Kazakhmys Empire

Google trans­lat­ed

Corporation “Kazakhmys” is both unique and at the same time typ­i­cal for Kazakhstan his­to­ry. More pre­cise­ly, this is the his­to­ry of the Republic of Kazakhstan, con­cen­trat­ed in one cor­po­ra­tion. Its essence is that the lega­cy of the Soviet indus­try was pri­va­tized in the inter­ests of the coun­try’s polit­i­cal elite, and man­age­ment was entrust­ed to a group of nom­i­nal owners.

The main goal of pri­va­ti­za­tion was to cre­ate a mech­a­nism capa­ble of gen­er­at­ing resource rent for a nar­row cir­cle of trust­ed per­sons. This explains the trans­for­ma­tion of the net­work of legal­ly inde­pen­dent indus­tri­al plants into a sin­gle cor­po­rate struc­ture, which is a real monop­oly of the type of the ear­ly twen­ti­eth cen­tu­ry. The place­ment of shares of this monop­oly on the London Stock Exchange has become a mech­a­nism for the Kazakh elite to legal­ize the struc­ture cre­at­ed in Kazakhstan and the resource rent extract­ed with its help.

The cor­po­ra­tion’s invest­ment plans were imple­ment­ed sole­ly by attract­ing funds from Western investors buy­ing the com­pa­ny’s shares. As a result, this led to the divi­sion of the cor­po­ra­tion into two parts — rent, which exists due to the exploita­tion of old assets and avail­able raw mate­ri­als, and invest­ment, the future of which is con­nect­ed with the imple­men­ta­tion of plans to launch a giant cop­per deposit in the Russian Far East to sup­ply raw mate­ri­als to the mar­ket of the People’s Republic of China. 

Private monopoly with many unknowns

Until recent­ly, the Kazakhmys cor­po­ra­tion was in fact a real monop­oly, crush­ing all cop­per min­ing and pro­duc­tion in the coun­try. In a 2011 report , it was even named the world’s only cop­per ver­ti­cal inte­grat­ed cor­po­ra­tion. At that time, the cop­per empire includ­ed 18 mines, a net­work of GOKs, cop­per smelters and four coal-fired pow­er plants. The lat­ter account­ed for 20% of all nation­al elec­tric­i­ty gen­er­a­tion. Three sta­tions served the inter­ests of the cor­po­ra­tion itself, and the fourth (Ekibastuz GRES‑1), where the cor­po­ra­tion owned half of the stake, worked both for domes­tic indus­tri­al con­sumers and for export (10% of the gen­er­a­tion went to Russia).

This entire sys­tem was cre­at­ed on the basis of a com­plex of enter­pris­es for the extrac­tion of cop­per ore and the pro­duc­tion of cop­per, locat­ed in the Karaganda region. In Soviet times, this com­plex served the needs of the mil­i­tary-indus­tri­al com­plex, and now its main client, as we have found out, is the Chinese economy.

The first min­ing oper­a­tions in Kazakhstan began in 1913. They were car­ried out at the Zhezkazgan cop­per deposit by the Spassky Joint-Stock Company, which was head­ed by the Englishman Leslie Urquhart. But the real indus­tri­al devel­op­ment of the region began in the years of the first five-year plans and reached its peak by the end of the 30s, when the “Big Dzhezkazgan” was launched — quar­ries, mines and the Dzhezkazgan cop­per combine.

In the 1950s, this com­plex of enter­pris­es was merged into the Dzhezkazgan Mining and Metallurgical Combine, which at that time pro­duced more than 90% of all cop­per in the USSR. In 1987 the plant was trans­formed into NPO Dzhezkazgantsvetmet, and in 1992 — into Zhezkazgantsvetmet JSC, which lat­er became the Kazakhmys corporation.

The trans­for­ma­tion into a joint-stock com­pa­ny launched the process of pri­va­ti­za­tion of the Soviet monop­oly, which became the prop­er­ty of inde­pen­dent Kazakhstan. But the pri­va­ti­za­tion was hid­den and was car­ried out through the trans­fer of the com­plex to the man­age­ment of Samsung C&T Deutschland GmbH — a divi­sion of the Korean con­cern. It was in 1995. A year lat­er, Samsung bought out 40% of the com­pa­ny’s shares from the state, but then sold them. A whole series of strange stock trans­ac­tions fol­lowed, in which the then head of the cor­po­ra­tion Lee Gong Hee took an active part. In 2008, South Korean law enforce­ment accused him of tax eva­sion. According to them, the head of the con­cern was buy­ing back shares from his con­cern at a reduced price. This led to the enrich­ment of the man­ag­er at the expense of Samsung. Following the inves­ti­ga­tion, Lee Gong Hee was con­vict­ed and received a sus­pend­ed sen­tence for tax evasion.

