Mining: a Ma’aden voyage - resources of Saudi Arabia

Materials World magazine
,
2 Jan 2014

The Kingdom of Saudi Arabia may be renowned for its vast reserves of oil, but it benefits from an abundance of mineral reserves it has increasingly sought to exploit as it looks to diversify its oil-dependent economy. Clive Hopewell, Corporate Partner at Charles Russell LLP, investigates.

While oil might be the first thing that springs to mind when you imagine drilling in Saudi Arabia, there are exciting developments gathering pace across the country, bringing a fresh wave of opportunity to the mining sector. From its inception in 1932, the Kingdom of Saudi Arabia has looked to capitalise upon its bountiful natural resources, including oil and gold. While the former has been at the forefront of the Saudi economy ever since, the latter has, until recently, remained largely peripheral.

The same can be said for much of the Kingdom’s mineral wealth. The country contains large deposits of bauxite, silver, copper, iron, tin, zinc and lead, as well as non-metallic minerals such as phosphate and tantalum. Although there has been plenty of exploration, spearheaded principally by the mining sector’s state regulator, the Deputy Ministry for Mineral Resources (DMMR), there has been correspondingly little in the way of extraction and processing. Some public–private partnerships have arisen over the years, but these have not precipitated much growth in the domestic mining industry.

Nonetheless, the tide has begun to turn with the advent of Saudi Arabian mining company, Ma’aden. Established in 1997 by the Government, Ma’aden is responsible for regulating mineral exploration and mining. It has acted as a catalyst for investment and delivered vital commercial impetus to the sector, particularly following its partial privatisation in 2008. In its brief history, the company has pursued strategic partnerships at home and abroad, with the aim of exploiting what has already been explored and discovered. Much of its work has entailed creating the necessary infrastructure to facilitate extraction and processing, as two of its current flagship projects, the Az Zabirah bauxite mine and Ad’Duwayhi gold mine, demonstrate.

After discovering significant deposits of bauxite in northeastern Saudi Arabia, Ma’aden has formed a US$10.8 billion joint venture with American firm Alcoa to create what it describes as, ‘The largest and most efficient vertically integrated aluminium complex in the world’. It is envisaged that ultimately the Az Zabirah mine will produce four million tonnes of bauxite a year, which will then be transported around 600km by train to a processing plant to be refined into alumina. The 1.8 million tonnes of alumina generated will then be smelted to produce 0.74 million tonnes of aluminium. Up to half of this aluminium can be processed by an adjacent rolling mill to produce sheet, end and tab stock for the manufacture of cans and products with automotive, construction and foil applications.

At present, the refinery is still under construction and is expected to be completed in 2014. In the interim period, alumina is being imported by Alcoa for smelting. Once the complex is fully operational and integrated, it is anticipated that the aluminium produced will undercut global prices and therefore be much sought after by the markets.

Ma’aden is responsible for implementing the project infrastructure. This extends beyond mining operations and encompasses an ambitious cooperative project with the country’s water and electricity utility companies, whereby the parties are developing a joint power and desalination plant. This will fulfil the complex’s daily water and electricity requirements, with the surplus fed into the national grid.

Joining the gold rush?
Gold, for obvious reasons, has been a key focus for Ma’aden. Saudi Arabia has significant deposits, particularly in the Nubian shield, a rich seam either side of the Red Sea. In addition to five existing mines, Ma’aden is currently developing two more sites, including one at Ad’Duwayhi. Mining and milling operations will be employed, with the resultant gold to be transported 450km south to Jeddah. Flowing in the opposite direction will be treated water from the Red Sea, via a 500km pipeline that will also service other nearby mines and facilitate mining operations.

It is not just water that Saudi Arabia may soon be extracting from the Red Sea. In conjunction with Sudan, mining for minerals such as gold, silver and copper is scheduled to commence on the seabed in 2014. Although the existence of deposits was first confirmed in the middle of the 20th Century, a mining licence was only obtained in 2010, awarded to a joint venture between Saudi and Canadian companies (the latter acting on Sudan’s behalf). Further exploration is ongoing, but recent core samples have revealed the presence of silver, zinc and copper.

Recent progress in the Kingdom’s mining sector is merely a taste of things to come, as the Government’s policy of diversification continues to take shape. Between 2010 and 2012, revenues from non-petroleum mining rose by nearly 17%. There has been an almost exponential increase in mineral exports since the turn of the century, with exports of base metals quadrupling and precious metals increasing one hundred-fold. The Government continues to invest heavily in the mining sector, providing tax incentives and improving infrastructure.

Clearly, opportunities abound as the Kingdom seeks to capitalise upon its mineral resources. Entry into this potentially lucrative market is conditional upon obtaining a licence. These are issued by the Ministry of Petroleum and Mineral Resources (of which DMMR is an offshoot) in accordance with the Government’s mining code, and can relate to exploration or exploitation. Mining licences enjoy several perks – there are no royalties payable, no import duties on mining equipment and no surface rental for exploration licences. Moreover, although restricted in duration to 30 years, they are renewable. But while vast tracts of land are already nominally under licence, the licence-holder often lacks the wherewithal to maximise its use. Therefore, joint ventures with state-owned operators are, in practice, the optimum way into the Saudi mining sector.

Opportunities undoubtedly exist in mining, but there are risks and challenges, too. The licensing scheme has become increasingly unwieldy. The Ministry’s right to remove inactive licences is rarely employed and is a hollow gesture that has done little to dissuade passive speculators domestically. Expertise and infrastructure can also prove difficult to access, though this tends to be a geographical issue. Finally, mining represents a tiny proportion of Saudi’s economy. Despite growth within the sector, its overall size within the country’s GDP has actually fallen from 0.4% to 0.3% in the last couple of years. At this stage, there is still some way to go for mining to become the third pillar in the national economy, after oil and petrochemicals, but the will is certainly there and the mining sector is displaying positive signs of growth.

Clive is Corporate Partner at Charles Russell LLP, former Head of Middle East and Head of the firms Energy and Natural Resources Sector Group. For more information, email clive.hopewell@charlesrussell.co.uk or call 020 7203 5044