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In association with

Uzbekistan Metals and Mining: A new beginning

Special Report

GlobalMarkets

3 ¬ FOREWORD BY DEPUTY PRIME MINISTER JAMSHID KUCHKAROV

4 ¬ INTERVIEW WITH THE DEPUTYMINISTER OF ECONOMIC DEVELOPMENTAND POVERTY REDUCTION Bobur Abdinazarov

5-8 ¬ ECONOMIC OVERVIEWA combination of factors demonstrate country’s economic resilience and growth opportunity

7 ¬ INTERVIEW WITH CHAIRMAN OF THE STATE COMMITTEE FOR GEOLOGY AND NATURAL RESOURCESBobir Islamov

9 ¬ INTERVIEW WITH THE CHAIRMAN, ALMALYK MINING AND

METALLURGICAL COMPLEX Abdulla Khursanov

10-11 ¬ METALS AND MINING OUTLOOKUzbekistan boasts some of the world’s largest gold, uranium

and copper reserves. To capitalise on these riches the

government is undertaking a bold reform programme to transform

the country’s metal and mining industry into a world leader.

12 ¬ INTERVIEW WITH THE DEPUTY GENERAL DIRECTOR, NAVOI MINING AND METALLURGICAL COMBINAT Kurbanmurat Taparov

www.globalcapital.com/globalmarkets2 CONTENTSIMF/WORLD BANK EDITION WEDNESDAY OCTOBER 13, 2021

SPECIAL REPORT: UZBEKISTAN

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Uzbekistan is one of the leadingcountries in the world in gold mining,

ranking fourth in terms of total reservesand seventh in terms of production. Onits territory there are 97 gold miningdeposits with reserves of more than sixthousand tons, 10 copper deposits withresources of about 44 million tons, andothers. Uzbekistan produces more than140 thousand tons of cathode copper andmore than 55 thousand tons of copper isprocessed by domestic enterprises.

The mining industry is one of the keydrivers for further development of oureconomy. Therefore, mining companiesare actively implementing investmentprojects to increase reserves of mineralresources and develop deposits for theextraction of gold, copper and othermineral resources. For example, in thenext five years, we are planning toincrease the production of cathode

copper to 290 thousand tons peryear through the development ofnew deposits and increasing theannual production to 400thousand tons in 2028.

Today we are working on amechanism to attract potentialinvestors to develop new mineraldeposits. The procedure forissuing permits for the right to use less-explored subsoil plots for thepurpose of geological explorationis being introduced on a firstcome, first served basis and forareas with a high degree ofexploration as well as potential fordiscovering deposits based on theresults of auctions.

In accordance with the decreesof the President of the Republic ofUzbekistan, modern methods ofcorporate governance will be introducedin mining companies. A huge amount ofwork has been carried out to transformthe activities of enterprises in the miningand metallurgical industry.

Today, reforms are being carried out torestructure the state enterprise NavoiMining & Metallurgy Combinat andtransform its activities. The plan tosupport this transformation is to create ajoint stock company, obtain creditratings from reputable agencies, andplace shares on international stockexchanges.

Also, by order of the President of theRepublic of Uzbekistan, a copperindustry cluster is being formed in thecountry aimed at creating multi-levelvalue chains from raw materials tofinished products, expanding explorationwork for copper, non-ferrous, and raremetals, as well as the development ofgeological science and the market forgeological services.

In addition, a new system ofinteraction between science andproduction is being introduced for thedevelopment of an interconnectedsystem of design and engineeringservices. This is translating intoproduction and development of newtypes of mining and metallurgicalmachinery, which in turn, leads toexpansion of chemical products.

We understand that human capital ishugely important, which is why we arepaying particular attention to improving thecapacity of the building and training systemin the mining and metallurgical industry.

I am sure that all these measures willimmediately yield results, and particularlyin helping to increase the flow of foreigndirect investment, the creation of new jobs,the development of related industries andthe export of products to foreign countries.The mining and metallurgical industry is the fundamental driver of the country’seconomy. We expect the industry’stransformation to strengthen and acceleratethe country’s economic growth.l

: UZBEKISTAN SPECIAL REPORT ¬ 3GlobalMarkets

FINE TUNING UZBEKISTAN'S ECONOMIC ENGINE

IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

Deputy Prime Minister Jamshid Kuchkarov

SPONSORED REPORT

The Uzbek government is committed to transforming the country’s

powerful metals and mining industry into a world leader

Foreword by Deputy Prime Minister – Minister of Economic Development and Poverty Reduction H.E. Jamshid Kuchkarov

In accordance with the

decrees of the President of

the Republic of Uzbekistan,

modern methods of corporate

governance will be introduced

in mining companies. A huge

amount of work has been

carried out to transform the

activities of enterprises in

the mining and metallurgical

industry.

‘‘

‘‘

4 ¬ UZBEKISTAN SPECIAL REPORT: Bobur Abdinazarov, Deputy Minister of Economic Development and Poverty Reduction

GlobalMarkets

In October

there was a decree

published to start

a new era of

transformation for

state-owned

enterprises (SOEs)

across the country.

We are pursuing

privatisation and

transformation in

multiple directions,

and there has been

great progress.

‘‘IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

SPONSORED REPORT

‘‘

GlobalMarkets: How has the economy andthe industrial sector weathered the pan-demic?Bobur Abdinazarov: Initially, it was verydifficult. Quarantine was introducedin March and this had a serious impact on the economy. We startedthinking about what sectors of theeconomy need to be supported duringa pandemic. For instance, in the con-struction industry we asked firms toorganise disinfected accommodationfor workers. Then we turned to the in-dustrial producers and instituted asimilar system, so that travel was min-imised, all facilities were kept ster-ilised and there was regular testing.Even during the quarantine period,we in government were keeping inclose contact with thousands of in-dustrial companies and producers atthe regional level to help solve prob-lems. For example, some firms saidthey couldn’t bring in foreign exportsto install equipment for new projects.We organised flights and strict quar-antine to bring in experts. Although inApril the industrial sector had con-tracted by 6% year-on-year, by theend of the year it had actually grown0.7% and GDP growth across thewhole economy was 1.7%.

