REG - Central Asia Metals - Proposed acquisition of Lynx Resources Limited <Origin Href="QuoteRef">CAML.L</Origin> - Part 4
22/09/2017 07:08
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electrolysis in cells that are similar in appearance to a large car battery. Placed inside these cells are
lead anode plates and stainless steel cathode sheets.
As the electric current runs through the electrolyte the copper molecules attach themselves to the cathodes and sheets of
at least 99.99 per cent. purity copper are formed. Every three days on a planned schedule a third of the stainless steel
cathodes are lifted from the cells and the copper is removed (stripped) from them. Once the copper is removed, the cathodes
are returned to the cells and the cycle is repeated.
The leaching, SX and EW processes run simultaneously and continuously and the copper cathode plates that are harvested are
stored in a secure area, prior to being delivered from the Kounrad site by rail and sea to end consumers, predominantly in
Turkey. The Company has an offtake agreement with metal trader, Traxys, which will purchase a minimum of 90 per cent. of
the copper cathode from Kounrad through an agreement with CAML that is in place until the end of 2018. This has been
extended to 2022 pursuant to the Debt Financing Agreement.
Operations commenced on the Eastern Dumps in 2012 and, to date, CAML has produced over 60,000 tonnes of copper cathode from
that area.
Year 2012 2013 2014 2015 2016 H1 2017
Copper Production 6,586 10,509 11,136 12,071 14,020 7,027
Stage 1 and Stage 2 Expansion
Since the initial construction of the copper production facilities on site, CAML has undertaken two self-funded expansions.
The Stage 1 Expansion was completed on schedule and under budget in Q2 2015, and involved enhancing the throughput and
copper plating capacity of the processing plant so as to be able to increase copper output to 50 tonnes of copper cathode
per day.
In 2016, the Company undertook the Stage 2 Expansion, which has extended the site infrastructure to the Western Dumps so as
to enable the leaching of copper from this larger resource area and, in doing so, has extended the life of the operation to
beyond 2030. CAML commenced irrigation of the Western Dumps in April 2017 and PLS has subsequently flowed out of the dumps
and into the collector trenches, and copper cathode has been produced from this area of the site.
Kounrad C1 cash costs
Kounrad's copper is produced at industry leading costs. The global copper industry measures 'C1 costs' graphically on a
cash cost of operations curve and, at US$0.45 per pound for H1 2017, Kounrad's costs are firmly within the lowest cost
quartile as indicated by the C1 cost curve for Q2 2017 below. This enhances Kounrad's ability to remain in production even
at depressed copper prices. Costs are aided by the particular geological characteristics of the Kounrad dumps, as the
largely impermeable bedrock has meant that rock does not have to be moved in order to extract the copper and that the
material itself is amenable to being irrigated and leached.
Costs have also been aided in the last 18 months by a marked devaluation of the local currency, the Kazakh Tenge (KZT). In
H2 2015, the KZT was allowed to float and devalued against the US Dollar by 85 per cent. Approximately 60 per cent. of
CAML's local costs are KZT denominated, so this devaluation had a marked reduction in the Company's in-country cost base.
The average C1 cash cost of production since production commenced in 2012 is US$0.57 per pound which is in the lowest
quartile of industry costs (source: Wood Mackenzie).
20.3.2 Kounrad Mineral Resource
Kounrad's JORC (2012) compliant resources, as estimated by Wardell Armstrong in 2017, and derived from the Kazakh Competent
Person's Report available on the Company's website:
Kounrad Dump Mineral Resource (Global Estimate), (WAI, 30 June 2017)
In accordance with the Guidelines of the JORC Code (2012)
Eastern Dumps
2 21,470 0.07 0.04 15,641 -
3 - - - -
5 33,896 0.08 0.04 27,246
Indicated 6 12,328 0.10 0.04 10,086
7 12,328 0.10 0.04 11,938
9 and 10 10,555 0.20 0.07 20,890
Total 89,653 0.10 0.04 85,799
2 13,775 0.07 0.04 9,659
3 1,033 0.22 - 2,285
5 35,058 0.1 0.05 33,528
Inferred 6 3,442 0.11 0.04 3,641
7 22,989 0.11 0.04 25,501
9 and 10 3,350 0.21 0.09 7,126
Total 79,646 0.1 0.05 81,740
Indicated ＋ Inferred........... Total 169,299 0.10 0.04 167,539 60,048 107,491
Western Dumps
1 36,942 0.18 0.1 65,193
1a - - - -
15 and 16 189,953 0.08 0.04 152,687
21 10,398 0.2 0.1 20,788
Indicated 21a 858 0.17 - 1,433
22 37,276 0.1 0.05 36,057
13 6,472 0.03 0.01 1,750
20 14,452 0.03 0.01 4,478
Total 296,351 0.10 0.05 282,386
1 19,751 0.14 0.07 26,958
1a 1,467 0.04 0.02 651
15 and 16 114,701 0.08 0.04 94,670
21 6,870 0.18 0.08 12,321
Indicated 21a 4,452 0.17 - 7,559
22 22,167 0.08 0.04 18,108
13 4,705 0.03 0.01 1,534
20 7,408 0.03 0.02 2,488
Total 181,521 0.09 0.04 164,289
Indicated + Inferred........... Total 477,872 0.09 0.04 446,675 1,300 445,375
Northern Dumps
Indicated......... Northern 2,973 0.04 0.01 1,277
Inferred............ Northern 2,856 0.05 0.02 1,455
Indicated + Inferred........... Total 5,829 0.05 0.01 2,732 0 2,732
0.05
0.02
1,455
Indicated + Inferred...........
Total
5,829
0.05
0.01
2,732
0
2,732
20.3.3 Future Development Strategy of Kounrad
Almost US$74 million has been invested at Kounrad in initial capital, expansionary capital (for the Stage 1 and Stage 2
Expansions) and sustaining capital. Aside from an estimated US$2 million sustaining capital annually, CAML is now fully
invested at Kounrad. The result of this is that the future annual production is not expected to increase. 2017 copper
production guidance is for between 13,000 tonnes and 14,000 tonnes production.
