Serbia: Challenges of Exploiting Serbian Mineral Resources – Ace in the Bush

9. June 2014. / News Serbia Energy

Exploitation of large domestic mineral resources demands the solving of two main challenges – to increase the production of coal and copper by revitalizing almost all existing and building new capacities in Kolubara, Kostolac and Bor, but also to put into use the significant reserves of rare metals

There has never been such great potential with so many controversies. This is how the current state of Serbian mining could be described in short. On one hand, one scandal follows another – problematic demands for starting the research of nickel reserves, (supposedly?) non-transparent business operations of RTB Bor (Mining and Smelting Complex Bor), problems in the operation of the Farmakom mines, whereas, in silence, a series of multinational companies have been exploring domestic reserves of precious metals for years already. And, according to the newest information, the first results are so good that we can believe in one of the famous socialist dogmas, that we really are a country possessing great natural (and mineral) resources.

Serbian Lithium for World Market

Dundee Precious Metals, Rio Tinto, Freeport-Mc Moran, Reservoir Capital Corp, Columbus Copper… These are only some of the names of big international players in the mining sector who have gained the licence in the previous years to perform the research of potential domestic reserves of coal and minerals. Within five years – from 2007, when the first important projects of this type were started, to 2011, twenty-odd companies invested 126 million euros in geological research, according to the official data of the line Ministry, and over 100 million dollars were invested by the mentioned Dundee alone (which now operates under the name Avala Resources). So many investments seem to be rendering the first results and this in the segments in which major mineral resources have not been too much expected. Namely, in October last year, Avala announced that the estimated reserves of gold at the Black Peak (Crni vrh in Serbian) near Bor, in the Korkan-Biger exploration areas, amounted to 72 tons, which provided the basis for further studies on the economic viability of possible exploitation and opening of a mine.
The other positive news refers to the probable reserves of jadarite, a rare mineral containing boron and lithium, two metals with an enormous range of commercial use in industry, agriculture and medicine. Should the estimates of the American and Serbian geologists working on the project Jadar, at a site near Loznica, turn out to be true, then, with the estimated 200 million tons of jadarite reserves, Serbia could satisfy even 20% of the total world demand and almost the entire European demand for lithium. Of course, we will have to wait further for future exploitation; the project is currently in the phase of some kind of pre-feasibility study, which means that they are working on a more detailed research of the deposit, pilot-testing of the previous findings and processing methods and on comprehensive socio-economic and environmental studies, but the company’s statements that “Jadar has been ranked among the largest lithium deposits in the world… as well as that the testing has confirmed that jadarite is an environmentally safe mineral” indicate towards an unexpectedly big development opportunity, not only for the region, but also for the entire national economy.

Privatization of the Mining and Smelting Complex Bor Unnecessary?

In addition to gold and jadarite, we also turn out to be rich in borate resources, which is another mineral with a wide commercial use in the production of more than 500 different products. The world market of borate currently has the character of an oligopoly, because only two deposits, controlled by Rio Tinto and the Turkish government, satisfy even 80% of the global demand. However, three months ago, it became known that, in the region Piskanje near Raška, the Canadian Erin Ventures Inc., had found indicative reserves of 5.6 million tons, together with 6.2 million tons more of probable borate reserves. If we know, for example, that there are 9 grams of borate in every iPad, it is no wonder that the world demand for this non-metal has already exceeded the total supply and that its price on the international market is expected to soar by the entire 40-45% during 2014-2015.

Even if the future of our mining might be partially based on the discovery and exploitation of rare metals, meanwhile, our reality is still tied to what we certainly have – copper, lead and zinc, and consequently, to the business operations of large systems, the Mining and Smelting Complex Bor and Farmakom, with their mines Lece and Zajača. After remaining in state ownership opposite to the plans, as a consequence of three unsuccessful privatizations, the giant from Bor has continuously recorded a growth of revenue since 2009, from somewhat less than 96 million euros to 290 million at the end of 2012, indeed with a minimum EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 0,4 percent and the net profit at the level of slightly less than 2 million euros. On the financial level, however, a large debt remains the key problem; whereas the revenue, to a large extent, depends on the price of copper on world markets, the net debt of the Mining and Smelting Complex Bor exceeded 315 million euros at the end of the year before last, which renders a ratio of even 307 x EBITDA.

Together with the inability of the buyers to provide the privatization funding and the unfavourable situation on the global copper market during the failed sale period, the outstanding financial obligations of the Bor complex, with the copper mines in Bor and Majdanpek, including a smelter and a refinery, were one of the main reasons for introducing the company into the restructuring process. Debt reduction did not happen in the meanwhile, on the contrary, the debt increased by 2.6 times, although as the result of funding a series of projects, from the erection of a new Smelter and Sulphuric Acid Plant, through the reconstruction of the existing capacities, to the modernization of mining equipment valued at more than 200 million euros. Of this sum, the Canadian bank EDC alone granted a loan of 135 million euros for the new smelter and the sulphuric acid plant, whereas around 37 million was invested in the entire system last year, which enabled the growth of both copper and gold and silver production, and a positive EBITDA, according to the unofficial results.

Despite the delayed activities related to the two most expensive projects, the erection of a new Smelter and a Sulphuric Acid Plant, the generally positive results are attracting the international investors again. According to the latest news, several companies are interested in investing in overburden exploitation, and two most prominent names already operating in the Bor basin are certainly the American Freeport-Mc Moran and the Chilean Codelco. The American company has recently discovered a rich deposit of copper ore with around 200 million tons near Bor, and the Chilean giant has already been cooperating with the Mining and Smelting Complex Bor in finding the optimal method for excavating the ore from the river Bor.

