Unlocking the Potential of Mining in Armenia Presentation to the Government of Armenia April 2024 Global trends in the mining industry present • Global demand for minerals is projected to grow rapidly, especially for critical minerals new opportunities for Armenia • There is a scramble to supply these minerals with strong geo-political drivers • Armenia transects the mineral rich Tethyan belt and already has a track record of mining copper, molybdenum and gold • Armenia offers potential for new private sector mining investment to: • Modernize and expand existing mines to remain competitive • Explore more intensively, deeper and for previously overlooked green mineral targets to find the mines of the future Mineral Deposits in the Central Tethyan Belt • Re-evaluate the viability of exploiting idle mines and undeveloped discoveries, as well as re-treat past waste to recover discarded minerals • Additional scope to add value to mined minerals but only if mining growth takes place • Public investment is needed now to implement the Mining Strategy to unlock these opportunities MinEx Consulting March 2021 1 Output of Metallic Mineral Concentrates* Tonnes A vicious cycle has • Output is now well below the peak level, Source: Armstat 500000 impacted by temporary shutdowns at prevented mining Teghut and Sokt 400000 300000 potential from being 200000 100000 * Copper, molybdenum and zinc concentrates unlocked • Productive capacity and value is highly 0 concentrated in four mines 2013 20142015 2016 2017 2018 2019 2020 2021 20222023 Mines: 2021 Sales Value AMD millions Source: EITI • Russian-owned mines accounted for 120000 100000 nearly 80% of 2021 mineral sales 80000 60000 40000 20000 • Of 23 licenses issued for mining, mining 0 Low Regulatory Poor Regulatory Priority and Performance / has taken place at only nine Weak Unaddressed Governance Legacies Country Area under Mineral Rights • Amulsar is the only post-Independence Zambia 46% discovery to have advanced to Australia Mongolia 38% 22% construction Brazil 20% Germany 12.7% High E&S Vicious Cycle Low Social • Exploration licenses cover only a small Armenia 5.0% Impact for Low Acceptance / Kazakhstan 4.1% Economic Higher part of Armenian territory Source: S&P Capital Contribution Investment Risk • Exploration spending has been Less and Lower inadequate to generate new discoveries Quality 2 Investment Business-as-usual In this scenario the vicious cycle remains entrenched will lead to a • Existing mine owners struggle to modernize and expand operations to remain competitive and shrinking mining compliant with environmental, social and governance (ESG) standards sector • New investors are deterred by concentrated ownership and perceptions of high operating risks • Spending on exploration and new mine development remains very low • Regulation lacks capacity and weak enforcement, allowing some mines to stay in business despite poor operating practices Business-as-usual Scenario • Investor confidence and public trust continues to be eroded Mineral Output US$ 1,600,000,000 • Without the Amulsar mine the decline would take place sooner 1,400,000,000 1,200,000,000 1,000,000,000 As a result, we project that by 2040: 800,000,000 600,000,000 400,000,000 • Mineral output would decline by 40%, at a rate of 2.8% CAGR 200,000,000 - • Mineral exports (35% of total exports on average in the past decade) would decline in 2020-22 Ave 2025 2030 2035 2040 Copper Molybdenum Gold proportion, as would jobs (10,000+) and tax revenues (10% of 2022 taxes) At fixed commodity prices in US$ terms (2020-22 average prices) • Some regions, especially in border areas, would be disproportionately impacted 3 • Government regulatory strengthening, public investment to support exploration and a Moving to a more more positive investment and security climate can unlock new sources of financing for virtuous cycle would modernization and expansion of existing mines and more exploration for new mineral unlock the potential targets of mining • We estimate it would require over US$3 billion of investment in new mines. This assumes: o Gold mines are faster to develop - two medium scale mines by 2030 and one large scale mine by 2035 o Copper & polymetallic mines are slower to develop - one medium scale mine by 2035 and one large scale mine by 2040 • In this scenario, we estimate the mining sector could grow to some US$3.6 billion by 2040, High Strong Regulatory Regulatory a threefold increase Priority and Performance / Public Legacies Investments Addressed Most Optimistic Scenario Mine Construction Cost Mineral Output US$ Estimated US$ million 4,000,000,000 Medium Scale Large Scale More More Social Economic Acceptance/ 3,000,000,000 Contribution Lower 2,000,000,000 Gold $250m $750m and Less E&S Investment Impact Risk 1,000,000,000 Copper $500m $1,500m - 2020-22 Ave 2025 2030 2035 2040 /polymetallic More and Higher Quality 4 Investment Copper Molybdenum Gold At fixed commodity prices in US$ terms (2020-22 average prices) Mining growth In the most optimistic scenario: would benefit the • the sector would grow at 6.2% CAGR, therefore more than keeping pace with the economy as a whole* whole economy • there would be an income multiplier effects, estimated to be 1.8 in a 2016 study** • exports would grow in proportion, since >95% of minerals exported by value • tax revenues would grow more than proportionately, assuming new investment results in higher profits on average • skilled employment would be boosted, though less than proportionately due to productivity savings • mine construction, expansions and technology upgrades would need substantial inflows of foreign capital • Armenia’s remote border areas would benefit from new economic opportunities, resulting from income and employment multipliers plus enhanced infrastructure * CGE model results