20.3.4 Copper Bay
The Copper Bay project is a site of historic tailings disposal on the beach at Chañaral Bay. This resulted from the
Potrerillos and El Salvador copper mines releasing tailings residues from their respective mineral processing operations
into the Rio Salado, which outflows into Chañaral Bay. Between 1938 and 1975, it is believed that some 250 million tonnes
of tailings were discharged and now sit in the beach, surf and bay zones.
The Group holds eight exploitation licences in relation to the Copper Bay Project, all of which run indefinitely and
together cover a total area of 15.25 square kilometres.
Following the completion of the pre-feasibility study in 2015, CAML undertook a definitive feasibility study on its 75 per
cent. owned Copper Bay tailings project in the Atacama Region of northern Chile.
However, the Board has now decided to seek to sell the Group's interest in the Copper Bay project.
20.3.5 Shuak
In November 2016, CAML signed a framework agreement to acquire an 80 per cent. effective interest in an early stage
exploration project called Shuak in the Akmola Oblast region of northern Kazakhstan. The acquisition completed
in August 2017. The consideration for the Shuak acquisition was an investment in exploration activities of US$2 million
over five years, subject to continued positive results from exploration activities and the general economic outlook for
commodity prices. The project is approximately 300 kilometres north of the capital city, Astana, and 40 kilometres north
east of the regional centre, Stepnogorsk.
The licence area is 197km2 and the area hosts two mineralisation styles that are of particular interest to CAML. These
are:
● saprolite hosted oxide and enriched copper, gold and molybdenum mineralisation that may be amenable to copper
production by SX-EW processing; and
● copper, molybdenum and gold bearing dissemination and stockwork mineralisation of a porphyry nature. In addition,
there are widespread copper, gold, silver and molybdenum geochemical anomalies within the licence area.
The Shuak property was explored between 1973 and 1991, with historic work including geochemistry, geophysics, trenching and
drilling at the site. During this time, over 45,000 metres were drilled and resource estimation to historic Soviet
standards was undertaken.
Around 8km2 of metalliferous saprolite has been identified within the licence area, with thicknesses varying from minimal
to potentially in excess of 60 metres in depth. Most recently, former owners of the property undertook small scale mining
at Mongol V and sampling of the stockpile generated from these mining activities demonstrated copper oxide grades in excess
of 2 per cent. in several cases. Column leach testing of this saprolitic material at CAML's Kounrad facility has shown it
to be amenable to processing by leaching with dilute sulphuric acid, with copper recoveries of over 90 per cent.
Together with partners, Aksu-Esil, CAML has been undertaking geological mapping and is nearing completion of a TEM-FAST
geophysics programme, which has been designed primarily to ascertain the depth and extent of the saprolite weathering
horizon. The 2017 diamond drilling programme of approximately 4,700 metres has recently commenced, together with an initial
7,000 metre core hydrotransport (CHT) drilling campaign. In total, 22,000 metres of drilling are planned for 2017 and the
total exploration budget for Shuak is approximately US$1.8 million which the Company intends to fund from existing cash
resources.
20.4 CAML Competent Person's Report
The Mineral Resource estimate for Kounrad was prepared by Mr. Phil Newell of WAI. Mr. Newell is a managing director
of WAI with 30 years' experience in the mining industry and sufficient experience that is relevant to the style of
mineralisation and type of deposit under consideration and to the activity which he is undertaking to quality as "Competent
Person" as defined by the JORC Code (2012). The Kazakh Competent Person's Report is available on the Company's website.
20.5 Kazakh Licence Table
Company Asset Holder Interest% Licence Expiry Date Licence Area Status (Exploration or Development & Comment)
Sq. Km
Sary Kazna LLP Kounrad 100 20 August 2034 22.5 Exploration and processing
Ken Shuak LLP Shuak 80 (effective) 8 May 2019 197 Exploration
8 May 2019
197
Exploration
21. Information on the Lynx Group
21.1 Introduction
Lynx Resources Limited holds, via its wholly owned subsidiary Lynx Mining, 100 per cent. of Lynx Europe, which in turn
holds 100 per cent. of Rudnik SASA DOOEL, through which the relevant mining licences in respect of the SASA Project are
held. Pursuant to the Acquisition Agreement, the Company is proposing to acquire the entire issued share capital of Lynx
Resources Limited, and thereby the SASA Project, from the Sellers for a total consideration of US$402.5 million. Rudnik
SASA DOOEL has Ore Reserves and Mineral Resources established in accordance with the guidelines as embodied in the JORC
Code (2012).
Further information on the Acquisition Agreement is disclosed in section 19 above and further information on the SASA
Mine is set out in section 21.3 below. Please refer to the Macedonian Competent Person's Report available on the Company's
website for a detailed resource and reserve statement and related compliance information for the Lynx Group.
21.2 History and Background to the Lynx Group
Lynx Resources is a Bermudan holding company that was formed on 19 June 2015. In November 2015, Lynx Europe acquired the
entire share capital of Rudnik SASA DOOEL from Solway Industries Ltd and Solway Industries Eesti AS.
Rudnik SASA DOOEL was incorporated for the purpose of taking over the business activities of mining and processing of lead
and zinc exploited from the SASA Mine. This mine was operated by the state-owned company SASA JSC, incorporated in
Macedonia, until 2005 when it was declared bankrupt and the assets of the bankrupt JSC were sold pursuant to a tender.
Following completion of the tender procedure, all assets of "SASA JSC in bankruptcy" were transferred to Rudnik SASA
DOOEL.
21.3 Overview of the SASA Mine
21.3.1 Background information on the SASA Mine
The SASA deposit was discovered during a period of exploration between 1954 and 1960. Trial mining commenced in 1965 and,
in 1966, the mine commenced commercial production as a state-owned entity. The mine closed in 2002 and was subsequently
placed into bankruptcy due to lack of operating capital from the Macedonian government which owned the mine. The Solway
Sellers subsequently purchased the mine, invested in new equipment and operations resumed in 2006. The Solway Sellers later
sold the mine to Fusion Capital and Orion in 2015.
