RUSSIA:
GOLD-MINING
IN THE RFE
September 2001 By Yana Tselikova, U.S. Commercial
Service,
Vladivostok, Russia
INTERNATIONAL COPYRIGHT, U.S. & FOREIGN
COMMERCIAL
SERVICE AND U.S. DEPARTMENT OF STATE, 2001. ALL RIGHTS RESERVED OUTSIDE
OF THE UNITED STATES.
SUMMARY
After almost a decade of depression, the
gold-mining
industry in Russia has started to recover and develop. Two-thirds of
Russian
gold mining is located in Eastern Siberia and The Russian Far East
(RFE).
The recent statistics show a steady growth in gold production in the
RFE.
Considerable wear-and-tear of existing equipment and the necessity of
introducing
new technologies, combined with better access to financial resources
provide
improved business opportunities to U.S. exporters of mining machinery.
This report provides an overview of the gold-mining industry in the
RFE,
and an insight into prospects for U.S. businesses.
INDUSTRY OVERVIEW
History: Gold-mining has always been one of the
traditional
and leading sectors in the Russian Far East (RFE) economy. In Soviet
times,
the gold-mining industry was a total government monopoly, although in
the
1970s the first non-government enterprises (the so-called artels)
started
to appear. But the government still was strictly regulating the
extraction,
production, and sale of precious metals.
Before Russia started to go through reforms in
the 1990s,
the largest gold-mining enterprise in the RFE was SeveroVostokZoloto
which
covered Kolyma (Magadan), Chukotka, and Kamchatka, and produced up to
50
tons annually. Yakutzoloto from Sakha (Yakutiya) manufactured up to 30
tons per year, Amurzoloto (Amur Oblast) - 10-12 tons and Primorzoloto
(Primorskiy
and Kahabrovskiy Krais, and Sakhalin) - 8-10 tons.
Outdated labor-consuming technologies and
equipment, low
capital investments, turmoil in the Russian economy, and drop in the
gold
prices on the world's market nearly resulted in the industry's collapse
in the mid 1990s.
The reserves of gold in Western Russia are
almost exhausted.
But in Eastern Russia (Eastern Siberia and the RFE) there are at least
5 deposits with estimated reserves of over 300 tons, as well as a
number
of 100-300 ton deposits.
After Russia began shifting to a market
economy and the
government stopped supporting the gold-mining industry, most of the
companies
were experiencing considerable financial constraints during 1991-1997.
Besides, the seasonal nature of gold production made it very
challenging
to find financial resources in advance to prepare for the mining
season.
Banks were very reluctant to provide loans and credit lines, and the
interest
rates were outrageous – 40-45% in hard currency. The government support
through Komdragmet (The State Committee for Precious Stones) was more
nominal
than practical. Most of the gold-miners found themselves in financial
deadlock
- - they kept on borrowing money to pay back loans and interest.
Current Situation
The situation in the industry improved in 1998.
Like
many other export-oriented industries, gold mining has benefited from
Russia's
August 1998 financial crisis. The ruble devaluation and resulting
decreased
production costs, improved the development of the RFE's gold-mining
industry.
Most of the loans taken by gold-miners were in rubles, so with the
ruble's
collapse and with the world's market prices starting to stabilize, the
gold-mining companies were able to pay them back very easily. As a
result,
the profitability of the gold-mining industry and its attractiveness
for
the investors grew significantly by the end of 1998.
Also in March 1998 the Russian government
adopted a Federal
Law "On Precious Metals and Gemstones", and in December 1998 Decree
#1419
was issued. These new regulations released the government's strict
control
over the gold industry and gold exports. Commercial banks started to
export
Russian gold. For the first time in the history of modern Russia, its
gold
market became a part of the global market. Another positive factor was
that gold prices on the world market started to stabilize and increase
after a two-decade period of decreases (in 1998 the lowest price for 20
years was registered).
Extraction of placer gold (which is a seasonal
process)
always significantly prevailed over mining of ore gold. Over the last
few
years, however, the structure of the gold-mining industry has been
changing,
and has started to shift from extraction of placer gold to lode gold
mining.
Lode gold mining is much more attractive to investors because it is not
seasonal and is economically more effective.
Investors and banks started to more
extensively finance
gold-mining projects and companies. Sberbank became an absolute leader
in providing loans and credit lines to gold-miners. Together with
Vneshtorgbank
it accounts for almost 50% of commercial loans given to the domestic
gold-miners.
Among other banks, the most active were Moscow-based Alfa-Bank, MDM,
Zenit,
NOMOS-Bank and Menatep, as well as regional and local banks - -
Dalkombank,
Regiobank, Neryungri Bank, and Kolyma-Bank. In 2000 the average loan
interest
rate for gold-miners ranged from 15-22% in rubles, and 15-17% in hard
currency.
