The third pillar: Diversification of output as international investment continues to rise

Hydrocarbons are not the only underground resource to yield billions of dollars of profit in Saudi Arabia. The mining of metallic ores, phosphates, bauxite and construction materials is an area of growth which the government hopes will become the third pillar of the economy, after oil and petrochemicals.

Most investment is still either local or regional, but the introduction of a new mining code in 2004 resulted in greater input from foreign investors. As developments come on-line, investors and the government are starting to see the benefits. A report released by the Ministry of Petroleum and Mineral Resources (MPMR) in August 2012 stated that mining investors made a total of $1.93bn in profits in 2011, bringing in $113m in state revenues.

Regulation

In the wake of the Mining Investment Law of 2004, Saudi Arabia has been praised for providing the industry with a clear regulatory framework. Formerly, prospective companies needed to apply not only for an exploration licence but also a royal decree. The new mining code has dispensed with the latter requirement, stipulating that only a licence from the Deputy Ministry for Mineral Resources – a subdivision of the MPMR which manages the development of the sector – need be acquired. An income tax rate of 20% for mining activities is also considered highly attractive in relation to international competitors. “The Kingdom has made fundamental changes to its business climate for the sector. New mining investment and foreign investment laws were ratified, income tax regulations were changed and corporate taxes were reduced,” Sultan J Shawli, the deputy minister for mineral reserves, told OBG.

Work In Progress

Nonetheless, some note that the regulatory environment could be further improved. For example, according to the Mining ventures with licence holders to enter the Saudi market. Others feel that the government needs to speed up the granting of licences further, as delays can lead to companies losing money.

It is commonly recognised, nonetheless, that the 2004 mining code is internationally competitive and has attracted new interest from investors. The 2012 MPMR report suggests that the number of licences granted in the country has reached 1565, spanning a total area of more than 64,000 sq km. While the large majority of these licences are for a range of construction materials, they also include significant resources of metallic ores, such as gold, silver, copper, zinc, iron and rare earths, as well as massive deposits of phosphates and bauxite.

Exploration

With a relatively young mining sector, the country has yet to discover the full extent of its mineral resources. “Saudi Arabia is often described as having a wealth of minerals, but the vast majority of the Kingdom remains unexplored. Only further drilling can reveal whether what has so far been found is just the tip of the iceberg,” Zohair Nawab, the president of the Saudi Geological Survey, told OBG. However, the country is believed to contain significantly more resources than are currently proven: 16 Saudi and foreign companies are making use of a total of 104 exploration licences, according to the 2012 report by the MPMR.

Saudi Arabia has greater potential for mineral resources than many other Gulf countries. “Kuwait, Qatar, Bahrain and to a lesser extent the UAE are all very flat, with little geological variation. The more complex geology of Saudi Arabia, along with that of Oman and Yemen, can be expected to host a greater amount and variety of mineral reserves,” said Nawab.

Coupled with the Kingdom’s vast and sparsely inhabited landscape, this could count as a competitive advantage in the long term, given that several other Gulf countries import minerals from Africa for processing in country. New information on mineral deposits throughout the country’s complex geology continues to emerge. “We are currently conducting a study on quartz,” said Nawab of the mineral, which can be used in a variety of technological and industrial products. “We have discovered several new locations with high-quality reserves, and are trying to estimate their reserves through drilling.”

Bauxite

As the only Gulf country with locally available reserves of bauxite – the mineral ore from which aluminium is produced – Saudi Arabia is well positioned to develop this subsector.

Until now, the Kingdom’s bauxite reserves had gone undeveloped, but this is set to change. Government-owned diversified mining firm Ma’aden has exclusive rights to development of these reserves, but in 2009 the company formed a joint venture with US mining giant Alcoa. The result of this partnership, which is valued at more than $10bn, is to be an integrated aluminium complex in the industrial city of Ras Al Khair, on the eastern coast. Part of this development is a smelter and a rolling mill, both of which will begin producing aluminium from imported bauxite ore in 2013. The joint venture will also see a mine and a refinery come on-line by 2015, at which point it will begin using locally sourced ore in production. The North-South Railway – the first phase of which was successfully tested in 2011 – will allow bauxite ore mined at Al Azbirah to be transported for processing in a refinery at Ras Al Khair, which will have an annual capacity of 1.8m tonnes. The refinery is under construction by South Korea’s Hyundai at a cost of $1.5bn.

The bauxite-aluminium industry is one of the best examples of Saudi Arabia using locally available resources to diversify the country’s industrial base and open up new opportunities for downstream manufacturing (see Industry chapter).

Phosphates

Along with bauxite, phosphate reserves have in recent years received their first major investment, which is set make the country one of the world’s largest producers and exporters of phosphates. Saudi Basic Industries Corporation has partnered with Ma’aden Phosphate Company in a $5.5bn joint venture for the construction of a phosphate and fertiliser complex – another prominent feature of the Ras Al Khair industrial city.

