Anatoly Kochetkov
Doctor of Geology & Mining

J

ust two years ago financiers and industrialists seemed to have lost their interest in Russian gold for a long time to come. The record low world prices of about $250 an ounce of this metal, the crisis in gold-mining as well as reduction of geological prospecting activity by no means contributed to attracting investors. But the trend changed. The downfall of gold prices that was going on since 1996 stopped in the spring of 2001 and already in the summer of that year their steady rise started. Rates of this upsurge increased considerably in 2002. At the end of November 2003 the price for one ounce of gold exceeded $400. By estimates, it will get stabilized within $370 and $390.
Due to the abundant inflow of foreign currency to the Russian economy and weakening of the U.S. dollar positions in world markets, the interest of financial structures in gold as a way to accumulate and realize assets has been getting stronger. In 2002 all gold mined in Russia was purchased by banks while the competition of financial institutions in this market became tougher. The gold-mining industry has been further strengthened by the liberalization of laws on turnover of gold and, particularly, by abolishing customs duties on exports of precious metals. It has provided producers with an opportunity to enter foreign markets independently. By the unofficial data, in 2002 fifty two Russian banks were engaged in operations with precious metals and export shipments of gold amounted to 190 tons while its production volume equaled 170.8 tons. Experts are still predicting a steep increase in Russia’s gold-mining volume that, in their opinion, will grow up to between 200 and 250 tons a year.
Russia’s gold-mining has become attractive for investors. Now there are two trends in this sector that are particularly evident. The first one is the ongoing consolidation of the market players and, above all, of gold-mining companies themselves. The second one is the start of gold-mining operations by major companies from other industries, such as Norilsk Nickel, MNPO Polymetal, ALROSA, Russian Aluminum, Sibneft and others. This is connected, in the first place, with their business diversification.
Valery Rudakov, the chairman of the board of directors at Polus JSC integrated into Norilsk Nickel, explained the holding’s plans to expand mining of gold by the desire to reduce risks resulting from fluctuations of prices for other metals at world stock exchanges. Valery Rudakov is also sure that only large companies can afford making necessary investments in gold field prospecting. In fact, these are the main advantages that the gold-mining industry will get from consolidating assets.
In October 2002 Norilsk Nickel acquired a 100% stake in Polus JSC that has a license to operate Olimpiadinskoye, Russia’s largest gold field that is now being developed. The deal cost $226M. As a result, Norilsk Nickel started controlling 15% of the Russian gold market and it was rated first in the country’s gold-mining industry. That same year the new owner’s annual production volume already amounted to about 30 tons.
According to Valery Rudakov, by 2007 the company plans to extract no less than 100 tons of gold a year and to become the world’s fifth leading enterprise in this respect. For these purposes Norilsk Nickel has bought large stakes in several other promising companies that have developed production infrastructures and some ore and stream-gold deposits. Among them is the Natalkinskoye field, the biggest one in the Magadan region with the gold balance reserves of 245.3 tons. By estimates of independent experts, these reserves have not been completely explored yet. Norilsk Nickel will continue the field’s geological study so as to add 600 to 800 tons of gold more to the balance of the field.
The company Lenzoloto is another promising acquisition by Norilsk Nickel. The region, where this company operates, has Russia’s largest gold ore field Sukhoy Log. Its reserves of gold amount to 1,046 tons. The auction for selling assets of Lenzoloto also revealed other potential contenders for Sukhoy Log, which were not known before. In addition to officials from Norilsk Nickel, the auction was attended by representatives of Basic Element, the structure that belongs to Oleg Deripaska, the owner of the company Russian Aluminum, and the investment company Sovlink that is controlled by Viktor Vekselberg, the chairman of the board of directors of the SUAL holding.
The starting price for a stake in Lenzoloto was set at 1.1 billion rubles ($37M). Norilsk Nickel paid out 4.7 billion rubles ($160M). It also acquired a 5.6% state stake in Lenzoloto and, as a result, Norilsk Nickel obtained the full control over this gold-mining company.
As Maxim Finsky, the deputy chairman of the management board of Norilsk Nickel, believes, in case of winning the right to develop Sukhoy Log the acquisition of Lenzoloto will allow Norilsk Nickel to save about $300M in investments. It is expected that just in three years the gold-mining volume at Sukhoy Log will amount to 15 tons a year and in five years it will reach 30 tons. At the same time the company intends to maintain the existing gold-mining volume at Lenzoloto equaling about 10 tons a year.