Some banks even provided 3-5-year credit lines.
There are some negative factors impeding
development of
Russia's gold industry. The gold-mining enterprises still lack
sufficient
capital to update equipment and technology as required.
The introduction of a 5% customs duty on gold
exports
in April 1999 disappointed the Russian gold-producers, as well as
commercial
banks involved in the gold exports. To get around this tax, the Russian
gold is now being exported via "gray routes", i.e. through countries
that
are members of the customs union with Russia. The major route is
through
Belarus (according to the Russian State Customs Committee estimates, in
the first half of 2001 96.5% of the total commercial banks' exports was
made via this former Soviet Republic).
Although the current world trend in the
gold-mining industry
is the merging of smaller gold manufacturers into larger corporations,
the rate of small companies and artels in Russia is still very high - -
about 70% (although they produce only 11% of the total gold output).
Such
small entities fail to attract investments and are often unable to
maintain
financial sustainability. But there is already emerging an
understanding
in the industry of the necessity for amalgamation to better adapt to
the
existing situation. The latter requires decreasing production costs,
introduction
of new technologies, and attraction of domestic and foreign
investments.
Another reason for merging is the on-going shifting from the placer to
lode gold production, which needs considerable initial capital
investments.
Recent Gold Production Statistics
In 2000 Russia produced 143 tons of gold, 13.2%
more
than in 1999. In the first 5 months of 2001 (before the active season
started)
the growth was already 13.9% more than in the same period of 2000.
In the RFE the most successful was Sakha
Republic (Yakutiya),
where gold production increased by 150%. One of the reasons for such
impressive
growth was the 1-ton "golden loan" given to Aldanzoloto by Komdragmet
of
the Sakha Republic (Committee of Precious Metals, a state agency), and
used for purchasing new equipment. Other leading enterprises in Sakha
are
Bamskaya, Drazhnik, Zolotinka, Zapadnaya, Nirungan, Ingali, Poisk,
Zoloto
Yinykchana, and Zoloto Neryungri.
Annual
gold production growth in Chukotka was over one ton in 2000.
Among the leaders are Ruda (35% growth in ore
gold mining),
Chukotka (300 kg increase), Arctica, Polyarnaya, and Shakhtyor.
Severniye
Rudniye Tekhnologii produced 600 kg versus 80 kg during the previous
year.
According to the statistics of the Magadan
Oblast Administration,
the volume of gold produced in 2000 was 30 tons, which is 650-kg growth
compared to 1999, and the highest results within the last 7 years.
There
is a slight shrinkage in gold production in 2001.
Amur Oblast also increased gold production,
which reached
11.86 tons in 2000. The best results were achieved by Solovyovskiy
Priisk
(1.8 tons), Maya, Vostok-1, Zeya, Rassvet, Dalnyaya, Khergu, and
Petrovskoye.
In the first 7 months of 2001 the region produced 5.18 tons (1.29 tons
of lode gold, and 3.89 tons of placer gold). It is 7.4% more than in
the
same period of 2000. By the end of this year Amur Regions plans to mine
about 13 tons.
The growth rate of the gold-mining industry in
Khabarovskiy
Krai increased 10 times, and was 35% (In 1999 it was 3.5%). In 2000
Kahabrovskiy
Krai was in 6th place among the leading gold-mining regions of Russia,
and produced 9.2 tons of gold. The projected growth in 2001 is 9%, and
the territory plans to mine over 10 tons of gold. Such dramatic
increase
was the result of the growth of ore gold mining, which now prevails
over
placer gold extraction. The largest deposits of ore gold are
Monogovershinnoye
(mined by the company with the same name, which produced 3 tons in
2000),
and Ryabinovoye (mined by Amur, which is also one of the largest
Russian
platinum producers). Other companies with growing production are
Vostok,
Sever, Zarya, Pribrezhnaya, and Ros-DV.
The results in Primorskiy Krai were much less
impressive
- - 460 kg. It was mainly because last year was the first for several
start-up
companies. But in 2001 some growth is expected. Nevada Manhattan, a
U.S.
license holder for mining Glukhoye lode has not started any site
operations
yet.
MAJOR DEPOSITS, PROJECTS, and KEY-PLAYERS
The JV Omolonskaya Zolotorudnaya Kompaniya,
the second
largest gold-mining company in Russia mines the Kubaka lode in
Northeast
Magadan. Initially the 50% share belonged to the US company Cyprus
Amax,
and another 50% was distributed between several local companies
(Dukatskiy
GOK, Magadanskaya Zolotoserebryannaya Kompaniya, Geometall, Elektrum,
and
the North-Evenk regional association of Evenk tribes). In 1996
Geometall
and Elektrum merged into Geometall Plus, and their mutual share grew up
to 28%. Later Cyprus Amax sold its share in the JV to the Canadian
Kinross
Gold Co., while 85.6% of Geometall Plus was acquired by another
Canadian
firm Western Pinnacle. Now it is a project with major Canadian
participation.
