MOSCOW - Russia's resources overlord, Deputy Prime Minister Igor Sechin, is
considering a new plan to award the right to mine Sukhoi Log, one of the
largest unmined gold deposits in the world, to a special-purpose company backed
by Russian Technologies, the state metals and minerals conglomerate run by
Sechin's old ally, Sergei Chemezov.
The operator and goldminer in the proposal is Lenzoloto. If Sechin approves the
plan, it would become independent of controlling shareholder Polyus Gold. But
with state supervision, and not enough state money, this is another big-ticket
item which Sechin
may offer his friends in Beijing.
Chemezov's group already owns and operates VSMPO-Avisma, the titanium and
magnesium monopoly in Russia. The group has been looking to add to it
additional alloy minerals, such as molybdenum. Chemezov's Russpetsstal
("Russian Special Steel") unit currently operates several plants for special
steels and alloys used in the aviation and aerospace industries and is planning
to add more. Chemezov is also a development partner in the large unmined Udokan
copper deposit.
Although gold is not thought of in Moscow as a strategic mineral for military
purposes, a move by Chemezov to put the long-delayed Sukhoi Log deposit into
development would confirm the trend towards state sponsorship of resource
projects, which the commercially owned, publicly listed Russian mining
companies cannot afford right now.
Lenzoloto is based in the Irkutsk region and held the Sukhoi Log mining license
in a joint venture with an Australian junior, Star Mining, between 1993 and
1997. Lenzoloto is a Russian-listed company, 64% of whose shares are held by
Polyus Gold, which bought up the stock in 2004 and 2005. Another 25% stake is
held by the Westway Alliance Corporation, a British Virgin Islands holding.
Financial reports by Polyus Gold indicate that, after paying a total of $199.3
million for its takeover - a price Polyus sources later acknowledged to have
been pushed up by competitive positioning among several Russian mining groups -
it wrote down the value of the asset by $114.6 million.
Production of gold by Lenzoloto comes from alluvial dredging, and totaled
181,000 ounces in 2008, close to the results achieved in 2006 and 2007. Without
the Sukhoi Log mining right, which the Kremlin has delayed reissuing for more
than a decade, the current market capitalization of Lenzoloto is just $31
million.
This may be just the low-price springboard for Sukhoi Log that Sechin and
Chemezov are looking for. Two sources have confirmed for Asia Times Online that
Sechin's office has ordered an investigation of the feasibility of awarding the
Sukhoi Log mining license to a combination of Russian Technologies and
Lenzoloto. One is in the Department of Russian Technologies, which is doing the
current study. Official correspondence also confirms the plan outline and study
now underway.
The second source, at the Ministry of Natural Resources, confirms that the
request for a study of the new proposal has come from Sechin's office. Reserve
evaluations and feasibility studies, including drilling, have already been done
on Sukhoi Log by South Africa's SRK in 1996-97; by Placer Dome and Barrick Gold
in 1998-1999; and in 2008 by the Russian mine consultancy, TsNIGRI (Central
Geological Research Institute for Nonferrous and Precious Metals). Old
estimates of Sukhoi Log's reserves at around the 30-million ounce mark have
doubled to over 60 million oz.
In its reassessment of the deposit and mine options, TsNIGRI reports that in
the fourth year of project start-up, gold production would be about 225,000 oz.
At full capacity four years later, the production estimate is 1.3 million oz
annually.
The proposal on Sechin's desk anticipates the government would authorize
Russian Technologies to buy back the control stake of Lenzoloto from Polyus
Gold, after which Lenzoloto would apply for the Sukhoi Log mining license.
If that is granted, the company would then issue another 25% of its shares to
state banks, in return for financing for the project. The additional emission
would be preference shares only, in order for Russian Technologies to preserve
full control over the project. The sum to be raised would be about $2 billion.
Later, it is proposed, the state banks would sell these shares to strategic
investors. This is likely to be where foreign mining investors, probably the
Chinese, will get their look-in.
International and Russian mining analysts have told Asia Times Online that
without fresh mine planning of this kind, there are two scenarios for the
Russian goldmining sector - a standstill on all new projects with capital
expenditure of more than $1 billion; or a reallocation by the Kremlin of mining
rights to state-sponsored special-purpose vehicles, or SPVs, which will then be
authorized to seek direct capital subscription from the nearest and biggest
source of cash, China's mining groups.
With the blessings of Prime Minister Vladimir Putin and the government's
foreign investment commission, Sechin has already arranged similar schemes for
Chinese and Indian debt and equity investment in the oil and gas sector. Now,
it seems, it's the turn of the hard-rock mining sector - but with a
modification of the national champion concept that prevailed at Sechin's office
until last year's crash.
To US investment analyst Kim Iskyan, the national champion scenario has run out
of gas; that is to say, cash. On the one hand, Iskyan, in a report by Eurasia
Group of Washington and London, says that "the Russian government is a clear
advocate of national champion companies in the domestic economy, and the lack
of a Kremlin standard-bearer in the metals and mining sector is an obvious
omission from the government's portfolio".
On the other hand, he concedes this hasn't happened. All that the Kremlin has
managed to do so far, according to Iskyan, is to make "clear that it will do
everything necessary to prevent foreign shareholders from taking significant
stakes in so-called strategic companies that control significant natural
resources ... it is unlikely that the Russian government's attitude towards
what is sometimes perceived as foreign encroachment on the country's national
treasures will change anytime soon."
In the gold sector, Polyus recently told bank and brokerage analysts that if
the federal government won't fund a large chunk of the development costs of its
present mine portfolio, it will postpone mine development. This evident
violation of the licensing terms is being winked at, not least of all because
federal officials claim they haven't the budget money available. Polyus said
recently it is seeking to raise $320 million from the state infrastructure
investment fund, supervised by Deputy Prime Minister Dmitry Kozak. But Kozak
has already announced that the fund is closed for new projects for this year.
That means postponement until 2010 at the very earliest for Polyus's
Nezhdaninskoye gold project in Sakha. Delays at other Polyus projects, such as
Natalka, have already been conceded to be even longer.
The papers setting out the Lenzoloto takeaway for Sukhoi Log acknowledge that
Polyus Gold is unwilling or unable to commit its cash or borrowing capacity to
bid and then to build the billion-dollar mine complex. But if the state
investment funds and state banks also admit to being stretched for funds, where
will Sechin and Chemezov turn for start-up cash, if the new project gets the
green light?
The answer was hinted at in a little noticed footnote to the official
communiques of the visit to Moscow China's President Hu Jintao. The new round
of Sino-Russian talks took place in mid-June. On the sidelines it was reported
that the China National Gold Group Corporation (CNGGC) had signed a cooperation
agreement with Viktor Vekselberg's Renova group to consider gold and platinum
prospects Vekselberg controls in the Kamchatka region. Once known as
Koryakgeoldobycha (KGD), the alluvial platinum and hard-rock gold assets have
been on sale to Russian and international miners for several years, without
attracting a buyer.
CNGGC is a Chinese government-owned company, with the claim to be the largest
single gold producer in China, and holder through wholly, majority, or minority
owned stakes, of 30% of China's gold reserves and resources. CNGC is also the
parent of Zhongjin Gold Corporation, one of the fastest risers among China's
publicly listed mining companies. In the past month, Zhongjin's share price has
jumped 74% on the Shanghai exchange. Its current market cap is the equivalent
of $750 million.
Renova spokesman Andrei Shtorkh isn't giving details of Renova's agreement with
CNGGC. That would be dwarfed by the deal, if Sechin and Chemezov decide to open
the Sukhoi Log goldmine to state-backed investment from both Moscow and
Beijing.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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