Tau-Ken Altyn LLP Director of Finance Zhanar Rakhimova: We are ready to process 70 tons of gold and 400 tons of silver annually
According to media reports, in 2016, Kazakhstan produced about 75 tons of raw gold. In this regard, last year its refining amounted to more than 35 tons. To find out why only a bit more than half of all the country’s mined gold is processed, we have interviewed the Financial Director of Tau-Ken Altyn LLP Refinery in Astana Zhanar Rahimova.
– Zhanar Dumanbekovna, what output volumes and performance indicators you have achieved for the year 2016? Are you reducing refining costs?
– Generally speaking, the year 2016 was good in terms of both production and financial performance. All the production and sales targets have been achieved. 12 tons of refined gold output was planned for 2016. 15 tons of refined gold output is planned for 2017 and in 2019, the company is planning to achieve the 25 tons designed capacity.
Capacity depends on purity and composition of chemically pure gold in gold-bearing raw materials supplied based on schedule by raw material suppliers. Cost reduction tendency is evident: starting from 2014, the plant produced 29 tons of refined gold.
– What is the approximate percentage?
– During the first operational years cost of refining services was $7.5 per ounce, today it is around $5-6, which means decrease by approximately 20%.
– What is the reason for that? Change of reagents cost?
– Meaning that it is not even due to gold content, isn’t it?
– Composition and gold content are also among the factors. Of course, the greater gold content, the lower production cost. On top of that are the volumes. The more gold is refined during a certain period, the lower its production cost is. A threshold, which can make us competitive in the world market, is about 18 tons. Today we have achieved 12 tons and our price is about $5-6 per ounce – we are on the level with all Russian companies. That is why Russian companies such as Polymetal (Varvarinskoye JSC) and Nordgold (Alel JSC), who are developing gold deposits in Kazakhstan, after their calculations decided to work with us rather than transport it from Kazakhstan – solely on economic reasons. That is the reason why today with 12-15 tons, our price is competing with Russia. Our objective is to achieve at least 18 tons design capacity. Then we will be more attractive compared to the Russian companies. This is what we call a cost reduction.
– Was the devaluation conducive to cost reduction?
– No, devaluation was not directly conducive to cost reduction except for profit; it rather affected revenues. Devaluation absolutely had no effect on refining services.
– If I recall right, your staff number is 70 – did you scale up wages?
– Not yet. Our staff is 74 people. Our task for today is to achieve the full design capacity, until that we are comfortable with the current salaries of our staff. Our goal is to make cost of refining competitive and to find the ways for raw materials attraction.
– As I see it, your supplies are seasonal, some month you have enough of them, the other time – not so much.
– Unfortunately, yes, it depends on miners.
– Does it affect cost fluctuations?
– No, it has no direct influence on cost. Our two other country’s refineries – Kazzinc and Kazakhmys – are not exposed to such takeoffs for they use commodities of their own metallurgical production. For example, Kazzinc: it takes gold-bearing raw materials from its zinc, lead and copper sludge. They only recycle the sludge. Kazakhmys is the copper industry, and they process copper sludge. They have a relatively stable supply of its own raw materials in sludge.
Mining industry of Kazakhstan was abandoned due to the fact that there was neither refining service nor technology to process mining products represented in Dore, placer gold, cathode gold, cathode powders, therewith, jewelry gold, pawnshops were not in demand. Pawnshops disposed metal scrap to the abroad black markets.
Technical scrap could not be processed in Kazakhstan, that is why Kazakhstan gold outflowed abroad. Now, with the advent of our factory, we closed the gap, and today all the gold from miners of Kazakhstan comes to us. However, Kazakh mining industry is seasonal. In summer volumes increase, in winter, like now, they slightly have dropped by 10-15%, but these fluctuations do not affect us considerably. Because we have already ordered the chemicals and additives to process 15 tons in compliance with the plan for the current year, and purchasing them that affects the formation of cost. Wages are determined, chemicals and additives are planned, and electricity is available. If some summer month we have exceeding processing, in winter we save. Generally, it does not affect the annual results and cost. Therefore, strong drops in supply have no considerable influence on us; we care about these 15 tons to be achieved.