In October 2005, part of the com­pa­ny’s shares was sold on the London Stock Exchange to a wide range of investors. Vladimir Kim and Oleg Novachuk played a spe­cial role among them.

Vladimir Sergeevich Kim began his career in the cop­per busi­ness in 1995 as Managing Director and Chief Executive Officer of Zhezkazgantsvetmet JSC. This appoint­ment hap­pened at the moment when the com­pa­ny was trans­ferred to the man­age­ment of a divi­sion of the Korean con­cern Samsung. In December 2000, Kim was already elect­ed Chairman of the Board of Directors of the com­pa­ny, becom­ing the own­er of the largest block (25.7%) of the cor­po­ra­tion’s shares (he con­trolled this stake through the Cuprum Holding Limited corporation).

Oleg Novachuk until 2005 owned 12% of the Kazakhmys cor­po­ra­tion (through Harper Finance LTD), but after the place­ment on the London Stock Exchange, the size of his block decreased to 5.6% of shares (for 2011).

It should be not­ed that in 2005, dur­ing the place­ment of shares on the London Stock Exchange, there were no ques­tions to the com­pa­ny. However, in 2010 they appeared. In London, they start­ed think­ing about who con­trols the Eurasian cop­per monop­oly. An inves­ti­ga­tion con­duct­ed by the British NGO Global Witness high­light­ed the close ties between Kazakhmys share­hold­ers and the first pres­i­dent of Kazakhstan, Nursultan Nazarbayev.

Interestingly, the pub­li­ca­tion of  the Global Witness inves­ti­ga­tion coin­cid­ed with the adop­tion by Kazakhmys of a new invest­ment pro­gram, which was going to be financed by the China Development Bank. 

Chinese plan

It is dif­fi­cult to say whether it was acci­den­tal or not, but the invest­ment pro­gram men­tioned above rad­i­cal­ly changed the state of affairs in the cor­po­ra­tion itself. Instead of extract­ing ore from well-explored deposits, and then pro­duc­ing qual­i­ty cop­per, which was sup­plied to the world mar­ket, the com­pa­ny began quar­ry­ing and sell­ing con­cen­trate to China. It was a com­plete­ly dif­fer­ent busi­ness in terms of mar­gin­al­i­ty, which was going to be financed by the China Development Bank.

The China Development Bank has allo­cat­ed more than $ 4 bil­lion for the devel­op­ment of two large cop­per deposits — Aktogay and Bozshakol. The mon­ey passed through the cash desk of the Kazakhstan state hold­ing NWF Samruk-Kazyna, which gave this loan an inter­state char­ac­ter. Enriched ore extract­ed from new deposits was to be sent to Chinese cop­per smelters. Thus, this pro­gram led to the accel­er­at­ed devel­op­ment of the raw mate­r­i­al base for the Chinese industry.

On aver­age, over a five-year peri­od — from 2008 to 2012 — sales to China already pro­vid­ed about 45% of all rev­enues of Kazakhmys Mining — the met­al­lur­gi­cal divi­sion of Kazakhmys at that time (it did not include the ener­gy divi­sion of the con­cern). And in 2012, about 80% of all cop­per of Kazakhmys was export­ed to China.

That is, it is com­plete­ly unim­por­tant in this sit­u­a­tion who was the own­er of the cor­po­ra­tion, since its mar­ket mod­el was deter­mined pri­mar­i­ly by finan­cial and com­mod­i­ty logistics.

Geopolitics of Kazakhmys

In total, more than 90 cop­per deposits have been explored on the ter­ri­to­ry of Kazakhstan. The cur­rent reserves of cop­per are about 41 mil­lion tons. This is approx­i­mate­ly 5% of the world’s reserves. The repub­lic ranks 4th in the world in terms of cop­per reserves after Chile, Indonesia and the United States. And yet this is too lit­tle to meet the needs of China. At least the lead­er­ship of Kazakhstan thinks so.