If the upward trend of financial performance and production results continues, there might not be a fourth attempt of privatization. In such scenario, it is not impossible that the state, as the owner of the Mining and Smelting Complex Bor, should opt for the model similar to the one promoted in the case of EPS – majority state ownership of the RTB Group combined with strategic partnerships or one hundred percent private investments in the opening of new mines and increasing production capacities. Elementary rules of economic rationality suggest that this very solution is the optimal one, because the Mining and Smelting Complex Bor is neither a loser which we should get rid of as soon as possible, nor an economic “cash cow”, such as NIS or Telekom, which could bring an excessive one-time inflow into the budget from the possible privatization.

In anticipation of future green-field projects – after obtaining the findings of the current research and feasibility studies for opening new mines – investments in the Serbian mining have been arriving through the transactions of takeovers and privatizations. One of the most interesting deals of this kind was concluded last year by the German Quarzwerke Gruppe when, in May 2013, they announced the purchase of 87% of shares of the Bulgarian company Kaolin AD, one of the leading producers of industrial minerals in the Southeast Europe. By this acquisition, the German company also took over 12 plants in Bulgaria, Ukraine and – Serbia. The company Jugo-kaolin, otherwise owning five of the Ub mines, quartz sand deposits Belorečki peščar near Bor and Srbokvarc near Zaječar, as well as the four factories now included in one of the world’s largest companies for the production of quartz sand. The economic logic of this business decision becomes clear with the data that we also possess significant reserves of quartz sand which, through the modernization of the existing and the erection of new production capacities, could provide us with a substitute for the current import of glass at the level of approximately 100 million euros every year.

New Projects for Strong Growth

When all ambitious projections are summed up, from the launching of jadarite and boron production, the increase in the physical volume of copper, gold, silver, lead and zinc production, the possible activation of nickel reserves, to a further increase in coal production, the highly set goals for developing domestic mining make sense. According to the ideal scenario, the participation of the sector in the total gross domestic product should be increased from the current less than 2% (of which coal, oil, natural gas and copper make 9/10) to 5.5% by 2020, combined with the increase in the physical volume of production to 48 million tons. Such strong growth prognoses are based primarily on the expected investments in numerous projects with the total estimated cost of over 5 billion euros, and this in all sectors – from the metal, through the energy, to the non-metal mineral resources.
For the realization of these projections, the fulfilment of a series of conditions would be necessary. One of the main requirements is the increase in coal production, to the mentioned 48 million tons, but also the increase in the output of copper production (to around 55 million tons), then the beginning of production of lithium and zinc, with a significant increase in the segment of lead and zinc, too.

However, we have learned from our negative experience with bombastic announcements of megalomaniacal projects always to take such prognoses with a large grain of salt. Too often, big investment plans, from idea to realization, got lost in the labyrinths of our inert administration, mutually inconsistent regulations, not fully completed legal framework, insufficient legal security of investors and, finally, even excessive appetites of officials at various levels, without whose percentage, somehow, there was always a significant signature missing. Therefore, for conservative reasons, when estimating the perspectives of mining development in our country, it would be advisable to rather operate with significantly more moderate prognoses, in which a realistic scenario would predict a continuous growth of GDP production and a stable increase of participation in the total gross domestic product by several percentage points per year, precisely in accordance with the trend within the period 2008-2012, when this percentage was increased from 1.2 to 1.7 at the end of 2012.

At least in one segment of the investment policy within the mining and even the energy sector, the state certainly applies a very favourable treatment of the companies exploiting our mineral resources. With the exception of the controversial issue of the 3-percent fee paid by NIS (guaranteed in this amount by the year 2023), the situation with the mining leasing rate is characterized by a wide-spread practice of tolerating the non-payment or irregular payment, to the extent that the cumulative debt of all payers in this respect has reached even 4.5 billion dinars, as the (operating) minister complained late last year. Among them, equal problems are caused both by the companies undergoing restructuring, even the Mining and Smelting Complex Bor, which are not obliged to settle the debt until the end of restructuring, and some private companies, Farmakom above all, as one of the biggest tax debtors, owing almost 400 million dinars to the state on various bases for their mines Zajača and Lece.

Coal Production Statistics

The total coal reserves in our country are at the level of around 4.9 billion tons, whereat lignite reserves represent around 93%, and the recently discovered brown coal reserves within the region of Štavalj, near Sjenica, are also very important (around 250 million tons). Almost the entire production, amounting to around 41 million tons per year, refers to the lignite which is mostly produced in the Kolubara mines, in four open pit mines (the participation of around 75%) and Kostolac (the participation of 25%, in one mine). The Kolubara lignite is supplied to the thermal power plants Nikola Tesla, Kolubara and Morava, whereas the coal from Kostolac is delivered to the thermal power plant of the same name.

Production in Bor and Majdanpek

Over more than a century, since their founding in 1903, more than 750 million tons of ore were excavated and around 3.35 million tons of copper were produced in Bor and Majdanpek, with 155.514 kilograms of gold and 971.030 kilograms of silver. The verified geological reserves amount to around 1.38 billion tons of copper, gold and silver. At the projected annual exploitation of 26 million tons of oar, current balance reserves guarantee production continuity within the next 50 years. During 2013, the Mining and Smelting Complex Bor excavated around 17 million tons of ore and produced 36.000 tons of copper, together with 5.8 tons of silver and 1.2 tons of gold.

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