Ukraine’s path to global competitiveness: creating its equivalent of “Real Madrid” in subsoil exploitation

What is the problem?

Ukrainian subsoil is quite rich and attractive for investments, but the industry needs more attention from the state to develop. Currently, there is a reform of subsoil utilization taking place in Ukraine. The European Business Association (EBA) recently hosted the inaugural "Mining Day" forum, bringing together government and business leaders to share progress and facilitate discussions on mineral extraction.

According to industry representatives, the key difficulties faced during wartime include:

• issues with energy supply;
• high risks for global investments;
• and logistical challenges, such as limited access to ports and complicated railway connections.

Other challenges are not directly related to war. EBA surveyed 39 member companies in the field of mineral extraction. When asked about what incentives are needed for the development of subsoil utilization, the business responded:

According to business representatives involved in the EBA study, the reform of subsoil use has received a rating of 6.26 out of ten. Additionally, 63% of respondents described the local regulatory environment as "satisfactory." The head of the Committee on Environmental Policy and Nature Management of the Verkhovna Rada of Ukraine [Ukraine's parliament – ed.], Oleh Bondarenko, shared that these numbers did not intimidate him but rather were encouraging as he had anticipated a lower evaluation.

He pointed out that the state maintained a certain level of stability for businesses during the war through its reform. According to Oleh Bondarenko, this reform has also resulted in ongoing investments and advancements in the industry.

"However, the truth is that one-fourth of the participants are still unsatisfied. Therefore, there is much room for improvement for both the parliament and the government. In my view, we are diligently and consistently addressing these issues," the head of the specialized parliamentary committee noted. "But as we continue, we must identify regulatory issues that must be addressed through legislation, improved through secondary regulations, and properly implemented by all involved parties, including subsoil-use entities."

Oleh Bondarenko also believes that businesses should understand the common interests involved in subsoil use, including those of the government, the public, and the businesses themselves.

What is the solution?

Meanwhile, most (82%) of the business representatives surveyed find the subsoil industry to be an appealing investment opportunity, rating Ukraine's resource potential at 7.85 out of 10. 

Dmytro Kashchuk, who leads the Committee on Subsoil Use at the European Business Association and heads business development at the Geological Investment Group, shared some impressive examples:

"At last year's auction, the price of copper skyrocketed by 420 times! And recently, the State Service of Geology and Mineral Resources of Ukraine held a sand auction where prices saw a whopping 217-fold increase."

Minister of Environmental Protection and Natural Resources of Ukraine Roman Strilets noted:

"The reform is currently establishing all the necessary conditions for the subsoil use industry of Ukraine to develop in line with European standards. This includes ensuring that investors have equal opportunities and free access to the market while also providing the public with transparent access to information and proper oversight."

As stated by the minister, this effort is focused on four key areas: digitizing, deregulating, modernizing, and increasing transparency. The goal is to transform the State Service of Geology and Mineral Resources of Ukraine into a more efficient and effective service.

"The reform is still ongoing, and we have not fully embarked on the path to radical transformation. We must engage in constructive dialogue with all stakeholders to comprehend their concerns, problems, and challenges," Ruslan Strilets added.

At the end of his speech, the minister emphasized: "Personally, my main concern with subsoil use is the depletion of natural resources. I believe it is important for businesses to be mindful of this issue and recognize that sustainable development principles are a necessary part of adhering to European guidelines. Therefore, on the one hand, we must apply deterrent mechanisms; on the other hand, we are ready to make the rules transparent."

During the discussion, several business representatives pointed out that the best course of action for the state would be to create a policy for managing subsoil resources.

How does it work?

"The state must determine its priorities in its strategy. This could involve attracting a large number of investors and diversifying the development of different deposits or perhaps focusing on the extensive processing of these minerals. Alternatively, the state could prioritize attracting a significant amount of investment. It should be noted that it is not feasible to accomplish all of these goals simultaneously, so the state must narrow its focus," Mykola Shevchenko, the deputy director for investments at Umgi, stated.

Dmytro Kashchuk, the head of the European Business Association's subsoil use committee, also made a point of highlighting the size and long-term nature of the industry, stating that it has a significant, cumulative impact on the economy and contributes to the GDP in the long run.

