Saudi Arabia's Mining Investment Environment and Policy Changes

Saudi Arabia is one of the countries with the richest oil and gas resources in the world, and is the second largest oil producing country in the world. Oil and gas are the backbone of Saudi Arabia's national economy. In 2018, oil revenue accounted for 67% of government fiscal revenue, 43% of GDP, and 78% of trade exports. However, since 2014, international oil prices have remained low, leading to a shortage of foreign exchange in Saudi Arabia and an economic downturn. By 2019, Saudi Arabia had a huge fiscal deficit for six consecutive years. Saudi Arabia's foreign exchange reserves decreased from a peak of 2796.9 billion riyals in 2014 to 1701.2 billion riyals in December 2020.
In 2020, the COVID-19 broke out, the global oil demand dropped sharply, the Saudi oil economy worsened, the oil revenue plummeted, and the finance faced severe challenges. The severe economic reality and enormous financial pressure have forced the government to accelerate the pace of economic transformation and reform.
Saudi Arabia introduced the "Saudi Arabia 2030 Vision Plan" (hereinafter referred to as the "2030 Vision Plan") and the "National Transformation Plan" in 2016 to overcome its excessive dependence on oil and gas in the economy. Strengthening mining development is one of the core contents of its transformation and economic diversification.
In recent years, Saudi Arabia has made a series of adjustments to its mining policies, and in September 2019, a new Ministry of Industry and Mineral Resources was established; In January 2021, the revised Mining Investment Law (hereinafter referred to as the "New Mining Law") officially came into effect; Provide multiple channels for mining financing; Simplify investment procedures and improve investment environment. Taking multiple measures to enhance the boosting effect of non energy mineral development on the Saudi economy, we are committed to developing the mining industry into the third pillar industry after the oil, gas, and petrochemical sectors. Saudi Arabia has abundant mineral resources, but the level of development is relatively low.
Overview of Mineral Resources
Saudi Arabia is one of the countries with the richest natural resources in the Middle East region. As of the end of 2019, its confirmed oil reserves were 409 × 108t, ranking second in the world; Confirmed natural gas reserves of 6 × 1012m3, ranking sixth in the world; Phosphate reserves of 14 × 108t, ranking sixth in the world; Bauxite reserves 2 × 108t; Metal minerals such as gold, copper, silver, iron, chromium, zinc, tantalum, and uranium, as well as non-metallic mineral resources such as limestone and gypsum, are abundant and distributed in desert and mountainous areas, mostly in near surface layers. However, due to its low level of geological work, the specific values of national resources and reserves are currently unclear.
As of the end of 2018, Saudi Arabia had discovered a total of 5574 mining areas, of which 54.5% were non-metallic minerals and 45.5% were metallic minerals. The metal mineral resources are mainly developed within the Arabian Shield, and are relatively concentrated in the southwest of Saudi Arabia and the Red Sea coast. Oil and gas resources, as well as industrial mineral resources such as gypsum and feldspar, are mainly distributed in the sedimentary strata of the Arabian Plateau in the eastern part of the country.
The Saudi government estimates that the total value of unexplored mineral resources in the country exceeds 5 trillion Saudi riyals.
Current status of mining development
Due to the low level of geological work, mining development in Saudi Arabia is still in its early stages. As of the end of 2018, a total of 2045 mining licenses have been issued. The mining development projects currently underway in Saudi Arabia are mainly focused on phosphate, iron, bauxite, gold, and zinc. The mining development is mainly controlled by state-owned companies such as Saudi Mining Company (Maaden) and Saudi Basic Industries Co., Ltd.
The overall level of mining development in Saudi Arabia is relatively low, and its mineral production accounts for a small proportion of the world. Apart from oil and natural gas, it currently mainly produces phosphate, gypsum, aluminum, gold, silver, iron, copper, zinc, etc. It is the seventh largest phosphate producing country and the ninth largest bauxite producing country in the world.
Most of Saudi Arabia's mineral production comes from Saudi mining companies. Saudi Arabian Mining Company is the main mining company in Saudi Arabia and the largest mining company in the Gulf region. The company was established in 1997 and its main business includes gold, non-ferrous metals, phosphates, etc. As of the end of 2018, Saudi Arabian Mining Company operated 12 mines, 4 exploration projects, and 2 industrial complexes within Saudi Arabia.