GlobalMarkets: Has the pandemic affected the reform and privatisationprocess? Abdinazarov: Once we started to suc-cessfully cope with the pandemic wecontinued to proceed with the reformprocess. So in October there was a decree published to start a new era oftransformation for state-owned enter-prises (SOEs) across the country. Weare pursuing privatisation and trans-formation in multiple directions, andthere has been great progress. Duringan initial phase in 2019, we unbundledlarge companies in the oil and gassector. Uzbekneftegaz has been splitinto three companies: extraction,transportation and distribution. Thesame thing has happened to Uzbeken-ergo. Now in-line with the October decree we are working with consult-ants to transform those companiesand increase operational efficiency.The same thing is happening in other sectors like transportation, where automaker Uzavtosanot is being trans-formed with help from Boston Consulting Group. In the metals andmining sector we are pursuing a simi-lar unbundling to the oil and gas sector. So we have our three largestcompanies – Navoi Mining and Metal-lurgical Combinat, which mines goldand uranium; Almalyk Mining andMetallurgical Combinat, which pro-duces mainly copper, silver and, gold;and Uzmetkombinat, which produces ferrous metals. All thesecompanies are carrying out new projects and being transformed.

GlobalMarkets: How is the governmentworking to attract more foreign invest-ment into mining and metals? Abdinazarov: We want more investorsto come and utilise Uzbekistan’s re-source base, but there is also infra-structure that we have to create first.The first infrastructure element is thelegislative and taxation framework.Second, would be reserves and identi-fying the relevant volume and loca-tion. So this year and next year there ismore attention being paid to explo-ration work. The State Committee for

Geology and Mineral Resources is car-rying out government programmes toincrease the mineral resource base.

There are also plans for more ad-vanced production that require helpfrom foreign companies. So, the Presi-dent has approved a new resolution toestablish a copper cluster. The Min-istry of Economic Development andPoverty Reduction will house a projectoffice for this initiative. Our main taskis to hire a consortium of consultingcompanies to calculate the reservesand help prepare bidding documents.We are going to choose two fields - onefor copper and the other for a raremetal. We are planning on acceptingbids from top international companiesin the mining and metals sector. Weunderstand that mining is not like ce-real production, where each field haslargely the same parameters. Differentsites and deposits will require differ-ent approaches. But the key thing isthat the approach should be open,transparent and in-line with interna-tional best practice.

GlobalMarkets: What are the other priori-ties for the sector’s development?Abdinazarov: We will continue to workwith international financial institu-tions, consultants and other experts.This puts us on a steep learning curveand every day we gain a better under-standing of the development process.We are working with different Uzbekand international universities to helpimprove our research capabilities andthe education of the next generation.The research and development processis very capital intensive, and so we arealso trying to structure things so thatthere is greater transfer of technologyand knowledge to our key companiesand the industry in general.

Environmental issues are becomingan ever greater priority. Lowering CO2emissions is a key objective. We knowthat all these projects in the miningindustry and across the industrialsector should be aligned with the aimof a green economy. So this will beone of the directions we will move to-wards next. l

NEW HEIGHTS EXPECTED FOR ECONOMY ANDINDUSTRY AFTER PANDEMIC REBOUND

Bobur Abdinazarov, Deputy Minister of Economic Development and Poverty Reduction

IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

ECONOMIC OVERVIEW 5SPECIAL REPORT: UZBEKISTAN

By Steven Gilmore

Uzbekistan’s economy shone like a beacon during the worldwide disrup-

tion of 2020. While a majority of countriessaw GDP growth turn negative, a mixtureof sound policy and a strong export base putUzbekistan in a select group that remainedrecession free. A comprehensive reform andprivatisation strategy across major indus-tries including metallurgy, mining, financeand energy means the country’s position asa star performer looks assured.

The government’s pandemic policy re-sponse included a stimulus equivalent toaround 2% of GDP that drew approval frominvestors and the IMF. There was a strongpublic health response and a quarantineregime tailored across different industriesthat allowed economic production torestart. The government provided familieswith one-off assistance payments and hikedpensions. Landlords were told to hold offon demanding rent, and utilities paused billpayments. Banks were told to give corpo-rate customers in hard-hit sectors a breakfrom interest payments.

“The government provided a sizable stim-ulus and that was very helpful,” says EricLivny, lead regional economist for CentralAsia at the European Bank for Reconstructionand Development (EBRD). “The authorities

really did put in place a full package of policymeasures to ease pressure.”

One export in particular helped the coun-try weather the economic storm during thepandemic — gold. Demand for almost everyexport from cereals to natural gas fell. Butthe export price of gold and the volumeUzbekistan produces both rose in 2020, tothe extent that gold accounted for over 40%of total exports that year. The country isblessed with deep deposits of precious met-als, non-ferrous metals and key ores likeuranium. Considerable effort is going to-wards ensuring that the mining industrymodernises to reach levels of efficiency thatcompliment its geological endowments. Yetthe administration knows that relying tooheavily on a handful of commodities canmean vulnerability rather than resilience.

Although Uzbekistan was one of the fewcountries in the world where growth re-mained positive, the slowdown was still se-vere. GDP growth fell from 5.7% in 2019 to1.6% in 2020, according to the World Bank.The government’s policy response haspaved the way for a sustained economic re-covery through 2021, including sectors thathad been hardest hit and initially slow torecover. After reeling from quarantinemeasures introduced in early 2020, the gov-ernment expects the services sector growthof between 8.5% and 10% this year. This

comprehensive recovery will likely lead ob-servers including the EBRD to up theiroverall growth estimates for the year.

“We’re seeing expansion everywhere andthe economy is running ahead of our 5.6%growth forecast so we are very likely to up-date,” says Livny. “For 2022 we’ve predicted6% and we will see whether that holds.”

A SENSE OF STABILITY A good chunk of the stimulus was fundedthrough international borrowing, a sourceof funding the government has worked hardto cultivate. The government sold a 10-yearEurobond in November of 2020 along with3 trillion som of local bonds ($288.9m). Notonly were there plenty of investors readyto lend, but Uzbekistan’s cost of borrowingduring the pandemic was largely un-changed from the country’s debut Eu-robonds issue back in 2019. A less welcomeresult of the stimulus is that public debt isnow around 40% GDP, almost double whatit was just a few years ago. The vast major-ity of the borrowing, however, is going toprojects and policy reform that will ulti-mately boost growth.