– Let me clarify the situation with Kazakhmys. Kaz Minerals export their concentrate to China… they have some by-product metals. Do they supply it to Kazakhmys? According to the data, the growth was more than by 50%…
– Indeed, KazMinerals export their concentrate to other countries, and this procedure is not related to us since exported concentrates, even containing precious metals, are not our target products due to their gold content being no more than 15 gram per ton.
Kazakhmys is processing almost all Kazakh copper. Hundreds of thousands tons of copper is exported. However, they process gold-bearing sludge – derivative of their copper electrolysis. In Kazakhmys they had four tons. In 2016, they achieved six tons. Two tons of gold-bearing raw material came from joint venture with Kyrgyzstan. As a result, Kazakhmys raised its volumes.
– What can you say about Tau-Ken Altyn profitability? My understanding is that you have been financed via budget loans either from Tau-Ken Samruk funds, haven’t you?
– Samruk-Kazyna JSC appropriated 5.5 billion tenge for the Refinery construction. Additionally, 5.5 billion tenge was allocated in equity for purchasing gold-bearing raw materials. Starting from 2015, the company returned to profitability. Therefore, we are not expecting any additional injections from the parental company. Increased dollar exchange rate had its effect on profitability as well. Another factor is increased gold price. In other words, our averaging performance for the year proved to be higher than we planned that also had its influence, plus volumes. Currently we cannot declare our revenue for 2016. However, the gain is sufficient to pay dividends to the parental company. Last year either we paid dividends to Tau-Ken Samruk JSC.
– What dividends are you expecting? Last year, unless I am mistaken, Kazzinc for example, paid 9 billion tenge to Tau-Ken Samruk.
– No, our dividends are numbered in millions. It is a good news for us given that many people predicted unprofitable next ten years. Far from it, already during the third year the plant returned to profit.
– Are you planning to invest any profit amount in 2017?
– This issue falls under competence of the parental company’s board. Whatever the board decides, so be it. At our end, we have right to request about retaining some part of net profit for production development. For example, last year the Board approved purchasing of silver vacuum distillation unit. This unit is unique, the only of its kind in the world that enabled cost reduction of our product. Due to this facility, in 2017, gold refining will be reduced some more. When we were talking about 6 dollars per ounce, we supposed the price we had in 2016. In 2017, we are planning to reduce price for minors somewhat by 5% and will be more attractive.
– Is this vacuum distillation unit preferably used for silver or Dore refining?
– This is a brand new innovative technology that allows us at high speed to separate gold from silver in Dore alloys. Previously, separation process took three days, but with the advent of vacuum distillation, we separate gold from silver within an hour and a half. This technology allowed us to save chemicals and time as well as boost gold sales.
– Can you use autoclave leaching? Polymetal say that they need autoclave leaching for Bakyrchik ore processing.
– For our enterprise definitely no! Autoclave leaching is applicable to ore bodies processing. Whereas, we process Dore alloys, cathode gold, gold panning. Here you should understand that before refining, gold and silver should be processed through several stages, starting from geological exploration, deposit development, gold-bearing ore and concentrate production, hydrometallurgical processes that involve flotation, sorption, desorption, etc. until cathode gold is powdered. Some enterprises process powders into Dore alloy. Only then, our turn comes – precious metals refining.
– What volumes of silver production can you achieve?
– This year silver production increased by 65% compared to the last year. If we consider the period from foundation in 2014, we produced about 9 tons of silver. Five tons out of them we sold to Kazzinc and are planning to sell other four tons. We also supply commodities to Jewelers but those amounts are rather small – one-two, maximum five kg. Raw materials contain 70-80% of gold and surely 10% of silver.
If we take into consideration the plant individually, we are ready to process any amount of silver, if Kazakhstan mining industry produces it. Unfortunately, in Kazakhstan there are no standalone silver deposits. Dore composition we have contains silver in rather less amounts than gold. For example, in 2016 we had only about 4 tons of refined silver vs 12 tons of refined gold.
