RISK FoCUS - JLT Specialty

RISK FoCUS JLT MINING aUGUSt 2016

Prepare for the boom* as the turkish mining sector has developed over the last fifteen years, investors have been attracted to new opportunities, particularly in the gold mining sector. a range of foreign investment incentives and turkey’s political stability have combined to make turkey one of the prime ‘frontier’ mining destinations in Europe. now, with an energy crisis brewing, and with the government determined to secure economic growth, mining is set for a boom.

Mining in Turkey has historically been

such as Turkish Coal Enterprises (TKI),

The momentum is clear, and Turkey is

an industry that has struggled to attract

ETI Maden and Turkish Hardcoal

set to become one of Europe’s best

large volumes of foreign direct investment

Enterprises (TTK). President Recep

prospects for exploration for a range of

on account of a notoriously difficult

Tayyib Erdogan, who has pledged to

metals and minerals. Turkey’s gold sector

operating environment and an overarching

transform the country into one of the

has grown consistently over the last

state presence within the sector. Indeed,

leading global economies by 2023,

decade, and will continue to attract a

in 2000, 85% of mining operations were

used his long tenure as Prime Minister,

large share of foreign investment. Fifteen

controlled by the state. However, in the

and head of the ruling Justice and

years ago, the gold sector was almost

last fifteen years, the sector has seen

Development Party (AKP) to initiate

non-existent. Today, Turkey is Europe’s

significant development and privatisation

steps to open up the sector and to

number one gold producer, with seven

since. As of 2014 only 10-15% of

attract new international investors.

operational, profitable mines. Yet despite

operations belonged to public bodies *A previous version of this article was featured in World Coal magazine in September 2015.

this progress, the gold sector is still in its

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JLT MINING | Risk Focus | August 2016

infancy, and while foreign investors are

During 2000-2012, domestic coal

for a quarter of the country’s USD50bn

encouraged by the government, with

consumption increased dramatically due

import bill. While the economy has been

incentives enshrined within the mining

to the rising demand for power, with the

benefitted from low oil prices, every

code which provide foreign investor

country facing a rapidly growing

USD10 increase in the price of oil adds

companies the same rights as domestic

population and increased industrialisation.

around USD4bn to the import bill. Not

mining companies, there are still risks

Yet despite its wealth of coal reserves,

only did the government have to import

to consider, including labour unrest.

insufficient investment and a lack of

oil and gas; Turkey also imports more

In addition, the government still displays

exploration projects have left Turkey

than 27mt of hard coal each year,

a streak of resource nationalism that

facing a substantial energy crisis as

predominantly from Russia and

could heighten legal and regulatory risks

power demand outweighs supply.

Colombia, in order to close the supply-

for those investors.

Long-standing government policies to

demand gap. In 2015, Turkey imported

provide free coal to the country’s poorest

27.78 million mt, a rise of 18% year on

BOOM TIME FOR COAL MINING

communities have also had an impact on

year to the highest annual volume since

Turkey’s coal mining sector is the sector with arguably the greatest potential over

supplies; in 2014 around 2 million tonnes

records began, according to Platts. This

(mt) of coal were distributed.

was despite a slight cut in coal use on

The gap between coal supplies and

account of low oil prices.

the next decade as coal becomes

power demand has had a significant

The majority of Turkey’s coal reserves

increasingly important for economic

economic impact as the government

are located in the western region in the

growth. Turkey produces both anthracite

has been forced to import costly

Zonguldak Basin, which contains more

(hard coal) and lignite (brown coal)

hydrocarbons for power generation.

than 1.5bn tonnes of reserves, 80% of

predominantly used for power generation.

In 2013, oil and natural gas accounted

which can be coked. Lignite deposits,

JLT RISK RATINGS FOR AUGUST 2016

Currency Inconvertibility & Transfer Risk 10

9

Country Economic Risk

8

Sovereign Credit Risk

7

6

5

4

3

War & Civil War

Expropriation

2 1

Contractual Agreement Repudiation

Terrorism

TURKEY 1 = Low Risk 10 = High Risk 3 = Under Review

Strikes, Riots & Civil Commotion

Legal & Regulatory Risk

www.jltspecialty.com | Risk Focus 3

however, are in abundance with an

Sivas-Kangal, which are then operated

estimated 12bn tonnes of reserves, with

by private companies under contract.

particular concentrations in the northwest. There are a number of organisations that manage regulation, exploration (site selection, drilling, reserve studies), mining operations (mineral processing, building facilities) and related activities subject to Turkish mining codes, alongside private and public companies. Separate licences are required for exploration activities, and mining operations activities. MTA (Mineral Research and Exploration General Directorate) provides exploration and research services for the sector, MiGEM grants licences on behalf of the government, and project manages publically owned sites, while TKi, Turkish Hardcoal Enterprise (TTK), and Elektrik Üretim A.Ş (EUAŞ) link the coal fields to demand by performing a range of activities from mining, to trading, to power production. For example, EUAŞ controls the key lignite fields situated in Afsin-Elbistan and