“There’s no real concern about the levelof debt,” says Karen Srapionov, partner atthe Avesta Group. “The return on these in-vestments is expected to be much sufficient-ly higher than a funding cost of perhaps

Uzbek economy back on track after strong recovery

Combination of factors demonstrate country’s economic resilience and growth opportunity

President Shavkat Mirziyoyev

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““Uzbekistan standsout as a star in theregion. Where inother economiesyou feel a fatigue,a lack of new ideasand dynamism, inUzbekistan thereare many reasonsto be optimisticabout the outlook.”— Eric Livny, EBRD

www.globalcapital.com/globalmarkets

IMF/WORLD BANK EDITION WEDNESDAY OCTOBER 13, 2021

6 ECONOMIC OVERVIEW SPECIAL REPORT: UZBEKISTAN

On the road to privatisationGold giant Navoi Mining andMetallurgical Combinat and car manufacturer Uzavtosanoat

3%-5% depending on the maturity.” The government is also well aware of

the repercussions from letting debt growunchecked. There is a hard debt ceiling of60% of GDP, and in 2022 a fiscal deficit ceil-ing of 2% of GDP will come into force. Thisgives the government headroom to pro-vide additional social spending or econom-ic stimulus while still capping the deficitat a sustainable level. The administrationhas become very judicious about what itfunds through external debt. Even inter-national financial institutions have beentold politely that their proposed projectwill have to wait until there is room in theborrowing schedule.

Inflation, long a thorn in the centralbank’s side, is no longer speeding up. In fact,it has started to slow down despite the fiscalstimulus. The figure for June this year was10.9%, down from 14% in the same month in2020. The government had a target of 5% by2023, which was ambitious even before thepandemic, and an interim goal of under 10%by 2021. Regardless of whether these tar-gets are met, there is still a sense of stabilityon the monetary front.

In the two years leading up to 2020, atremendous increase in credit to the econ-omy had raised the danger of overheating.Banks were issuing loans at eye-wateringrates as high as 30%, reminding some ob-servers of Kazakhstan’s problems with re-tail lending almost a decade ago. Uzbek-istan’s financial regulator, the centralbank, began trying to bring down lendingrates in mid-2020. The pandemic, althoughhugely disruptive and damaging, resultedin a sharp drop in credit growth, whichslowed from around 50% down to a moremanageable 23%.

Meanwhile, a high level of state-owner-ship and regulatory control in the financialsector meant the authorities were able toprovide fresh funding and debt reliefthrough banks very efficiently. This tookthe form of new crisis loans and deferring

the repayment of existing loans for someborrowers for up to six months. Inevitablynon-performing loans have jumped — fromjust over 2% at the end of 2020 to reach 4.7%in May 2021. But this is only a minor causefor concern.

The industries that were hardest hit —including tourism, logistics and SMEs —borrow mainly from Uzbekistan’s privatesector lenders. In recent years, these pri-vate sector lenders have received large vol-umes of funding and technical assistancefrom international financial institutions,who are eager to see more cash flow tosmall businesses. This has left private sec-tor banks with stricter credit policies thantheir state-owned peers, and most are in aposition to either restructure loans or beginrecovering underlying collateral. On theother hand, the state-owned lenders, whosecustomers include huge utilities and strate-gic enterprises, benefit from state guaran-tees. Should any of these big clients strug-gle, the government is obligated to step-in.

State-ownership of the banking sectorstands at 85%, but there is an ambitiousstrategy to reduce this to 40% by 2025. Thegovernment recognises that state-controlhas led to weak competition, interest ratedistortion and reduced the incentive for riskmanagement. With the help of internationalfinancial institutions, Uzbekistan has start-ed on the long road towards transformation.The IFC will take a $35m stake in IpotekaBank, the state-owned mortgage lender, andprovide a convertible loan to Uzpromstroy-bank, which lends mainly to the industrialand construction sectors. The EBRD is help-ing the government prepare to privatisetwo other lenders — Asaka Bank and Alo-qabank. Even lenders that will not be pri-vatised are undergoing dramatic internalreform. State-owned banks are no longerallowed to issue loans at preferential inter-est rates and are increasingly fundingthemselves in part through the internation-al bond market.

PUSHING ON WITH PRIVATISATION The government’s wider privatisation strat-egy covers the entire economy. As the IMFnoted in April, the pandemic’s impact inboth economic and humanitarian terms andhas slowed the transition to a market econ-omy. But once the government had the out-break under control and its policy measuresin place, it returned to the task in earnest.A new presidential decree published in Oc-tober 2020 listed over 500 state-owned enti-ties scheduled for at least partial privatisa-tion. The decree also includes 32 large state-owned enterprises (SOE) to be transformedthrough privatisation. In order to create asolid foundation for the process, the author-ities are working on a new privatisation law.The expectation is that the new law will beenacted after elections in October this year,but the country has already completed itsfirst large privatisation deal. Turkey’s Coca-Cola Içecek (CCI) agreed to pay $252.2m forthe Uzbek government’s 57% stake in Coca-Cola Bottlers Uzbekistan — a joint venturewith Coca-Cola.

“It’s a very good deal,” says Srapionov.“The valuation was good, there were inter-national advisers working on the sale andI think this will give the government a betterunderstanding of how the process shouldwork. That improves the outlook for futuredeals, and we hope that the next privatisa-tions will be done in a similar manner.”