– Why does Kazzinc purchase from you, given they also produce silver? Is it a kind of tolling maybe?
– No, Kazzinc produces and sells annually about 900-1,000 tons of silver. They have networking established, we have been also proposed to sell abroad, but our poor 9 tons will take more costs on customs and transportation. So, when we have the closest partner to whom we can supply without any costs, they pay, we do not dream about anything else.
– Is your pricing based on LME?
– Yes, it is.
– Last year during AMM, speaker from the National Bank Akylzhan Baymagambetov said that the issue of 30-day money advance to enterprises, who have gap in current assets due to the purchase of gold. Did they launch this regulation? How much does the refinery pay annually for gold purchasing?
– Last year, on February 29, the Board of the National Bank made amendments into the rules on approval and purchasing gold from the refineries. One of the amendments was prepayment or advance payment to refineries. Our amount of advance payment is 70% for 30 days. However, there are certain criteria and one of them is that the plant must produce at least 10 tons per year. In addition, a parent company should act as a guarantor and the refinery should be profitable. We comply with all these criteria; our guarantor is Samruk-Kazyna fund. Last year we purchased raw material approximately at 150-160 billion tenge.
– Do you have any delays from enterprises you advance?
– We do not advance to the suppliers of raw material, because they cannot give us any guarantee. The amount is considerable; guarantee seems expensive for them. We do not advance to the suppliers, but we are advanced by the National Bank to promptly, same day, pay to the suppliers of raw materials. Our prepayment to the suppliers is 90%, whereas, the National Bank makes prepayment up to 70%.
– Am I right to believe that the enterprises deliver gold and you pay to them at once?
– If weight and gold content correspond, we pay 90% the same day.
– Mass media reported that 75 tons of untreated gold in 2016 was produced by Kazakhstan, while, Tau-Ken Altyn refined 12 tons, Kazzinc – 17 tons, Kazakhmys, from your words, 6 tons.
– Kazzinc produced 19 tons. Totally 37 tons.
– Where are the other tons of gold from 75 tons, given 37 tons only were refined and purchased by the National Bank? Looks 37 tons of untreated gold went to the third party?
– The mining industry extracted from the ground 75 tons of gold. Then beneficiation plant processed it into concentrates. This part of mining industry includes the processing plants. Now processing plants begin to extract gold from concentrate in the form of cathode, gold panning or Dore. This is our product that comes to us. Neither the plants nor the entire mining industry has processing plants at their disposal. Moreover, not all of them have gold recovery plants. Those who have will be able to serve only their own needs since they normally build for themselves, while Kazakhstan is vast. Those mining and smelting companies, which do not have their own gold recovery plants, sell gold abroad and still export it in the form of a concentrate.
– Do you find it proper? Are they not subject to the ban on the export of precious metals?
– They still export concentrates. At the first stage, our government has constructed the refinery we have, thus, we stopped gold outflow with high content, high readiness – we stopped outflow of cathode gold, Dore, gold panning. Now, in order to stop outflow of gold-bearing raw materials in the form of concentrate we should increase capacity of beneficiation plants, this is exactly what currently our government is implementing. To date, Ministry for Investments and Development (MID) is in charge of this issue, and I am absolutely convinced that by 2017–2018 gold refining in Kazakhstan in terms of gold-bearing raw materials treatment will be properly organized.
– What about Yubileinoye-Altynex, seemingly they export copper-gold concentrate to Russia, don’t they?
– They have a mixed concentrate. For your better understanding, take large companies. We now have more than 40 supply contracts. Five companies out of 40 have full gold ores processing cycle. Here belong Altyn Almas, it is self-existent and produces Dore alloys of very high readiness. Kazakhaltyn is the second major – they are completely self-existent, it is located in Stepnogorsk region, they have both beneficiation and gold recovery plant. Varvarinskoye – completely self-existent. ALEL – East Kazakhstan, Sekisovskoye Deposit, they are self-existent. All the rest are small companies, they have no money to build a benefiiciation plant, etc. However, there are two other major companies. They are Bakyrchik and Yubileinoye. Yubileinoye is planning the construction of beneficiation plant, gold recovery plant with its start in 2017-2018. This gives us a full confidence that Yubileinoye gold will come to us. It is included into plan and the government represented by MID is supervising and monitoring it.
