Mining Iran: endless opportunity, corruption and the Trump question
Post-sanctions Iran represents a vast opportunity for foreign investors with an abundance of mineral reserves, including copper and zinc, and many favourable terms for investment. But it’s not without its challenges. Heidi Vella gets the low-down on Iran’s mining landscape for foreign investors, including the potential impact of US president-elect Donald Trump.
The Persian state of Iran remains one of the most untapped yet most important mineral resources of the world. The country is home to 7% of global mineral reserves, encompassing some 68 minerals and more than 37 billion tonnes (bt) of proven reserves and 57bt of potential reserves. According to the US Geological Survey, Iran holds the world's largest zinc reserves as well as the ninth largest copper, 12th largest iron ore and 10th largest uranium reserves.
When UN sanctions in Iran were lifted in January 2016, so was the chokehold on foreign investment. Iran’s mining sector became officially open for business. Since then the Iranian government has been keen to seek foreign investment and the technology it needs to fully exploit extensive mineral reserves that are currently only mined by mostly state-owned companies. If the recent US election result does not rumble the political landscape, Iran is set to receive considerable foreign investments.
“There are a lot of reasons to be positive about Iran’s mining sector,” says Sabrin Chowdhury, commodities analyst at BMI Research. “It used to be that banks couldn’t undertake international transactions and actually lend investment capital to those who want to expand their presence in Iran. They can actually do all those things now, so that is a something to be positive about.”
Chowdhury says the local potential is enormous in Iran as it has a large, skilled population with a huge demand for infrastructure and a domestic market for metals.
The head of the Iranian Mines and Mining Industries Development and Renovation Organization said in May that, based on the road map drawn up for 2025, Iran’s steel demand will rise to 40 million tons.
A report published by BMI Research in September predicted that Iran’s mining sector will face short-term challenges but will see a steady acceleration in growth limited to around 5-6% over the coming years.
The report also shows that Iran's copper production will continue to rise, averaging an annual growth of 13% during 2016-2020, compared to 2.1% during the past five years. Copper production could reach 508 kilo tonnes (kt) by 2020 despite a monopoly held by state-owned mining company Nicoco.
“Right now the country is still recovering from the after effects of the sanctions; their infrastructure is so outdated, mining technology is so outdated,” Chowdhury says.
To lure foreign investment Iran’s government is offering a number of incentives. These include a tax free window and exemptions to new mining investments. “Up to 20 years from inception mining companies get exempted from 80-100% of all of taxes. The government also vows not to claim any ownership rights on the land they are using so companies won’t have to pay mining royalties or extraction rights in those land areas,” explains Chowdhury.
The government is also offering free insurance coverage during exploration and free access to energy and water.
Under Iran's Foreign Investment and Protection Act, which came into force in 2002, there are no restrictions on the percentage of foreign shareholding and ownership of mining companies. Mining companies are also allowed to fully repatriate their principle capital dividend and profits overseas.
Investments so far
Since sanctions were lifted the government has already authorised $2bn worth of direct foreign investment for 29 industrial and mining projects.
In May 2016, India said it will invest up to $500m to develop a strategic port in Iran. At the time Iran’s President Hassan Rouhani said Iran’s energy resources and Indian mines can pave ground for cooperation in the aluminium, steel and petrochemical industries.
China and Iran have signed the biggest pact of all, agreeing to increase bilateral trade to $600bn over the next decade while Korean steelmaker POSCO has signed an agreement to build a $1.6bn steel mill in Iran.
Poor infrastructure, bureaucracy, corruption and a complex legal system are some of the challenges companies can expect to face when going into Iran.
“The legal environment is really hostile, there are no intellectual property protection rights and trade bureaucracy is highly time consuming,” says Chowdhury.
“Importers and exporters have to go through a lot of regulatory hurdles and there are huge corruption issue in the country,”
The Transparency Initiative ranks Iran 130 out of 168 countries globally, close to Nigeria (136) and Russia (119).
