied for a licence to begin mining operations in an area of 3200 sq km in Block 62 and Block 6. Initial processing is planned at Umm Al Samim, with final downstream blending of potash and sulphur to produce potassium sulphate planned for the Duqm Special Zone, where GMG is developing a $20m-40m pilot plant, scheduled to come online in 2022.

CHROMITE: GMG is also the largest chrome producer in Oman at 400,000 tonnes per annum. As part of the company’s strategy to add value to the sultanate’s manganese ore segment, plans are under way to establish the country’s first manganese ferroalloy smelter, to be located at the Sohar Port and Freezone. In the first phase GMG aims to produce 4000 tonnes of manganese ferroalloy, with Oman’s manganese deposits estimated at between 1.5m and 2m tonnes.

At the end of 2017 state approvals and permitting were in place for the plant, and the company was waiting for guarantees that the electricity generation capacity being developed by Majan Electricity Company would be sufficient. The planned facility is to be constructed adjacent to an existing ferrochrome smelter owned by GMG subsidiary Gulf Mining Ferro Alloys.

OUTLOOK: Motivated by a need to fill the budgetary gap left by the drop in oil revenues, the government is playing a key role in incentivising new investment throughout Oman’s mining sector. Though levels of production of both industrial and metallic minerals were impacted by the 2015-16 global commodities slump, the long-term outlook for the sector remains stable, driven by the increase in construction activity and rising demand for large volumes of construction materials in Asia and East Africa.

Seeking to enhance the contribution of the sector to economic diversification, the government is taking steps to address long-standing operator concerns with overly burdensome regulation and delays in licensing and permitting. This is being achieved by increasing transparency, boosting investment incentives and streamlining the permitting process to make it easier for investors to obtain mining licences. The new mining law and the national mining strategy, both due to come into effect in 2018, are set to drive growth in the sultanate’s mining sector into the next decade.