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Growth Stocks Weekly
Junior Gold and Natural
Resource Sector Analysis
(A supplementary report to the Growth Stocks Weekly newsletter)
Special Report on Kazakhstan
Richard Reinhard
rreinhard@shaw.ca
Dec 15, 2005
Many subscribers have asked
me about Kazakhstan lately, probably because three of my mining
portfolio stocks have their main assets there. They're curious
- and cautious - about the political and investment risks in
the country. It's an interesting question, as the money being
raised for Kazakh projects is huge right now - I can think of
three mining companies alone in the last three months that have
raised over US$2 billion in the UK and Canada.
So my question is - if big
institutional money is willing to put so much capital into that
region, why do North American retail investors shy away from
it? It was clearly time for me to write a more in-depth report
on this fast-growing country that is so strategic to all three
major world powers - Russia, China and the United States. Hopefully
this will answer some of your questions about Kazakhstan, a very
rich and not so different place on the far side of our planet.
Please find below my special report on Kazakhstan.
Kazakhstan - Attractive
for Investment and Resource Development
Investment Climate
The Republic of Kazakhstan
is a stable democratic country and is considered a "model
transition economy" after gaining its independence from
the Soviet centralized command system in December 1991 to become
a free market economy. It's a leader on such indicators as political
stability, currency stability, investment climate, integration
with the world economy, development of securities market legislation
and price stability. Kazakhstan is the second largest (after
Russia) of the former Soviet Republics, and is located in both
Europe and Asia, as evidenced by its excellent relations with
diverse interests that include Russia, China, Europe, Canada
and the U.S.
The country is headed by highly-popular Nursultan Nazarbayev,
its first president after gaining independence, re-elected in
1999 and again last week for a further 7-year term. Under Nazarbayev's
presidency, Kazakhstan made substantial progress towards developing
a free market economy. The country has a friendly foreign investment
climate and is a member of the United Nations, the World Customs
Organization the Organization for Security and Cooperation in
Europe. Kazakhstan is also an observer at the World Trade Organization
and an active participant in the North Atlantic Treaty Organization's
(NATO) Partnership for Peace program. Nazarbayev has clearly
determined and is successfully executing Kazakhstan's main diplomatic
strategy - creating and maintaining favourable conditions for
the steady development of the country on the basis of political
and economic reforms.
The laws of Kazakhstan establish a single investment regime for
both domestic and foreign investors. The country guarantees stability
of contracts where investors enter into contracts with Kazakh
State agencies, with the exception of a change of law intended
for national or ecological security, public health or morality,
or if it affects the procedure or conditions of import, production
and/or sales of excisable goods. In 1994 the Law "Of Foreign
Investments" was introduced to attract foreign capital into
the country's economy. In 1997 the Law "Of State Support
of Direct Investments" was introduced to attract foreign
investment into less attractive sectors of the economy. Continuing
the evolution, by 2001 it was determined that there was a further
need for amendments to existing laws, resulting in the new draft
of the Investment Law which was passed in early 2003. This new
law further improves state support for investors and their legal
rights.
For five years in a row the country has experienced a significant
growth in its GDP: 2000 - 9.8%, 2001 - 13.5%, 2002 - 9.8%, 2003
- 9.3%, 2004 - 9.4%. Economic progress during the first
decade of Kazakhstan's independence was made possible as a result
of large-scale political and economic reforms and a healthy investment
climate. The first CIS country to reach investment grade status,
2002 saw Kazakhstan's bond rating upgraded by Moody's to Baa3,
similar to Saudi Arabia, Bahrain and Mexico. By late 2004 a further
Moody's upgrade was achieved to Ba1/NP (Positive), followed in
May 2004 with a Standard & Poor's upgrading of its long-term
local and foreign currency ratings to BBB/BBB- and a short-term
foreign currency rating to A-3 (Stable).
Kazakhstan is well-placed for a period of solid economic growth,
based on foreign direct investment in the energy sector, increased
pipeline export capacity, combined with tight fiscal and monetary
policy and strong banking system regulation and supervision.
The Kazakhstan Government is continually taking steps to improve
the domestic investment climate. Over-riding principles include
stability and predictability; legal transparency; protection
of investors; a level playing field for foreign and local investors;
sanctity of contracts. Kazakhstan wants to encourage direct investment
into the priority sectors of the economy and initiates full consultations
and exchange of views with foreign investors, often within the
framework of their Foreign Investors' Council (FIC) set up in
June 1998. Investors carrying out projects in the priority sectors
enjoy special privileges in taxation and customs tariffs.
With a strong and renewed 7-year mandate following last week's
election, the government is focused on issues to further improve
the economy, seeking to further improve the investment climate
and business environment in the country. Priority is to ensure
effective and level implementation of economic market legislation
and investment laws at the local grass-roots level, diversification
and modernization, stimulating the growth of the value-added
and high-tech components of the economy, and to ensure that economic
growth becomes sustainable and non-oil dependent. Over the next
10 years oil output is set to rise to around 3.5 million bpd
from just over 1 million bpd, higher than current production
levels in Norway and only slightly below output in Iran and Mexico.
