Iran shows mining potential post-sanctions
As Iran looks set to re-open for business to foreign mining companies this year, Guy Richards reports on the opportunities on offer and highlights the key parts of the country’s fiscal and legal frameworks
In January 2016, international sanctions imposed against Iran for its refusal to suspend its uranium enrichment programme were lifted, after a framework placing limits on the country’s nuclear plans for the next 10 years was agreed. One of the many consequences of this shift in policy will be in Iran's mining industry, opening the doors to foreign companies to own mines and finance mining projects, as well as to import and export metals and minerals.
These opportunities will be major. International estimates rank Iran as 10th in the world for mineral variety – it has 68 types of minerals – and holds some 37Bt of proven reserves and 57Bt of potential reserves. These reserves are currently valued at around US$700 billion but new discoveries could push that figure to US$1.4 trillion, according to Nasser Bozorgmehr, Chief Adviser at Iranian Mines, Mining Industries Development and Renovation (IMIDRO), a state-owned body whose role it is to promote foreign and private investment in Iran’s mining industry. The industry has more than 5,000 active mines that between them employ 600,000 people but, although it generates around 25% of the market value of the Tehran Stock Exchange, it contributes only 0.6% to the country’s GDP.
That said, Iran has big plans for ramping up production of some important commodities. In terms of copper for example, 75% of the Middle East’s total copper ore production comes from Iran. The country’s reserves are estimated to be 2Bt and, in 2014, its copper (cathode) production totalled 194,000t, which it is aiming to quadruple to 800,000t by 2025.
Regarding aluminium, Iran aims to triple its production to 1.5Mt by 2025. Its local supplies are supplemented by small-scale imports from India and Australia, which together satisfy 300kt of demand each year. To date, Chinese, German, French and Italian companies have been involved in aluminium production in Iran, and they will find it easier to ramp up investment in the post-sanctions environment.
In terms of zinc, with 300Mt of proven zinc reserves, Iran sits behind China, Kazakhstan and India as the world’s fourth biggest producer of lead and zinc concentrate. So far, though, only 5.1Mt have been extracted – less than 0.5% of what is available. Iran also has impressive deposits of iron ore, and globally it was the world’s 15th largest steel producer in 2013, when it produced 15.4Mt of crude steel to meet the country’s 20Mt domestic demand. By 2025, it aims to increase this threefold to 52Mt.
And all of this is based on what is known about the country’s deposits now, as Government officials have said that known mineral reserves have been on explorations over only 7% of Iran’s land area.
It is not just sanctions that have starved the domestic industry of investment over the years – too much reliance on the oil and gas sector, which has been given investment precedence over mining, has taken its toll too – but a neat coincidence of the impending lifting of of the former and a slump in prices of the latter has proved timely.
In September 2015, IMIDRO’s Managing Director Mehdi Karbasian told the media, ‘Sanctions imposed on Iran have certainly hurt the Iranian people, and the mining industry has suffered from a variety of ills, such as low railway capacity, low volume of facilities, lack of specialists in extraction and processing, and in particular the lack of modern equipment and advanced technologies – old and second-hand machinery, some of which has been used in other countries for over 50 years, has had to be used in many of our mines.’
However, he added, ‘When sanctions are lifted, investment in Iran will be a win-win situation and, in my opinion, the mines and mining industry sector, in competing with the oil industry, can even be a substitute for oil.’ To that end, it is opening up nearly US$30 billion worth of mining projects to foreign investors.
Some parties have already made overtures to the country. For example, in August 2015, Japan’s fourth-largest steel maker Kobe Steel and the state-run Japan Oil, Gas and Metals National Corp met officials in Tehran to discuss cooperation in the mining sector and, a month earlier, trade delegations from Germany, France and the Netherlands also visited Iran. At the time, Karbasian said, ‘We have held extensive negotiations with them in regard to investments in the steel and mining industries. We have also had negotiations with representatives of British and Austrian companies.’ However, he said, apart from the Japanese delegations, companies looking to invest don’t want to be identified until sanctions have been lifted.
Iran’s mining sector is regulated by the country’s constitution and Mining Code. As well as promoting foreign investment, the IMIDRO is responsible for the formation and implementation of mining policy, which includes setting policy on mineral exploration and extraction, construction and development, and royalty levels. However, exploration licences are issued by the Ministry of Industry, Mines and Trade (MIMT). These are valid for a year and apply to an area of up to 40km2. Once minerals are discovered, the MIMT then issues a discovery certificate that can be transferred to another party or used to apply for an extraction licence.
From a fiscal standpoint, doing business in Iran does not look too onerous. According to research consultancy Timetric, royalty rates in 2015-16 were 6% for extraction from an underground mine, 10% for open pit and 8% for underground and open pit. Corporate income tax was 25% and VAT 8%.
The legal and fiscal framework
From a broader legal and regulatory perspective, Iran has relatively well-established frameworks. It has ratified the New York Arbitration Convention and, since 2002, has had in place the Foreign Investment Promotion and Protection Act, which offers protection against expropriation, restrictions on repatriation of funds and unfair competition, and foreign businesses have received pay-outs under the Act in the past. There are also free trade zones and special economic zones that benefit from various tax breaks, visa exemptions, and labour law and banking incentives.
Iran is a civil law jurisdiction with codified laws on tax, interest-free (Islamic) banking, securities, bankruptcy, competition, consumer protection and intellectual property. In addition, and unlike Iran’s oil and gas sector, where foreign ownership of resources is strictly regulated, there are no restrictions preventing ownership of mineral rights by foreign companies or individuals.
John Tivey, Head of Global Mining and Metals at international law firm White & Case, says, ‘The Civil Code and Commercial Code – which have both been in place for more than 80 years – provide foreign companies with a measure of legal clarity and continuity to conduct their business with confidence. Article 4 of Iran’s Constitution states that all laws shall be based on shariah principles, as determined by the Guardian Council, and commercial dealings are based on the Commercial Code, which is based on the French Napoleonic Code and predates Iran’s Islamic revolution of 1979.’
However, even after Implementation Day – when sanctions relating directly to Iran’s nuclear projects are lifted – many other sanctions will remain and, of course, the nuclear deal may not hold. As Tivey’s colleague, mining and metals partner Rebecca Campbell, explains, ‘Companies may want to wait before committing significant resources to Iran’s market to see whether the nuclear deal sticks, as they don’t want to get caught by "snap back" sanctions, and the ongoing sanctions compliance costs for US and non-US parties will be a reality of entering Iran’s market.’
Other challenges will be navigating the country’s bureaucracy and access to finance. Iran does notoriously badly in terms of red tape dealing with construction permits, for example – it requires 15 procedures and can take 318 days, ranking 172nd among 189 countries in this category by the World Bank’s 2015 Ease of Doing Business Index.
On the finance side, Iran’s banking system has a reputation for inefficiency and poor risk management, and it has been cut off from the SWIFT financial transactions system since 2012. As Campbell explains, ‘Financial flows dried up significantly when Iranian banks were cut off from the SWIFT system, so getting this liquidity transfer back in circulation will be critical in a post-sanctions environment. However, re-establishing banking connections may not be straightforward – US banks are excluded by sanctions and European banks are reluctant given prior stringent enforcement.’
Clearly these are still early days for investing in mining in Iran, but given that a typical project takes a few years to get up and running, those companies who stake their claims as soon as possible may be the ones who reap the greatest rewards in the future.