The role of DBK in the development of the mining and metallurgical industry

The current crisis especially emphasizes the importance of the comprehensive development of the domestic economy. One of its most important elements is the mining and metallurgical industry (MMC). The industry has a significant impact on the formation of macroeconomic indicators in the Republic of Kazakhstan. The mining and metallurgical industry has been identified as one of the priorities in many presidential messages, in addition, the developed strategy of industrial and innovative development of Kazakhstan contributes to the development.

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For example, the volume of production of MMC in 2019 amounted to 7,394.2 billion tenge, which is 11% higher than last year and corresponds to 25% of the total value of industrial products in Kazakhstan. And the share of MMC products in the republic's industry is about 20%. Development Bank of Kazakhstan JSC (structure of the Baiterek holding) regularly supports the industry and is a working instrument for financing projects in the mining and metallurgical sector. The chairman of the Management Board of DBK, Abay Sarkulov, told AMME about how the bank works with this industry and what prospects it has.

- Abay Serikovich, good afternoon. Tell us how many projects in the field of MMC were financed by DBK over the past year, how has the dynamics changed this year (in quantitative and value terms)?

- I would like to note that the largest share in the loan portfolio of the Development Bank of Kazakhstan is occupied by projects of the mining and metallurgical industry - 33%. This industry has a good socio-economic effect: job creation, export orientation and tax deductions. The bank's loan portfolio in the field of MMC includes such projects as: LLP YDD Corporation, LLP KAZ Minerals Aktogay, JSC Kazakhstan Electrolysis Plant, LLP QazCarbon (KazCarbon), LLP Kazzinc, Aktobe Rail and Section Works LLP, JSC" Zhairem mining and concentrating Complex". These enterprises employ a total of 31,186 people.

In 2019, a significant event took place in the MMC industry, a high-tech and unique plant for the production of high-quality ferrosilicon LLP "YDD Corporation" in Karaganda was put into operation, financing for which the bank opened in 2018. The main production of the plant is high-quality, high-quality ferrosilicon (FeSi75), which is used in the production and alloying of steel, cast iron alloys to improve the mechanical and corrosion resistance of metals. Ferrosilicon is used in industrial, civil construction, in shipbuilding, aviation, automotive and others. According to the results of socio-economic development, the export of ferrosilicon for 8 months of this year increased by 5.4 times, and a significant share in the production of ferrosilicon is occupied by LLP "YDD Corporation". The products of YDD Corporation LLP are in high demand, and export destinations have now reached 38 countries. The total cost of the construction of the YDD Corporation LLP plant amounted to about USD 92 million. The project was implemented entirely at the expense of private funds from Kazakhstani and European investors with the attraction of debt financing from DBK within the framework of the SPIID 2015–2019. The bank provided in the form of a loan of KZT 24.1 billion for a period of 11 years at 8.9% per annum.

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Also last year, DBK approved and opened financing for one investment project of KAZ Minerals Aktogay LLP within the framework of expanding the production capacity of the Aktogay mining and processing plant in the East Kazakhstan region. The total cost of the project is over 1,260 million US dollars. DBK's cooperation with KAZ Minerals Aktogay LLP began in December 2016, when agreement was signed to open a credit line in the amount of $ 300 million to complete the construction of a concentrator for processing sulphide ore at the Aktogay deposit in East Kazakhstan. In October 2017, the enterprise reached the design production level, after which it was decided to build a second concentrator in order to double the plant's capacity. Copper concentrate produced at the Aktogay and Bozshakol mines is attractive to copper smelters due to the absence of harmful impurities such as arsenic and iridium.

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- Have the plans for 2020 been adjusted in connection with the coronavirus pandemic?

- In 2020, DBK approved and opened financing for two investment projects with a total cost of 25,432 million tenge. Within the framework of the SPIID, a bright project of innovative production in the field of MMC was financed - a factory for coal enrichment and modernization of the existing foundry of Qaz Carbon LLP in Karaganda. The product line includes 939 product names. The total cost of the project is 12 billion tenge, DBK opened a credit line in the amount of 9.2 billion tenge for a period of 7 years.

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The second project is the modernization and reconstruction of the existing facilities for the production of zinc products of Kazzinc LLP. The amount of the DBK loan was 10 billion tenge. Funding was directed to the modernization of industrial facilities, which have been in operation since the 50s and 60s, in order to maintain existing capacities and expand the production program.

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At the same time, we note that the plan for 2020 was not adjusted.

- On what basis does DBK decide on determing projects for financing in the mining and metallurgical complex and metallurgy, how is the process of determining a financially profitable project going? Are the conditions for the provision of a financing instrument formed in a personalized manner, depending on the manufactured product?

