Unlocking Iran's mining potential

Published in MEED, 15 July 2015 In late May, the Iranian mining industry gathered for a conference in Tehran. Almost 300 local companies came to the Iran Mines & Mining Industries Summit, which gives an indication of the size of the industry. But more importantly, delegates from several dozen international companies were also there, from Germany, Australia, China and India.

Mining is one of the industries in the Islamic Republic that could really benefit from more foreign involvement, in terms of money and expertise. According to Turquoise Partners, a Tehran-based investment house, Iran’s mining sector is struggling with problems on many fronts, ranging from outdated technology to a shortage of finance and a lack of research capabilities.

“The mining sector has a lot of potential due to the country’s sizeable reserves and relative proximity to large consumers,” the group said in a report published in February. “However, it suffers from a lack of investment in technology, infrastructure, and research and development. The sector could benefit from massive investment, which would stimulate other related sectors as well.”

The scale of the investment needed is daunting. In the government’s sixth economic development plan, which runs from 2015 to 2020, some $15bn of spending is earmarked for the mining industry in order to boost output of steel, copper and aluminium. But that forms just part of what the government would like to achieve.

Iranian Mining Industries Development & Renovation Organisation (Imidro), the state-owned body responsible for the sector, has been involved in $10bn-worth of projects since it was set up in 2010, but its future plans far outstrip that. Imidro says it needs to raise about $40bn of finance to meet its targets for 2025. These include producing 55 million tonnes of steel, 1.5 million tonnes of aluminium and 800,000 tonnes of copper cathode by that date – four- and five-fold increases on what the country produces at the moment.

Attracting international companies into the market would be one way of meeting the investment shortfall. As the presence of the companies at the conference shows, many foreign firms are well aware of the opportunities on offer; the problem, as ever for Iran, is how to persuade them to enter the market.

Mehdi Karbasian, deputy minister of industry, mining and trade, has said that simplifying the rules for international investors would help, but that will not be enough on its own. Exploring for new minerals and then extracting them is an expensive, high-risk business. The initial investments required are large, the vast majority of prospects come to nothing and it can take a long time before a mine starts making a profit.

Given Iran’s recent history, all this means international mining firms are likely to approach the market with a great deal of caution, even if the international sanctions regime is dismantled in line with the agreement reached on 14 July between Iran and the six world powers. Imidro has itself been on the US government’s list of sanctioned entities for many years and foreign companies will be wary of getting too closely tied in with it, in case sanctions are reimposed in the future. As a result, any hopes that they will rush into Iran once it returns to the international mainstream may be unduly optimistic.

Mark Fitzpatrick, a director of the London-based think-tank International Institute for Strategic Studies (IISS), says it could take up to nine months before sanctions start to be lifted in any meaningful way.

“A lot of companies are going to be reluctant to invest anything in Iran,” he says. “Banks are going to be reluctant to service the trade, until they’re sure it won’t fall foul of American sanctions because of the huge fines that have been levied on many European banks. So they’re going to be hesitant for some time. They might be hesitant until they see who is the next US president and whether that president will implement the deal.”

Even if sanctions relief comes more quickly, Iran’s track record for attracting investment into its mining sector is not all that great. According to a recent research report produced for the Iranian parliament, of the total $34bn of accumulated foreign direct investments in the Islamic Republic up until 2009, only 7 per cent went into the mining sector. That compares with between 30 and 40 per cent of inward investment that went into the sector in other countries with large mining industries, such as Chile, Australia and Canada.

In the meantime, Tehran is under pressure to find other ways to help the industry reach the scale of investment that is needed. In November last year , Ahmad Morad Alizadeh, CEO of National Iranian Copper Industries Company (NICICO), called for more financial assistance to help private companies balance the risks and rewards involved in mining.

“The small private sector is not able to meet the financial resources,” he said. “The private sector is not capable of taking high risks in the areas of exploration, thus negotiations are ongoing with the Ministry of Industry, Mine and Trade, Imidro, NICICO, banks, as well as the Mines Insurance Fund to decrease the aforementioned risk.”

The government has also been searching for other ways to help the industry beyond simply trying to attract international investors. At the mining conference in late May, Mohammadreza Nematzadeh, the minister of industry, mining andtrade, floated the idea that the mining sector could be made exempt from tax. However, given the fiscal constraints the government is under, he may struggle to win support for that from his colleagues.

For all the difficulties the industry faces, there is little doubt that Iran has great potential when it comes to mining. According to Imidro, there are more than 68 different minerals buried in the earth of the Islamic Republic, ranging from iron ore to coal, gold, lead, zinc and copper, with a total estimated value of some $700bn.

Even in the face of sanctions, which have undermined the effectiveness of the industry, the country is a major player in global terms. The international organising committee of the World Mining Congress (WMC) ranks Iran as the 10th largest minerals producer in the world, with total output of some 348 million tonnes. That figure is largely made up of fuels, particularly oil, but also gas and coal. However, even excluding fuels, Iran is the 11th biggest minerals producer, with almost 48 million tonnes a year (t/y) of output. No other country in the Middle East comes close to the scale of the Iranian mining sector. The next largest are Saudi Arabia and Morocco, which produce about 10.5 million t/y each, excluding fuels.

Iran is among the top 10 producers in the world of industrial minerals such as baryte, bentonite, boron, feldspar, gypsum, perlite and sulfur. It is also among the 10 largest producers of several metals including chromium, molybdenum, arsenic and mercury. In 2013, the most recent year for which figures are available, the WMC estimates that the total value of mining production in Iran, excluding fuels, was almost $7.9bn.

The potential is clearly there, but it remains an open question as to how quickly and effectively Iran will be able to exploit its plentiful resources.