The SASA Mine is located in north eastern Macedonia, approximately 150km east of the capital city, Skopje, and 10km north
of local town, Makedonska Kamenica. Geographically, the mine is located within the Osogovo Mountains, at an altitude of
between 975 metres and 1,600 metres above sea level, experiencing average annual precipitation of approximately 600mm, some
of which is in the form of snow.
The assets comprise an operating underground lead, zinc and silver mine. The current underground mine is a sub-level caving
operation, which utilises the geotechnical characteristics of the weak hanging wall to allow the rock to cave naturally
into the void remaining after ore has been blasted. Mined ore is either transported to ore passes and hoisted out of the
Golema Reka mineshaft or loaded directly onto underground trucks, where it is driven up the decline.
The mine produces approximately 780,000 tonnes of ore each year, feeding a processing plant with crushing capacity of 1
million tonnes of ore each year. The processing plant uses froth flotation technology to produce a zinc concentrate and a
lead concentrate, which can be trucked to smelters in the surrounding region.
Year Units 2008 2009 2010 2011 2012 2013 2014 2015 2016
Plant Feed
Feed tonnes............................ dmt 854,319 864,592 811,383 758,252 754,153 774,007 780,285 777,121 779,231
Ore moisture.......................... % 3.34 3.36 3.39 3.66 3.98 3.71 3.56 3.26 3.00
Pb - mill head grade................ % 4.68 4.43 4.05 3.83 3.93 4.13 4.16 4.04 3.95
Zn - mill head grade............... % 4.08 4.14 3.81 3.43 3.35 3.47 3.48 3.52 3.41
Tonnes Pb in feed.................. t Pb 39,983 38,276 32,878 29,036 29,658 31,982 32,475 31,375 30,761
Tonnes Zn in feed.................. t Zn 34,896 35,820 30,905 26,009 25,280 26,858 27,192 27,370 26,599
Lead Concentrate
Pb concentrate - Production.. dmt 49,146 47,634 41,298 37,148 38,025 40,996 41,631 40,162 39,507
Pb recovery to Pb conc.......... % 91.60 94.20 94.39 95.07 94.42 94.37 94.51 94.10 94.13
Zn recovery to Pb conc......... % 4.15 3.81 3.77 3.79 3.65 3.95 3.96 4.20 4.02
Pb concentrate - Pb grade % 74.53 75.70 75.15 74.31 73.64 73.62 73.73 73.51 73.29
Pb concentrate - Zn grade...... % 2.94 2.86 2.82 2.66 2.43 2.59 2.59 2.86 2.70
Pb in Pb conc......................... t 36,627 36,058 31,034 27,604 28,003 30,181 30,693 29,524 28,955
Pb concentrate - Moisture.... % 6.09 5.46 5.47 5.77 6.01 5.94 5.77 5.50 5.80
Zinc Concentrate
Zn concentrate - Production. dmt 57,950 61,030 52,783 44,550 43,140 46,228 46,920 47,159 45,548
Pb recovery to Zn conc......... % 1.99 2.04 1.82 1.61 1.57 1.53 1.92 2.47 1.97
Zn recovery to Zn conc......... % 82.25 85.45 86.01 86.60 86.20 86.31 86.50 85.77 84.64
Zn concentrate - Pb grade...... % 1.37 1.28 1.13 1.05 1.08 1.06 1.33 1.64 1.33
Zn concentrate - Zn grade...... % 49.53 50.16 50.36 50.56 50.51 50.15 50.13 49.78 49.43
Zn in Zn conc........................ t 28,706 30,610 26,583 22,524 21,789 23,182 23,522 23,476 22,515
Zn concentrate - Moisture.... % 9.24 8.77 8.89 8.69 8.74 8.51 8.37 8.51 8.43
For 2016, the mining cost was US$17.1/t of ore and processing cost was US$10.5/t of ore. Recoveries of 84.6 per cent. for
zinc and 94.1 per cent. for lead were achieved. The C1 cash cost at the SASA Mine is estimated to be US$0.39 per pound for
zinc and US$0.29 per pound for lead. This is in the lower end of the second quartile of global producers for zinc and the
lowest quartile of global producers for lead (Source: Wood Mackenzie).
The SASA Mine run of mine production guidance for 2017 is over 770,000t. The lead grade range is between 3.37 per cent. and
4.03 per cent. whilst the zinc grade range is between 2.65 per cent. and 3.27 per cent.
21.3.2 Regional and Local Geology
The SASA Mine lies within the Serbo-Macedonian Massif, which hosts a large number of lead and zinc deposits and extends
through Serbia, Macedonia, Bulgaria, eastern Greece and into Turkey.
The SASA Mine Svinja Reka and Golema Reka deposits are located on the eastern flank of a copper molybdenum porphyry deposit
at Osogovo.
The SASA Mine lead zinc silver mineralisation occurs as stratiform deposits hosted predominantly by quartz-graphite schist
and marbles of Lower Palaeozoic age at Svinja Reka and by gneisses at Golema Reka. Hydrothermal and bedding parallel
faulting are responsible for the metasomatism of the host sediments that produce skarn and base metal mineralisation of the
Svinja Reka and Golema Reka deposits.
The deposits are well defined lenses of lead zinc silver mineralisation, which dip at about 35 degrees to the south west
and range in true thickness from 2 metres to 30 metres.
21.3.3 The SASA Mine Mineral Resource
SRK has estimated the Mineral Resource as at 1 July 2017 in line with the JORC Code (2012) and included it in the
Macedonian Competent Person's report available on the Company's website. The Mineral Resource is shown below inclusive of
reserves.
