Sunday, 23 September

Is the Alaverdi Copper Foundry On the Verge of Closing?

An interview with Gagik Arzumanyan, Executive Director of the Armenian Copper Programme (CJSC)

- When was the last time the Ministry of Environmental Protection conducted an inspection of the Alaverdi copper smelting facility?

 - An inspection of the copper smelter was last made in 2004, when the mine wasn’t in operation. There were no major violations of the environmental codes found.

Even though mining operations were suspended at the time there was some disagreement with members of the Ministry team regarding the copper content of the ore. We accepted the findings of the Ministry and paid natural resource extraction fees based on their figures. Thus, the dispute was settled. Regarding the operations of the copper smelter, if environmental violations are found to exist, we pay all amounts as prescribed by law. The law does not strictly forbid emissions in excess of the maximum permissible limits, but rather defines penalties in case of such emissions. Until July 1, 2005, the fines imposed for emissions exceeding such levels were charged on threefold amounts, after that fivefold and even tenfold amounts, depending on the extend of exceeding the limits.

 - What do these payments amount to yearly?

 - Every quarter we pay between 32-33 million Armenian drams in emission fees. As a result of the changes to the law effective July 1, 2005 our payments have tripled. In essence, fees for emissions exceeding maximum permissible limits were increased ten fold. But taking into account the fact that the same law envisaged the establishment of temporary emission limits according to a certain timetable, we signed an action plan with the Ministry, which obligates us to cut emission levels by a minimum of 70% as of January 1, 2009. If we fail to meet this obligation, our emission fees will increase accordingly; by about 2.5 times. Until the increase our emission fees totaled 10-12 million drams per quarter.

 - According to this action plan, in order for emissions to be cut you must install certain necessary equipment. Will you do so and, in general, what environmental protection plans will you implement?

 - As far back as 2002, when we signed a loan agreement with the European Bank for Reconstruction and Development (EBRD), we also agreed to an environmental action plan. There were both short-term and midium-term measures planned, about twenty in all. These have been defined based on the company’s environmental audit conducted by Hatch Associates Limited, a well-known Canadian firm selected by the EBRD. This study has pinpointed all problem issues needed to be addressed and the remedial measures to be taken. Based on that, an environmental action plan has been agreed upon in conjunction with the EBRD. One of the measures under the action planwas to investigate possible long-term solutions to the major environmental problem we've been facing.

We’ve implemented a series of short and midium-term measures. For example, measures like cleaning the area from scrap materials or storage of unused equipment in confined spaces, issues which never before received proper attention. There are measures ranging from the monitoring of the atmosphere, the dust content in the soil, to water monitoring. We’ve created a closed water circulation system as well. In the past, this water would have been dumped back in the Debed River. One of the short-term measures relates to work safety. According to the measures agreed with the ERBD, every quarter we purchase protective gear for the workers (safety glasses, gloves, hardhats, etc).

As for longer-term objective of substantially cutting emissions, we’ve studied a variety of options. Conventionally, copper smelters around the world have solved this problem by producing sulfuric acid. There are two main drawbacks to adapting this process in Armenia. The first deals with the capacity. Alaverdi is one of the world’s smallest copper smelting facilities, which does not produce enough and stable flow of sulfuric gases to produce sulfuric acid. The small-scale production capacity also results in the content of sulfur in the gases not being sufficient to produce sulfuric acid with the processes known.

The second major obstacle we face is that of transportation. Most of the sulfuric acid produced in the world is used in producing fertilizers. Copper smelter have to produce sulfuric acid in order to ensure a clean production process and large scale efficiencies. However, since it’s not possible to store large quantities of sulfuric acid, as opposed to other industrial products, one needs a guaranteed market for the sulfuric acid. At current capacity of the smelter, we’re talking about producing some 35-40,000 tons of sulfuric acid. In the best of circumstances Armenia’s domestic market could only consume some 10,000 tons of product. Sadly, there’s no long-term market for sulfuric acid in the region either.

 - Couldn’t Georgia serve as a market?

- The Rustavi Fertilizer Factory in Georgia has indicated an interest in the use of sulfuric acid. Right now it imports sulfuric acid from Azerbaijan. So far, nothing more than a tentative interest has been identified.

 - How much can Armenian possibly consume?

 - We were hopeful that the Vanadzor chemical plant, once up and running, would need to consume large amounts of sulfuric acid. These hopes haven’t been realized. We’re constantly on the lookout for potential answers. One option we’re investigating is leaching, a process that accounts for about 20% of the world’s copper production. This process essentially uses sulfuric acid but a certain type of oxide ore is required. We know that in Armenia this type of oxide ore is available at least at Teghout and at Kajaran. There’s only a limited amount of oxide ore at Teghout, some 30 million tons at best, with a very low copper content of 0,2%.