In 2012, Minister of Industry and New Technologies Asset Issekeshev made a loud state­ment that “the explored reserves of cop­per and poly­met­als in Kazakhstan remain for 10–15 years.” He explained this by the fact that geo­log­i­cal explo­ration is car­ried out in insuf­fi­cient vol­ume, while the deposits dis­cov­ered by geol­o­gists back in the USSR are being devel­oped very inten­sive­ly. As a result, accord­ing to the data pro­vid­ed by Issekeshev, since 2000, cop­per reserves in the coun­try have decreased by 2.4 mil­lion tons (5.8%).

This was a seri­ous state­ment, giv­en the fact that Issekeshev was close to the first pres­i­dent of the coun­try. And it turned out to be espe­cial­ly sig­nif­i­cant for Kazakhmys, the main cop­per pro­duc­er in the coun­try. The fact is that a year ear­li­er, in the sum­mer of 2011, the gen­er­al man­ag­ing direc­tor of the cor­po­ra­tion, Oleg Novachuk, promised Kazakh jour­nal­ists that the reserves of cop­per at the com­pa­ny’s deposits would be enough “for more than 30 years.” True, he had to admit that cop­per-bear­ing ores are get­ting poor­er, and if “10 years ago, the 0.5% ore grade was not con­sid­ered a project at all, it was just waste”, today “the 0.51% ore grade is con­sid­ered a suc­cess­ful project.”

The new projects of Kazakhmys, which were ready to be financed by the China Development Bank, were ori­ent­ed towards this kind of min­ing of poor ores. Chinese con­trac­tors began to move there, which forced out the for­mer firms from among the Turkish concerns.

But most impor­tant­ly, there were no cop­per smelters in the new min­ing areas, and their con­struc­tion was not planned. GOKs were sup­posed to ship prod­ucts direct­ly to China, which is geo­graph­i­cal­ly clos­er to new deposits than the old cen­ters of cop­per metallurgy.

Restructuring. Kazakhmys Corporation LLP

In 2014, a new geo­graph­ic real­i­ty was con­sol­i­dat­ed with a new legal sta­tus. The busi­ness of Kazakhmys was rad­i­cal­ly restruc­tured. The so-called “mature” projects, locat­ed in the tra­di­tion­al cen­ters of the cop­per indus­try in cen­tral Kazakhstan, were trans­ferred to the Kazakhmys Corporation LLP, owned by Vladimir Kim and Eduard Ogay.

The deci­sion on this trans­fer was approved on August 15, 2014. Since then, infor­ma­tion about the devel­op­ment of the com­pa­ny has left the pub­lic sphere. But this spring it became known about rad­i­cal changes in the sys­tem of its man­age­ment. On April 14, 2020, the Chairman of the Board of Kazakhmys Corporation LLP, Eduard Ogay, appoint­ed Andrey Gaidin as his first deputy, who is believed to have Russian inter­ests behind him.

Finding itself with­out the sup­port of third-par­ty share­hold­ers, the com­pa­ny is like­ly to become an easy prey for Russian cor­po­ra­tions that are active­ly devel­op­ing the cop­per busi­ness in the regions neigh­bor­ing Kazakhstan.

To enlarge the dia­gram, click on it with the mouse. Two clicks give the largest scale.

All promis­ing projects focused on the extrac­tion of raw mate­ri­als remained with­in the “old Kazakhmys”, reg­is­tered in London and renamed KAZ Minerals PLC. The shares of this par­tic­u­lar cor­po­ra­tion are now trad­ed on the London Stock Exchange.

However, it is obvi­ous that the com­pa­ny will lose its sta­tus as a pub­lic cor­po­ra­tion already in 2021. The pri­vate invest­ment com­pa­ny Nova Resources BV, reg­is­tered in the Netherlands, has offered share­hold­ers to buy back shares from them with a 12% pre­mi­um to the clos­ing price on October 27, 2020. The entire com­pa­ny is val­ued at £ 3 bil­lion. The buy­back will be financed by the Russian bank VTB, but the com­pa­ny Nova Resources BV itself is declared to be con­trolled by Vladimir Kim and Oleg Novachuk, who now own almost 40% of the shares of KAZ Minerals (Kim — about 31.6%, Novachuk — about 7.8%).

To acquire a com­pa­ny, the approval of a major­i­ty of vot­ing share­hold­ers hold­ing 75% of the shares must be obtained, with the excep­tion of those shares owned or con­trolled by Vladimir Kim and Oleg Novachuk.

According to Novachuk, KAZ Minerals’ long-term inter­ests will be best served as a pri­vate com­pa­ny. Most like­ly, this is due to more favor­able con­di­tions for attract­ing debt financ­ing com­pared to the issue of shares in the inter­ests of exter­nal investors.

