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Gold-digging, Russian
style
By John Helmer
MOSCOW -
Highland Gold, the embattled London-listed junior gold
mining concern, won Tuesday morning's auction for
freehold title to buildings, equipment and other
property at the Mnogovershinnoye mine in the Khabarovsk
region of far eastern Russia. In 11 rounds of bidding,
it defeated the Sakha gold-mining company, Alrosa
Invest.
The outcome relieves pressure on South
Africa's Harmony Gold, which is the major shareholder in
Highland Gold, and which has provided most of the cash
to fund its mining operations at the Mnogovershinnoye
("Many Peaks") mine. Had Highland Gold been beaten in
the auction, the company would have had to halt gold
production.
Russia, the fifth largest gold
producer in the world (after Indonesia, but ahead of
China), is rapidly running out of gold deposits. These
were discovered and tested by Soviet geologists. They
are relatively cheap for domestic or foreign mining
companies to develop and most of these gold lodes are in
the Asian part of Russia, although Asian buyers of the
gold have been reluctant to buy direct, let alone invest
in Russian gold mines.
That is mainly because
over the past five or six years, most international gold
miners working in Russia ran into trouble; these were
mostly Australian, Canadian and South African. They
either lost their mining rights to domestic raiders, or
found that the cost of gold production in Russia failed
to justify the risks.
The recent takeoff of the
gold price has triggered a cautious rush by foreigners
once more to eastern Russia, where gold can generally be
mined for less than $160 an ounce. If the gold price
rises above $350 per ounce, as now, most miners believe
that Russian gold mining is lucrative enough to once
again be worth a gamble.
Calculations like these
also appeal to cash-strapped Russian gold-mining
companies. One of them, Alrosa Invest - a creation of
the Alrosa diamond-mining concern and the president of
Sakha, Vyacheslav Shtirov - made a hostile takeover
attempt, a year ago, for the Nezhdaninskoye deposit,
which is located in the east Siberian Sakha republic.
But it was forced to retreat by determined resistance
from its target, London-listed Celtic Resources, headed
by Australian Kevin Foo.
However, the two
companies have yet to consummate the peace agreement
they announced they had struck in June. This week's
surprise bid by Alrosa Invest for the Khabarovsk mine
property is a signal, industry sources told Asia Times
Online, that the fight with Celtic Resources is far from
settled, and that Alrosa Invest is still impatient and
hungry for the cash that Celtic and its undeveloped mine
cannot provide.
Gennady Pocherevin, head of the
Khabarovsk region's natural resources and mining
department, told Asia Times Online that the winning bid
in Tuesday's auction in Khabarovsk was 818 million
rubles (US$26.7 million). The price is 4 percent above
the auction reserve of 785 million rubles ($25.7
million), fixed by the region after Highland Gold had
insisted in earlier negotiations that the price should
be much lower. The final bid in the auction was reached
in 3 million-ruble steps after 11 rounds.
Pocherevin said four bidders participated in the
auction, two representing Highland Gold's Russian
company, Rusdragmet. The other two bidders were the Amur
artel, a prospectors' group which mines gold and
platinum in the neighboring Amur region; and Alrosa
Investment Group. Pocherevin said the Amur artel
"counted on victory in the auction only if the
competition was not very strong". It dropped out of the
bidding in the early stages, he said.
Alrosa
Investment Group, he said, "had more serious plans and
participated in the auction until the price grew to
Rb815 million, and was a serious competitor for
Mnogovershinnoye." A Sakha mining source confirmed that
Alrosa Invest has been very active in recent days,
preparing its bid. In June, Alrosa Invest signed a heads
of agreement with Celtic to take a 23 percent stake in
Celtic, in return for transferring its shareholding in
the South Verkhoyansk Mining Company (operator of the
Nezhdaninskoye mine) to Celtic.
In addition to
the share swap, Alros Invest promised to raise a $20
million loan for financing start-up of the mine. That
deal has yet to be implemented, the Sakha mining source
said. Promised production this year at Nezhdaninskoye
now looks likely to be zero, postponed until next year,
the source added.
Norilsk Nickel and Polymetal,
Russia's two leading gold miners, did not participate in
the bidding for Mnogovershinnoye.
Peter
Daresbury, the chairman of Highland Gold in London, said
in a company statement, "This is a successful outcome
for shareholders. The purchase price of 818 million
rubles has secured the assets at fair value. The
management team has achieved a successful conclusion to
the auction while sustaining uninterrupted production
from the MNV [Mnogovershinnoye] mine. Highland Gold now
owns 100 percent of the assets at Mnogovershinnoye."
The Khabarovsk governor, Victor Ishaev, had a
falling-out with Highland Gold's Russian executive, Ivan
Kulakov, several months ago. However, the governor told
associates that he needed to assure that the gold mine
kept producing gold and tax revenues for his
cash-strapped region. He and other regional officials
have alleged that Highland Gold has added to its profit
line from tax and other concessions provided by the
region.
Pocherevin told Asia Times Online, "The
auction has ended in the best possible way for the
region and the company, as it now guarantees that the
owner of Mnogovershinnoye remains the same, the company
operates normally, and its work is not interrupted. We
are glad to have foreign investors at Mnogovershinnoye."
Pocherevin also said that the region expects
that Highland Gold will make investments into the MNV
property. "The reserves of the deposit provide for
effective investment," he noted, adding that the removal
of the uncertainty over the mine property should allow a
meeting with the management of Mnogovershinnoye to
discuss further prospects of the company.
According to Pocherevin, the purchase price must
be paid within a month. Highland Gold has not yet
released its interim financial report for the six months
to June 30. It has acknowledged to Asia Times Online
that it must repay about $22 million in short-term loans
from Russian banks by November.
The company
recently announced it is paying almost $12 million as
the down payment on its acquisition of the Maiskoye gold
deposit in the remote Arctic region of Chukotka; this is
another Soviet-era project that is up for grabs.
Maiskoye will require at least another $90 million, and
at least five years, before it will produce any gold,
Moscow mining experts said. Highland Gold sources have
told Asia Times Online that they have access to a $30
million bank credit.
After failing to negotiate
an increased rental or sale of the mine property to
Highland Gold, the Khabarovsk government decided against
halting gold production at the Mnogovershinnoye mine on
August 15, a deadline that had been given to the mining
company after the region terminated the leasehold
agreement the two had in May. Instead, operations were
extended until the auction deadline of September 16.
The delay triggered intense speculation among
gold miners over whether someone might stage a hostile
takeover, outbidding Highland Gold for the mine
equipment, and then putting pressure on the company to
sell down its shareholding in the company, which holds
the mine license. In the first half of this year, the
company says that it produced just over 90,000 ounces of
gold. It ranks in the top five of Russian gold mines.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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