Anatoly Kochetkov
Cand. of Sc. (Geol. and Min.)

By the Russian classification, Sukhoy Log is attributed to super large gold-ore deposits. The explored reserves are 1,046 metric tons or over 20 % of gold resources in the Russian inferior. Their value is estimated at $9bn. These ores contain platinum, palladium and rhodium as well. The development of the Sukhoy Log deposit can enlarge the Russian gold output (153.4 t in 2001) by almost one third.

    As early as in the 1970s the State Planning Committee of the USSR felt great concern about this deposit’s future. But at that time the top planning body acknowledged its development to be economically unsound. In the last decade, a forthcoming start of the development of Sukhoy Log was regularly reported. Having received a mining licence, Lenzoloto (a Russian company) selected Star Technology (Australia) as a strategic partner. On getting 31 percent of shares and claiming enormous field reserves, the latter put up its shares for an auction. Just within a day, their price soared ten times – from 9 to 90 cents. As a result, Star Technology received more than $100m but put only $36m into a joint (with Lenzoloto) venture. The Australian people did not even choose to pay their portion of the authorized capital. Because of it, «the strategic partner» lost the larger part of the Lenzoloto shares.
In 1997, by Boris Govorin’s (the Irkutsk governor) initiative, the licence for the development of the Sukhoy Log deposit was revoked from the Lenzoloto’s subsidiary and the deposit again became the state property. Since that time,Lenzoloto deals with its usual business – development of placer fields. Other potential investors got interested in Sukhoy Log. Barrick Gold Corporation (Canada) with an output of 3.7m oz/yr of gold and Placer Dome Inc. with 3m oz/yr carried out an additional geological survey and are assumed to be satisfied with the findings. BHP, a well-known diversified Australian company, is expected to open a Moscow office. The experts feel that it is related to the company’s interest in Sukhoy Log. The potential investors also enlist Rio Tinto (an international company), JPI (South Africa) as well as Lanta Bank (Russia), the owner of share blocks of three mine enterprises developing small iron-ore deposits in the same Urkutsk Region.
The Sukhoy Log problem resides in the fact that the ores are attributed to rebellious ones. They contain 2.76 gr of gold per ton. Five thousand tons of ore must be mined to obtain one bank ingot weighing 12.5 kg, with the operating costs minimum 60 percent of run-of-mine gold value and about 35 percent going to taxes. One and a half billion dollars is required for the first stage of deposit development and construction of a gold-extracting plant. This project will be bank-credited with a minimum interest rate of 7 percent. The recoupement time will be about ten years. Let’s compare: in Latin America (Peru, Argentine, Brazil, Chile), Africa (Ghana), South-East Asia (Indonesia) gold-ore mining projects are repaid within 5 to 7 years. The higher gold price is, the shorter recoupement time is. However, any estimation of the project’s profitability can be symbolic only because none of possible investors has any business plan. In consideration of new mining technologies applied and current gold prices retained, the profitability is predicted at a level of 10 to 15 percent. The main benefit of the deposit is the large mining volume.
Russian gold producers have no funds for such a great project. Foreign companies are playing a waiting game. Sure, there is another way – to develop the deposit by sections. But this variant does not suit the Urkutsk regional administrators who count on big lumpsum capital inputs and set-up of a large number of jobs.
In summer, 2001 the Ministry of Mineral Resources of Russia and the Urkutsk regional administration signed a resolution on a new tender for developing Sukhoy Log to be invited. But the tender has not been carried out as yet. One reason is the discord between federal and regional authorities. The ministry is of the opinion that only companies incorporated in Russia may be invited to the tender while the regional administration is convinced that investors able to put $1.5bn in the project cannot be found in the country. Valery Braiko, Head of Gold Producers Union, feels that Russian companies are even unlikely to take part in the tender.
Now no more than ten companies out of almost 600 Russian gold mining enterprises are capable to implement big projects. They include Polyus, Polimetall, Mnogovershinnoye JSC (a Sibneft subsidiary), Omolonsky Gold Ore Company and Buryatzoloto.
It must be borne in mind that if a commercial significance of platinoids in the Sukhoy Log deposit is confirmed its value will grow minimum 1.5 time. In this case the development of the deposit will be of disadvantage to the biggest Russian players in the platinoids market, above all, Norilsk Nickel. Even if supported by the administration, the gold mining companies would hardly manage to withstand this giant. That is why the companies are likely to be united into a pool or holding. Then it will be easier to collect funds and share risks among several participants.
In autumn, 2001 the tender for the development of the Sukhoy Log deposit was again postponed. The reason was the new requirements put forward by the Ministry of Mineral Resources, which are stiff enough in specifying the term of development, output volume and mining efficiency. The Irkutsk regional administration intends to insist on documents of tenderers’ financial soundness to be submitted. Besides, it is willing to change the licence agreement – the tenderers must have 100 percent of funds required for the development of the first stage available on their accounts.
Last year the Irkutsk authorities have softened their requirements to a considerable extent. Initially, they not only insisted on lumpsum input of the entire amount but also wanted credits to be granted by first-class banks. Now the regional authorities agree to accept a guarantee that a licence applicant will input own funds or attract credits sufficient for the development of the first stage to produce 8 to 10 tons of gold each year. The total design capacity of the gold mining enterprise will be 30 to 40 tons per year.
In order to win the licence, the Russian gold producers started active lobbying of their interests in the Ministry of Mineral Resources and the State Duma. The ministry has sound grounds to protect the Russian gold producers’ interests. The matter is that this licence may just be a good way to increase capitalization for a foreign investor as it has already been demonstrated by Star Technology (Australia). After buying the licence, foreign companies can delay the start of active development of the deposit in order to restrain gold mining growth and influence the world market. It is extremely difficult to revoke a licence. It can be exemplified by the long litigation with Star Technology.
In October, 2001 the Committee on Mineral Resources and Conservancy of the State Duma made out an amendment to the Law on Mineral Resources. The amendment states that «only Russian citizens and legal entities incorporated in the territory of Russia may be the users of mineral resources in the mining of deposits of main types of strategic raw materials whose reserves account for more than 20 percent of explored registered resources of Russia». If this amendment is approved foreign companies will be deprived of the right to participate in the tender for the Sukhoy Log development licence.
First Deputy Irkutsk Administration Head Nikolay Melnik affirms that finalization of the tender terms and conditions is nearing. However, a new idea – to carry out not a tender but to hold an auction for the development of Sukhoy Log – has already emerged in the Government of Russia and the Ministry of Mineral Resources. «The packages of terms and conditions offered by participants – investment commitments, size and term of payment and so on – will be assessed in the tender. What exactly will be put up for the auction is ambiguous as yet», Sergei Kashuba, Chairman of the Committee on Precious metals of the Association of Russian Banks, is perplexed. There also appeared reports that the Ministry of Mineral Resources itself will allegedly finance the Sukhoy Log project, that is, the state budget will become an investment source.

