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#1 (17) 2017

Nikolai KAMENSKIY,

Geology means opportunity

 

We discuss the advantages and disadvantages of Kazakhstan’s move to the international mineral reserves reporting system, the shortage of staff, and the problems and outlook for geology with Nikolai KAMENSKIY, director of Two Key engineering and consulting company.

 

 

 

 

 

 

Mr. Kamenskiy, today your company is one of the best consulting and engineering service providers for Kazakhstan’s mining and geological companies. Your business has grown from a small team of only four associates to a large company with more than 100 employees. How did you get there?

 

 

 

When I graduated from Kazakh Polytechnic Institute in 1991, there were 250 geologists and geophysicists in our class. Our graduating class was the first to receive uncommitted diplomas. At that time, there was already a major system-wide crisis that left a lot of talented geologists without work. That was when I came up with the idea of forming a team of associates and setting up a consulting company.

In the early days, 80% of everything my colleagues and I were doing was for the first time. This was mainly due to new laws and new business areas focused on market relations. However, our reliance on skill multiplied by our employees’ strong work ethic has paid off.

As a result, Two Key LLP is actively expanding its engineering, consulting and exploration activities. We have departments specializing in field geologic exploration, drilling, environmental audits and radioecology, and we also have in-house mineralogical and analytical laboratories. The latter has received national and international certification. Today, our laboratory can analyze more than 50 elements of the Periodic Table.

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What projects does your company have in its portfolio?

 

We’ve recently been able to make real progress in many areas of our industry.

Two Key is currently in the process of designing one of the world’s largest uranium mines. We have successfully defended reports on reserve estimations for a total of more than 200,000 tons of uranium, 3 million tons of copper, 100 tons of gold, 70,000 tons of tungsten and 50,000 tons of molybdenum.

Over a period of six years, our exploration team has worked on uranium, gold, anthracite and polymetallic deposits, and has discovered several promising copper, tungsten, tin and polymetal structures on these sites.

Projects implemented by our company include open cast mining with output from several hundred thousand tons of ore per year to really big mines producing up to 20 million tons of ore per year. Just recently, we prepared and successfully approved an underground mining project. This is the first project for this type of mining, and we’re not stopping there.

 

 

 

Kazakhstan moved to the international mineral reserves reporting system and joined CRIRSCO with its own KAZRC standard in June 2016. What are the main differences in these systems, and what can we expect from these changes?

 

Both National Reserves Committee (GKZ) standards and the international standards have essentially the same objective: to confirm the reliability of reserves. However, we should be aware that the GKZ system is more developed and 50 years older that the most advanced standard in the CRIRSCO series.

It’s another issue that our system is not accepted in financial circles of the West on principle. I think this is deliberate. Imagine the following monologue:

Who signed the reserve estimate report for you? The chief expedition geologist? We don’t know him... If a Competent Person registered according to all the rules of international standards would have signed it, then of course we would consider this report. Where did you perform the analysis? In a laboratory operating according to national standards? No, we don’t trust it... But if you would have performed the analysis in an internationally accredited laboratory...

They don’t care that our chief geologists are usually better qualified that most present-day competent persons, or that our national standards are stricter than international accreditation.

A simple approach and based on a technicality. They won’t even consider these projects. I think all this is done in order to acquire the most assets for the least money. And if you want to sell your mining asset on the exchange, the approach will be something like this:

How much do you want for it? 33 million? No, we don’t trust you, although there might be something in it, we’ll buy it from you for half a million if you wish. No? You want 33? Do everything by international standards and then we’ll see.

Given this approach, of course we were right to move to international reporting standards. Now we can start talking to the international financial community in the same language, and you have to understand that this is only the beginning. Financial institutions will do everything possible to drive down prices and not pay the real price for our assets. What can I say? That’s the market for you.