Mineral Tonnage Metal Grade Metal Content
resource
classification
Mt % Pb % Zn g/t Ag kt Pb kt Zn t Ag
Indicated.......................................................... 13.3 4.59 3.68 22.0 611 490 9,403
Inferred............................................................. 10.1 3.55 1.67 18.1 357 168 5,849
Total.................................................................. 23.4 4.14 2.81 20.3 968 658 15,252
Total..................................................................
23.4
4.14
2.81
20.3
968
658
15,252
Ore Reserves are as stated on 1 July 2017, in line with the JORC Code (2012). Ore Reserves have been classified as Probable
Ore Reserves, on the basis that the relevant Mineral Resources are in the Indicated Mineral Resource category.
Ore reserve classification Tonnage Metal Grade Metal Content
Mt % Pb % Zn g/t Ag kt Pb kt Zn t Ag
Probable........................................................... 10.9 3.85 3.08 18.4 421 337 6,447
Total................................................................. 10.9 3.85 3.08 18.4 421 337 6,447
Total.................................................................
10.9
3.85
3.08
18.4
421
337
6,447
21.3.4 Future Development Strategy of the SASA Project
Future mine development
On the basis of the mine's current Probable Reserves, production can be sustained at the SASA Mine until at least 2032.
However, the mine has additional Inferred Mineral Resources at both Svinja Reka and Golema Reka which are expected to
increase the life of the operation to 2038.
There is additional resource potential in the mine and licence area, and particularly in the Kozja Reka deposit area, which
was previously mined from between 1966-1989. There are no current mineral resources for this deposit, which is located
between Svinja Reka and Golema Reka, but a diamond drilling programme is currently underway there.
A new chief geologist has recently been hired with more than 15 years' experience, who is responsible for growing the
resource base and increasing the confidence category of Inferred Mineral Resources into Indicated Mineral Resource around
the SASA Mine. In particular, areas of geological prospectivity are Svinja Reka North from level 990, Svinja Reka from
level 830-750, Kozja Reka and the upper section of Golema Reka.
Tailings Storage
The Company is currently obtaining the necessary permits and is constructing TSF 4 which is expected to be completed in Q2
2018 and which will be required for mining activities once the existing tailings facility reaches the maximum storage
capacity, which is expected to occur in Q4 2018.
Water Quality
Further to a recent inspection, the permitting is in process for construction of a settlement pond to improve water quality
for Horizon 830. The Company is also seeking an amendment to its A-Permit. Further details are set out in the Macedonian
Competent Person's Report available on the Company website.
21.4 Lynx Group Competent Person's Report
The Mineral Resource estimate for the SASA Mine was prepared by Mr Guy Dishaw of SRK. Mr Dishaw has sufficient experience
which is relevant to the style of mineralisation and the type of deposit under consideration and to the activity which he
is undertaking to qualify as a "Competent Person" as defined by the JORC Code 2012.
The Competent Person who has reviewed the Ore Reserves and the Life of Mine Plan ("LoMp") as reported by Lynx Resources is
Mr Chris Bray of SRK. Mr Bray is a Mining Engineer with 20 years' experience in the mining and metals industry, including
operational experience in underground lead-zinc mines, and as such qualifies as a Competent Person as defined in the JORC
Code (2012).
21.5 Licence Table
Company Asset Holder Interest% Licence Expiry Date Licence AreaSq. Km Status (Exploration or Development & Comment)
Rudnik SASA DOOEL SASA Mine 100 28 September 2030 (for exploitation) 4.22 (exploitation) Current annual run of mine production is 780 kt, producing lead and zinc concentrates
Rudnik SASA DOOEL SASA Mine 100 13 December 2017 1.42 (exploration) Application for renewal of the licence is already in progress
13 December 2017
1.42 (exploration)
Application for renewal of the licence is already in progress
22. INFORMATION ON KAZAKHSTAN AND KAZAKH MINERAL POLICY & LAW
22.1 Overview of Kazakhstan
22.1.1 Geography and Population
Kazakhstan is the ninth largest country in the world by land area. It is located in Central Asia and is bordered by Russia
to the north and west, China's Xinjiang-Uigur Autonomous Region to the east, Kyrgyzstan, Uzbekistan and Turkmenistan to the
south and the Caspian Sea to the west. The country covers an area of approximately 2.7 million square kilometres
(approximately the same size as Western Europe) and spans two time zones from the Caspian Sea in the west to the Altai
Mountains in the east. In December 1997, the capital moved from Almaty to Astana, which is located in central Kazakhstan,
and most of the state bodies have relocated to Astana. However, Almaty remains the financial capital and the largest city
in Kazakhstan. As at 8 January 2017, the population of Kazakhstan was approximately 18 million people, which makes it a
very sparsely populated country with an average population density of 6.49 people per square kilometre.
22.1.2 Government
Kazakhstan is a constitutional republic with a presidential form of governance. The president is both the head of state and
commander-in-chief of the armed forces. President Nursultan Nazarbayev, who has been in office since Kazakhstan became
independent in December 1991, was re-elected in April 2015 with an overall voting majority of almost 98 per cent. The
Kazakhstan constitution provides for separation of powers, but the president wields considerable control over all three
branches of government and determines national policy priorities. He may also veto legislation that has been passed by the
Parliament. In March 2017, the constitution of Kazakhstan (the "Constitution") was amended to pass certain authorities from
the president to the government and the Parliament and restrict the power of the president with respect to certain issues,
but, in practice, the amendments did not significantly reduce the president's power.
Bakhytzhan Sagintayev, who has been prime minister since 8 September 2016, was appointed by the president and approved by
the Parliament and is Kazakhstan's head of government. There are two deputy prime ministers and 16 ministers in the
government.
Kazakhstan has had two different parliamentary structures since the end of the Soviet era. The current structure has a
bicameral Parliament, with the Mazhilis (the lower house) comprised of 107 members and the Senate comprised of 47 members.