None the less, up to now the prospects of developing this super large gold-ore deposit are still indefinite. It is due to not only shortage of finance but also weak general concepts of gold mining sector progress. An objective of these concepts is to harmonize the interests of the federal center, regional administration and local population, as well as Russian and foreign investors. In our opinion, the most effective way of developing Sukhoy Log can be an application of the economic mechanism known as Production Sharing Agreement (PSA). It permits a valid tax system to be replaced with a special pattern of division of products between the investor and the state in the process of the project’s implementation. This approach will guarantee the return of the funds to the investor within a reasonable time period and the receipt by the state of its share of gold (about 25 percent). Here jobs and required infrastructure will be established in the region that is still one of the main suppliers of gold in the country.

R   E   F   E   R   E   N   C   E Development of large gold-ore deposits with low-grade rebellious ores involves special technologies of mining and processing along with substantial investments. In the USSR there were several deposits of this type – Nezhdaninsnskoye, Maiskoye, Sukhoy Log, Muruntau, Kumtor, Olimpiadinskoye, Natalka. Only industrial uranium business units with necessary funds, technologies and material resources could have got down to their development. The Muruntau deposit (Uzbekistan) discovered during the uranium mining operations turned out to be in the most favorable conditions. Now the Russian gold producing industry has no business units comparable with world leaders. The development of the Sukhoy Log and other large deposits requires this industry to be restructured with the formation of companies like ALROSA or Norilsk Nickel.