Like the bauxite mine at Al Azbirah, the phosphate mine at Al Jalamid is linked to the North-South Railway. Phosphate ore is transported to Ras Al Khair, where it is combined with sulphur and natural gas, both of which are locally available, to yield diammonium phosphate and excess ammonia. Commercial operations began in 2012 but the facility has not yet ramped up to full capacity. The North-South Railway has also not reached its full mineral freight capacity, which it is scheduled to achieve in July 2013. When its full capacity is reached, however, this operation alone could account for as much as 10% of the world’s traded phosphates.

No less significant than the current facility is a $5.6bn phosphate project approved by the government in mid-2012. The project will see the construction of mining and processing facilities near the Al Khabra mine, and will be one of the major features of mining city Wa’ad Al Shammal (see analysis).

Rights to all of the Kingdom’s known phosphate reserves are currently held by Ma’aden, but foreign investors have applied for licences to explore for as yet unknown resources. As in the case of other domestic mineral reserves, exploration to date is believed to be insufficient. When asked which of the country’s mineral resources had the greatest potential for further development, Nawab pointed to phosphates before all others.

Downstream, there could be new opportunities for manufacturers of fertilisers and other chemicals products. “Saudi Arabia has the necessary locally available inputs for the production of fertiliser, such as sulphur and nitrogen. This gives the Kingdom a major competitive advantage in that it is more independent than other fertiliser producers,” said Nawab.

Gold

While bauxite and phosphates are just beginning to be developed, Saudi Arabia has an established industry in the mining of gold. The state-owned Ma’aden Gold and Base Metals Company operates five mines in the Kingdom, and has been producing gold since 1988. Reserves in some of these mines are depleted to the point of exhaustion, and until now the company has tried to maintain steady production levels to extend the lifespan of the mines.

The Al Rajhi report, however, said that Ma’aden’s overall gold output is expected to increase by 30% by 2014 due to the contribution of two new mines, at Ad Duwayhi and As Suq. Ma’aden predicts that its production will reach 400,000 oz per year by the end of 2015, but Al Rajhi submitted a more conservative estimate of 240,000-260,000 oz per year by then.

The increase in production comes at a time when investors have been taking refuge in gold, which is considered something of a safe haven during periods of economic uncertainty. Gold prices reached record highs of $1920 per oz in 2011 and, as of early February 2013, were at around $1675 per oz, with many analysts remaining bullish about continuing growth. According to the Al Rajhi report, gold has experienced less volatility and higher returns over the past five years than many benchmark indices.

The Price Is Right

“Gold production will be especially interesting for Saudi Arabia when prices are so high,” said Jarmo Kotilaine, the chief economist at NCB Capital. High gold prices were cited as one of the contributing factors to Ma’aden’s profits in the first half of 2012, which increased by 243% compared to the same period in 2011, to $66m.

Rising prices could make mines which are difficult to access – or those with lower-grade ore – more viable. Several others could add further production capacity in the years ahead. According to Ma’aden’s 2011 annual report, mines at Mansourah, Masarrah, Ar Rjum and Humaymah are currently at the pre-feasibility stage, while additional sites at Bir Tawillah and Zalim are in the exploration phase.

While five of the six mines producing gold as their primary output are managed by Ma’aden, foreign players have shown increasing interest in searching for Saudi gold. As of late 2012 four exploration licences had been granted, including one for a UK-Saudi joint venture between KEFI Minerals and local partner ARTAR, and a further 19 applications were pending. While the company is still in the exploration stage, it released promising results throughout 2012, including a “new discovery at Selib North, which could potentially be part of a large intrusive system”. Other foreign ventures told OBG that they are exploring promising areas.

Copper & Zinc

Foreign investors are also mining copper and zinc ores in Saudi Arabia. Prominent among these is Bariq Mining, which operates a copper mine at Jabal Sayid. Investors have shown strong interest in this project over the past couple of years. Following the award of its licence in May 2010, the company was snapped up by Equinox Minerals and Equinox – which also owned a mine in Zambia – was in turn bought out by Barrick Gold in April 2011.

Construction work valued at $400m on the Jabal Sayid project was completed in 2012, and commissioning of the plant is under way. Bariq is expecting to produce copper concentrate by the first quarter of 2013, though blasting operations have been in progress since the end of 2011. Some 45,000-60,000 tonnes of copper was expected to be produced per year during the first five years of operation. However, the company’s blasting licence has been temporarily suspended by the government, as the firm’s Western Australian safety standards do not comply with the rules in force in Saudi Arabia. This has reduced the company’s forecast copper output for 2013 by 23,000-45,000 tonnes.

In a separate development, Saudi-US venture Al Masane Al Kobra resumed full operations in October 2012 at a mine holding copper and zinc reserves in the Najran province that had been closed for decades. The firm also announced that it is planning to start building a $400m copper smelter at the end of 2013. Currently, all Saudi copper is exported for processing, but the government is keen to retain as much of the value chain in country as possible.