- In general, the selection of projects for MMC industry is carried out by the bank according to the same basic principles and criteria as the selection of projects in other branches of the manufacturing industry. But there are, of course, individual characteristics inherent in this industry.

When selecting projects in the mining and metallurgical complex for a bank, of course, one of the most important criteria is free access to the raw material base and its quality. If the source of raw materials is a deposit, then it is imperative that there is documentary confirmation of balance reserves in the form of a report on the assessment of reserves by the Committee of Geology of the Republic of Kazakhstan or confirmation of reserves and their parameters by independent consultants (JORC).

If, for example, the main activity of a company is the development of a deposit, it is necessary to determine the validity period of the exploration / production contract and synchronize the loan term with the term of the subsoil use right.

At the same time, since the existence of subsoil use rights obliges the company to fulfill certain obligations to state bodies under the subsoil use contract (work program), it is necessary to analyze the fulfillment of contractual obligations (for example, reserves for environmental restoration) and their impact on the efficiency of the project, and in general, return on investment. In general, in this sector, vertical business integration contributes to the management of project risks, which is also important to know when considering projects.

- What else should you pay attention to?

- In MMC projects, special attention should be paid to the technical equipment, for example, if the applicant applied only for equipment for processing, then is there technical equipment for production. It is necessary to pay attention to the competitiveness of the selected technology, a comparison of the appropriateness of using the selected technology in terms of adaptation to the project, the impact on the profitability of the project.

For a bank as a development institution, the depth of processing / redistribution of products is also a very important point, whether the final product is a product with high added value. And, of course, the bank gives preference to projects with higher product conversion rates.

As well as for any project, the most important issue is the prospects of demand for products on a long-term planning horizon, sales development, availability of off-take contracts or other contracts with strong counterparties that guarantee product sales.

In general, I repeat that the selection criteria are similar for all investment projects with some adaptation to the specifics of the mining and metallurgical complex.

At the same time, of course, the bank offers individual conditions for each project, based on the essence of the investment idea, the timing and conditions of its implementation, and, of course, based on the bank's capabilities.

- What projects in the field of MMC do the Development Bank of Kazakhstan see as the most promising in the medium and long term?

The most promising in the medium and long term in the field of MMC, I would single out three areas: these are projects that involve the production of products of a higher value added or with a high potential for import substitution or export oriented. We are also talking about projects involving the use of innovative technologies, including elements of Industry 4.0. Thirdly, these are projects aimed at the production of rare earth metals.

- Have the tools for assessing the sustainability of projects changed in connection with the coronavirus crisis, especially in terms of the risks of non-repayment of loans?

- The COVID-19 pandemic and the global lingering decline in business activity have become a real test not only for the financial stability of individual companies, but also for the economies of all countries, for the world economy. According to the forecasts of the World Bank, this year the planet's economy will contract by 5.2%, and in 2021 the global economic growth will revive and reach 4.2%. However, all experts agree that all current forecasts are extremely uncertain and will depend on the scenarios for the development of the situation, including the duration of the pandemic and quarantine measures in developed countries, the duration of the disruption of global trade and sales relations. If we talk about MMC, here the main consumer market has been and remains China, and most of the players in the metal markets and the level of prices for metals depend on its trade balance. Therefore, the situation of China's trade relations and the development of its economy have always been and are one of the main focuses of the bank's expertise.

Of course, in the context of such a high uncertainty factor, the bank also takes into account various medium-term scenarios for the further development of the situation in the target markets of our borrowers, the impact of macroeconomic events is reflected, stress tests are carried out, and options for the dynamics of demand and prices for project products are simulated. But at the same time, since DBK provides long-term loans, and the pandemic, like any crises, is temporary in nature, the bank adheres to a sound approach when assessing long-term prospects.

Also, in addition to a significant factor of uncertainty and a decrease in activity in the markets, there is another side of the influence of the pandemic - it is a change in global supply chains, a decrease in the rate of globalization of economies, measures to protect the interests of local producers taken by the governments of all countries, the development of new products and industries. Therefore, when examining the market risks of projects, the list of analyzed factors has significantly expanded. In general, I would like to say that the coronavirus crisis itself, like any crisis, is not only a threat, but also an opportunity to build up expert experience, search for new mutually beneficial solutions, finance structures together with our clients and strengthen risk management systems both in the bank and in borrowing companies.

- Have DBK outlined plans for financing projects in MMC sector for 2021?

- To date, the preliminary pipeline of projects in the field of MMC for 2021 consists of 5 projects with a total amount of financing of 1 billion tenge.

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