How to Finance Subsoil Users: Five Proposals

I was invited to speak at an AFD forum on financing subsoil users. The topic is timely and the right one to raise. If we truly want an economy with sustainable growth, we need to develop the sectors where we have accumulated competence, expertise and understanding. In Kazakhstan, that is the mining industry, which includes oil. In 50 years' time, nobody will need oil. So it is better to use the oil sector now to build up a reserve that we can draw on later. Prices of solid minerals are unlikely to fall in the foreseeable future, with the possible exception of gold, which for now is largely an investment asset owing to its historical functions. Gold and solid minerals therefore also need to be developed.

Unfortunately, however, reforms in subsoil use are moving at a snail's pace, which in turn hinders the development of lending.

Subsoil users need money during exploration and field development. Few need it during the production phase, perhaps only when prices fall. But bank lending today is structured so that it requires existing cash flows and collateral. Junior companies have neither, which makes lending impossible. Moreover, investors who have already put in a certain amount often run into a funding shortfall at the final stages of exploration and development. Kazakhstan has no appraisal companies capable of making an adequate valuation of subsoil use rights. There are also no statistics on the sale of subsoil use contracts, and valuation systems such as JORC are out of reach for juniors, as they also require the entire cycle of geological exploration to be completed. If a company has not finished exploration and its contract has expired, extending the exploration period is very difficult, which means a risk of losing the contract. Foreclosing on subsoil use contracts pledged as collateral is very complicated and takes enormous effort and money. They can be sold only through court auctions, and everyone taking part in an auction must obtain permission from the Ministry. While the contract is being foreclosed on and sold, work programs are not suspended, and the rights themselves are not extended. In short, there is a whole raft of problems that prevent normal lending to subsoil users. As a result, the sector is developing only through foreign companies, which then become the main beneficiaries of these deposits.

As one option, I think we need to:

1. Develop a guarantee mechanism for the exploration and development stages, similar to the one now operating at the Damu Fund;
2. Completely revise the procedures for registering and foreclosing on collateral in the form of subsoil use contracts, including allowing banks to take them onto their balance sheets for subsequent sale to investors without red tape or litigation;
3. Suspend work programs for the period of foreclosure and sale, and extend the term of contracts for that period;
4. Allow subsoil use rights to be pledged as collateral for other obligations, including where a production contract for one area is used as collateral for exploration of another area and/or another type of solid mineral;
5. Make actual transactions involving the sale of subsoil use rights and shares in subsoil user companies public (without naming the companies), in order to determine the real appraised value of subsoil use contracts. The ministries have this information, since all sales are approved by them, and it is essential for determining the fair collateral value of contracts.

In my opinion, it is better to develop the mining industry than housing construction or the automotive industry. Construction is a consumption sector, and without stable revenues such a model becomes unsustainable, while the automotive industry adds no value. If we are to build, let it be infrastructure in cities and villages, and infrastructure for mining companies and tourism.