JOHANNESBURG (miningweekly.com) – The agreement reached between Iran and world powers in Vienna, Austria, in July over the country’s nuclear programme is reopening the Iranian economy to global trade and investment after ten years of international sanctions against the country.

US-based think-tank the Council on Foreign Relations (CFR) recounts that the US, the United Nations (UN) and the European Union imposed multiple sanctions on Iran for its nuclear programme since the International Atomic Energy Association (IAEA), the UN’s nuclear watchdog, found in September 2005 that Tehran was not compliant with its international obligations.

“The US spearheaded international efforts to financially isolate Iran and block its oil exports to raise the cost of Iran’s efforts to develop potential nuclear weapons capability and bring its government to the negotiating table,” the CFR says.

However, Iran agreed to restrictions on its nuclear programme and intensive inspections in the agreement signed with China, France, Russia, the UK, the US and Germany on July 14.

The CFR explains that, under the agreement, many of the most punishing sanctions are poised to be lifted when the IAEA verifies that Iran has taken steps such as reducing its stockpiles of fissile materials and centrifuges.

“Still, some sanctions are unrelated to nuclear proliferation and will remain in place,” the CFR points out.

Nonetheless, Iran-based business services company Iran Europe Industrial & Trading Group marketing and sales senior manager Hooman Khajehnasiri tells Mining Weekly that since the agreement was reached, many mining company executives have been visiting Iran to find out about opportunities in the country.

He predicts that there will be a significant increase in the number of mining projects that Europe- and even North America-based companies undertake in Iran in the coming months, particularly owing to the ability of these companies to raise finance for such projects.

The lifting of sanctions will also enable companies to import mining and mineral processing technologies, as well as general equipment, to Iran with less administrative and legal challenges, which will assist in improving the productivity of existing mining operations, he adds.

However, research firm BMI Research commodities analyst Mitchell Hugers says the lifting of sanctions will take at least three to five years to have a positive impact on Iran’s mining sector growth.

“The most immediate impact will be the rise of the country’s steel imports, as domestic production will be unable to cope with growing demand,” he states.

Hugers adds that BMI has a positive outlook for Iran’s mining sector, as the country hosts more than 68 mineral types, including considerable deposits in coal, iron-ore, copper, lead, zinc, chromium, uranium and gold, with more than 37-billion tons of proven reserves and 57-billion tons of potential reserves.

According to the US Geological Survey (USGS), Iran holds the world’s largest zinc, the ninth-largest copper, the twelfth-largest iron-ore and the tenth-largest uranium reserves. The USGS also notes that Iran has more than 7% of global mineral reserves.

“The country’s mineral wealth makes it an attractive investment and mining destination for companies,” Khajehnasiri asserts.

Hugers further notes that Iran’s mining industry will also benefit from continuing government support, as government has implemented a 20-Year Vision Plan to attract $2-billion into the mining sector to achieve production targets in the country.

BMI forecasts that the value of Iran’s mining industry will increase from $79.4-billion in 2015 to $95.5-billion by 2019, which represents an average growth of 0.5% year-on-year.

Challenges

Hugers says that growth in Iran’s mining sector will be capped because of factors such as Iran’s investment appeal remaining limited, owing to widespread corruption and an inefficient bureaucracy.

Further, he notes that international sanctions have crippled the country’s business environment, which will limit new investment freely entering the country.

He adds that the legacy of years of mining underinvestment and industry consolidation will also limit the sector’s growth over the coming years, owing to the low levels of current investment and the ageing infrastructure of most mining firms in Iran that can operate only at 50% to 60% capacity.

Hugers also believes that the highly consolidated nature of the Iranian mining industry, consisting primarily of local and State-owned miners, will limit new miners from entering the market.

He points out that the country’s steel production sector is dominated by three large companies, namely Mobarakeh Steel Company (46% market share), Khuzestan Steel Company (23% market share) and Esfahan Steel Company (20% market share).

Khajehnasiri acknowledges that government is heavily involved in the main mineral resources sector, with the majority of the mines being State-owned (70% to 100%), but adds that government has, over the past two years, attempted to develop the sector through private and foreign investment. This has resulted in several privately owned or public–private joint venture mines opening in Iran.

Beneficiation and Industrialisation Push

Khajehnasiri says the Iranian government is focusing on iron-ore beneficiation, particularly pelletising projects through iron-ore fines to boost Iran’s downstream steel sector.

“We have several projects under way throughout Iran, with a capacity to produce between 1.2-million tons and 5-million tons of iron-ore pellets a year. These projects are critical to ensuring the future of Iran’s local steel manufacturing sector.”

This focus is partly because Iran has traditionally imported iron-ore pellets and government wants to create upstream business opportunities for locals and create less reliance on imported iron-ore pellets, he adds.

Khajehnasiri tells that iron-ore miners in Iran have in the past predominantly exported raw material without undertaking any form of local beneficiation. “However, since June 2014, government passed a series of laws to significantly increase tariffs on exported, unprocessed iron-ore fines by up to 30% to encourage local processing.”

Therefore, miners have, in essence, been forced to beneficiate iron-ore fines to create value-added products that can be used mostly in the local steel sector or even exported.

Further, the Iranian government’s 20-Year Vision Plan targets the production of at least 55-million tons of crude steel by 2025.

Iran Industry, Mines and Trade Minister Mohammad-Reza Nematzadeh says this goal is “easily achievable” and requires the mining and steel sectors to produce a minimum of 80-million tons of iron-ore concentrate and pellets, as well as 58-million tons of direct-reduced iron during this period.

Oil and Gas

BMI senior oil and gas analyst Christopher Haines says BMI has adjusted its Iran crude oil and condensates forecasts upwards to take into account the stipulations of the Vienna Agreement.

BMI predicts Iranian production to increase from March 2016 and is factoring in the ramp-up of 600 000 bbl/d by the end 2016 because of the reopening of shut-in wells and fields.

“All new production will be earmarked for exports, in addition to volumes released from storage. Iran will be able to increase crude oil and condensate exports by a maximum of 700 000 bbl/d by the end of 2016,” he states.

Although BMI also predicts significant upside for Iranian oil production after 2017, it is not factored into the company’s current forecasts because it will depend on the scale of international oil companies (IOCs) returning and the pace at which they return to the Iranian energy sector.

Strong Upside Risk

Haines says Iran’s oilfields are very mature, with more than 60% of oil production coming from oilfields developed more than 60 years ago.

“Decades of underinvestment, difficulty in accessing technology and restricted finance have resulted in particularly low recovery rates of between 20% and 30% at existing fields.

“[D]rilling new wells in existing fields and the increased application of improved . . . and enhanced oil-recovery methods will be a priority for government as a way to boost production capacity in the short to medium term,” he explains.

Clarification on contract negotiations and the terms offered by the Iranian government will be a crucial determinant in gauging demand and participation by foreign IOCs, Haines adds.

He notes that Iran remains a high-risk market for investors from a broader operational and political risk perspective.

“Notably, sanctions can be snapped back, should Iran deviate from the agreement. The risk of the agreement breaking down will be higher from 2017, with Presidential elections scheduled to take place in Iran and the US in that year. There are significant risks on the Iranian side, as uncertainty could cause a slower uptake in oil contracts and IOC interest,” Haines concludes.