show a 2.6% gap between the GDP contribution of this scenario and the business-as-usual scenario ** Armenia: Strategic Mineral Sector Sustainability Assessment 2016, World Bank 5 Objective Provide geological information to better target and reduce the risks of exploration Key Public Actions Investments The Mining Strategy actions cover: • Digitizing and posting online old Soviet-era survey data and reports for reinterpretation (1) Improve geological • Acquiring new geophysical data by airborne surveys and geochemical data by field surveys information • Generating interpretive maps and analysis to indicate new exploration targets • Adopting international standards for reporting drilling results, mineral resources and reserves • Installing modern storage and laboratory equipment for drill cores and other samples • Developing a computerized online cadastral system to facilitate selection of exploration areas for Airborne Survey* US$5-15 mining companies to apply for million • Strengthening state institutional capacity to execute the above actions (i.e. Geological Survey) Other Geo-data US$2-3 Justification • Investment in geological information de-risks exploration, increases exploration spending and Actions million improves the chance of making discoveries. New mineral discoveries typically lead to a wave of new private sector investment – that is why public investment pays off. Geological Survey** US$1-5 • US$1 of public investment in geodata generates between US$1 and US$20 of exploration million spending, with a mean of US$5 (World Bank 2016 evaluation) � In mineral-rich Chile every US$1 million spent to support exploration resulted in US$11.7 million of fiscal * Cost depends on surface area covered and types of geophysical data collected receipts from mines developed in the three decades to 2017. ** Cost depends on extent of new buildings and equipment • Geological information has additional public value in assisting the government to optimally manage mineral resources and subsoil more broadly 6 Key Public Objective Attract higher quality investors and reduce harmful mining practices by strengthening regulatory capacity Investments Actions The Mining Strategy sets goals and outlines actions to strengthen institutional capacity to regulate the mining sector to modern and ESG compliant standards (2) Strengthen capacity of State regulatory • Capacity is needed to: agencies o conduct technical due diligence and impact assessment to weed out poor quality applicants and proposals; and o monitor compliance of mining companies as a basis for proper enforcement of Direct institutional US$3-5 high mining, environmental, social and labor standards costs million • Investment is needed in expertise, equipment and support services to address mining and mineral processing, water and waste management, mine closure, Foundational US$1-2 occupational health and safety, social impact management and taxation education million • Investment is also needed in foundational education to supply graduates to work in the public and private arms of the future mining sector • Actions need to be preceded by sufficient preparatory studies and stakeholder consultation to design suitable legal provisions and administrative arrangements, especially where several state agencies will have responsibility • Effective implementation of the Mining Strategy will need strong leadership and management of regulatory reforms and capacity building across several Government 7 institutions Key Public Objective Manage the legacies of past mining, without which social acceptance will remain low and negative investor perceptions persist Investments Actions The Mining Strategy includes goals and actions to reduce the harmful legacies (3) Reduce the harmful of past mining legacies of past mining Public investment would be needed to: • Audit abandoned mine and waste sites for remediation, retreatment and Initial Audit US$1-2 repurposing potential million • Conduct pre-feasibility studies of priority sites, especially those with Pre-feasibility US$0.5-2 potential for retreatment of tailings and other past waste to recover residual studies million per minerals study o A variety of recovery methods exist which are mineral and site-specific and may depend on ecological restoration potential o Suitable funding models involving a mix of public and private investment would depend on site specific liabilities and allocation of risks o Eventual costs impossible to assess w/o initial audit • Opportunity to gain insights from new World Bank RESILAND Land Restoration Project 8 • To have a transformative impact the reforms need significant and flagship Donors, like the public investments World Bank, can • Each investment is an initiative which needs dedicated management and provide financial expertise, especially because several state agencies will need to coordinate support and their actions and high public expectations must be met expertise • To date the World Bank support to the Government on mining sector reforms has consisted of grants to support analytical inputs and advice into the formulation of the Mining Strategy • As the Government transitions from policy design to implementation scaled up support can be in the form of direct technical assistance loans and/or budget support linked to implementation milestones World Bank financing of mining sector reform Niger US$37 million • Benefits of such support are: Madagascar US$35 million • Front loading spending on urgent public investments using concessional funds Malawi US$15 million • Expertise and training to develop budgets, scope of work, TORs, monitoring arrangements for Mongolia US$12.5 million critical public investments Solomon Islands US$5 million • Better value for money and risk mitigation through procurement, fiduciary and ESF support 9