In order to meet such staggering growth in energy demand, the government has set out plans to revamp its energy strategy by increasing renewable energy operations and incentivising foreign investment into the coal sector. The government plans to increase the share of coal in electricity production from 25% to 30% in the next few years, in order to meet a capacity goal of 120,000MWs by 2023, in line with the government’s 2023 vision plan. In 2012 Turkey produced 2.3mt of hard coal and 70mt of lignite, but it is estimated that by 2018, Turkey will produce above 100mt (with a similar hard coal and lignite ratio). As the government looks to reduce the share of electricity generated by gas-fired power plants, coal mine production in Turkey will accelerate at a much faster rate than its regional peers.

the government plans to increase the share of coal in electricity production from 25% to 30% in the next few years, in order to meet a capacity goal of 120,000MWs by 2023, in line with the government’s 2023 vision plan.

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NAVIGATING TURKEY’S INVESTMENT LANDSCAPE

heavily concentrated - heightening opposition from political parties.

Investing in the Turkish mining sector

Amidst the political instability that

has the potential to be very profitable,

occured in 2014, Turkey endured several

particularly now as the government

mining disasters that were blamed on the

looks to expand coal mining. Yet,

ruling AKP for not ensuring sufficient

navigating the investment landscape

health and safety laws – resulting in the

can be fraught with difficulties, with the

deaths of hundreds of miners. According

regulatory environment characterised by

to the International Labour Organisation

lengthy, bureaucratic delays with

(ILO) Turkey has the highest rate of

widespread bribery and corruption. When Erdogan won the Turkish presidential elections in August 2014, foreign investors were mindful that further politicisation of the judiciary, central bank and business environment would continue to cause concerns for investors. Indeed in the months that followed Erdogan began to take steps to consolidate power around the executive branch; turning what was traditionally a largely ceremonial role into one in which political power is

of the government’s health and safety record in the mining sector pointed to the country’s privatisation model – arguing that permitting the use of subcontractors to run state licenced projects, and a culture of prioritising investment return and production figures over worker safety was at the root of Turkey’s high accident statistics. The Soma and Ermenek accidents

worker deaths in Europe. Between 2007

fuelled new calls for the government to

and 2012, 4.6 miners died for each

improve health and safety regulations,

million tonnes (mt) produced in Turkey, in

prompting the passage of a wide-ranging

comparison with 1.3 in India and 0.2 in

Omnibus Bill in September 2014. The

the US. The Soma disaster in May 2014

new bill marked significant improvements

was Turkey’s worst mining disaster on

for mine workers’ rights by limiting the

record, with 301 miners killed. Just five

legal working time of miners to 36 hours

months later, the Ermenek mine accident

a week and reducing the retirement age

occurred; 18 miners drowned following

to 50, from 55. Additionally, mine

the flooding of a mine shaft. The accident

workers at lignite mines are now legally

sparked international condemnation from

entitled to be paid at least double the

mining companies that argued that the

minimum wage on account of the

accident was entirely preventable. Critics

dangerous nature of the work. The


Omnibus Bill was well overdue, yet with

was the hardest hit, with 22 mine

the government keen to now exploit coal

operations closing, leaving over 5000

reserves and rapidly boost production,

mine workers unemployed.

there is a risk that environmental damage

As small domestic mining companies

and worker safety could be jeopardised

struggle to stay afloat with increased

in the new coal mining boom. Culturally,

regulation and costs, we could see an

worker health and safety still appears not

uptick in larger foreign companies

be the top of the government’s agenda;

expanding their presence in Turkey.

the amended mining law paves the way for a more comprehensive legal and regulatory environment in the mining sector.

quite tellingly, no government minister resigned in the aftermath of Soma.

MOMENT OF CLARITY

Whilst these regulations were welcomed,

If 2014 was a pivotal year for Turkish coal

smaller mining producers have struggled

mining on account of several notable

to cope with the new regulations that

mining disasters and the shutdown of

have led to increased labour costs

operations for small domestic mines, the

weighing on their profit margins. In line

Key modifications include a new

future is brighter. The government has

with the Omnibus Bill, a job security

permanent supervision system for the

demonstrated its commitment to the

expert, a doctor and health staff must all

transfer of mining licences controlled by

development of the burgeoning mining

be assigned to each mining project,

the Ministry of Energy and Natural

industry through the implementation of

piling up additional costs for smaller

Resources (MENR) which will increase

several changes to Turkey’s mining law

mining firms. Within a week of the

control over the transfer process and

(Law no. 3213) in a bid to unblock the

passage more than 36 mine owners

prompt greater consideration for

country’s notorious mine permitting

were forced to shut down operations, on

environmental concerns. Additionally,

logjam. On 17 February 2015 the

account of increased costs that have

licence areas can now be auctioned off

amended Mining Law (Law no. 6592)

under new modifications with the licence

the original law that was overburdened with administration obstacles and bureaucratic red-tape.