Now about Bakyrchik. You have probably heard Mr. Nesis – Polymetal has bought Bakyrchik, Kyzyl. This is one of the largest gold deposits not only in Kazakhstan, but also in Eurasian region. Therefore, Bakyrchik gold, unfortunately, has one flaw: it contains a lot of arsenic. Here I can refer to Mr Nesis, who developed the plan, submitted it to the government, our government accepted his proposal, approved the plan for the development of Bakyrchik Deposit, so, part of its gold with a high content of arsenic will be exported to China to be processed, get rid of arsenic and go back to Kazakhstan. Part with a lower content of arsenic will be exported to Russia by Polymetal, processed into Dore and returned to our plant. With the advent of Bakyrchik in 2018 and Yubileinoye in 2019 we may have a full confidence that we will achieve the full capacity.
– Which enterprises export more gold, small or large?
– Small enterprises now do not export. Just imagine, annually they have 100-300 kg. Therefore, under leadership of MID we enhanced small enterprises to consolidate. For example, Zhaltyrbulak, Dank, Gornyak, and partially Kazakhaltyn – all together they have one beneficiation plant to supply their processed raw material to us. Thus, large companies export large volumes of gold in concentrate, such as Yubileinoye and currently Bakyrchik, but the second one is already well planned.
– Could you provide information about how much gold large enterprises supply to you with the breakdown by volumes?
– We work approximately with 35 companies, who are our suppliers of raw materials. Our biggies are Altay Ken Baiytu, Kazakhaltyn, Altyn Almas, Varvarinka and ALEL. Starting from 2014, we have already purchased approximately 30 tons of raw materials. Considering last year, major companies supplied 8-9 tons out of 12. The rest is from small ones. Kazakhaltyn – 2 tons, Altyn Almas – about 4 tons, Varvarinka – 2.5 ton, ALEL – 2.5 tons. Major companies predominantly deliver more than 2 tons. Altyn Almas has two deposits – Pustynnoye in Karaganda and Akbakay in Zhambyl region, so they have four tons.
Small companies supply about two tons. Out of 35 enterprises that supply gold to us for refining, only five are major companies, 30 other are small. However, we do not ignore anyone, this is the feature of our factory – we can accept for recycling both 100 grams and 10 tons, if they offer.
Last year we started to work with Altyntau Kokshetau – Vasilkovskoye Deposit – based on tolling. We process their product and give them back refined gold, they already sell it to the National Bank. This year, we have purchased from them about one ton, and next year we are planning to purchase 3.5 tons.
– Last year they suddenly became more active.
– Altyntau Kokshetau became very active, they had more than 10, for the year they have planned 13 tons. They supply the main part to Kazzinc and 3.5 tons to us this year.
– I would like to ask you about Maikaiynzoloto, who now is partially offered for sale. Do you work with them?
– Unfortunately, no
– Recently, a jeweler’s forum was held. In your speech, you said that you were going to sell small bars by kilograms, then to collect technical scrap from pawnshops to recycle it and those jewelers from Almaty, Astana, Kostanay already addressed to you. How are you going to develop cooperation with them to bring this related industry out – previously, I guess, the scrap was exported overseas?
– When our plant was designed, the government gave a concrete task – annually we should recycle 25 tons of gold and 50 tons of silver. It is a design capacity of our plant, which is planned. The first achievement of our technologists, if I may say so, is that today we are technologically ready to process 70 tons of gold and 400 tons of silver. Means today the plant ready to increase the capacity up to 70 tons of gold without additional investments.
Second, the government has given us the task to produce only standard bullion to the Bank, weighing 12 kg. Therefore, the second achievement of our plant during these three years is that we now produce gold in small bars weighing 100 grams, 250 grams, 500 grams and 1000 grams. This product is a kind of gold investment.