In the Mazhilis, 98 members are elected by direct party-list vote and nine members are appointed by the Assembly of Nations
of Kazakhstan. Two senators are selected by each of the elected assemblies (maslikhats) of Kazakhstan's sixteen principal
administrative divisions (fourteen regions plus the cities of Astana and Almaty). Half of the senators are re-elected every
three years. Mazhilis deputies and the government both have the right to initiate legislation, though the government
proposes most legislation considered by the Parliament.
22.1.3 Economic overview
Kazakhstan is an industrial country, with mining and oil and gas operations as its main prospects for economic growth. Over
the past two years, Kazakhstan has faced a decline in trade due to a fall in oil prices, a recession in neighbouring Russia
and a slowdown in Chinese growth. In order to address the worsening economic situation, the government of Kazakhstan has
responded with a number of initiatives to try to stimulate the economy.
These range from a widespread planned privatisation programme to some fundamental proposals for changes in the law aimed at
attracting increased foreign investment into the country. Currently, it is estimated that the Kazakhstan state owns
approximately 70 per cent. of businesses and the country targets reducing this to 15 per cent. by 2021 through the
privatisation programme. One such proposal to increase foreign direct investment in Kazakhstan is to introduce a new mining
code that looks set to replace the existing subsoil use law. It is anticipated that the new mining code expected to be
enacted in 2018 will be based on the existing regulatory approach in the mining sectors in Western Australia and will
simplify regulation and improve the investment climate.
Following an 85 per cent. devaluation of Kazakhstan's currency, the Tenge, against the US Dollar in 2015, the Tenge
remained broadly stable throughout 2016, showing a slight appreciation to 333 KZT/USD (31 December 2015: 340 KZT/USD)
towards the end of the year. This appears to have been largely related to the recovery in oil prices to US$55 per barrel
following OPEC's agreement in November 2016 to cut output to 32.5 million barrels a day in order to improve supply-demand
fundamentals.
The 2016 official rate of inflation in Kazakhstan was 8.5 per cent. (2015: 13.6 per cent.) which, although at the top end
of the forecast range for the year, appears to be a solid achievement in monetary control given such a marked devaluation
in the currency in the previous year. During 2017, the Directors' believe that the stability of Kazakhstan's economy and
the local currency is likely to continue to be dependent on the strength of oil prices.
Looking to the medium term, the Directors' believe that Kazakhstan is well placed to benefit from China's initiative to
revive the ancient "Silk Road" with economic corridors to Europe. Kazakhstan expects China to invest US$26 billion between
2016 and 2021 in the country, both in infrastructure and industry, in conjunction with liberalising bilateral trade. In
addition, during 2016, Exxon Mobil, Chevron and Lukoil agreed to a US$37 billion investment in the Tengiz oil field to
increase output by almost 50 per cent. by 2022 and the Kashagan oil fields, the largest in Kazakhstan, commenced production
of oil in November 2016.
The legacy of the Soviet Union resulted in the model of a highly state regulated economy in Kazakhstan including price
control for many state-owned monopolies. In 2017, the government has committed to reviewing some of these price controls.
While the removal of these controls may result in near term higher prices for consumers, the proposed changes are expected
to improve competition and increase the interest of foreign investors in those industries.
The eventual replacement of long serving president, Nursultan Nazarbayev, is arguably one of the biggest uncertainties
facing the Kazakhstan economy in the longer term. In order to plan for this, Nazarbayev launched his "100 concrete steps"
initiative in May 2015, listing 100 measures aimed at making improvements to the legal system, improving the civil service,
ensuring economic growth, boosting national unity and making the state more accountable.
22.2 Mineral Policy and Law in Kazakhstan
General
Regulation of the mining sector can be divided into three broad areas:
● regulation in relation to subsoil use rights and operations, including local content;
● regulation in relation to environmental matters; and
● anti-monopoly regulation
22.2.1 Subsoil use regulation
In Kazakhstan, the subsoil and minerals contained in the country are owned by the state in accordance with the
Constitution. The state ensures access to the subsoil mostly by entering into subsoil use contracts for exploration or
mining (or a combination of the two) on terms and conditions and within the limits provided for by Kazakhstan law. Unless
otherwise stipulated by Kazakhstan laws and subsoil use contracts, mineral raw materials must be owned by a subsoil user.
Most types of subsoil use operations must be carried out on a temporary and payable basis. Subsoil use rights are normally
granted as a result of competitive procedures in the form of a tender or auction or, by way of exception, as a result of
direct negotiations between a proponent and the competent body.
The Ministry for Investments and Development of the Republic of Kazakhstan has been assigned by the government of
Kazakhstan to exercise the function of the competent body (the "Competent Body") in the mining sector and grants
exploration and mining contracts for all minerals except for uranium and coal on behalf of the state. Subsoil use contracts
are granted for a specific period but may be extended before the date of expiration subject to certain limitations and
conditions. Subsoil use contracts may be unilaterally terminated by the Competent Body if, amongst other things, subsoil
users do not satisfy their contractual obligations, which may include operational obligations (exploration drilling, mining
and/or processing of certain amount of minerals), minimal expenditure obligations set out in a contract, payment of taxes
and satisfaction of other exploration and mining, environmental, and health and safety requirements.
The Kounrad Contract was concluded pursuant to the Law No. 2828 "On Subsoil and Subsoil Use" of 27 January 1996 (the
"Previous Subsoil Law") that was superseded by the new Law No. 291-IV "On Subsoil and Subsoil Use" dated 24 June 2010 (the
"Subsoil Law").
The following important provisions were retained in the Subsoil Law from the Previous Subsoil Law:
Issuance of New Shares
Under the Subsoil Law, the consent of the Competent Body is required for the issuance of new shares by a subsoil user or
its parent company.
Priority Right to Acquire Minerals
The state shall have a priority right to acquire a subsoil user's minerals, at prices not exceeding those applied by the
subsoil user to third parties that prevail on the date of the relevant transaction, minus transportation and selling
costs.