There is obviously still much to do to make this institution work, and that includes endorsing our competent persons that we already have thanks to the formation of the Professional Association of Independent Experts in Subsurface Use (PONEN) in Kazakhstan. We need to advance our standard to international exchanges, and trust me, even though this standard is just about identical to JORC, this will be really difficult. I think we can say we’ve made real headway in this area only when international exchanges start allocating funds for construction and development of our projects signed by our competent persons. We have a long, hard road ahead of us.

 

 

 

 

Let’s discuss the pros and cons of moving to the new reserves reporting standards.

 

Moving to the new model has both advantages and disadvantages. The main advantage is that KAZRC will allow us to talk to the global market in a language they understand, and I hope this will help attract investors. Along with this, subsurface users will be less dependent on the government, because after moving to the new reporting system, the government will receive and unconditionally accept geological reports, including reserves reports prepared by competent persons. It will also not be entitled to reject them. It will be easier and faster for a subsurface user to decide whether to develop particular reserves by focusing on the project’s cost-effectiveness under specific economic conditions. This is really a leap forward in removing administrative barriers for mines that are already operating.

But this won’t make life much easier for a subsurface user. In the new system, you have to be much more cautious about choosing your consultants (competent persons). The old system had a code of strict rules and instructions and an independent expert assessment institution. As a result, the government recognized the reliability of resources signed by GKZ. Historically, GKZ was the government’s competent person, which at one time made recommendations to the government about whether or not to invest public funds in a particular project.

If GKZ declared reserves cost-effective and reliable, the State Planning Committee included this project in its development plan, and construction of mines, plants, and sometimes even cities started at these sites. If GKZ did not declare a project cost-effective, no one allocated funds for such projects. All international standards for public reserves reports include these principles of reliability and cost-effectiveness of reserves.

In the new system, everything comes down to risk and good faith of the owner of this site and the person who prepared this specific reserves estimation report, a competent person. There are no strict rules in this system, and everything is focused on the experience of specific competent persons. It’s a kind of game: I trust you –

 I don’t trust you. No one peddles their services. It’s all on you: trust or don’t trust a specific person or specific company that you hired. If you want to verify what they’ve explored and estimated for you, then hire other competent persons and they will do the verification. If you want to sell a site, go to competent persons; if you want to buy, do the same.

“Novice” subsurface users are at high risk of losing their money. However, the risk for asset owners who are not involved in company management also increases, but the risk is different.

Most hired managers (specialists in any occupation) work for their employers temporarily and are usually dissatisfied with their pay. Their goal while they’re at a specific site is to make a name for themselves and then find higher paying jobs. Usually it is they who order unnecessary re-estimations of reserves in order to explain to their shareholders that in this case, they can only operate on high grade sections. And for a while, the shareholders even receive excess profit from their activities, pay them the corresponding bonuses, and then the “hangover” sets in. The managers have made a name for themselves, have been paid bonuses, and then they leave for a bigger company for higher pay. Meanwhile, the shareholders are left with a site where everything valuable has been mined out, the remains are a large amount of reserves with low cost-effectiveness, and the question is “what do we do with all this?”

International reporting systems mean both greater opportunities and greater risks. Looking back, the worst scams have been carried under the authority of international standards. But if you’re lucky enough to find real professionals who will make discovery reliably and competently, and will prove its credibility to everyone, you can easily join the club of billionaires, having spent relatively little money.

In any case, you have to realize that geology is a risk, like a kind of roulette. Even when all satellite images in the world and geological and geophysical maps show that there should be a prospect here, there might not be. Or it may be where you expected, but not quite what you wanted. So all geological exploration is done in stages; and after each stage you need to stop and ask some simple questions:

1. Are there grounds for continuing further work that is usually more expensive?

2. Have we done everything possible to prove that the prospect may be here/already here/definitely not here and it’s useless to search?  Again, competent persons have to answer these simple questions (you have to realize that previously they were just called geologists and geophysicists with a lot of experience).