Third, regarding your question, we now produce granules of high readiness, i.e. 9999 fineness mark. This enabled to develop a jewelry industry. There are so many jewelers now, before they could not buy raw materials since they had no money. They could not afford to buy even a kilogram bar of gold in order to split it, put fineness mark – it is actually very expensive. However, after we started to produce granules, even smaller jewelers can come to us for purchasing, if they have some money.
The fourth achievement of our plant is that in December last year – just a month ago – we were accredited for manufacturing jewelry alloys. We can easily produce gold of 585 or 750 fineness provided for a good volume of orders. Minimum capacity of our furnace is 5 kg. If we operate furnace just to produce one kilogram, the cost will be too high.
If today’s jewelry industry unites and decides to buy at least 5 kg of gold 585 fineness, our plant is ready. This is the highest achievement of our plant over the last three years in excess of the instructions of the government. In addition, the greatest result of our activities is that we have stopped the outflow of gold-bearing raw materials abroad and contribute to developing the jewelry industry, which once wound down.
Thanks to the new law, VAT on gold was repealed. Earlier jewelers used to buy from banks minimum 100 grams with VAT. Now they can buy from the plant 1-gram granule without VAT.
– If I go now to the Bank to buy a bullion, should I pay VAT?
– No, according to the law this burden has been eliminated. 32-ounce limitation also has been eliminated from the Tax Code. VAT is not subject to payment now.
– What is the difference between 9999 and 585 fines for the jeweler, and why are you interested in producing alloys by yourself?
– The jeweler is interested in purchasing as much as he needs, based on the London Metal Exchange without VAT. However, to produce 585 fineness he needs a metallurgical industry, furnace to melt gold in his workshop. For example, producing 10 rings requires electricity consumption, metallurgist is needed to whom salary will be paid. Then he should buy on the market chemically pure copper and silver to make an alloy. Then product price will be high. While we can produce and sell the finished alloys. For one dollar you can buy more 585 fineness in weight, no need to pay for the metallurgy, electricity, as the jeweler can buy ready alloy. Therefore, the price of the jewelry will drop even more.
– You work with retail businesses. What are the volumes of technical scrap purchasing, gold-bearing raw materials, sale of gold to jewelers?
– Jewelers just have come to us. By its special resolution, National Bank allowed for the first half of this year 150 kg of gold provided for availability of the buyer represented by a jeweler. Therefore, we address to all, including via your media, “dear jewelers, you used to suffer, when there was no money for large volumes, now come and buy from us”. We can easily sell 150 kg. Last year we sold 17 kg to jewelers.
– Was it allowed by the National Bank as well?
– No, according to the rules, only the National Bank had the priority right for sale of refined gold. Last year they gave us permission to sell directly to jewelers only, the limit being 150 kg. It became effective only in the second half of the year, so for the last four months we have sold 17 kg.
– Do you mean individuals cannot buy gold from you?
– No, they cannot, individuals may acquire gold either in the banks or in the form of bullion coins manufactured by the mint. They can also come to the National Bank and purchase 100-gram bar, which we produce.
– Did you have any tax problem regarding SEZ? VAT exemptions are repealed due to joining WTO, could you disclose them? How did it affect the economy of the enterprise?
– Only one tax exemption was repealed from January 1, which was disappointing for us. Now we should pay VAT on gold-bearing raw material import. Considering the entire country, I have no right to judge how the state benefits from it. Nevertheless, for our enterprise it is not fair on one reason. We are getting more competitive on the world market; now we partially process gold from Russian suppliers. The South Russian regions bring their gold to us for refining because our price is competitive. Last year, when there was no VAT on import, Iran brought its gold to us.
– This is the Mukashevs project. Are they not delivering gold from their deposit in Iran now?
– This is Iranian project, and one of the founders are the Mukashevs. Previously, they used to deliver Dore alloys and benefit was exceptional, because VAT on imports was not applied, therefore, we could refine it. This year they wanted to deliver the first batch but customs said: “pay 12% VAT”. Of course, they refused to pay and currently are working with Metalor company, Switzerland. What is the benefit for Kazakhstan and what is the lost for Tau-Ken Altyn? We lost additional tons. While their production volumes accounts for two tons.