A perhaps unrealistic enthusiasm forheadline-grabbing IPOs in London andNew York has been replaced by a more ju-dicious strategy of smaller placements onthe local exchange, with international list-ings coming later on. For instance, oil andgas companies such as Uzbekneftegaz andUztransgaz are expected to list on theTashkent Stock Exchange in 2022-2023.Several of the mining and metal produc-tion giants have primary or secondary of-ferings scheduled for the same period.State-firms need to get their house in orderlong before a prospective share sale, and

SPONSORED REPORT

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GlobalMarkets: What are the priorities forreforming Uzbekistan’s metals and miningsector?Bobir Islamov: The industry faces anumber of important challenges.Firstly, developing the mineral resourcebase through efficient exploration, im-proving outdated equipment andlaunching a modernisation programme.As part of the modernisation effort, total purchases of new equipment in thecurrent year will reach $40m. This in-cludes equipment that will increasedrilling productivity by 25% and raisethe volume of core recovered to 97%. Wehave also purchased equipment for con-ducting aerial geophysical exploration,which allows us to identify promisingareas in a shorter time.

At the same time, there is a focus onpersonnel training. Goskomgeologyand the Uzbek University of Geological Sciences have established a new teach-ing cluster around a single campus uni-versity, which will function as a placewhere students can study and conductlaboratory research at the same time.

Another priority is to increase invest-ment attractiveness through better legislation. There has been huge workalready in this area. We have contactedseveral foreign consultancies to help usdevelop the strategy, which includesreducing the tax burden on companiesand making information more avail-able and transparent.

GlobalMarkets: How has Goskomgeology’sstructure and remit changed?Islamov: There are 22 entities that usedto be under Goskomgeology, most ofwhich are focussed on research and ex-ploration. With help from internationalauditors we estimated the value of allthese companies’ assets and trans-formed them into joint stock compa-nies. Most have since been combinedinto one huge geological explorationcompany — Uzbekgeologorazvedka —with a modern corporate managementsystem, which is designed to operate inmarket conditions. The company com-bines all the former regional geologicalexploration companies and will cover

lab facilities and geophysical facilities.Goskomgeology now focuses mainly on regulation, including policy for exploration and the protection of subsoils. At the same time, we are gath-ering and consolidating all geologicalinformation and taking responsibilityfor relations with subsoil users.

GlobalMarkets: How will Goskomgeologyinteract with the new exploration entity? Islamov: So together with the Ministryof Finance we work on an annual geol-ogy exploration programme based onan allocated state budget. Goskomgeol-ogy contracts the agreed list of explo-ration projects out to Uzbekgeologo-razvedka. Representatives fromGoskomgeology, the State Asset Man-agement Company and the Ministry ofFinance are on the supervisory boardof Uzbekgeologorazvedka, which willremain a state-owned entity, but thestrategy is to gradually reduce theshare of state ownership.

GlobalMarkets: What kind of new regulation is Goskomgeology working on? Islamov: The most important documentunder development is the new law “OnSubsoil”. This document has alreadybeen prepared and passed through theMinistry of Justice and is now with thegovernment. The law is under discus-sion and will soon be debated inparliament. We began by studying

international best practice and experience. In the drafting process we consulted several organisations includ-ing Boston Consulting, the EBRD andthe World Bank.

The measures the law would intro-duce includes definitions of compe-tence for personnel, so introducingqualification standards for key jobs. Atthe same time, it aims to rationalise theuse of subsoils by introducing a blocksystem for mining permits. This type of system is already effective and in usein Canada, Australia and Kazakhstan.There are also minimum requirements for the exploration ofmining. There are articles for providingfree access to geological information,

the digitisation of data, conservationand sustainable use of subsoil. The royalties of many liquid metals andminerals are also being lowered inorder to increase the sector’s appeal toforeign investors.

GlobalMarkets: Can you outline how theblock system will work? Islamov: We enlisted the help of theEBRD as a consultant on the block sys-tem. Greenfield areas, or less studiedareas, will be allocated using the blocksystem on the principle of first come,first served. Brownfield sites withproven deposits will be allocatedthrough an online transparent auction,which are open to domestic and inter-national companies.

The first auctions took place earlierthis year, when we auctioned 40 sites.The winners included firms fromTurkey, Russia, China and Uzbekistan.By the end of this year, we plan to putforward another 20 sites. This will likelyhappen in the autumn. Most of these willbe brownfield sites with proven deposits.

We are planning roadshows to helpmake investors aware of the auctions inorder to attract interest from compa-nies from other countries. During 2020this was hard to do because of the pan-demic. We’re already working on theschedule, which will include Canada,the UK and briefings in Korea andJapan. l

GOSKOMGEOLOGY AIMS TO BUILD “BEST PRACTICE” REGULATION TO SUPERCHARGE INDUSTRY GROWTH

GlobalMarkets IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

Bobir Islamov, Chairman of the State Committee of the Republic of Uzbekistan forGeology and Natural Resources

UZBEKISTAN SPECIAL REPORT INTERVIEW: Bobir Islamov, Chairman of the State Committee for Geology and Natural Resources ¬ 7

The industry

faces a number of

important challenges.

Firstly, developing

the mineral resource

base through

efficient exploration,

improving outdated

equipment and

launching a moderni-

sation programme.

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SPONSORED REPORT

even firms that may never be privatisedor are further back in queue are undergo-ing huge reform. There is no sector or in-dustry unaffected by the government’sdrive for modernisation.

“One of the most important tasks of theMinistry of Finance is to implement meas-ures for the restructuring and financing —enhancing the financial stability — of state-owned enterprises” says KhurshedMustafoyev, director of the department atthe Ministry of Finance. “This includes in-tegration of international financial report-ing standards, creating a modern corporategovernance system, compliance standards,

and medium and long term business plans.” These reforms are lengthening the list

of SOEs that are able to secure a credit rat-ing and are allowed to raise capital (fund-ing) directly through the international cap-ital markets. “UzAuto Motors issued adebut $300m bond this year, and the planis for companies in the mining and metalssector to issue $1bn worth of Eurobondsin 2022,” says Mustafoyev. Uzbekhydroen-ergo received a B+ rating from Fitch in2020 and Almalyk Mining and Metallurgi-cal Complex received the same rating fromS&P Global. It is expected that Uzbekneftegazand Uzbektelecom will receive their creditratings this year. Uzbekistan’s SOEs willnot just be rated, they will need to betterperform.

“We understand that better corporategovernance means more successful com-panies,” says Bobur Abdinazarov, DeputyMinister of Economy and Poverty Reduc-tion. “We know that the role of the super-visory board and board of directors atthese firms needs to be expanded andskilled personnel brought in. Hiring con-sultants are helping us staff these boardswith international experts.”