Changes in mining policies
Mining is the key for Saudi Arabia to break away from its excessive dependence on oil and gas and achieve economic diversification. As part of the 2030 Vision Plan, Saudi Arabia is committed to enhancing the role of mining in boosting the economy. In September 2019, a new Ministry of Industry and Mineral Resources was established; In January 2021, the "New Mining Law" officially came into effect, aiming to develop the mining industry into the third pillar industry after the oil, gas and petrochemical sectors.
Reform of mining regulatory agencies
In September 2019, Saudi Arabia separated the mining industry from the energy sector and established a new Ministry of Industry and Mineral Resources. The Ministry became completely independent from January 1, 2020, and its main responsibilities include: ① formulating mining policies and supervising their implementation; ② Responsible for the public bidding of mining rights; ③ Manage matters related to the application, issuance, renewal, transfer, and termination of mining rights; ④ Supervise the exploration and mining activities of mining rights holders and curb illegal activities. The Ministry of Industry and Mineral Resources will establish and lead a permanent committee, led by the Minister of Industry and Mineral Resources, and organize at least 15 members from the Ministry of Energy, the Ministry of the Interior, and other government departments to participate in order to strengthen cooperation among major government agencies involved in mining activities, support and promote the implementation and enforcement of mining laws. In addition, the Ministry of Industry and Mineral Resources will formulate and publish detailed rules for the implementation of the Mining Law, refining various provisions of the Mining Law.
Revise the Mining Investment Law
In June 2020, the Saudi cabinet approved a new mining law aimed at promoting financing for investors and supporting geological surveys and mineral exploration activities, attracting foreign mining investment. The new mining law consists of 8 chapters and 63 articles, mainly including definitions, mining activity permit areas, basic principles of mining permits, rights and obligations, financial regulations, illegal activities, and punishment measures. Compared to the old mining method, the new mining method has multiple modifications and presents some new characteristics.
(1) Implementing classified management of mineral resources
The new mining law divides mineral resources into three categories for management: A category is for metallic, precious and semi precious metal minerals, B category is for non-metallic, industrial minerals and raw materials, and C category is for building materials. There are differences in license application and fee payment among the three types of mineral resources.
(2) New adjustments in mining license application
One is to add a general license and extend the validity period of some licenses. The new mining law allows for the application of a general permit for the land surrounding the mining permit for the construction of mining engineering facilities, in order to facilitate mining activities. At the same time, the validity periods of exploration permits, mining permits, and building material mining permits have been extended. The validity period of exploration permits can be extended up to 15 years, the validity period of mining permits can be extended up to 60 years, and the validity period of building material mining permits can be extended up to 15 years.
The second is that the application sequence for mining rights is based on the application time. According to the old mining law, multiple applications for the same type of permit in the same mining site, the applicant's capital and technical capabilities, contribution to national fiscal revenue, and other preferred conditions stipulated by law are all conditions for reference in the arbitration. According to the new mining law, multiple applications for the same type of license in the same mine will be judged based on the application registration time, provided that they meet the corresponding economic and technical conditions, pay the license application fee, and other application conditions stipulated by law.
The third is to further tighten the scope of license applicants. According to the old mining law, both natural persons and corporate entities can apply for mining licenses. The new mining law has tightened the scope of permit applicants, stipulating that except for survey permits, other mining permits can only be granted to legal persons.
The fourth is to increase the types of land allowed for mining activities. According to the old mining law, land planned for water conservancy projects, public facilities, military facilities, or agricultural projects cannot be granted licenses. The new mining law has relaxed this requirement, stipulating that public facility land, tourist destinations, historical sites, archaeological areas, wildlife reserves, pastures, forests, and national geological parks can be granted survey permits, and after obtaining permits from relevant government departments, exploration and development permits can be granted.