So, Norilsk Nickel now owns a 100% stake in Polus JSC, a 50.6% stake in the company Matrosov Rudnik and a 65.87% stake in Lenzoloto JSC. Recently Valery Rudakov confirmed the holding’s interest in several gold fields in the Krasnoyarsk region. In particular, Norilsk Nickel won the tender for the right to prospect and extract gold ore at one of the sites in the Titimukhta field located near the Olimpiadinskoye field and the mine owned by Polus JSC. With the starting price of 7 million 286.2 thousand rubles the amount of payment by the bidding results equaled 298 million 850.2 thousand rubles. The company’s leaders considered such an amount economically justified. The license was issued for 20 years. In accordance with its terms prospecting operations should be finished there no later than 2005 but, by their estimates, from 2007 the gold-mining volume should reach no less than 2 tons a year. In 5 to 7 years Norilsk Nickel will be annually mining 100 tons of gold and will become one of the world’s gold-mining giants. It is not ruled out that its structure will get a new company to manage all gold-mining assets.
Also, the ore-mining holding MNPO Polymetal has formed a major raw material base for extracting precious metals. In 5 years it has invested in the industry over $200M. The holding includes 7 ore-mining and 6 auxiliary companies in regions of Eastern Siberia and the Far East. The management company is based in Saint Petersburg. The holding’s scientific research and design subdivisions are also located there. MNPO Polymetal has 17 licenses for exploring and developing deposits of precious metals. It independently implements the whole complex of works on preparing fields for development. Besides, the holding is Russia’s largest producer of silver.
In September 2003 MNPO Polymetal has obtained a license for exporting precious metals and it can now make direct export shipments of gold. The company has also announced its intention to participate in a tender for developing Sukhoy Log.
Foreign investors are showing interest in the Russian gold-mining as well, although quite often there are no guarantees that developing gold fields will be profitable since they are usually located in difficult-of-access and little-developed regions with harsh climate. Most of all, investors like those fields, which were explored and partially developed in the Soviet times, because they certainly need less capital investments.
Ireland’s Celtik Resources reached an agreement with the company ALROSA to develop the large field Nezhdaninskoye in Yakutia. The joint venture Highland Gold Mining Ltd. (HGML) was set up in May 2002 by the British investment house Fleming Family & Partners (40%), South African company Harmony Gold Ltd (31.7 %) and Sibneft’s subsidiary Mnogovershinnoye JSC (over 20%) for investing in Russian gold-mining projects. In just one year HGML acquired 4 gold fields in the Chita region and in September 2003 it bought a 100% stake in a company that has a license to develop the large field Maiskoye in the Chukchi National District. HGML owns the mine Mnogovershinny, the main gold-mining enterprise in the Khabarovsk region, and all its equipment bought out from the region’s administration. By experts’ estimates, auctions for selling state shares of these gold-mining enterprises broke all records of the past years by the intensity of competition.
The raw material base of Highland Gold is estimated at 525 tons of gold. In the nearest three years the company intends to invest $170M in developing production and, starting in 2007, it hopes for mining over 17.5 tons of gold a year. Canada’s Barrick Gold Corp., which has bought a 29% stake in Highland Gold, is becoming its strategic investor. The partners are planning to acquire new gold-mining assets in Russia.
Britain’s Trans-Siberian Gold, which also owns several Russian gold-mining assets, has recently placed its shares in the sector of alternative investments (AIM) of the London Stock Exchange. The bidding results have proved a high interest of investors in stock of Trans-Siberian Gold. The company has licenses for developing gold fields on the Kamchatka Peninsula as well as in the Krasnoyarsk region. It intends to explore one of Yakut gold ore fields. The proven reserves of all explored fields, which belong to Trans-Siberian Gold, are set at 50 tons and at 80 tons, if taken together with the hypothetical ones.
Gold ore projects in Russia are being actively sought for by the Zolotodobyvauschaya kompaniya Omchak founded by Susumanzoloto JSC and Britain’s Peter Hambro Mining.
It seems that all mentioned companies will participate in a tender for Sukhoy Log. By the way, Canada’s Placer Dome and the transnational company Rio Tinto are also interested in this field.
The abundance of contenders makes it necessary to find the most rational and advantageous way of selling the license. Russia’s Ministry of Economy considers an open auction the most acceptable one. Other federal structures and the administration of the Irkutsk region, where the field is located, insist on holding a tender for detail designs. So far no decision has been made as regards forms of foreign companies’ participation. Nevertheless, whoever wins this tender, the start of developing Sukhoy Log will undoubtedly become a major event for the world market of gold.