According to the findings of the EBA survey, the most promising minerals for businesses in Ukraine and globally are titanium, lithium, rare earth elements, hydrocarbons (oil, gas, condensate), and iron ore. These minerals fall under the category of construction group materials and critical raw materials, as classified by the European Union. Rubryka covered this classification and the potential for Ukraine in a recent article.

Oleh Bondarenko, head of the specialized parliamentary committee, is hopeful that the Ukrainian legislation will soon include definitions for "critical raw materials" and "strategic raw materials." These definitions will aid the state in determining industry priorities and facilitate integration into the European market.

Minister Ruslan Strilets also stressed that the reform of subsoil utilization aims to achieve the strategic objectives of our nation. This includes the integration of Ukraine into the European Union, specifically our inclusion as a key partner in the EU's raw materials strategy until 2030.

According to business representatives, revealing information about critical materials will assist in determining the industry's development priorities.

"The critical minerals information is labeled as "for official use." We advocate sharing this information with all investors, as it helps them make strategic decisions about whether to pursue these minerals," Mykola Shevchenko noted in particular.

According to Andrii Horokhov, General Director of Umgi, critical raw materials are significant investments with fierce global competition.

"Today, our focus is on critical materials. These projects cost anywhere from 300 million to billions of dollars or euros, aimed at developing this process. As we have not had any successful operational players in critical materials in independent Ukraine for over 30 years, our "Real Madrid," it is clear that we, as a community, are not doing enough in this area," the general director of Umgi shared his thoughts.

Andrii Horokhov continued: "As the saying goes among Ukrainians, "it's easier to beat your father in a group." In this case, the goal is not only to outdo local competitors but also to succeed in the global market by raising hundreds of millions or even billions of dollars and achieving positive cash flow and return on investment. From an investor's perspective, it is important to have a long-term perspective and consider what level of profitability would entice a Western investor to agree."

According to Andrii Horokhov, if we cannot provide investors with high figures, there should be additional incentives or protections in place to prevent bankruptcy:

"There is a particular type of support for the country that is not driven by personal interests but rather by a clear strategy that is backed by the public. This approach does not favor any one individual but rather promotes the welfare of all investors and society as a whole."

During the second "Mining Day" discussion panel, Volodymyr Lavrenchuk, the moderator and regional director of "NEQSOL Holding Ukraine," brought up a suggestion from one of the meeting attendees. They proposed that since the "Ye-oselia" program [ "There is a home" – a state program of affordable housing loans for citizens of Ukraine – ed.] is functioning successfully in Ukraine, perhaps it would be beneficial also to implement "Ye-nadra" ["The is a subsoil" in English – ed.] 

"As a business, we thoroughly understand the necessary components for attracting investments. These include tax incentives, potential subsidies, and regulatory relief. Equally important in this scenario is securing early financing on favorable terms. War risk insurance would also play a crucial role in subsoil use projects in Ukraine," Dmytro Kashchuk listed. Other participants of the meeting expressed similar wishes, detailing them.

"Our country possesses advantages in both our resources and our ability to attract investments," Mykola Shevchenko, Deputy Director of Investments of Umgi, stressed. Some of these benefits stem from the reform, which will persist.

Mykola Shevchenko included the following in the list:

"Ukraine looks pretty good, so we are also investing in it," the deputy director for investments of Umgi explained.

At the "Mining Day" panel discussions, speakers from the mining industry also shared insights on their projects, discussing both the challenges and benefits of their work. Executives from BGV Group, an investment firm focused on developing ventures in mining and processing, shared their experiences of not only surviving but also thriving in the face of military obstacles.

Serhii Voytsekhovskyi, a board member at "BGV Group Management," stated that the group is currently focused on two projects involving graphite mining. These include the Balakhiv graphite deposit in the Kirovohrad region and the Zarichne deposit in the northern part of the Odesa region.

Why graphite? Serhii Voytsekhovskyi explained it to a broad audience without going into deep technical details.

"When you think of a power cell, it's made up of an anode and a cathode, with the anode being primarily composed of graphite. These power cells are not your typical flashlight batteries – we're focused on the electric car and energy storage markets here," Serhii Voytsekhovskyi noted.

According to Serhiy Voytsekhovskyi, graphite has been listed as one of the EU's critical raw materials. He also provided current and future global statistics, revealing that China now dominates 80% of the graphite mining market.