Natural gas production is also set to rise sharply. Against this
background the current account is likely to record rising surpluses
from 2008 onwards, the assets of the National Fund should continue
to mount and the government's net creditor position should strengthen
further.
Vast Resources
Kazakhstan is geographically
varied, comprising extensive grassland, semi desert and mountainous
regions. It is bordered by Russia, China, Kyrgyzstan, Uzbekistan,
Turkmenistan and the Caspian Sea. The population of some 14 million
is highly literate and well educated. The country has good infrastructure
with a well developed national grid and network of all-year roads,
railways and airports.
Kazakhstan possesses significant fossil fuel reserves, along
with mineral and metal deposits. Its burgeoning industrial sector
is based on the extraction and processing of these natural resources.
Since gaining its independence in 1991 after the break up of
the Soviet Union, Kazakhstan has experienced rapid economic growth,
mostly attributed to its natural resources. According to the
EBRD, Kazakhstan's GDP grew by 9.4% in 2004 and is projected
to grow by over 7.0% in 2005. The economic expansion is due to
increased production of oil, minerals and other commodities,
supported by high oil prices and rising foreign investments.
Kazakhstan's substantial mineral resources include the world's
largest chromium, vanadium, bismuth and fluorine reserves. The
country is a major producer of iron, coal, uranium, copper, lead,
zinc, tungsten, molybdenum, borates, phosphorite, potassium and
cadmium. It also ranks third amongst CIS countries in terms of
gold reserves. Almost all gold mining companies and properties
have been fully privatized in Kazakhstan, the only country within
the former Soviet Union to have done so. This allows gold doré
and gold-copper concentrates to be freely exported and sold.
Coal reserves in Kazakhstan are approximately 160Bt from 155
deposits in 10 major coalfields principally comprising energy
and coking coal. The country also possesses enormous iron ore
resources, containing 50-60% iron. Kazakhstan contains world
class phosphorite deposits in terms of thickness and quality.
It is the eighth largest copper producing country in the world
and is a major producer of alumina (1.55 Mtpa). Kazakhstan occupies
a large proportion of the Caspian oil province, where reserves
are estimated to contain 20 billion barrels of oil and 700,000,000t
of gas condensate, attracting more than US$15 billion in foreign
direct investment over the last decade.
Conclusion
Seeking to take advantage of
the secular bull market in resource and materials, investors
seeking higher returns increasingly look to the countries of
the former Soviet Union. Kazakhstan - the first among these countries
to receive the investment grade, is currently among top 10 world's
fastest-growing economies (according to The Economist Intelligence
Unit) with US$8.4 billion of direct foreign investment in 2004
(82.8 % growth compared to 2003) and real GDP growth of 9.4%
in 2004.
Abundance of natural resources, many untapped resource-rich areas,
economic and political stability, investor-friendly climate -
all attributes that are proving popular with foreign investors,
especially those in the extraction-based industries. However,
to reduce the country's dependence on the energy sector through
diversification and modernization of the economy, the government
of Kazakhstan is keen to attract much needed investment into
such sectors as agriculture, food and beverage, transport, communications,
financial sector, tourism as well as to encourage the development
of SMEs and boost manufacturing. Various incentives are planned
for investors ready to develop these markets. With the traditional
extraction-based sectors still offering plenty of opportunities
and new prospects emerging thanks to the government's Strategy
for Industrial and Innovative Development, Kazakhstan presents
tremendous opportunities.
Click here for quick economic
statistics on Kazakhstan:
http://www.cia.gov/cia/publications/factbook/geos/kz.html
Additional Sources for this
report include: AFX-Asia, Agence France Presse, Associated Press,
BBC Monitoring Central Asia Unit, Caspian News Agency, Caspian
Business Report, Central Asia & Caucasus Business Report,
CIA World Factbook, The Economist, Economist Intelligence Unit
ViewsWire, The Financial Times, FSU Oil and Gas Monitor, Global
Inisght, Interfax News Agency, ITAR-TASS News Agency, The Moscow
Times, Oil and Gas Journal, Petroleum Economist, Platt's Oilgram
News, PR Newswire, Radio Free Europe/Radio Liberty, Reuters,
Stratfor, The Times of Central Asia, U.S. Department of Commerce's
Business Information Service for the Newly Independent States
(BISNIS), U.S. Department of State, U.S. Department of Energy,
U.S. Energy Information Administration, U.S. Department of State,
World Markets Research Centre.
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© 2005 by Diversified Financial Solutions, Inc. All Rights
Reserved.
Richard Reinhard
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rreinhard@shaw.ca
http://www.gsweekly.com
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