Right to Requisition Minerals
In the event of martial law or a state of emergency, the Kazakhstan government may requisition some or all of the minerals
owned by a subsoil user. Requisition may be in any amount necessary to cover the needs of the state during the entire
period of martial law or the state of emergency. Minerals may be requisitioned from any subsoil user regardless of the form
of ownership. The state shall guarantee compensation for requisitioned minerals either by payment in kind, or by paying
their monetary value to a foreign subsoil user in freely convertible currency and to a domestic subsoil user in the
national currency at prices not exceeding those applied by subsoil users in transactions related to the relevant minerals
that prevail on the date of requisition, minus transportation and selling costs.
The State's Pre-Emptive Right
The Subsoil Law differentiates between subsoil use rights and the objects related to the subsoil use rights (the
"Objects"). Objects are participatory interests (shares, securities confirming title to shares and securities convertible
into shares) in a legal entity holding the subsoil use right, as well as a legal entity which may directly and/or
indirectly determine and/or influence decisions adopted by a subsoil user, if the principal activity of such entity is
related to subsoil use in the Republic of Kazakhstan (the "Controlling Legal Entity").
The concept of the state's pre-emptive right, being the right of the Republic of Kazakhstan to acquire any subsoil use
right (or its part) or shares in a subsoil user company or its Controlling Legal Entity which are being alienated (the
"State's Pre-Emptive Right"), was first introduced in the Previous Subsoil Law in 2004 and was transferred to the Subsoil
Law in respect of both the subsoil use rights and the Objects. Although the State's Pre-Emptive Right does not currently
apply to the Company, this right gives the state a right of first refusal in respect of any such transfers on terms "no
worse than those offered by other prospective purchasers" and the Company may become subject to it in the future.
Prior to the amendments to the Subsoil Law introduced on 29 December 2014 (enacted 11 January 2015), the State's
Pre-Emptive Right applied retroactively to all existing contracts, as well as prospectively to future contracts. Following
the above-mentioned amendments, the State's Pre-Emptive Right now applies to those contracts (whether existing or future)
related to the deposits and subsoil use plots of strategic importance. With certain limited exemptions, the State's waiver
of its pre-emptive rights would need to be obtained for any transfer of the subsoil use rights or the Objects related to
those deposits and subsoil use plots, including any initial and secondary public offerings of shares on organised
securities markets. The deposits and subsoil use plots of strategic importance are designated by the Kazakhstan government
and the current list includes 361 hydrocarbon, minerals and underground water deposits categorised as strategic. While the
Kounrad mine in Kazakhstan is not currently included on the list, the Kazakhstan government is entitled to amend this list
at their discretion.
For a copper deposit to be designated as a strategic deposit, one of the following criteria must be satisfied:
A. the deposit is part of a group of deposits which are developed by one person or a group of affiliated persons
under one or several subsoil use contracts, the aggregate amount of recoverable resources of which exceed 5 million tonnes;
or
B. the deposit is important from the state's national security and defence perspective and development of which:
i) could pose or poses a threat to the economic interest of Kazakhstan;
ii) leads to decrease of the defence capacity of the state or a threat of state borders a inviolability; or
iii) leads to sharp deterioration of ecological situation, including the quality of potable water, natural
disasters and other force-majeure circumstances of natural and technogeneous nature and/or epidemic.
The Consent for Transfers of Subsoil Use Rights and Objects
Subsoil use rights (or a share therein) and the related Objects can only be transferred, including in cases of foreclosure
(including a pledge), with the consent of the Competent Body in accordance with the procedure established by Article 37 of
the Subsoil Law.
A credit facility secured by a pledge of the subsoil use right shall only be allowed for the purposes of furthering is
subsoil use, or for further processing, provided that such processing is stipulated in the relevant subsoil use contract
and is carried out within the territory of Kazakhstan by the subsoil user itself or by a wholly-owned subsidiary.
The admission to trading of any Objects which are shares or other securities confirming title to shares or convertible
securities on an organised securities market, including through an initial public offering or an additional placement of
such Objects, requires prior consent of the Competent Body.
The Subsoil Law, however, provides that the Competent Body's consent shall not be required in the following instances:
A. transactions for alienation of shares or other securities confirming title to shares, or securities convertible
into shares which are traded on an organised securities market and are issued by a subsoil user legal entity or a
Controlling Legal Entity;
B. the transfer, in full or in part, of the subsoil use right and/or an Object:
i) to a subsidiary in which at least a 99 per cent. participatory interest (shareholding) is held directly or
indirectly by the subsoil user, provided that such subsidiary is not registered in a jurisdiction with a preferential tax
treatment (the so-called "black listed offshore jurisdictions"); and
ii) between legal entities in each of which at least a 99 per cent. participatory interest (shareholding) is held
directly or indirectly by one and the same person, provided that the acquirer of all or part of the subsoil use right
and/or the Objects is not registered in a jurisdiction with a preferential tax treatment; or
iii) the transfer of shares in a subsoil user legal entity if, as the result of such a transfer, an entity acquires
the right to directly or indirectly dispose less than 0.1 per cent. of the participatory interests in the charter capital
of the subsoil user or the Controlling Legal Entity.
C. transfer of shares in a subsoil user legal entity if, as the result of such a transfer, an entity acquires the
right to directly or indirectly dispose less than 0.1 per cent. of the participatory interests in the charter capital of
the subsoil user or the Controlling Legal Entity.
In these instances, the state's waiver of its pre-emptive rights (if applicable) shall not be required either.
Any transactions or other related actions effected without the required consent of the Competent Body are null and void.
Termination of Subsoil Use Contracts
According to Article 72.3 of the Subsoil Law, the Competent Body may prematurely and unilaterally terminate a subsoil use
contract:
A. if the subsoil user fails to eliminate more than two violations of obligations under its subsoil use contract
within the time set in the Competent Body's notice;
B. in the event of a transfer of a subsoil use right and/or of an Object by the subsoil user without the Competent
Body's prior consent when such consent is required; and
C. if the subsoil user performs less than 30 per cent. of its financial obligations under the contract during two
consecutive years.
