Turning To Gold For Riches

BMI View: The Iraqi government ' s move to attract foreign investors into the mining space suggest s a brighter outlook is in store for domestic gold production over the coming years. Nevertheless, a number of key challenges on multiple fronts will continue to impede projects development and ensure that capital inflows into the mining s ector remain well-below potential.

We believe Iraq's gold mining sector is poised to experience brighter days over the coming years as the country looks to secure foreign investors into its non-oil resources industry. Apart from its stellar gold deposits on offer, Iraq's move to boost its gold reserves in recent months further reinforces our conviction for the country to become a bigger producer of precious metal going forward. According to the International Monetary Fund (IMF), Iraq's gold holdings had quadrupled to more than 31 tonnes over the course of three months between August and October, joining a growing list of countries to beef up the gold reserves of its central bank for the first time in years.

We highlight that the recent discovery of what could be one of the world's largest gold deposits in Baghdad has the potential to effectively transform the economic landscape of Iraq. In line with our expectations, the elevated gold prices of recent years have continued to justify the economics of undertaking gold mining projects and encourage an increasing number of miners to expand output and embark on further investment opportunities. For more than two years, exploration and drilling activities have been carried out in the upscale Aldajh area after substantial gold deposits were discovered in the surrounding region.

Encouraging Investment
Gold Spot (US$/oz), Weekly Chart

More Positive Developments On The Cards...

Whilst we acknowledge that mining companies operating in Iraq will have to grapple with a number of key challenges on multiple fronts, particularly on concerns over political stability and infrastructure support, recent developments in the mining space is at least a cause for optimism. Indeed, Iraq is looking to reduce its reliance on oil exports for economic growth and is aiming to diversify its industrial sector by expanding production in the long-neglected mining sector. In a bid to attract foreign investment, the Iraqi government is offering companies a 10-year tax break with the possibility of this being extended to 15 years in the case of a joint project development with a local partner.

…But Political Risks Continue To Lurk

Nevertheless , we continue to cast doubts on the near-term growth pros pects of Iraq's mining industry. Despite the formation of a government in December 2010, we expect political progress to remain slow and stability to remain fragile. With recent developments reinforcing our view that political uncertainty will remain elevated, investment in the country will grow below potential over the medium term. Indeed, Iraq's central bank governor was dismissed on October 16, after officials began an investigation to probe allegations of corruption against him. As many see the move as being motivated by an attempt by Iraq's Shi'a Prime Minister Nouri al-Maliki to reduce the independence of the central bank and to increase his power vis-à-vis Sunni and Kurd political blocs, sectarian tensions will continue to deepen in the country.

Infrastructure Deficit Remains A Major Obstacle

Moreover , the perennial problem of inadequacies in infrastructure support and power supply will continue to weigh on investors ' sentiment and ensure that future capital inflows into the mining sector are well-below potential. W e remain affirmed in our belief that the infrastructure spending plans by the Iraqi government will continue to suffer from chronic over-ambition. The announcement that Iraq will oversee an infrastructure-focused investment plan of between US$250bn and US$275bn over the next five years (2013-2017) is an encouraging sign that the government is taking the ongoing infrastructure deficit seriously. However, huge sums have been discussed previously for infrastructure investment, with only minor progress seen on the ground. Furthermore, few details have been released pertaining to how the government plans to overcome deep-rooted institutional failures to filter this investment into projects.

This article is tagged to:
Sector: Mining
Geography: Iraq

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