We have requested that the Mining and Metallurgy Institute conduct metallurgical testwork to ascertain within what parameters would it be possible to extract copper from ore containing 0,2% copper, using leaching. We’ll know the final findings some time in September.

Another possible option is that sulfuric acid is used to restore saltedlands. While such areas exist in Armenia, the scale involved wouldn’t justify this as a long-term solution.

One other avenue that we’ve studied for quite some time is a non-conventional in its approach. We’ve even developed a project that has passed the due-diligence of the European Bank. It involves utilizing sulfuric gases to produce gypsum. However, independent marketing research has identified that in three years from now the market for gypsum in Armenia will not exceed 12,000 tons per annum. This compares to up to 100,000 tons of gypsum that could be generated annualy at current copper production levels. Markets in other countries are closed to us. Georgia imports large amounts of high quality gypsum from Turkey. In other words, we can only include the Armenian market when it comes to making decisions.

What all these means is that if we will not be able to come up with long-term sustainable solutions to the environmental problem of the smelter, it may be possible that we would have to shut down copper smelting operations as of January 1, 2009. In that case we’d have to retrain some of the smelter workers. Some workers would be transferred to the Alaverdi mine and processing plant as these operations are developing at favorable rates. I’m convinced that large-scale operations will concurrently commence in Teghout, resulting in a large labor demand.

When copper production levels in Armenia would reach tens of thousands of tons annually, then construction of a new, modern and higher-capacity copper smelter might be justified. It has to be taken into account also that in the last couple of years  the copper processing market has changed fundamentally. Previously, the market was treating copper smelters as continuation of the copper production chain; those engaged in copper mining were prepared to share their profits with the smelter through price participation. In other words, the smelter received certain percentage of copper price, in addition to fixed treatment charges. This meant that at low prices smelters earned fixed minimum revenue,while at high prices they were earning additional revenue as a share of copper price. Due to increasing shortage of copper concentrate in the market resulting mainly from demand in the Chinese market, the price participation has gradually eliminated.

Given that new smelters being constructed throughout the world have a minimum production capacity of 200,000-250,000 tons, Armenia cannot be competitive with its 10,000-ton smelter in the long run. We might be competitive with production capacities of some 100,000 tons. We’re aware of the intention of our southern Armenian partners to build a copper smelter. We’d be pleased to see it become a reality. It would give our top metallurgists the opportunity to continue working in their professional capacity, in case, God forbids, we’d be forced to close the doors of our copper smelting facility.

 - If you halted operations, would you sell off the concentrate on hand?

 - Today we only account for a smaller share total concentrate being produced in Armenia. Other companies produce most of the copper concentrate. Armenia exports most of the concentrate it produces, while we buy significant part of it. If the Alaverdi operation shuts down, then the Zangezour Copper Molybdenum Combine and other producers will have to export all the concentrate they produce.

We must also take into account the fact that it a ton of copper costs more to transport in the form of concentrate from Kajaran to Alaverdi than to transport in the form of blister copper from Alaverdi to Europe, as bizarre as this may appear. Domestic transportation costs are quite high, both in terms ofrail freight costs and quality, as well as the time it take to get to destination.

 - Under the action plan agreed with the Government, first stage of the emission reduction program was planned for the end of 2007.

At that time we were considering wet scrubbing process resulting in gypsum production, which was to achieve 10% reduction in emissions in the first phase and by 70% in the second. It is now clear that this will not be road we’ll be taking.

 - How would you evaluate your plant’s environmental situation?

 - Let’s separate the situation at the copper smelter, where we do have major environmental problems, and we make no secret of that. If we will not be able to solve these problems, we’ll be forced to shut down the copper smelter; hopefully only on a temporary basis. 

 - Are environmental concerns taken into account in Armenia’s mining sector?

 - It’s my belief that firms engaged in mining inArmenia have yet a lot do to fully integrate environmental concerns into theie operations. Today our company is cooperating with one of the leading global mining companies, and despite the fact that our production facility in Drmbon is considered to be one of the most environmentally friendly plants inArmenia, we can feel the need to learn more from the best international experience.. In part the fact that environmental concerns are not properly accomodated could be explained by the tendency to overlook environmental issues and focus solely on economic developmentwhen a country is in a crisis situation. But I’m happy to see that environmental issues are gradually being given the attention they deserve.

Instead of Stimulating Exports, the Government is Punishing the Exporter

- Other than environmental issues, what problems does the Armenian Copper Programme face?

 - Apart from the environmental issues, there’s another serious problem in our operations related with the refund of Value Added Tax (VAT) to exporters. Presently, the government owes us the equivalent sum of more than U.S. $5 million. This year alone the amount of the debt owed us by the government increased by some U.S. $3.5 million. 