Corruption should definitely be a red flag for foreign investors and companies looking to invest in Iran. Particularly doing business with Iran's Revolutionary Guards, a parastatal organisation that controls a large chunk of the Iranian economy and is accused of human rights abuses. Many individuals associated with the group are still restricted under UN sanctions.
In recent years the US and European anti-corruption agencies have caught out several companies that have become embroiled in corruption overseas or have been found in breach of international sanctions, and have handed out hefty fines.
However, high corruption risk has definitely not stopped both US and European companies investing in hotspots such as Nigeria and Angola.
“US companies do invest overseas where corruption is high as they have a provision for these things. I am sure they can work around it. It’s not that big an issue except it raises costs for them,” says Chowdhury. She points out that mining companies are not expected to partner with state-owned firms for concessions, a situation which can usually be a red flag for masked corruption.
Currently, however, Iran’s mining sector is dominated by state owned-mining firms, which can be both a problem and a positive for foreign firms.
State-owned Nicoco operates the country's three major copper mines of Sarcheshmeh, Sungun and Miduk which have combined estimated reserves of 3.4 bt of ore containing an average of 0.6% copper. The Sarcheshmeh copper mine, located in Kerman Province, is the world's second largest, holding over 826 million tonnes (mt) of proven and 1.2 bt of estimated copper reserves with 0.7% average grade alongside substantial amounts of other minerals including molybdenum, gold, silver and rare metals.
“[A dominance by state-owned firms] is a positive and a negative,” says Chowdhury. “If you are a foreign investor you would probably have better technology and equipment than these state-owned companies that are built with bureaucracy and outdated equipment. However, you can see it as a huge negative factor as an investor because these state-owned players are very established and have preferential access to credit and contacts in the government sectors so can more easily get government contracts.”
The potential impact of President Trump
The recent election of Donald Trump as the new president of the US will also have American and other international companies concerned about making long-term investments in Iran.
“The big question in the Middle East for Trump is whether to preserve the Iran nuclear deal or seek to re-negotiate it,” says Chowdhury.
Trump has described the Iran nuclear deal as a 'disaster' and said he would scrap it 'on day one'. This has been contradicted, however, by claims he would not scrap the deal but simply increase monitoring on Iran's activities.
The nuclear agreement completed in January 2016 removed almost all UN and EU sanctions, which Trump does not have the power to reinstate on his own, says Chowdhury. “US primary sanctions pertaining to US companies are in place and will be so for the tenure of his presidency,” she adds. “These include banning the use of the US dollar in transactions with Iran and stopping almost all US companies from doing business with Iran unless a waiver is granted.”
There is scope for Trump's actions to also affect companies based outside the US but with assets in the country.
”US secondary sanctions are the only actions available for Trump, provided he has support in Congress,” says Chowdhury. “These relate to restrictions on non-US companies which do business in Iran and the US. Some of these are still in place, for example any non-US company which does business with Iran's Revolutionary Guards can have its assets in the US seized. Trump has raised the possibility or re-instating all US secondary sanctions, but he is unlikely to do so immediately. Any attempt to do so would likely be regarded in Tehran as an abandonment of the deal, with potentially significant domestic repercussions.”
Chowdhury continues: “Iranian President Hassan Rouhani dedicated a great deal of political capital on the negotiations, which were reluctantly backed by Supreme Leader Ayatollah Ali Khamenei himself. A breakdown of the nuclear deal ahead of Iran's May 2017 presidential election would severely undermine the position of Rouhani, potentially paving the way for a hardliner to be elected president. Were that to happen, relations between Iran and the West would deteriorate once again, and Iran could revive its nuclear programme. The risk of an Israeli or US strike on Iran would once again rise.”
Despite this political risk Chowdhury says “our view on investment to increase in Iran from Europe and Asian investors remains unchanged”, adding: “Growth prospects are very high because commodity prices are increasing in the coming years. Increasing prices would lead to higher revenue, higher profitability so this would attract investors to Iran in the long term mainly because of the large resources the country has.”