Treatment of Subsoil Use Contracts in Relation to Deposits and Subsoil Use Plots of Strategic Importance
The Competent Body has the right to initiate reviews of the terms a subsoil use contract related to deposits and subsoil
use plots of strategic importance and to require amendments and/or additions to such contracts in circumstances where the
activities of the subsoil user in the contract area lead to material changes in the economic interests of the state which
create a threat to national security. In this regard the Subsoil Law entitles the Competent Body to unilaterally terminate
the subsoil use contract related to a strategic deposit if: (i) within two months from the date of the Competent Body
notification, the subsoil user does not provide its written consent, or refuses, to negotiate the amendments and/or
additions to the subsoil use contract; (ii) within four months from the date when the subsoil user provided its consent to
start negotiations, the parties fails to reach an agreement on the subsoil use contract amendment; or (iii) the parties
fail to execute the respective amendments and/or additions to the subsoil use contract within six months from the date when
an agreement was reached with the Competent Body to restore the state's economic interests. Since the enactment of the
Subsoil Law, according to publicly available information, the Kazakhstan government has never officially invoked this
provision with respect to any of the strategic deposits. In any event, Kounrad is currently not listed as a strategic
deposit.
Procurement Rules
The Subsoil Law generally requires subsoil users to comply with certain local content requirements to procure Kazakhstan
produced goods, works and services from local suppliers, as well as employ Kazakhstan citizens. The share of local content
is detailed in subsoil use contracts, including those executed prior to the enactment of the Subsoil Law.
In connection with Kazakhstan's accession to the World Trade Organization a number of amendments to Kazakhstan legislation,
including the Subsoil Law, were introduced modifying, inter alia, the procurement and local content regulation regime. For
instance, according to the said amendments, subsoil users party to contracts executed prior to 1 January 2015, are obliged
to procure Kazakhstan produced goods until the earlier of:
A. 1 January 2021; or
B. expiration of the subsoil use contract,
provided, however, that if the subsoil use contract's duration term is modified, the local content obligations in respect
of procurement of locally produced goods shall be excluded from the contract.
22.2.2 Environmental regulation
The mining sector is heavily regulated from an environmental perspective and the conduct of mining operations requires a
number of permits and approvals. An environmental permit ("EP") is a special permit that grants a subsoil user a temporary
right to emit or disburse emissions into the atmosphere and discharge waste substances into surface and underground waters.
EPs contain the conditions governing the subsoil user's impact on the environment. Companies which have an impact on the
environment (through pollution, discharging waste, etc.) are required to obtain an EP. An EP is normally issued for up to
ten years or until there is a change in either the technology used by the EP holder or the terms and conditions set forth
in the EP. Environmental compliance is monitored either by regional executive authorities or by the Ministry of Energy of
the Republic of Kazakhstan, whose Committee of Environmental Regulation and Control is in charge of enforcing environmental
legislation. Fees for pollution of the environment are established by the tax code and may be increased (within certain
limits) by local representative bodies (maslikhat). The holding of an EP does not exempt a subsoil user from liability to
pay compensation for damage to the environment caused by its activities, or from any administrative or criminal liability.
Annual renewal is subject to compliance with the permit's terms and conditions, and applicable environmental laws.
In February 2009, Kazakhstan ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
Ratification of the Kyoto Protocol, which is intended to limit or discourage emissions of greenhouse gases such as carbon
dioxide, had an impact on environmental regulations in Kazakhstan.
Following the ratification, the Kazakhstan Environmental Code (dated 9 January 2007, as amended) (the "Environmental Code")
was amended to set out a framework for climate change control in Kazakhstan, which came into force on 1 January 2013,
including in relation to obtaining quotas for greenhouse gas emissions by legal entities emitting more than 20,000 tonnes
of carbon dioxide in a year, quota trading and development of the national quota allocation plan. However, in response to
industry complaints on the imperfections of the legal mechanism put in place for the allocation of quotas and trading, and
difficulties with adherence to the same, in April 2016 Kazakhstan suspended the application of a number of provisions of
the Environmental Code related to greenhouse gas emissions until 1 January 2018. The application of the national allocation
plan for 2016 to 2020 and the quotas distributed among the companies were also suspended until 1 January 2018. The Ministry
of Energy is currently reconsidering the mechanisms in place under the greenhouse gas emissions regulation.
In November 2016 Kazakhstan ratified the Paris Agreement under the United Nations Framework Convention on Climate Change.
The impact of the ratification remains to be seen.
Water use permits
The Water Code, dated 9 July 2003, No. 481 (the "Water Code") aims at implementing governmental policy in relation to the
utilisation and protection of water resources. The Water Code sets out obligations for the use of water and discharge of
certain materials into the water, on the basis of water use permits ("WUP"). A WUP can be suspended if the terms specified
in the relevant WUP are breached, and may be withdrawn if the violations are not cured. Such terms include monitoring the
quality of underground water, submitting statistical reports and monitoring reports, complying with requirements relating
to water protection during mining operations and regular checking of equipment.
Enforcement
Enforcement of environmental requirements is effected by various officials of the Ministry of Energy and its territorial
divisions who have the authority to supervise environmental compliance and initiate judicial proceedings. Pursuant to the
Environmental Code, state officials, in their enforcement of environmental protection measures, are entitled to, inter
alia:
• inspect facilities and take measurements and/or samples for analysis;
• request and receive documentation, results of analysis and other materials;
• initiate procedures relating to the: (i) recalling of licences; (ii) termination of contracts for the use and
taking of natural resources; and (iii) suspension and annulment of environmental and other permits in the event of
violation of the terms of such permits;
• issue orders to individuals and legal entities on elimination of violations of environmental laws;
• file claims to courts with respect to violations of Kazakhstan laws; and
• propose to the Competent Body to suspend or terminate a subsoil use contract in certain circumstances.