The drive for reform and modernisationis equally visible in the government’s pushfor transparency as it opens up new areasof the economy up to the private sector. InJanuary 2022, the government aims to havein place an asset and income declarationscheme for public officials. Mining rightswill go to qualified firms through transpar-ent online bids. Well-connected individualscan no longer quickly and quietly snap uplarge chunks of prime real estate.

“Now everything goes through an on-line auction,” says Srapionov. “It’s not justreal estate either, this is across the wholeeconomy.”

This continues all the way down tothings like traffic cameras. Private compa-nies can now buy licences at auction toplace cameras and receive a proportion offines levied on careless drivers. The licencefor one prime location recently went forthe equivalent of several hundred thou-sand US dollars.

AN OPTIMISTIC OUTLOOKThe message is that Uzbekistan wants eco-nomic growth that is not only rapid - butalso inclusive and sustainable. At present,the country does not create enough jobs tokeep pace with population demand. Unem-ployment rose several percentage pointsduring the pandemic to hit 13% in 2020, ac-cording to government figures. Plans toshrink the public sector only make privatesector job creation more of an imperative.

Even before the covid shock Uzbekistan’sgovernment - well aware that only a smallproportion of the working population paystax - had started on a policy path to legalisethe long neglected informal economy.

This included making it far easier forsmall businesses to pay a set amount of taxand legally register, allowing them to accessformal sources of finance. The microfinancesector is being revitalised to provide small-scale financing at sustainable interest ratesto a new generation of entrepreneurs ingrowth sectors like tourism.

Uzbekistan boasts incredible culture andcuisine. There are mountains, desert andthe ancient cities of Samarkand andBukhara. Although tourism is still only 3%of the economy, it is a sector that offers anew source of revenue for ordinary house-holds. The industry was badly damaged bycovid, and will take years to recover. Butthere is huge optimism at the potential fortourism to become a major economic driverand provide employment.

Similarly, for a country heavily reliantupon energy-intensive sectors like metals,mining, oil and gas, the commitment to agreen economy signals a commitment tosustainability that should reassure domes-tic and international investors. The overallincrease in energy use because of sectorslike metals and mining and populationgrowth is going to be significant. With helpfrom the EBRD Uzbekistan has adopted astrategy for transitioning to a low-carboneconomy with a target of net-zero by 2060.This will involve an energy mix that in-cludes new nuclear power stations and abig push on renewables.

As international investors shake off thecovid shock and begin to put capital to workonce again, Uzbekistan remains as attrac-tive a proposition as it did before the pan-demic. Inflation has slowed and debt isunder control. The som has stabilised andby most metrics the currency still lookscheap given the potential for rapid econom-ic development. Companies doing businessin Uzbekistan can enjoy exceptionally lowcosts while a modern legal environmentbuilds up around them. The path ahead isby no means without hurdles. Uzbekistan’sprivatisation project is immense, and in acountry with strong vested interests re-forms in some areas may yet falter. Butthere are far more reasons to believe thegovernment’s ambitions will be realised.

“Uzbekistan stands out as a star in theregion,” says Livny. “Where in othereconomies you feel a fatigue, a lack of newideas and dynamism, in Uzbekistan thereare many reasons to be optimistic about theoutlook.” GM

8 ECONOMIC OVERVIEWIMF/WORLD BANK EDITION WEDNESDAY OCTOBER 13, 2021

SPECIAL REPORT: UZBEKISTAN

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Going for goldUzbekistan’s vital world-class mining sector

GlobalMarkets: How are the government’sreform plans for the mining and metalssectors affecting Almalyk Mining andMetallurgical Complex (AMMC)? Abdulla Khursanov: Since 2016, underthe leadership of President MirziyoyevUzbekistan has undertaken large-scalereforms covering almost all areas of theeconomy. Many of these have had abeneficial effect on AMMC. For exam-ple, the liberalisation of foreign ex-change policy and reforms in taxationhave allowed the company tostrengthen its financial position.

The greatest changes for AMMCcome from the reforms that specificallytarget the metals and mining sector.Between 2017 and 2020 there havebeen several Presidential Decreesspecifically aimed at improvingAMMC’s production capacity and effi-ciency. These will allow AMMC to in-crease production almost three-fold.For example, the production of copperwill rise from 148,500 tonnes per yearto 400,000 tonnes, gold from 17 tonnesto 50 tonnes and silver from 160 tonnesto 190 tonnes. AMMC will become theleading copper ore processor in theworld.

GlobalMarkets: What kind of challengesare involved?Khursanov: Many of the challenges willbe due to the tremendous increase inproduction as a result of planned in-vestment projects. The first challengeis water requirements, which will in-crease by two or three times to 450 mil-lion cubic meters by 2030. Similarly,energy requirements will increase five-fold, and the solution here is new stateenergy stations that will providearound 600MW of power. A third chal-lenge is transportation issues. Today,we have one railway station that werely upon for all our transportationneeds. Of course, this isn’t enough, andso we are working with the Ministry ofTransport and Railways and other au-thorities to construct new stations.

Yet another result of increased pro-duction capacity is an increase in

concentrates, which contain a lot ofsulphur. So today our operations pro-duce around 800,000 tonnes of sul-phuric acid, and in the future this willrise to 2.5m tonnes. The solution hereis to create a system that can providethe sulphuric acid to Uzbekistan’s fer-tiliser producers. At present, a conceptis being developed for the improvedproduction of mineral fertilisers inconjunction with the production of sulfuric acid.

GlobalMarkets: What are the opportuni-ties for international collaboration andpartnerships across all AMMC operations?Khursanov: The possibilities are limit-less. AMMC is always open for coopera-tion and partnerships. Today, we ex-port 18 types of products to more than20 countries including Turkey, China,Switzerland, Germany and the Nether-lands. We’re increasing our export mar-kets and recently began exporting toAustralia and Indonesia.

In terms of international science col-laboration we are now working with theKorean Institute of Rare Metals(KIRAM) to create high quality prod-ucts from metals like molybdenum,tungsten and rhenium. We are also co-operating with Russia’s TOMS Re-search and Design Institute, whichdevelops technologies for the process-ing of oxidized ores, off-balance oresand industrial waste.