A total investment of $250 million resulted in extraction of over 50
tons
of gold since 1997. In 2000 the company mined 13 tons of gold.
The Kuranakh gold deposit (about 300 tons) in
Yakutiya
was expected to be mined by Kuranakh Gold Mining Company - - a JV
between
the local Aldanzoloto, Sakhazoloto, and Canada's Echo Bay Mines. But
now
the US Newmont Gold is in the process of purchasing shares from Echo
Bay
Mines. The Kuranakh is included into the list of deposits that are to
be
mined under PSA, but the parties have not yet agreed about the terms
and
conditions (note: the PSA process can be very lengthy, and Echo Bay has
been involved in this process for several years).
The Nezhdaninskoye lode was discovered in 1961
and is
located 800 km to the east from Yakutsk (Sakha Republic/Yakutiya).
Projected
reserves are 95 million of ore (494 tons of gold with the content of
5.1
grams per 1 ton of ore). It is the second largest gold deposit in
Russia.
In 1996 the Irish Celtic Resources Holding PLC together with the
Russian
companies Finansovo-Promyshlennaya Kompaniya and Sakhazloto formed the
JV Yuzhno-Verkhoyanskaya Mining Company. But the gold production can
start
only after the Russian Duma and the government adopts the PSA on this
deposit.
Without a PSA specifying favorable terms for foreign investors the low
initial profitability and delayed returns on investments make this
project
unattractive.
The Pokrovskoye gold lode is one of the
largest in the
Amur Oblast. It is mined by Pokrovskiy Rudnik company, which became
famous
throughout Russia for its unique experience of year-round production by
the method of glomeroblastic leaching, and mined 1.5 tons in 2000. This
year the company started to build a new gold-extraction plant with
annual
production capacity of 4 tons. The company already has produced 1.23
tons
of gold in 7 months of 2001. One of the largest deposits in the region
deposit Bamskoye (over 150 tons of projected reserves) is being
exploited
by Apsakan company. In 1-2 years it plans to produce 2-3 tons annually.
The Mayskoye deposit in Chukotka
(about 300 t of
gold in reserves) has already passed three readings, but was not signed
by the president because, according to his advisors, it must go through
additional editing to better meet the existing legal requirements. The
license belongs to the Fund of Chukotka's Development, Fund of the
Development
of the Chukotka's Economy, artel Chukotka, and Chaunskiy
Mining-Geological
Enterprise. If the PSA is adopted, several international investors are
interested in participating in this project.
The Mnogovershinnoye lode is located in the
north of Khabarovskiy
Krai near the city of Nikolayevsk-on-Amur. Its reserves are 105 tons of
gold with an average content of 9 grams per ton. Mnogovershinnoye is
mined
by the Mnogovershinnaya Company. It started development of the lode in
1999, and mined 3 tons of gold in 2000. The company plans to reach
projected
annual capacity of 5 tons in 2002.
BUSINESS OPPORTUNITIES
The major share of local gold-mining equipment
is outdated,
with a high wear-and-tear rate. There is substantial demand for a broad
range of machinery for mining both placer and lode gold, as well as
ore-dressing
and engineering equipment. Due to political, and then economic,
reasons,
U.S. equipment was rarely imported in the past. Both political and
economic
changes as well as growing gold production in the RFE present business
opportunities for U.S. exporters of mining equipment.
Among the best sales prospects are: trucks,
bulldozers,
excavators, drilling machinery, ore-dressing equipment,
ore-crushing/milling
machinery, and ore-recovering equipment.
Further Assistance for U.S. Companies This
information
is being provided by the U.S. & Foreign Commercial Service in
Russia,
which offers its services to U.S. companies wishing to sell U.S.
products
and services in Russia, including identifying distributors and
arranging
meetings with prospective buyers during business visits. Commercial
Service
Russia has offices in Moscow, St. Petersburg, Vladivostok and
Yekaterinburg.
Contact: For further information you are
welcome to contact
the author of this report at CS Vladivostok: Yana Tselikova U.S.
Commercial
Service Vladivostok 32 Pushkinskaya Street Vladivostok, Russia, 690000
Tel.: (7-4232) 300-093 Fax: (7-4232) 300-092 Int'l Fax: (7-509)
851-1211
E-mail: Yana.Tselikova@mail.doc.gov or
Vladivostok.office.box@mail.doc.gov
www.cs.vladivostok.com
Companies may obtain information on the
Russian market
and general counseling on their approach without charge. Intensive
individualized
services are available through the following customized programs: This
report is provided courtesy of the Business Information Service for the
Newly Independent States (BISNIS)
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