Second, already for a year we are working with the Mongolian Republic. Mongolbank expressed its great interest in delivering the Mongolian gold to us for refining. Now we will lose the Mongolian gold because of the notorious VAT. We have a potential for refining and, in this terms, we made a huge step forward, therewith have closed the border economically with VAT.
– But the Russians and Kyrgyz can still deliver, can’t they?
– the Russians can. TheKyrgyzdeliver by two tons to Balkhash.
– What was the Mongols’ purpose – for their own use, consumption or to store it in their National Bank?
– The Mongols do not have refining industry as we do, and now they deliver it to Switzerland. They made calculations and decided to work with us. However, because of VAT now we were abandoned, since for them it is economically disadvantageous, because they can deliver it to Switzerland paying no VAT.
Now as far as VAT exemption was repealed, we have to pay 12% in accordance with the customs procedures but we sell to the National Bank at zero rate. Imagine, this VAT is included into our costs and affects profit, which will be reduced of course. Pursuant to article 256, VAT on import is not subject to repayment. In fact, these 12 % VAT costs on import – even if we take these 400 kg, half of a ton – are resulting in millions. This affects our cost and profit.
– At AMM you were talking about discount rate, seemingly 0.7%. Was it changed upwards or downwards?
– To date, the National Bank purchases gold at 0.07% discount rate. Discount will not change until we get the certificate of Good Delivery from London Metal Exchange. We will get it after three years – in 2018, if this year we output 10 tons. There are conditions for obtaining a Good Delivery, in other words, it is a confirmation of high quality of metal purity. The enterprise must be three years since commissioning; we comply with this criterion. The second requirement is that the enterprise should consecutively produce at least 10 tons per annum, in this view, we have produced annually 10 tons for the last two years. In 2017, we are planning to output 15 tons, means we are going to comply with this requirement too and by the end of 2017, we will apply for the certificate. If in 2018 we get a Good Delivery, discount will be less.
– How do you generally think, is the gold industry in Kazakhstan booming?
– I would not say that it is booming, the industry is going to normally operate, given we are processing own raw materials. We are moving from the stage of raw material producing country, at least in our industry, into a high-tech one. We sell gold of high readiness and develop our jewelry industry.
– What is your attitude to the issue about independent miners? Could you work with them and SME segment in the gold mining industry?
– I can only offer my opinion. I am convinced that small-medium businesses like gold-mining cooperatives, etc., should be given the opportunity to mine gold. Nevertheless, today good many perversely understand such essence. For example, Kazakhaltyn in Stepnogorsk region is a large company, and it is highly professional in mining activities, they have a subsoil use contract related to these deposits. Now, some people ruthlessly interfere into internal affairs of Kazakhaltyn and steal from them, it is called stealing. However, Kazakhaltyn as a major company is not interested in small deposits with low gold content. There are so many small deposits all over Kazakhstan. Let the small-medium businesses apply to MID, Committee of Mineral Resources, sign the contract, buy gold deposits and all that they produce, we will accept. It is a benefit to us – we will have increased volumes of raw materials. But never steal from those who are already operating their business. See what is perversity – they don’t want to overburden themselves with stripping works, etc.
– Maybe they think Kazakhaltyn actively developed deposits from the previous century, when their grandfathers and fathers worked there, themselves gold miners maybe are working. So, maybe they think as local community they have right for a big share. I cannot judge if it is correct or not.
– Pursuant to the subsoil use contract, Aksu, Zholymbet deposits are owned by Kazakhaltyn, they pay taxes, the company’s management is responsible for them. Small companies, individual entrepreneurs, if they want, should come to the Kazakhaltyn management and sign a contract to enter normal legal relations. For Kazakhaltyn it will also be a benefit to work with them where they independently are not economically feasible. Small business may process tailings and they can buy from these small businesses gold-bearing raw materials. Generally, volumes will increase and will be delivered to us.