(3) Further simplification and extension of license mortgage procedures and rectification deadlines
One is to further clarify and simplify the license mortgage procedure. The New Mining Law stipulates that without obtaining written permission from the Ministry of Industry and Mineral Resources, exploration and mining licenses can be mortgaged. The holder of the license (i.e. the mortgagor) shall register at the license registration office of the Ministry of Industry and Mineral Resources before the mortgage becomes effective. At the same time, the New Mining Law also clearly stipulates that survey permits cannot be mortgaged. The second is the extension of license arrears and rectification period. The new mining law will extend the overdue period for permits from 90 or 150 days to 180 days, and the environmental protection rectification period from 60 days to 180 days.
(4) Strengthen support and services for mining activities
One is to establish a national geological database and share geological data. The Ministry of Industry and Mineral Resources will cooperate with the Saudi Geological Survey to establish a national geological database and provide mining investors with maps, data, research reports, and other materials. The new mining law has relaxed some confidentiality provisions for geological reports, clarifying that geological reports within the validity period of the license can be automatically decrypted after 5 years and can be publicly disclosed.
The second is to establish a mining fund and a service company. The Ministry of Industry and Mineral Resources will establish a mining fund to provide financial support for the development of mining, as well as financial support for geological surveys and exploration projects. The funds mainly come from license fees, service fees, fines, surface rent, bidding income, donations, etc. At the same time, one or several subsidiary companies will be established to provide services for mining related activities, and the company's funds will come from the mining fund.
The third is the expansion of the discretionary power of the Minister of Industry and Mineral Resources, who can negotiate with the Minister of Finance to waive some fees.
(5) Higher requirements for mining development
Firstly, the cost of illegal and irregular behavior has increased. According to the old mining law, any illegal or irregular survey or development activities will result in a fine of no more than 100000 rials, and all ores and their products, as well as the tools and equipment used, will be confiscated. The new mining law imposes stricter penalties on illegal and irregular behaviors, and clarifies that for multiple illegal and irregular behaviors, the punishment measures can be stacked: each violation is fined less than 100000 rials; Terminate mining activities; Revocation of license: No new license can be applied for within 3 years after the license is revoked; Confiscate equipment and tools involved in violations.
The second is that environmental protection requirements are stricter. The new mining law requires that permit applications should be accompanied by environmental and social impact reports, as well as feasibility reports to promote local community development, and requires mining permit holders to provide economic guarantees: ① Mining permits, small-scale mining permits, and general mining permit applications should be accompanied by environmental and social impact reports, as well as mine restoration and closure plans. ② The application for mining license and small-scale mining license should be accompanied by a commercial feasibility report on how to support local community development, localization, and sources of funds for mine restoration and closure The exploration permit and the building materials quarry permit should be accompanied by an environmental impact management plan and a social impact management plan The holder of the mining permit should provide economic guarantees for the restoration and closure of the mine.
Optimization of investment environment
Saudi Arabia is striving to improve its investment environment, vigorously attract foreign investment, and promote privatization reform. In the 2030 Vision Plan, the proportion of foreign direct investment in GDP will be increased from the current 3.8% to 5.7%, and the contribution of the private economy to GDP will be increased from the current 40% to 65%. Therefore, Saudi Arabia has implemented a series of measures to lower the entry threshold for foreign investment and encourage the development of the private economy. The Global Business Environment Report 2020 released by the World Bank shows that among 190 economies worldwide, Saudi Arabia's business convenience index jumped 30 places to 62nd place in 2020, making it the economy with the most significant improvement in the global business environment.
Increase investment in infrastructure
Since 2017, the Saudi government's infrastructure and transportation budget has significantly increased, with a compound annual growth rate of 12.5% by 2020. In 2020, despite the outbreak of COVID-19, infrastructure and transportation expenditure will still exceed 2019. As of the third quarter of 2020, infrastructure and transportation project expenditures had reached 38.4 billion riyals, including the development of over 2000 kilometers of new roads, expansion of airports, and upgrading of port infrastructure. At the same time, Saudi Arabia has simplified the power connection and installation engineering, and processed new power connection requirements through geographic information systems, making electricity access more convenient.
Strengthen financial support
In July 2019, Saudi Arabia expanded the authorization scope of its $28 billion Saudi Industrial Development Fund to allow financing for energy, logistics, and mining projects. Previously, the fund was only aimed at local manufacturing enterprises. From then on, Saudi companies can apply for multi-purpose term loans and acquisition financing, and foreign joint ventures investing in Saudi Arabia also have the qualification to apply for financing.