Therefore, China is the leader in the global battery market, with plans to build two and a half times more gigafactories (battery factories) than the rest of the world combined by 2050. This amounts to approximately 4.5-4.6 thousand gigawatts, significantly surpassing China's current capacity of 1,000 gigawatts.

The second segment of the global battery market comprises North America, predominantly Canada and the United States. Experts predict that they will amass around one gigawatt by 2050.

The third section includes all of Europe, and it is expected to reach a capacity of around one gigawatt by 2050.

Experts predict that the battery market will grow by 5.4 times in the next three years.

"We've been working with graphite for a few years now, and when we look back and examine those expert forecasts, we realize they were never accurate. The market actually grew much faster than they had predicted," Serhii Voytsekhovskyi mentioned.

Several trends, such as the decarbonization of the economy and the transition to electric power, are driving the swift development.

"Our Balakhivka Graphite Project is an exceptional story on a global level, as the estimated resources of this deposit amount to approximately 500 million tons. In other words, it is an extremely large deposit," the member of the board of directors of "BGV Group Management" explained.

"BGV Group Management" aims to finalize the feasibility study for this project by the first quarter of next year and subsequently commence construction of a factory to produce a high-value product. This product will be a viable alternative to Chinese imports in the European market.

BGV Group Management has opened a plant in the Zhytomyr region, which has created 200 job opportunities. The plant is located on the Zherevsky deposit, covering an area of 63.2 hectares and holding reserves of 46 million cubic meters of rock. The estimated investment for exploration and launching the plant's operations is currently around 22 million dollars.

"After six months of intense warfare, the plant was officially put into operation. It required great bravery from both the investors and the team, as we chose to launch the enterprise in a location just 45 km from the Belarusian border and 150 km from active combat zones," the director, Oleksandr Tolkach, began narrating the extraordinary case of "Granite Quarry" LLC.

By the way, Rubryka can show an online tour of the enterprise.

"The project was quite complex, especially in terms of construction organization. It involved building and installing a crushing and sorting line at the plant, constructing a three-kilometer railway infrastructure, and preparing the deposit for operation," the plant director listed.

According to Oleksandr Tolkach, launching the enterprise involved overcoming numerous challenges caused by the full-scale ar. Just as the plant installation was nearly completed, the wagon shipment systems were supposed to arrive from Türkiye by sea. However, with the outbreak of a large-scale war, the ports were closed.

"It seems that we caught our Turkish partners off guard. We had decided to transport the systems by road from Türkiye to the Zhytomyr border area, right amid the war's early stages when there was intense shelling and a portion of the region was under enemy control," Oleksandr Tolkach recalled. "The alteration in the agreed-upon logistics chain had a significant effect on the delivery time and cost, but ultimately, the systems were delivered, shipped, and installed."

"Granite Quarry" LLC has its own railway infrastructure and an automated system for loading wagons.

"Ukrainian people are resilient and can work under any circumstances. One of our contractors was a company from the Kharkiv region. Despite being constantly targeted by enemy fire and operating under difficult conditions, their team managed to complete our order and fulfill all contractual duties," the director of "Granite Quarry" said.

Thanks to its complete reconstruction and modernization, the company can now produce top-quality crushed stone products using state-of-the-art Swedish equipment. With the capacity to process over 1.5 million tons of mining material annually, the "Granite Quarry" currently operates at only one-third of its full potential. However, there are plans in place to ramp up production and grow the team.

Oleksandr Tolkach added: "We are exploring the possibility of using our own crushed stone for producing value-added products such as concrete, modular structures, and paving tiles. There is a significant amount of work ahead, but above all, we are looking towards rebuilding our country, which is a strong motivation." 

"What's your secret?" inquired Volodymyr Boyko, the founder of NADRA.info, as he listened to the director of Granite Quarry LLC share these examples and figures.

"We started from the optimality criterion: we focused on the optimal price, quality, and reliability. It is also about mining equipment, high- and energy-efficient processing equipment, high-quality crushed stone, and providing a logistical component," Oleksandr Tolkach said.

He also emphasized that the international brands with which the company works are very optimistic about the future of Ukraine. "During the war, our partners are still fulfilling all their obligations, providing technical support for equipment, updating systems, and maintaining automobile and loading equipment," Oleksandr Tolkach added.

"The opening of the plant and continued investment in the industrial potential is actually about the investor's and our team's faith in this country and its Victory," the director of "Granite Quarry" LLC stressed.

Photos by Mykola Tymchenko