GlobalMarkets: What are the restructuringand privatisation plans for AMMC?Khursanov: We are aiming to conduct anIPO in 2023, and are working withKPMG to prepare for the listing. Therehas already been an assessment to de-termine the fair value of our long termassets and the actual value of long-term social obligations in accordancewith IFRS. The process of transferringnon-core assets is underway. Our inter-national auditor statements for 2019and 2020 have already been prepared.

There is also a four-step roadmapthat will see AMMC transform across arange of areas including corporate

governance, IT systems, energy man-agement and environmental and socialprotection. AMMC has a departmentfor strategic development and transfor-mation, which among other things willhelp us in converting financing state-ments from national finance standardsto IFRS. We also now have a compli-ance and monitoring department thatlooks at financial risks.

In June this year S&P Global assignedus a B+ rating on stable outlook, andwe’ve started to look into obtaining asecond rating from Fitch. We expectthat AMMC will be in a position toissue Eurobonds in the next few years,and have consulted JP Morgan andCitibank in this regard.

GlobalMarkets: What sources of fundingdoes AMMC rely on, and how is thischanging? Khursanov: We use our own funds andcredit lines, and of course fundingfrom the Reconstruction and Develop-ment Fund of Uzbekistan. As a result ofthe reforms underway, we have beenable to rely more on market funding. In2020, with our rating from S&P, wewere able to obtain our first direct softloans from Russia’s VEB Bank to pur-chase dump trucks and Russian equip-ment. AMMC is alsoworking on attract-ing credit fundsfrom Gazprom Bank,VEB, SocieteGenerale, ICBC StandardBank,Helaba and other leading bankstofinance development of the Yoshlik Ideposit. l

MINING GIANT AMMC WELCOMES “LIMITLESS” POTENTIAL FOR INTERNATIONALCOLLABORATION

Between 2017

and 2020 there

have been several

Presidential

Decrees specifically

aimed at improving

AMMC’s production

capacity and

efficiency. These

will allow AMMC to

increase production

almost three-fold.

‘‘

‘‘

GlobalMarkets IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

Abdulla Khursanov,Chairman, Almalyk Mining and Metallurgical Complex

SPONSORED REPORT

UZBEKISTAN SPECIAL REPORT INTERVIEW: Abdulla Khursanov, Chairman, Almalyk Mining and Metallurgical Complex ¬ 9

IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

10 METALS AND MINING SPECIAL REPORT: UZBEKISTAN

By Steven Gilmore

Despite boasting one of the most diversifiedeconomies in the region, Uzbekistan’s mining

and metals sector still contributes a huge share ofeconomic production. The Ministry of Economic De-velopment and Poverty Reduction estimates thatmining companies account for 50% to 60% of valueadded in GDP. Even before the pandemic sent de-mand for gold soaring, the precious metal represent-ed around 25% of total Uzbek exports. The countrywas the eight-largest gold producer in 2020, the fifthlargest producer of uranium and claims the world’seighth-largest copper reserves. The country’s state-owned mining giants play a vital role in reachingnew export markets.

But the government recognises that the sectorcould and should be larger, more efficient and moreproductive. To this end, the authorities have beguna wholesale transformation that has parallels in otherindustries like energy. Over the past five years, asteady stream of legal acts has laid out the road aheadfor mining and metals. Specific presidential decreesdedicated to overall reform, improving exploration,transitioning to market conditions and attracting in-ternational investment have all been published.

Sound regulatory architecture will provide thefoundation for sustainable development, and the gov-ernment is determined to get this right from the out-set. Created in 1991, the State Committee for Geologyand Mineral Resources (Goskomgeology) holds nu-merous mineral deposits and is the entity with whichmost foreign firms have signed joint ventures. ButGoskomgeology has now evolved into a regulatorwith an almost exclusive focus on policy. Many of itsdeposits are being transferred to the state-ownedmining giants, which are themselves being mod-ernised and reformed to function as joint stock com-panies. A host of smaller exploration entities previ-ously under Goskomgeology have been spun off toform one huge state-owned exploration unit —Uzbekgeologorazvedka. With the help of interna-tional consultants and financial institutions, the gov-ernment hopes to place shares in the new entity with

local and international investors in 2025.Goskomgeology is now dedicated to helping the

government improve policy across sustainability, su-pervision, investment, training and qualifications.Licences and permits are being introduced for theuse of groundwater, strategic metals, nonmetallicraw materials and artisanal mining. The EuropeanBank for Reconstruction and Development, BostonConsulting Group and the World Bank all con-tributed recommendations to a new version of thelaw “on subsoil”. This key piece of legislation will in-troduce new industry-wide standards, rationalisethe use of land through a block system for explorationand reduce royalties and licence payments.

“We have had a practice of production sharingagreement joint-ventures, but we see that manycountries are moving to a licence-based allocationfor fields,” says Bobur Abdinazarov, Deputy Ministerof Economy and Poverty Reduction. “We are plan-ning to move to a system where every company —local or foreign — pays the same taxes and the licencefee would vary depending on the field.”

The licencing system will be open, transparent andsupported by new mechanisms for assigning rights,free access to geological information and the digiti-zation of data. A new online platform “E-auksion”will go live later this year, with the first auctionsscheduled for November 30th.

“We will be putting up for auction the rights to 31geological sites, which will be provided to investorsunder a licence agreement giving them 100% controlover management,” says Bobir Islamov, chairman,Goskomgeology.

MOVING UP THE VALUE CHAIN Exploration is key to identifying new deposits forboth domestic and international firms to access, andfor estimating the value of existing discoveries. Al-though state-owned Uzbekgeologorazvedka has atemporary monopoly on exploration, this will notlast for long. The government plans to hold compet-itive tenders for future exploration programmes. Is-lamov says that new equipment and technology isalready allowing exploration at new depths and

across wider areas. “Initial exploration increased 35% in 2019-20, and

we’ve already identified 12 promising new areas,”he says. “The foundation is being laid for further in-creases in the coming years.”