almost doubled as a result of tighter

was brought into effect marking a greater

regulations. Zonguldak province, in the

area boundaries, based on the continuity

level of flexibility for mining companies

heart of coal mining country in Turkey,

of mineralised areas. The amended law

operating in Turkey in comparison with

also ushers in greater protection for

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licence holders to retain their licence

will be welcomed by foreign investors,

personnel have been arrested and on 20

if they have started the application

change is on the horizon. For decades,

July, a state of emergency bill was

process, but have not yet fully obtained,

mining investors in Turkey have been

implemented, which critics of the

the necessary operating permits.

attracted by the country’s political

government argue will enable Erdogan to

Historically mining companies had their

stability and strong, stable government.

continue in his efforts to consolidate

licences quickly revoked beyond a

While other emerging markets displayed

power and will further distance Turkey

certain operating permit issuance

clear resource nationalist tendencies,

from Europe. However, Erdogan and the

timeframe. Furthermore, a new royalty

or significant political upheaval, Turkey’s

AKP will inevitably point to the significant,

framework has been introduced which

mining sector benefitted from the

and growing threats, from both Islamic

scales according to commodity prices.

stability of the ruling AKP government.

State and Kurdish separatist rebels to

The amended mining law paves the way for a more comprehensive legal and regulatory environment in the mining

The gold sector, in particular, has been

vindicate the decision to impose

transformed since 2000.

emergency rule. At this stage, the impact

However, on account of developments

on mining investors should be minimal.

sector. Ground turnover will be further

since 2014, Turkey has entered a period

While Erdogan’s increasing

encouraged, reducing the number of

of volatility which is only likely to intensify

authoritarianism is a concern, the country

areas currently sterilised to exploration as

in the short term and will lead to changes

needs decisive leadership if it is to

licence owners were previously allowed

in respect of Turkey’s political and

safeguard the economy in the face of

to hold ground at minimal cost by

security risk environment.

undertaking limited work. As a result, the mine permit process is expected to speed up, and encourage faster turnover. However, although Turkey has taken

On the night of July 15-16, Turkey stood on the brink of civil war as a rebel faction within the military sought to oust Erdogan. While the coup failed, the event

clear strides to improve the mining

has reinvigorated the President’s

regulatory environment and such moves

mandate. Thus far around 9,000 military

security threats. Turkey’s economic performance has been deteriorating since 2014; contrast this to the 8.8% economic growth seen in 2012. In 2015, growth was 4%, and this is set to fall to 3.5% in 2016. The currency has depreciated, inflation is on the rise, Erdogan has repeatedly interfered in


Central Bank monetary policy-making,

board, and Political Risk Insurance (PRI)

and the government has failed to

offers an effective safety net. Licence

address its large current account deficit.

cancellation, selective discrimination

Tourism numbers have also fallen

(such as tax hikes), currency inconvertibility

dramatically on account of a spate of

and transfer risks, expropriation of assets,

terrorist attacks over the last two years,

and loss of equity or default of debt as a

particularly in Istanbul. Investors may

result of strikes, protest risk, war risks, and

temporarily stall investment decisions

terrorism, can all be covered.

until the dust has fully settled in the wake of the failed coup; it is unlikely that we will see a significant reverse of the capital inflows seen since November 2015 after the AKP was returned to power with an outright majority.

GETTING PREPARED Turkey’s mining sector will continue to offer investors considerable opportunities, yet political volatility means that investors need to consider a broad range of country risks to stay ahead. Undoubtedly any decision to invest in an emerging market requires considerable planning, especially while political risks appear to be heightened across the

JLT Mining is an established global team with a strong client base across a range of commodities and risks. It is our commitment to our clients’ interests that sets us apart. We work hard to find robust solutions that preempt our clients’ needs and which anticipate the changing trends in the mining industry. This enables JLT Mining clients to improve their resilience, and position their business to continually secure new opportunities. Working with JLT Mining is a partnership. Our cross-class expertise stems from longtermrelationships with miners, contractors,traders, and mining financiers. We understand the project lifecycle from start to finish, and know where we can add value. We deliver products and services that provide a competitive advantage – particularly during hard times. This means that our clients stay with us because of the value we add, not just because we achieve competitive premium rates.

ContaCt Amy Gibbs Head of Global Mining +44 (0) 20 7558 3958 [email protected]

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