Mining in Iran and sanctions

MINING SECTOR IN IRAN AFTER MAY 8TH 2019

Mining Iran

In terms of geology, Iran is a land of promise. Well known for its oil and gas resources, the country is also among the largest reserve holders of many metal and industrial minerals, possesses diverse and abundant mines and is a top producer of several commodities like copper, iron ore, zinc, gypsum, feldspar, barite, bentonite and fluorspar.

Iran has an extensive mining industry, from exploration and extraction to processing, but the sector barely contributes 6% to the national economy, which remains highly dependent on hydrocarbon production. The Government has repeatedly announced its goal of increasing the share of the mining sector in the GDP and non-oil exports, but the territory is still largely underexplored, and important investments are required to unleash its potential.

Iranian Mining Sector: Competitive Advantages

The Iranian mining market combines highly attractive features and development capacities for private investors.

Stable Mining Regulation

The Iranian mineral sector is heavily controlled by the State through the Iranian Mines and Mining Industries Development Organization (IMIDRO), in charge of large-scale mines, and the Industrial Development and Renovation Organization (IDRO), acting in the mining industries.

However, many private companies are operating in the country, holding Exploration and Operation Licenses awarded under the Mining Act of 1998, as amended in 2011 and 2013.

Any natural or legal person having certain technical and financial qualifications may apply before the local office of the MIMT for an Exploration License in any unclaimed area, by proposing a minimum exploration plan.

An Exploration License grants the right to carry out geological and geophysical studies, including drilling and appraisal works, and requires the payment of an annual canon per square kilometer, which amount varies depending on the category or group of mineral substances.

In case of discovery, the Exploration License holder requests a Discovery Certificate, which is a letter issued by the MIMT confirming the existence of the discovery and the fulfillment of the committed exploration plan.

The holder of a Discovery Certificate may then apply for an Exploitation License, by submitting a proposed production plan and financial guarantees to the MIMT. The Exploitation License can be transacted, extended and mortgaged, providing a credit instrument in the market.

Protection to Investments

Iran offers a stable legal framework for the private investors through the Foreign Investment Promotion and Protection Act (FIPPA), which defines the modalities for foreign investments, including Direct and several types of project financing structures that have been successfully working in the country for many years, such as Civil Participation, Buy-Back, Counter Trade and Build-Operate-Transfer (BOT).

The FIPPA grants equal rights to foreign and local investments, allows imports, exports and remittance of benefits and capital abroad and provides guarantees and protection against discriminatory expropriation and nationalization. Iran is party to 58 Bilateral Investment Treaties (BITs) – including several European Countries like Spain – providing additional protection to certain nationals.

Regarding the ease of contract enforcement, including the arbitration clauses, the World Bank ranking assigns to Iran a score of 56/100, above the regional average for Middle East & North Africa.

Special Economic Zones (SEZ)

The SEZ are designated locations that enjoy customs exemption to facilitate export and import of goods and machinery related to a particular sector of the economy, considered as an investment priority. Additional advantages may also be applicable to each specific region, such as the granting of construction and completion licenses free of charge. Recently three new SEZs are being created and developed by IMIDRO) under the names of Parsian (located in Hormozgan), Lamard (located in Fars) and Kashan (located in Isfahan).

Strategic Location

Iran benefits from a unique geographical advantage for imports and exports, as a key region with direct and close access to multiple attractive markets in Asia, Middle East and Europe.

 

Energy, Infrastructure and Workforce

In a top oil and gas producing country, mining operations and industries have wide access to affordable energy. In terms of infrastructure, imports and exports enjoy the benefits of several ports and related facilities along the coast, equipped with logistics for oil exports. With a well-established mining sector, Iran also offers a qualified workforce at competitive cost for production operations and processing industries.

After the partial lifting of sanctions in October 2015 under the Joint Comprehensive Plan of Action (JCPA), known as the “Iran Nuclear Deal”, the Iranian Government seized the opportunity and launched a discourse of “open doors” to foreign investment that materialized in effective policy actions.

However, the increasingly complex scenario of international sanctions is putting Iran in a tight spot and forcing companies to a permanent re-evaluation of their strategies regarding the country. Despite all its potential, the mining sector is not stranger to the impact of the political scene.

Scenario: A Long Road of Sanctions

Iran has been subjected to sanctions all along its recent history, from the restrictions on properties and assets imposed by the United States following the seizure of the Embassy in Teheran in 1979 to the United Nations sanctions targeted at the Iranian nuclear and ballistic program in 2006, which were also adopted by the European Union in 2012. None of these sanctions aimed at the mining industry as such but only at certain materials (graphite, raw or semi-finished metals such as aluminum and steel) to the extent that they were integrated to industrial processes in the sanctioned sectors.