There are already a host of successful partnershipsbetween Uzbekistan’s state-owned firms and foreignminers. In 2018, Russian company Rosgeoperspektivaagreed to work with Goskomgeology to explore forcopper and gold. In 2019, French firm Orano formeda joint venture with Goskomgeology to work on Ura-nium mining. The Japan Oil, Gas and Metals NationalCorporation is working on uranium and other metals.Turkish firms are mining for gold and tungsten.

“At present there are more than $600m worth ofprojects involving international mining firms un-derway,” says Islamov. “There are projects in thediscussion stage where the investment portfolio ex-ceeds $1bn.”

The government is by no means relying on inter-national firms to ensure more efficient and produc-tive activity across the sector. Shifting towardsvalue-added production and processed products isa key part of the industry’s growth. The governmentrecently announced plans for a new value-addedcopper industry cluster, which will be followed inthe future by similar clusters for other strategic min-erals and metals.

In many ways, the project represents industry re-form in microcosm. The cluster will use new typesof equipment and technology, it will take advantageof fresh regulatory standards and new interactionsbetween science and manufacturing. Foreign con-sultants and advisors will help prepare a draft con-cept, and there is great scope for foreign manufac-turers and investors to take part.

The country’s copper miner — Almalyk Miningand Metallurgical Combinat (AMMC) — has a hugerole to play in the cluster. AMMC is working to dra-matically improve processing of cathode copper,which will be the only raw material for all high value-added finished products in the country. The complexis already engaged in deep processing of cathodecopper to produce pipes, wire and enamel wire.

Reforms ready mining sector to reachworld-class potential Uzbekistan boasts some of the world’s largest gold, uranium and copper reserves. To capitalise on these riches

the government is undertaking a bold reform programme to transform the country’s metal and mining industry

into a world leader.

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“Working on rare and hard alloys will require newscientific and technological facilities in the cluster,”says Abdulla Khursanov, chairman, AMMC. “Alma-lyk has a pipeline of 19 investment projects totallingover $75m.”

AMMC is studying the potential for producing cop-per products for electric motors and graphite brush-es. Longer term plans include producing the typesof copper cable products used in electric vehiclesand components in renewable energy engineering.The search for new value chains and export oppor-tunities is taking place elsewhere in the metals andmining sector. Goskomgeology is working with state-owned lender Uzpromstroybank and the country’sbuilding materials association on a strategy to de-velop building materials for domestic use and a value-added production chain focussed on exports.

“With the advent of new technologies there is wilddemand for metals and our challenge is to take ad-vantage of these new opportunities,” says Islamov.

Uzbek firms have long been regular attendees atinternational exhibitions and conferences, seekingto highlight their production quality to new markets.Increasingly, they are working with industry bodiesand exchanges to secure accreditation. After manyyears of attending the London Metal Exchange(LME) Week, AMMC is now in talks with the LMEto earn a brand A designation for copper.

“This will expand our sales reach,” says Khursanov.“We are also going to participate in LME auctionsand use their financial instruments for hedging.”

BUILDING SELF-RELIANCEWhen it comes to developing the cluster project, al-though the government will negotiate contracts withforeign firms, the cost of developing the cluster willbe covered by AMMC and other state-owned compa-nies like Navoi Mining and Metallurgical Combinat(NMMC). As newly incorporated joint stock compa-nies, the mining giants are moving away from a re-liance on state funding. AMMC received its first cred-it rating from S&P Global in 2020, and is hoping toopen credit lines with several European lenders. AnIPO is scheduled for 2023 and the capital markets willoffer yet another funding option.

“Taking into account the need to finance invest-ment projects as well as the great interest in the com-plex from foreign investors and businesses, we expectto successfully issue Eurobonds in the next fewyears,” says Khursanov.

In order to make the company more attractive toforeign capital AMMC has worked with potential in-vestors, international financial institutions and SRKConsulting. This has allowed the complex to recal-culate the reserves of key deposits including the hugecopper sites at Kalmakyr and Yoshlik-I. Preparationfor an IPO has meant shifting to modern standardsof accounting, financial reporting and auditing withhelp from some of the ‘big four’ accounting firms.

NMMC is going through a similar corporate con-version. Despite being one of the largest gold pro-ducers in the world, the combinat is also a major ura-nium producer. On the one hand, the country’s deepdeposits of uranium ore will allow it to create a thriv-ing domestic nuclear power industry. On the other

hand, the uranium operation has made it hard forNMMC to attract foreign investors only interestedin gold. In addition, NMMC and AMMC have a largenumber of non-industrial assets and facilities that theyare responsible for, which makes their products moreexpensive and again hampers outside investment.

“Privatising the big mining complexes is a compli-cated process,” says Karen Srapionov, partner atAvesta Investment Group. “These complexes are likeentire cities. You have social assets like kinder-gartens, housing, or even a football team. All thisneeds to be assessed and separated before an IPO.”

The mining giants are also reconsidering what an-cillary industrial activities should be part of theiroperations. AMMC, for example, expects to save over$10m a year by constructing a machine-building plantto allow it to produce its own crushers, mills, spareparts and other maintenance products. At the sametime, it has scheduled a phased transition to out-source numerous other aspects of its operations —including transport, ICT and repairs — to reduce thecosts of finished products.

NMMC’s uranium mining operations have alreadybeen spun off into a separate entity named Navoiu-ran. Another entity — Navoi Mining and Metallur-gical Combinat Fund — will handle social obligations.That leaves NMMC free to focus on gold mining andattracting international investment through an IPOscheduled for 2023. Like AMMC, the combinat is alsolooking into Eurobonds and international credit linesto fund its capital intensive projects. NMMC’s over-arching strategy is a billion dollar investment pro-gramme that will boost gold production by 30% be-tween 2016 and 2026.

“McKinsey will be involved in helping NMMC im-prove operational efficiency and carry out its billiondollar investment strategy,” says KurbanmuratTaparov, NMMC’s deputy general director. “UK-basedconsultant Alvares & Marsal will help NMMC buildout an international standard procurement system.”