In other words, during the past eight months of this year we’ve given the government a non-interest bearing loan for that amount and we haven’t a clue when we’ll get the money back. Let’s remember that we’re referring to the copper smelting facility which, and I repeat, operates with a small profit margin, as opposed to mining companies. Despite the paltry profits it realizes, it’s obligated to pay indirectly to the government several times larger amount in the form of VAT paid to suppliers. Given the fact that it is unpredictable when and at what amount the actual refund will take place, it’s apparent that this issue is a serious obstacle to our development.

Even if we increase production ten fold, in the best-case scenario annual profits of the smelter will amount to U.S. $7-8 million. How can you expect a company to survive in those conditions when the government is in debt to the company to the tune of U.S. $5 million? I can supply you with an interesting fact. When we received the first portion of our loan from the European Bank in December 2002 the amount of the government’s debt to us was about U.S. $100,000. In December 2006 when the loan was repaid in the amount of U.S. $4.5 million, the government owed us more than U.S. $4.5 million. In essence, we were borrowing money from an international financial institution in order to give the government a non-interest bearing loan. I consider this to be the biggest administrative problem of our country. The government has failed to ensure the implementation of the laws to refund to exporters the VAT. Given all this, it’s pointless to even ponder the implementation of serious projects which imply downstreat integration, when profit margins norrow thus necessitating tighter control over cash flow and VAT refunds in particular.

Another problem in our operations deals with the tariffs on natural gas. About third of our processing costs are natural gas expenses. Just imagine the consequences if natural gas prices were to increase by three-fold. It’s clear that the copper smelter, at least at its current shape, couldn’t be operational given those conditions. There are other factors at play as well which taken individually could have a major negative impact on the running of the smelter.

I can honestly say that in the absence of other factors, the issue of VAT refunds alone is enough to halt copper smelting operations in Armenia and suspend projects aimed at further processing of products domestically. If all of what we produce were sold in Armenia the copper smelter wouldn’t face this problem. It appears that instead of stimulating exports, the government is punishing the exporter.

Since 2002 we’ve had disagreements with the tax authorities regarding the amount of tax overpayments, even resulting in judicial inquiries of the matter. The tax authorities have groundlessly denied the return of a certain portion of these amounts under the interesting pretext that these sums require “further clarification”. While the tax authorities don’t dispute these amounts, the matter is in their hands and they’ve been “reviewing” the issue for several years now.

For the time being let’s put aside the fact that as opposed to all other taxpayers, exporters are subject to monthly visits by the tax authorities who conduct audits of all pertinent financial data. Even in these circumstances, where the most subjective of factors come into play, the return of VAT over-payments can be denied or postponed. Here, the objections of exporters are overlooked as a matter of routine.
I’m convinced that until the moment the government starts incurring penalties for delaying the refund of VAT, the issue will remain unresolved. This policy is applied in many other countries. If a company is late in paying its taxes, it must pay some fines. Here, the government hasn’t paid its obligations for years without incurring any legal or financial penalties.

The most frightening aspect of the entire issue is unpredictability. Today, for instance, I couldn’t tell you the amount of money we'll be refunded this month. However amazing it may seem, it’s all dependent on one thing - whether the Tax Department can fulfill its revenue collecting obligations. If it can guarantee the necessary revenue streams to meet the budgetary targets then the excess funds will be returned to the exporters. If, on the other hand, it fails to meet monthly revenue target, it’s first of all the exporters who wind up paying the balance by postponing the return of their tax overpayments. In essence, the return of these VAT overpayments is made on a residual basis. Exporters receive returns according to the degree to which the collection of revenues has been realized, and not many other things matter in this respect.

- In other words, is operating a business in Armenia both risky and unprofitable?

- Any business that sets its sights on the on the foreign market, that operates with a large turnover and small margins, is in an extremely precarious position. Putting all other obstacles aside, here I’m talking about the fact that the resolution to the matter rests within the jurisdiction of the government and that the law demands such a resolution. If the law stipulates that such overpayments be returned, then so they must be.

- Has the appreciation of the Armenian Dram had any impact on your company’s performance?

- Its impact has been quite serious indeed. According to our figures, because of the appreciation of the Armenian Dram vis a vis US Dollar we’ve experienced a $2 million drop in annual profits as compared to 2003. I’m referring to the Armenian Copper Programme only. The other company of Vallex Group, Base Metals CSJC, has experienced relatively greater losses since only a tiny portion of its costs is dollar-denominated. It’s been the unprecedented sharp rise of metal prices at international markets that has somewhat compensated this damaging impact of currency appreciation for mining companies Base Metals. Without this strong price increase for metals, especially in the case of copper, molybdenum and gold, the situation for mining companies would have been disastrous.

- How would you evaluate the state of the mining industry sector in Armenia today?

- It’s a matter of fact that presently the mining industry is the largest contributor to the overall economic growth and has the best prospects for long-term development when compared to all other sectors.

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