In 2012 Ma’aden awarded a contract to Bechtel – a US-based multinational engineering, procurement and construction firm with expertise in mining – for pre-feasibility studies on Ma’aden’s proposals to build copper and zinc smelters.

Rare Earths

According to the Saudi Geological Survey, a two-year study is now under way on Saudi reserves of rare earths, which are used in a wide range of high-tech sectors, including oil refining, medical equipment and missile manufacturing. Following the completion of drilling and analysis of the study, the results are to be submitted to the Deputy Ministry for Mineral Resources. The world’s largest known deposit of tantalum and niobium could be located in the Tabuq region of northern Saudi Arabia; if developed, it could prove very profitable.

Global rare earth exports are dominated by China, which has come under increasing criticism from the international community for imposing strict quotas on annual exports. As such, there has been increasing demand for finding a more stable supply of the valuable resource. “The constraint has become a big issue, so many investors will be looking at new opportunities in other jurisdictions,” said Kotilaine.

Construction Materials

Most licences issued in recent years have been for building materials. The MPMR report states that 1286 of the 1565 mining licences are for this subsector, and the Deputy Ministry for Mineral Resources continued to issue many such licences in 2012.

“Saudi Arabia has a great deal of experience in mining for less valuable construction materials, which are used both in the local market and for export,” said Nawab. In 2011, approximately 48.5m tonnes of cement and 50.8m cu metres of ceramic were produced by companies in Saudi Arabia.

Restraints On Growth

The ongoing lack of transportation, shortage of water and inadequate infrastructure have been cited by investors as some of the major limitations to the continued growth of the mining sector, according to a 2012 report in the Mining Journal. Water shortages, in particular, have been described by Khalid Al Mudaifer, the CEO of Ma’aden, as one of the two greatest challenges facing the Saudi mining industry. The processing of metallurgical ores and the cooling of mines requires a lot of water, and Saudi Arabia is one of the world’s most water-scarce countries. On the transportation front, the erstwhile absence of railway infrastructure has been cited as a major barrier to entry, especially in the phosphates industry.

Steps are being taken to address these problems, however. In January 2012 Ma’aden signed a contract for the construction of a 430-km pipeline designed to carry treated “grey” water to the Ad Duwaihi mine, along with four other gold mines in the Makkah region. The importance of this project being delivered on schedule is clear.

“The pipeline is an essential step in Ma’aden’s ambition to expand our gold production to 400,000 oz per annum in 2015,” Al Mudaifer said.

As for other infrastructure, the government is hoping that its new mining hubs at Ras Al Khair and the recently approved Wa’ad Al Shimaal will provide significant relief, allowing for upstream and downstream mining activities – particularly in phosphates – to cluster at these locations. In addition to the North-South Railway – which is due to be transporting mineral ores at full capacity by mid-2013 – the government also announced in 2012 that it is to build rail connections for Wa’ad Al Shimaal and between Ras Al Khair and Jubail (see analysis).

Workforce  

Mining is not unique among Saudi industries in reporting serious shortages of skilled labour – the second of the two greatest challenges cited by Al Mudaifer. “This is not a country in which a mining culture yet exists,” Allan Jack, Jeddah branch manager of Bariq Mining, told OBG. “Most good graduates still want to go and work for the oil and gas majors, and there is an insufficient number of geologists graduating from Saudi universities.”

As the government pushes to integrate a greater number of Saudis into the private sector workforce, it may therefore be challenging for those in the mining sector to reduce their dependence on expatriate employees. Mining companies are being asked to boost Saudi representation to 70%, although the companies’ position is made easier by the fact that no differentiation is currently made between technical and non-technical roles.

A notable development in this regard came in mid-2012, when the Saudi Technical Institute for Mining – a collaboration between Ma’aden, the Technical and Vocational Training Corporation, and Missouri University – began to accept its first students for the 2012/13 academic year. The institute is to offer courses in three disciplines: underground mining, surface mining and operations.

Outlook

While Saudi mining companies have traditional strengths in construction materials and, to a lesser degree, precious metals, this output is now diversifying. Gold production is due to increase at a time when international prices for the precious metal remain at elevated levels, and there is a great deal of interest in the potential for ongoing exploration to make new lucky strikes.

Further opportunities may be found out to sea. When completed in 2013, a study by Canada’s Diamond Fields International may reveal that deep-sea deposits of gold, silver and other metal ores in the Atlantis II basin can be feasibly exploited by as early as 2014, provided that the environmental risks are minimal, and the Saudi and Sudanese governments cooperate effectively. As well as precious metals, phosphates have some of the best potential for further growth. Despite the imminent arrival of new bauxite processing facilities, further exploration for this mineral is not currently taking place.

Aside from resources, there are other reasons why mining companies could find Saudi Arabia more attractive in the years ahead. The emergence of new railway infrastructure should further increase investor interest, and there is also talk of tweaking the 2004 mining code. The regulatory environment has taken real strides forward with implementation of the new code, but many believe that the government could still do more to clarify and enhance regulation.