Simplify approval procedures
Saudi Arabia has merged a series of procedures before and after company registration, providing one-stop services for company registration; Launch an online service platform to issue building permits online. By strengthening the single window of electronic trade and establishing an online certification platform for imported goods, we can accelerate the speed of imports and exports.
Legislation to protect the rights and interests of investors
Saudi Arabia has enacted secured transactions and bankruptcy laws, enhancing opportunities for obtaining credit and facilitating corporate financing. Introduce restructuring procedures, allow creditors to initiate restructuring procedures, improve voting arrangements in restructuring, enhance business continuity during bankruptcy, increase the participation of creditors, and promote the resolution of bankruptcy; Strengthening the protection of minority investors by increasing the amount of evidence obtained during trials. Saudi investment law allows foreigners to have 100% ownership of projects.
Opportunities and Challenges
Opportunities
Saudi Arabia has abundant mineral resources, and the government attaches great importance to the development of domestic mining, adopting various preferential policies to attract investment. Chinese enterprises are facing unprecedented opportunities.
(1) Saudi Arabia has a clear cost advantage in mining investment
Saudi Arabia has abundant oil and gas resources, low energy prices, and sufficient electricity supply. The price of industrial diesel is 0.10 US dollars per liter, industrial natural gas is 0.75 US dollars per million British heat, and industrial electricity is 0.048 US dollars per kilowatt hour. This can meet the needs of mining construction and production, effectively reducing production costs. Saudi Arabia has no franchise fees, and the company tax rate is relatively low. The corporate income tax rate is 20%. According to Saudi Arabia's Foreign Investment Law and Mining Law, mining companies have the right to import equipment and machinery tax-free.
(2) Saudi Arabia has relatively complete infrastructure and superior geographical location
Highways are the main mode of transportation in Saudi Arabia, with a total length of 19.3 × 104km; The existing railway is 590km, and the north-south railway is under construction with a total length of 2400km; Each major port has a total of 183 berths, with an annual total throughput of 1.5 × 108t. The World Competitiveness Report (2019) released by the World Economic Forum shows that Saudi Arabia's transportation infrastructure score is 64.4, ranking 34th out of 141 economies; The score for water and power supply infrastructure is 91.7, ranking 47th, indicating a relatively complete infrastructure. In addition, Saudi Arabia has a superior geographical location and is an international hub connecting Asia, Europe, and Africa, with convenient import and export of goods.
(3) Strong demand for mineral products in Saudi Arabia
Saudi Arabia is undergoing large-scale industrial and economic diversification, with resource intensive manufacturing industries such as machinery, electrical equipment, and automobiles expected to expand significantly, and the demand for mineral products will also increase significantly, thereby stimulating huge investment opportunities.
(4) Since the establishment of diplomatic relations between China and Saudi Arabia, bilateral trade has been frequent and the relationship has been friendly
The proposal of China's "the Belt and Road" initiative and the goal setting of Saudi Arabia's "2030 Vision Plan" have created an opportunity for China and Saudi Arabia to deepen mining cooperation. In 2019, China's direct investment flow to Saudi Arabia was 654 million US dollars, with a direct investment stock of 551 million US dollars.
In October 2020, Saudi Arabia launched a regional geological survey with a budget of 2 billion Saudi Riyals and signed four initial cooperation contracts with China, Finland, the United Kingdom, and South Africa, with a total value of over 500 million Saudi Riyals. Over the next six years, Saudi Arabia will conduct exploration of approximately 60 × 104km2 of the western Arabian Shield, providing new areas for international mining investment and promoting the contribution of the mining industry to the national economy. In 2020, China and Saudi Arabia have made significant progress in geoscience cooperation under the "the Belt and Road" initiative. The China Geological Survey Bureau of the Ministry of Natural Resources has successfully won the bid for the project of "high-precision geochemical exploration of Saudi Arabian shield water sediment and heavy sand samples", which is crucial to delineate favorable target areas for ore prospecting and attract mining investment, marking a new stage of China Saudi Arabia geological cooperation.
