Private sector vital to Saudi mining sector expansion

Published in MEED, 22 January 2017

The Saudi government is planning structural reforms to stimulate more investment from the private sector

Saudi Arabia’’s Vision 2030 document, released in April last year, laid out some ambitious targets for growing the kingdom’s mining sector.

The government said it was “determined” to ensure the number of jobs in the industry rose from 65,000 to 90,000 by 2020, and that its contribution to GDP increased to SR97bn ($25.9bn), from SR64bn currently.

Since then the authorities have gone even further. Khalid al-Falih, minister of energy, industry and mineral resources and chairman of Saudi Arabian Mining Company (Maaden), told reporters on the sidelines of a conference in Jeddah in November that the aim is to push the sector’s revenues to SR240bn by 2030. However, it is worth pointing out that this target is lower than one set by his predecessor, Ali al-Naimi, who in October 2015 said the aim for 2030 was SR360bn.

Whatever the targets, they will not be easy to hit. In order to meet its aims, the government says it will make several structural reforms to stimulate more private sector investment, such as building a comprehensive database of the kingdom’s mineral resources, reviewing the licensing procedures, investing in infrastructure, developing funding methods and establishing centres of excellence. It also wants to form strategic international partnerships and increase the productivity of local mining companies.

Seeking more private investment is sensible in the current climate, according to Ian Coles, a partner at law firm Mayer Brown. “With government finances running in the red, if the mining industry is to expand then external sources of funding will need to be found,” he says. “If the government is to reach its target, this is going to involve a significant amount of external investment from both the international mining community and other traditional sources of debt and equity funding.”

Whether enough private capital will emerge depends, to some extent, on when and how the government revises its licensing system. Saudi Arabia certainly has potential when it comes to mineral resources. It produces more than a dozen metals and minerals in significant quantities, and is among the world’s top 20 producers of materials including aluminium, bauxite, gypsum and phosphates. The country also has about 6 per cent of the world’s uranium reserves, which are currently unexploited.

Several private, international firms are already involved in the sector, often in partnership with Maaden. US mining giant Alcoa has a 25.1 per cent stake in both Maaden Aluminium Company and Maaden Bauxite & Alumina Company. Another US firm, Barrick Gold Corporation, has a 50:50 joint venture with Maaden for Maaden Barrick Copper Company (MBCC). A third American firm, Trecora Resources, has a one-third share in Al-Masane Al-Kobra Mining Company (AMAK), which produces copper and zinc.

Nonetheless, the industry looks certain to be dominated by state-run enterprises in the future. The critical player is Maaden, which dominates the space. It is not the only state body involved, however. Saudi Basic Industries Corporation (Sabic) has a 30 per cent stake in Maaden Phosphate Company. And Maaden also works with Technical & Vocational Training Corporation (TVTC). The two set up the Saudi Mining Polytechnic in Arar in the north of the country in 2012, and are due to open another training institute at Waad al-Shamal this year.

The plans to expand the kingdom’s mining industry come at a time when the sector globally is in the doldrums. Fears over an economic slowdown in China have prompted falls in the prices of a wide range of commodities, including iron ore, aluminium, copper and zinc. Maaden, which is the 10th largest mining company in the world, according to UK consultancy PwC, has not escaped the impact of that. In 2015 and the first half of 2016, the company saw profits decline. Its third-quarter 2016 results saw a small year-on-year rise in profit. However, the performance was still below expectations, according to Jassim al-Jubran, an analyst at local investment bank Al-Jazira Capital, due to lower-than-expected sales, which were only partially offset by a reduction in costs.

Mining is a cyclical business and this is not the first or last downturn the industry will endure. Some have taken advantage of the slowdown to revamp their operations. In November 2015, AMAK closed its copper and zinc mine to allow for extensive renovation work. The operations restarted on 16 December 2016, with Simon Upfill-Brown, CEO of Trecora, saying at the time: “We expect to continue to eliminate bottlenecks and to ramp up production of the mine over the next three to six months.”

Maaden, meanwhile, is pursuing a twin-track approach of expansion while also trying to keep costs under control. On 1 January this year, commercial operations began at the ammonia plant run by one of its subsidiaries, Maaden Waad Al-Shamal Phosphate Company, at Ras al-Khair, with a production capacity of 1.1 million tonnes a year (t/y). The Ras al-Khair site is home to a multi-commodity minerals hub developed by Maaden, which was inaugurated in late November 2016.

Last year, production also started at three other sites. In October, the alumina refinery run by Maaden Bauxite & Alumina Company started up. In July, MBCC began commercial production at the Jabal Sayid copper mine, which will have an output of 45,000 t/y. And on 1 April, Maaden Gold & Base Metals Company started commercial production at the Ad Duwayhi gold mine, which has an annual production capacity of 180,000 ounces.

Other projects are in the pipeline. In November, Maaden said it was planning a SR24bn phosphate fertiliser plant at an undisclosed site, which will add 3 million t/y to its output by 2024. Later this year the company is due to start up its $7bn Waad al Shamal phosphates plant.

All this activity is leading some observers to take a positive view of the short-term prospects for the industry. The local Jadwa Investment points to mining along with finance and utilities as the three sectors likely to grow fastest in 2017. Al-Jazira Capital’s Al-Jubran says “[Maaden’s] margins are expected to positively expand after the commencement of commercial production at Waad al-Shamal.”

This could set the scene for further growth in the years ahead and the government’s longer-term targets may yet be achievable. However, a lot still hinges on policy details that have yet to be unveiled.