However, by impairing the international financial flows, they created a complex scenario for any company wishing to do business with Iran in virtually all sectors of the economy.

The Iranian Nuclear Deal (JCPA) reached in 2015 between Iran, the P5+1 (China, France, Russia, United Kingdom, United States as five permanent members of the United Nations Security Council plus Germany) and the European Union was a turning point that breathed life into the Iranian economy. In the mining sector, the JCPA removed the sanctions that prohibited investments in certain minerals and the related facilities and fields.

Government Policy: Opportunities

Encouraged by this favorable international context, on 19 March 2017 the Iranian Parliament approved the “Sixth Development Plan 2016-2021”. The Law entrusted the Government with the mission of attracting foreign investments in several sectors and encouraging joint agreements and partnerships between domestic and foreign entities. Based on these key guidelines, the Ministry of Industry, Mine and Trade (MIMT) launched strategic plans for exploration, mine reactivation, improvement of production efficiency and impulse to mineral processing and conversion of minerals to intermediary and consumer goods, to be achieved through “elimination of the restrictions and facilitation of the conditions” for foreign investments.

Not surprisingly, this combination of partial ease of sanctions and friendly Government policies had a positive effect on the mining industry. Along 2016 and 2017 some production-capacity expansion projects were activated, in certain cases with the participation of international companies, production grew, and exports of steel, aluminum, copper and other minerals rose.

But the favorable winds didn’t last long.

In October 2018 the United States withdrew from the JCPA, which meant the fully re-instatement of previously lifted direct and secondary sanctions on the financial sector and the most critical sectors of Iran’s economy, such as the energy, shipping and shipbuilding, which again included the minerals and semi-finished metals integrated in their processes.

Meanwhile the other stakeholders of the deal, mainly the European Union and China, remained “committed to the continued full and effective implementation of the nuclear deal” and adopted a supportive attitude in favor of Iran. In the case of the European Union, the support translated in the setting of financial tools that might ease the impact of the sanctions.

The tools, though, are still undeveloped and their effectiveness has not been verified yet. In the case of China, the support is an open trading with Iran, followed by other regional players like Japan and South Korea that resulted in a strong “Eastward shift” of Iran trade.

 

Latest Development: Another Turn of the Screw

On May 8, 2019 the United States took one further step in its “policy to deny the Iranian government revenue”. The Executive Order “Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran” of May 8, 2019 includes operations, transactions, transportation, marketing, supply of good or services and provision of financial, material or technological support in connection with the mentioned raw minerals and their semi-finished products. Any person or entity, including financial institutions, engaged in these activities will have a 90-day period to wind-down those transactions with exposure to sanctions.

The real impact of this recent decision is difficult to assess in advance, as there are almost no precedents of sanctions applicable specifically to the mining sector. The experience on sanctions to any other sector allows to anticipate that they will generate volatility in the domestic and international markets and cripple the planned investment policies in mining.

With the Iranian mining sector now subjected to an unprecedented pressure, companies are in a difficult position and should maximize caution. Whether they are carrying out operations with Iran or Iran-related parties or evaluating a prospective operation or transaction, they should tighten their compliance programs to ensure full periodic screening of counterparties and a permanent update of the regulation database. Also, contractual standards should be designed, as tools capable to provide protection against sanctions in clauses such as conditions precedent, termination clauses, representations and warranties, and indemnities.

By adopting a risk-based approach to sanctions, with a compliance program adapted to its business profile, characteristics, location and operating markets, a company may not only identify risks and implement mitigation strategies but also recognize opportunities such as access to new markets, local synergies and product diversification.

Conclusion

Iran is endowed with extensive mineral resources and its mining industry presents many features that may attract the investor’s interest, including favorable Government policies, stability in laws and regulations applicable to foreign investments and mining activities, proximity to markets, access to energy and infrastructure and competitive advantages in workforce.

In the past, Iran has already given proof of its resilience to challenging international scenarios. Any company wishing to operate in the Iranian business environment should run a comprehensive risk analysis, which may not only disclose exposures but also reveal opportunities for those investors that are able to adopt appropriate mitigation strategies.

For more information regarding the present status of US sanctions, EU policies and their consequences please follow this link: https://bit.ly/2CZi1JK


Authors: Qazale and Marina Paradela