Abc: Study Gold Risk-Hedging

Tau-Ken Samruk actively seeking new suppliers of gold raw materials.


Tau-Ken Samruk, JSC CEO Mazhit Turmagambetov shared the details of the company’s deposits development and projects realization with

– What is the current situation in the company?

– Last year Tau-Ken Altyn Refinery sold 12 tons to the National Bank. Our plan for this year is 15 tons. We are going to start up four mining projects – Shalkiya, Alaigyr lead-zinc strategic deposit, lead-silver deposit in Karaganda region, Massalsky iron ore deposit in Akmola region and Northern Katpar jointly with Upper Kairakty in Karaganda region (tungsten-molybdenum ores).

We have developed our own strategy. Initially, we planned intensive geological exploration and annually finance 200 million dollars. Unfortunately, this strategy fell short of expectations since we simply did not find deposits to invest. Of course, firstly we were supposed to have 17 deposits. We abandoned two of them since geological exploration data were not confirmed – we found nothing there. Two deposits were sold. We have now left six exploration deposits. Four out of them are gold and two copper ones.

The idea was that if we follow the path of organic growth, starting from exploration and ending with the construction of the plant, this would be a very long way. Normally geological exploration takes at least 6 years, which means the company is not going to produce anything, therefore, we purchased deposits with the measured reserves. Now we work hard to start operations. We are planning to complete Shalkiya and Alaigyr in 2018. Massalsky is planned for 2022 as far as this project is rather complicated. However, we are pleased with the prospects. Our marketing researches proved to be on the right way – now zinc, lead and iron show a positive dynamic by indicators. The only trouble is high volatility in gold prices. Our sales system is as follows: we purchase Dore, placer gold from suppliers, sometimes, when we sell gold to the National Bank, the price drops, and we incur losses. Although last year Tau-Ken Altyn had 2 billion tenge profit. However, the situation in the gold market is rather challenging.

We are not fully financed by Samruk. According to the decision, Samruk undertakes to finance 40% and we attract the other 60% from the third parties. You know that we work with EBRD to finance Shalkiya. We hope to sign a Loan Agreement. In January, we signed an Agreement with the European Bank of Development that gave us 56 million dollars to finance Alaigyr. Now we negotiate the possible financing of Massalsky deposit. As you know, in accordance with the project agreement, we are currently working with the Chinese party – national company – and we definitely want to get financing from Exim Bank. We regularly hold negotiations, Feasibility Study is completed, and we are considering the possibility to go down to the designing stage. Ironorealsoprovesapositivetrend.

We have rehabilitated Silicon Plant (produces metallurgical silicon, silica fume (microsilica) and silicon slag) under instructions of the Council for Mining and Metallurgical Industry. Now it is called Tau-Ken Temir and located in Karaganda. In October 2014, we commissioned the first furnace, in October 2015, the second one. Last year, we produced 20.5 thousand tons of silicon. We sell 100% of silicon: some 40% to America and 60% to Europe and Russia. However, I should note that the last year was fairly challenging. Many silicon plants suffered losses, because during the year the prices fell by 40%. Therefore, we have the task to further reduce the cost as much as possible to have a margin.

– What production plan has Tau-Ken Temir for the current year?

– Its maximum capacity is 23,900 tons, last year we produced 20,520 tons, this year we should achieve 21,900 tons. Currently we see the improved situation with prices. Now we rely only on ourselves. We should reduce the costs, but the fact of the matter is that prices for the raw materials are growing with the growth of prices for metal. Coal, charcoal, wood chips, coke – all is growing. It is very difficult to balance to achieve indicators. Much was because the transaction regarding purchasing Aktas Deposit supposed to be owned by our company took much time, but we closed the deal in the beginning of the year.

– What part of production goes to Russia taking into account fair export tenge-ruble parity?

– 15 percent of the total amount. Main part of the production goes to Europe and 40% to the United States. Another thing is that if we do not comply with the technology and steel grade, the price surely drops.

– Hasn’t Massalsky Project cost changed?

– Massalsky is around 1 billion dollars.

– What about Alaigyr and Shalkiya, will they start operations in 2018?

– Yes, they will. Construction is not the only thing to do but we should also perform pre-commissioning works. If we have the least doubts that something in terms of technology is missing, we double-check it. We thoroughly research processes so we do not go wrong with the technology. You know that the plants start operations and then they stop their activities or produce non-competitive products. – What shall we do with Shalkiya products then?

– We have a contract with Kazzinc but if we have a buyer ready to pay more, then, in the nature of things we will probably take this chance. – Is 56 million dollars from Eurasian Bank for Alaigyr Project the full amount needed? – Some part was financed by the Fund.

– Do you sell gold to the National Bank at the price as of the day of the transaction or actual delivery?

– Let’s say, you supply us Dore. I receive it and fix the price as of this day. The second day, we pay to the supplier 90%. The other 10% we pay based on the average price over the last month. The same procedure we have with the National Bank. In a week, gold is processed. We supply this gold and they pay us 90% at the stock price.

– Can you hedge risks from gold prices volatility?

– We are studying this issue. I can’t say we hedge or not. The volumes seem to be not so large, but, on the other hand, 12 tons also mean money. Tau-Ken Altyn solely brought us 155 billion tenge profit. This is good money, almost 500 million dollars. This year we want 15 tons, but the question is if we can find so much gold? We can process even more, the problem is that we can’t find so much gold.

– How much scrap gold do you process?

– We are lucky, if we have 300-400 kg.

– Do you really benefit from selling pelleted gold?

– Our gold electrolysis technology enables anodes shape golden plates. Then we cut and load it into a special machine that shreds it all and makes little pellets. We put it into the moulder and run the furnace on. We get precisely 12 kg. Why a jeweler buy a bar? Pellets is what he need. They take but not so much.

– How much did they ask for initially?

– I don’t know how much they asked but the National Bank gave permission for 150 kg. They address the issue to the National Bank: give them permission to sell gold to us. The Bank agreed but nobody is buying. Hard to say what the reason is. It is not a game-changer. What means 12 kg?

– Are you going to expand volumes up to 25 tons in 2019?

– Yes, we are. For now, we comply with the plan. Of course if we find gold. You see we suffer lack of gold. We have 32 suppliers. We explore Kazakhstan, Kyrgyzstan, Mongolia, and Iran. Iran was expected to supply gold. Now, we have Import VAT that caused a problem. We addressed to the Government to consider this issue. Otherwise, we will not get this gold and will not be competitive. VATis 12%.

– What volumes are you expecting from Iran?

– They plan up to 4 tons. It is our Kazakh company. This year they signed a contract with us for 2 tons, but if we can’t solve the problem with VAT, we will lose it. They will supply to Switzerland.

– Did you have a coal project in Kushmurun? What is the situation with it?

– It was planned that Turkey would build a power plant based on Kushmurun coal in Kostanay region. However, their requirement is guarantee of capacity purchasing. Means, if it is not required, they should be paid for these facilities. However, in the Ministry they said that the commissioning of the new capacity until 2030 is not feasible.

– For coal generation in particular?

– Yes. Turgay coal basin is estimated to have 50 billion tons. That’s a big deal. Formerly, it was a strategic reserve, and it was preserved for a case of some disasters.

– How much was it expected to cost?

– They didn’t deliver feasibility study. Now, we are just going to have the contract, but we don’t have a feasibility study yet. If the Ministry still does not want to comply with the terms of investors, they will not come.

– Was there a condition to share 50 x 50?

– It was subject to agreement. Generally, yes.

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