Before AMMC and NMMC conduct their respec-tive IPOs, another mining firm is scheduled to gofirst. The government plans to conduct primary andsecondary share sales for Uzmetkombinat — thecountry’s leading steel maker — in 2022. The sectoraltransformation will take years, but the myriad re-forms already in place leave no doubts as to the gov-ernment’s commitment. Investors eager for a stakein an industry preparing to reach world-class statuswill soon be spoilt for choice. GM

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Groundbreaking 20211) President Shavkat Mirziyoyev lays the corner stonefor a new AMMC copper concentrating plant in July.2) construction begins in August. 3) Re-equiping withnew mining dump trucks — part of an order with acarrying capacity of 220 tons. 4) A new rail line iscompleted from mine to smelter in March. 5) New in-dustrial water supply pipeline completed in July. 6) A new reagent is developed in June for the pro-cessing of gold and copper ores made from organicmineral ingredients based on local raw materials.

www.globalcapital.com/globalmarkets

METALS AND MINING 11IMF/WORLD BANK EDITION WEDNESDAY OCTOBER 13, 2021

SPECIAL REPORT: UZBEKISTAN

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GlobalMarkets: What progress has beenmade in the reform of Navoi Mining andMetallurgical Combinat (NMMC)?Kurbanmurat Taparov: NMMC is thelargest enterprise not just in the indus-trial sector but the whole country. Weaccount for 14% of all industrial prod-ucts in Uzbekistan and contribute 22%of the state budget. In 2020, NMMC’sgold production reached 79.7 tonnes,ranking us 5th among the world’slargest gold producers. The governmentis keen to reform the metals and miningindustry, and has passed three decreesin the last three years. These will intro-duce a modern corporate governancesystem, and most importantly create afavorable investment environment forforeign investors.

In line with the decrees, NMMC hasbecome a joint stock company andtransferred assets unrelated to goldmining to relevant organisations andlocal authorities. A ‘Big Four’ account-ing firm carried out the valuation of allNMMC’s assets and liabilities. Separatestate entities “Navoiuran” and “Fund ofNavoi Mining and Metallurgical Combi-nat” were established to hold propertyand other non-gold related assets. Thefund has been operating as a separatelegal entity since June of this year.

GlobalMarkets: Is NMMC gaining any newassets as part of the reform?Taparov: There are deposits that will betransferred to NMMC. The State Com-mittee for Geology and Mineral Re-sources has prepared a list of deposits to

be transferred and more than 22 wererevalued in accordance with the Aus-tralasian Code for Reporting of Explo-ration Results, Mineral Resources andOre Reserves (JORC Code). The revalua-tion work of an additional 10 depositswill be wrapped up this year.

GlobalMarkets: Can you outline some of theinvestment projects NMMC will be under-taking?Taparov: In 2017, there was a specific de-cree to increase NMMC’s production ofprecious metals that covers the periodthrough to 2026. There are 27 major in-vestment projects, which will ultimatelyincrease gold production by 30%. Goldproduction has already increased by10% and silver by 45%. In 2020, we heldthe opening ceremony for the 7-Gidrometallurgical plant, which is partof this investment programme. Theplant has the capacity to process 15 mil-lion tonnes of technological waste usingtechnology unique in global processing.Capital expenditure on these variousprojects between 2017 and 2021 totalled$2.4bn. Foreign investment in NMMC isover three times what it was in 2016. Ac-cording to the investment programmefor 2022-2026, we plan to raise financingof just over $1.54bn. This will bring a fur-ther 20% increase in gold production.

GlobalMarkets: How will NMMC’s approachto financing change as a joint stock com-pany? Taparov: We plan to use different instru-ments such as loans from financial in-stitutions and corporate bonds. Thatway, the funds remaining at NMMC’sdisposal can be directed to the statebudget and used to finance large-scaledevelopment projects including socialprogrammes and infrastructure devel-opment programmes.

In order to help raise international fi-nancing we prepared an ESG develop-ment report in accordance with GRI(Global Reporting Initiative) standardswith help from Deloitte. A new IFRS-standard accounting policy was devel-oped with help from a ‘Big Four’

accounting firm, and a fundamentallynew corporate structure designed inconsultation with international experts.

It is worth noting that from 2020NMMC’s investment projects have beenfinanced through loans taken from in-ternational banks. We have entered intounsecured loan agreements totalling$850m with international banks. Rais-ing international financing from bankshas been made possible in part by mov-ing to IFRS standard financial reports aspart of the transformation process.

GlobalMarkets: What are the next prioritiesfor reform? Taparov: In the near future we plan toimplement several important measures.The main stages of reorganising NMMCinto a full-fledged joint stock companyare scheduled to finish in October.

In order to increase operational effi-ciency and create a proper compliancesystem, we are auditing our procure-ment and management mechanisms,again with assistance from an interna-tional consultants. The combinat willsoon introduce a new electronic ac-counting and financial reporting systemthat will help improve financial analysisand planning.

The appointment of foreign experts toour supervisory board has been approved,as part of a push to increase the numberof qualified specialists. NMMC is work-ing with recruitment consultants to at-tract additional foreign and localspecialists to managerial positions.

We know that introducing modernmethods of corporate governance makesthe company more attractive to interna-tional investors. In addition, raising financing through the placement of securities in order to further develop thecompany, expand production capacityand create additional job places is a keyfeature of joint stock companies. NMMCis considering the possibility of issuingEurobonds in 2022, and next year, incase of favourable conditions and following the issuance, we may placeshares through an IPO on an interna-tional stock exchange.l

EUROBONDS AND IPO TOHELP GOLD PRODUCERBOOST PRODUCTION

12 ¬ UZBEKISTAN SPECIAL REPORT INTERVIEW: Kurbanmurat Taparov, Deputy General Director, Navoi Mining and Metallurgical Combinat

GlobalMarkets IMF/WORLD BANK EDITION, WEDNESDAY OCTOBER 13, 2021

Foreign invest-

ment in NMMC is

over three times

what it was in

2016. According to

the investment

programme for

2022-2026, we plan

to raise financing of

just over $1.54bn.

This will bring a

further 20% in-

crease in gold

production.

‘‘

‘‘

Kurbanmurat Taparov, Deputy General Director, Navoi Mining and Metallurgical Combinat

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