22.2.3 Anti-monopoly regulation
Anti-monopoly regulation in Kazakhstan is evolving and has undergone significant changes in the recent years shifting from
strict and heavy pricing and tariffs regulation to being more focused on the supervision and monitoring of fair
competition.
Certain transactions that qualify as economic concentration are subject to the prior notification to or approval by the
Committee for Regulation of Natural Monopolies, Competition Protection and Consumers' Rights Protection of the Ministry of
National Economy (the "Anti-Monopoly Committee"). The following transactions qualify as economic concentration:
A. company reorganisation through merger or consolidation;
B. acquisition by a person of voting shares (or participation interests in charter capital or participatory shares)
of a company where such person gains the right to dispose of more than 50 per cent. of such shares if prior to the
acquisition such person did not possess shares in the company or possessed 50 per cent. of the voting shares or less. This,
however, does not apply to the formation of a new company;
C. acquisition by a person of another company's fixed production assets and/or intangible assets into ownership,
possession and use, including in payment of charter capital, if the book value of the property in question exceeds 10 per
cent. of the book value of the fixed production assets and intangible assets of the company alienating or transferring the
property;
D. acquisition by a person (including on the basis of a trust management agreement, joint operation agreement or
agency agreement) of rights which allow such person to issue binding instructions to the other person for the conduct of
its business activities or to perform the functions of its executive body; or
E. participation of the same individuals in the executive bodies, boards of directors, supervisory boards or other
management bodies of two or more companies, provided that such individuals determine the terms of business activities
conducted by such companies.
Approval or the notification of the Anti-Monopoly Committee is required when the aggregate book value of assets or goods
turnover for the previous year of companies involved in the transaction exceed ten times the monthly calculation index
(which is currently approximately US $70 million). Either of the above transactions being effected within one group of
entities does not require approval or notification to the Anti-Monopoly Committee. Transactions conducted in the absence of
the Anti-Monopoly Committee's consent, where such was required, and which result in the creation or enhancement of a
dominant or monopolistic position of a market participant and/or the restriction of competition may be invalidated by the
court on the basis of an action brought by the Anti-Monopoly Committee.
A company is deemed to occupy a dominant position if its market share is equal to or exceeds a threshold of 35 per cent.,
provided that all of the following circumstances are true in respect of such entity: (i) possibility of unilaterally
determining the prices and having a decisive influence on the general conditions of a product's sale in the market; (ii)
the lasting duration of the entity's ability to have a decisive influence on the general conditions of a product's sale in
the market; and (iii) if there are economic, technological, administrative or any other restrictions to access the market.
Notwithstanding the above-mentioned circumstances, an entity would be considered to occupy a dominant position if its
market share is 50 per cent. or more.
In addition, if three or fewer entities in a relevant market hold an aggregate market share of 50 per cent. or more, or if
four or fewer entities in a relevant market hold an aggregate market share of 70 per cent. or more, each is deemed to hold
a dominant market position, provided that such entities meet all of the following criteria: (i) the market share remains
the same for a year or longer (or for the term of a certain market's existence); (ii) the product sold or purchased by such
entity cannot be replaced with another product; and (iii) the pricing information for such product or the conditions of its
sale are available to the general public. If an entity holds a market share not exceeding 15 per cent. of the relevant
market, such entity shall not be deemed to hold a dominant market position.
22.3 Summary of Key Agreements
22.3.1 The Kounrad Contract
The Kounrad Contract was entered into by and between MEMR and Saryarka on 20 August 2007 and governs the subsoil use terms
in respect of the Kounrad asset. The Kounrad Contract was duly approved by the necessary competent authorities and
registered with MEMR under registration number 2447.
On 6 September 2007, Sary Kazna Limited Liability Partnership ("Sary Kazna") and Saryarka entered into: (i) a joint
operating agreement, which was replaced by a joint operating agreement dated 16 August 2010 (the "Kounrad JOA") and (ii)
the agreement for transfer of the subsoil use rights. Those two agreements provided for the transfer of 60 per cent. of the
subsoil use rights under the Kounrad Contract to Sary Kazna.
On 23 May 2014, another agreement for transfer of the subsoil use rights was entered into between Sary Kazna and Saryarka
whereby Sary Kazna acquired the remaining 40 per cent. of the subsoil use rights under the Kounrad Contract.
The initial term of the Kounrad Contract is 27 years from the date of its registration, i.e. until 20 August 2034. This
term comprised two years of exploration and 25 years of production.
22.3.2 Amendments to the Kounrad Contract
As at the date of this announcement the Kounrad Contract includes nine amendments. Amendment No. 1 dated 15 November 2007
formalised the transfer of 60 per cent. of the subsoil use right under the Kounrad Contract from Saryarka to Sary Kazna.
Amendment No. 2 dated 14 April 2009 was concluded in connection with the adoption of the new Tax Code on 10 December 2008
which introduced a new tax regime and taxes applicable to subsoil users, including Sary Kazna and Saryarka under the
Kounrad Contract.
Amendment No. 3, executed on 2 September 2010, extended the exploration period for a further two years to expire on 20
August 2011 while reducing the production period from 25 to 23 years. In addition, amendments in respect of new reporting
procedures in relation to local content in goods, works and services and Kazakhstan personnel were introduced. Amendment
No. 3 also formalised that the Ministry of Industry and New Technologies became the successor of MEMR in respect of the
mineral sector.
On 08 November 2013 Amendments No. 4, No. 5 and No. 6 were concluded relating to: (i) commercial discovery; (ii) extension
of the exploration period; and (ii) partial assignment of the Kounrad Contract in connection with transfer of 40 per cent.
stake in the project from Saryarka to Central Asia Investment Consulting Company LLP, respectively. In accordance with
these amendments, it was agreed to:
1) subject the Kounrad Contract to the effect of, at that time, the newly introduced Subsoil Law;
2) approve a new work programme for the first five years of the production period;
3) extend the exploration period for two years to 20 August 2013 and approve a new work program for the extended
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