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Metals & Mining: ambitious growth target Faisal AlAzmeh, CFA >> Merrill Lynch KSA Company faisal.alazmeh@baml.com The NTP has focused on several areas relating to domestic drivers, i.e., housing, retail, trade and finance. However, a core part of the Saudi government’s transformation strategy is to focus on expanding the Kingdom’s mining potential. Saudi Maaden has historically been Saudi’s mining champion, but the mining sector currently contributes only around 2% to the Kingdom’s GDP. The NTP has set a high target for the sector: its contribution to GDP growing by 50% to SAR97bn by 2020 and sector employment increasing by 40% to 90k. While the first target could be achieved given the amount of capital that is currently being deployed in the sector, the latter part is questionable in our view as capital intensive projects are not the best means for employment generation. Government focus on mining to boost jobs and growth The focus on mining is driven by the ample and growing resources available. The Kingdom’s largest mined products are phosphates, bauxite and gold. It supplies around 8% of global DAP production and has the largest integrated aluminium company in the world. Ma’aden continues to discover new gold and copper sites as well. We believe the outlook for mining is encouraging and the contribution to GDP targeted by the government could be achieved. We believe investments in this sector faces two hurdles: 1. Diversification —- the base metal cycle lags that of oil but is eventually driven by the same global drivers (global growth). Furthermore, the NTP has currently set a low number for its capital commitments to the industry (USS82mn), achieving the targeted diversification and job creation at the moment seems to be highly dependent on attracting private sector capital. This would require attractive incentives schemes such as energy subsidies, tax exemptions or ease of issuing work permits for expats. However, at the moment, these have not been addressed by the Saudi authorities. 2. High capital intensity — for example, the government has spent close to US$21bn on Saudi Maaden but the company employs only around 6,000 permanent workers, of which Saudis account for nearly a third. While the build-up of this capacity does create a multiplier effect of almost 10x during the construction phase, most of the added jobs are usually low income blue-collar jobs that tend not to attract Saudis. Domestic services sectors create more jobs than mining for dollars spent We argue that capital spent on domestic services sectors is likely to yield more employment for dollars spent. A key example is Saptco, the Saudi Public transport Company, which has spent around US$450mn on assets and currently employs around the same number of permanent employees as Maaden, of which 1,200 are Saudis. We acknowledge that the technology and technical transfer will be different in an investment like Maaden versus Saptco, yet we believe the economic efficiency of using the mining sector as a means of generating employment is questionable. NTP is already happening: Saudi Aramco has project to create 2,000 jobs The plan to develop the mining industry is moving forward. Saudi Aramco has already announced its plans to build a downstream industrial complex along with GE and Cividale SpA. The complex will include the first-of-its-kind high-end forging & casting manufacturing facility and will serve the region’s maritime and energy industries. The project will cost around US$400mn and likely generate around 2,000 jobs. OS Merrill Lynch GEMs Paper #26 | 30 June 2016 67 HOUSE_OVERSIGHT_016177