Challenge
(1) The management of foreign labor is becoming increasingly strict, leading to an increase in labor costs
The Saudi labor market is mainly composed of foreign workers from India, Pakistan, the Philippines, and other countries, accounting for approximately 64%. In order to increase the employment rate of local people, the government has stipulated that foreign enterprises must have a certain proportion of local people in the workforce when contracting projects in the local area. The sand specialization rate for industries such as engineering contracting, maintenance, cleaning, and operation is 10%, with 5% for national investment projects and 10% for private investment projects.
Saudi Arabian workers have low professional abilities but high wages and benefits, which invisibly increases the labor costs of the enterprise. Due to the prolonged low oil prices, the Saudi economy has suffered a heavy blow, and the unemployment rate continues to rise. The government has always hoped to promote employment for local people, and the management of foreign workers has become increasingly strict. The work visa fee for foreign workers has increased from $30 per year 10 years ago to over $2000 in 2019, and there is still a trend of increase. The visa rejection rate for Saudi foreign workers is about 60%. In 2020, the outbreak of the COVID-19 further increased the economic burden. In the second quarter of 2020, the unemployment rate in Saudi Arabia was 15.4%. In this year, about 1.2 million foreign workers left. Enterprises may face the lack of skilled workers.
(2) Long administrative approval time, local agents are indispensable
The Saudi labor market is relatively complex, with short working hours, resulting in long administrative approval times. In addition, Saudi Arabia's Foreign Investment Law stipulates that legally registered foreign-funded enterprises do not need to engage in business activities through Saudi agents. However, local agents or agencies are indispensable in the actual operation process of enterprises, especially in matters involving dealings with the government.
Although the investment industry in Saudi Arabia operates relatively normally and has strict laws, the Saudi market has a strong religious characteristic, and all laws, treaties, international agreements, and agreements are ultimately subject to Islamic law and cannot conflict with it. In case of contract disputes, arbitration or litigation in the local area may lack necessary and fair legal basis, and domestic arbitration institutions in Saudi Arabia may make judgments in favor of local people.
proposal
Pay close attention to policy changes and conduct thorough market research
Before investing in Saudi Arabia, Chinese companies should carefully study the foreign investment law, mining investment law, environmental protection law, labor law and other laws and regulations issued by institutions such as the Saudi Investment General Administration and the Saudi Ministry of Industry and Mineral Resources. They should pay close attention to changes in relevant industry policies, strengthen comprehensive research on Saudi Arabia's geology, minerals, policies, markets, finance, technology, investment environment, etc., timely and deeply understand the situation, and make strategic choices.
Conduct a thorough risk assessment and seize investment opportunities
Opportunities and risks coexist in the Saudi Arabian market, and enterprises should fully evaluate the risks in the Saudi mining market, mineral resource potential, labor market, infrastructure, and other aspects. The new mining law requires enterprises to attach environmental and social impact reports, as well as feasibility reports to promote local community development, when applying for mining permits.
These means that enterprises need to increase investment in environmental protection and restoration, infrastructure construction, and local employee training. They need to fully consider costs and benefits when making investment and business decisions, and select high-quality mining projects. Chinese enterprises can focus on the southwestern region of Saudi Arabia, which has abundant mineral resources, as well as areas along the Red Sea coast with well-developed infrastructure, such as highways and railways, to facilitate the processing and transportation of mineral products and reduce costs. In addition, Saudi Arabia's processing industry has a strong external dependence, and Chinese enterprises can pay attention to investment opportunities in high value-added mining fields such as mineral product processing and smelting, consolidating the cooperation foundation of the entire mining industry chain. In addition to mining exploration and development, attention can be paid to cooperative investment opportunities in related fields such as engineering geology, urban geology, and water resource exploration.
Building an international community of interests and actively promoting the localization process
Chinese enterprises should integrate resources from all parties, actively seek trustworthy partners, strengthen cooperation with local and international large companies, establish complementary interest alliances, achieve win-win cooperation, and reduce investment risks. At the same time, leveraging the geographical advantages of local companies, adapt to the local society as soon as possible. Chinese funded enterprises should practice social responsibility, follow commercial logic, actively participate in local public welfare and environmental protection undertakings, strengthen communication and exchange with local communities, news media, and non-governmental organizations, and establish a good image of people-oriented and nurturing local society.