Saudi Arabia Diversifying into Metals

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Think of Saudi Arabia and one normally thinks of oil. With both the largest reserves and largest production, oil is estimated to be good for 72 years according to Wikipedia. Although the level of reserves is a hotly debated issue there is no question that Saudi Arabia’s economy is overwhelmingly dependent on oil and gas production representing as it does 90% of exports and 40% of GDP according to the EIA.

However Saudi is not blessed with just phenomenal oil reserves. In a bid to diversify from the country’s reliance on the fortunes of the oil market, Saudi has opened up the market to private investment in mineral extraction and embarked on an extremely ambitious state investment program in metals refining. Saudi has certain factors in its favor, abundant cheap power – usually gas or oil based, low (almost zero) land costs and a very investor friendly regulatory regime. The drawbacks have been what has held back investment in the past – large distances with poor infrastructure to bring in equipment and bring out minerals from central regions and lack of water. Labor shortages can be an issue too as foreign workers can be expensive and historically local Saudi’s proved unwilling to take manual jobs, although that appears to be changing as younger generations face up to the realities of the modern world.

We have written previously about the fortunes of the Maaden backed aluminum smelter in which Rio was forced to withdraw earlier this year due to financing problems. Even without Rio, Maaden is moving ahead with that project and recently launched an IPO to raise $2.5bn towards it. The timing is probably not so bad. By the time the project comes on stream, aluminum demand may begin to pick up and the cost of production is likely to be low allowing the 740,000 ton/year plant to compete effectively.

A number of foreign firms working new sites in the historically rich area of western Saudi known as the Cradle of Gold are gradually raising the annual gold production above the 5.7 tons produced last year reports the FT. The two biggest limitations are water supply and infrastructure to these relatively remote regions but developers believe many more deposits are waiting to be found as exploration continues. A water pipeline is being laid in to spur development and a new north-south railroad is being built to access bauxite, iron ore, potash and other reserves previous deemed too isolated to develop.

An Australian miner Citadel Resources has recently released bore hole data proving an ore body with up to 3% copper, 0.4 g/t of gold and 19 g/t silver at depths from just subsurface to 700ft down. Reserves are estimated at 100m tons. Plans are underway to bring this to commercial production.

In fact an area stretching from the Red Sea to central Saudi Arabia known as the Arabian Shield was surveyed to varying degrees in the 90’s and development opportunities for iron ore, copper, zinc, gold and other metals were identified but largely shelved due to low world market prices. Those resources are now gaining renewed interest by the Maaden, the Saudi agency responsible, following the strength of prices since the middle of this decade. The authorities would like to see substantial downstream processing rather than the export of unrefined ores in a bid to stem the import of over $1.4bn of metals to a country already rich in metallic natural resources.

–Stuart Burns

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