To enlarge the dia­gram, click on it with the mouse. Two clicks give the largest scale.

China Growth Projects

At the core of KAZ Minerals’ busi­ness are two major projects called Growth Projects. These are the Bozshakol and Aktogay fields, the devel­op­ment of which is con­sid­ered by the gov­ern­ment of Kazakhstan to be the largest indus­tri­al con­struc­tion project in the coun­try over the past 50 years.

Deposits are open pits from which ore is extract­ed. The huge amount of ore itself and low min­ing costs off­set the low cop­per con­tent in the rock.

Bozshakol reserves are esti­mat­ed at 992 mil­lion tons. The cop­per con­tent in the ore is here on aver­age about 0.36%. According to cal­cu­la­tions, the deposit will make it pos­si­ble to extract about 100 thou­sand tons of cop­per annu­al­ly for ten years.

Aktogay’s reserves amount to 1,604 mil­lion tons of min­er­al resources with an even low­er cop­per con­tent of 0.33%. The pro­duc­tion vol­umes are now about 146 thou­sand tons of cop­per per year. But already in 2021 this fig­ure is expect­ed to dou­ble. The esti­mat­ed life of the field is about 25 years (includ­ing the expan­sion project).

Most of the ore mined from these two deposits, as expect­ed, is sent to China in the form of con­cen­trate pro­duced at the GOK. And only a small part will go to the Balkhash cop­per smelter, where it is melt­ed into cath­ode cop­per under tolling con­di­tions. According to the finan­cial report, in 2019, 13.6 thou­sand tons of cop­per con­cen­trate from Bozshakol and 43.7 thou­sand tons from Aktogay were sent for smelt­ing. In the same report, such sup­plies are explained by the avail­abil­i­ty of avail­able cop­per smelt­ing capac­i­ty and attrac­tive conditions.

KAZ Minerals also includes the Bozymchak project, an open-pit mine locat­ed in south­west­ern Kyrgyzstan. In terms of its scale, it is seri­ous­ly infe­ri­or to Bozshagol and Aktogay (in 2019, 1,081 thou­sand tons of ore were mined at the deposit, from which 7.3 thou­sand tons of cop­per were pro­duced). But on the oth­er hand, the cop­per con­tent in the ore here is 0.82%, which is sig­nif­i­cant­ly high­er than in large projects.

In addi­tion to open pit mines, KAZ Minerals pro­duces ore from three under­ground mines locat­ed in east­ern Kazakhstan. At these deposits, the cop­per con­tent in the ore exceeds 2%. In 2019, about 3.0 mil­lion tons of ore were raised from the mines and 51 thou­sand tons of cop­per were produced.

But the real prospects for the busi­ness of KAZ Minerals are asso­ci­at­ed with the Baimskaya project, which has not yet begun, which will be imple­ment­ed in Russia on the Chukotka Peninsula. The Peschanka deposit is locat­ed here — one of the world’s largest unde­vel­oped cop­per deposits. Here, 9.5 mil­lion tons of cop­per can be mined with an aver­age grade of 0.43% of this met­al in the ore. In January 2019, KAZ Minerals paid 900 mil­lion US dol­lars for the right to devel­op Baimskaya.

Three open pits and a min­ing and pro­cess­ing com­plex will be built at the field. This will be the project of the cen­tu­ry for Chukotka. The entire infra­struc­ture will also be equipped here — a rota­tion­al camp for min­ers, an air­field and oth­er aux­il­iary facil­i­ties. The total invest­ment is esti­mat­ed at US $ 7 billion.

Baimsky GOK will pro­duce 1.5 mil­lion tonnes of cop­per con­cen­trate. There are no plants for the pro­duc­tion of rolled prod­ucts from cop­per and its alloys in the Russian Far East. China will become the main con­sumer of cop­per raw mate­ri­als. Thus, a very inter­est­ing pic­ture is emerg­ing: a Kazakh cor­po­ra­tion will crit­i­cal­ly depend on access to Russian assets in Chukotka and access to the Chinese mar­ket. Without any alternatives.

A team of jour­nal­ists worked on the project:
Alexey Tikhonov, Nazira Darimbet, Evgeniya Mazhitova, Zhanna Baitelova, Alexander Baranov, Yulia Kozlova, Irina Petrushova

This inves­ti­ga­tion was orig­i­nal­ly pub­lished in the Russian lan­guage and appeared on the orig­i­nal KLEPTO ASIA website.