Worth its Wait in Gold

Russia Needs to Improve Efficiency in Gold Production Before Its Impressive Resources Can Make It Onto the Market  
Valery Rudakov, the chairman of the Committee for Mining, Production and Trade of Precious Metals and Stones at the Russian Chamber of Commerce and Industry, suggested on Tuesday that Russia has the potential to become the world’s largest gold producer within the next decade. But the chances of his vision coming true seemed slim when gold industry insiders met at the Adam Smith CIS Metals Summit in Moscow on Tuesday to discuss the sector.

Tim McCutcheon, the CEO of Ovoca Gold, a gold exploration and mine development company with assets in Magadan, was positive about Russia’s potential: “Russia is a huge player, Russia matters, you have to be in Russia,” he said during the opening session of the conference. McCutcheon also said that Russian mines have a longer life expectancy than their key competitors. “Russia’s average mine life is 25 years, compared to countries like Australia where it is ten to 15 years.”

But turning that potential into production is proving difficult. Despite being the world’s fifth largest gold miner, McCutcheon views Russia as “underexplored, undermined and underrepresented in asset portfolios.”

Will Russia become the world’s largest gold producer in the next ten years? Tell us on Facebook
In the last two years, convincing investors to back Russian gold producers has been made more difficult by certain aspects of the global economy, such as investors’ increased risk aversion in the wake of the financial crisis. This is despite the continuation of the strong growth trend for gold products, which began in 2001. Russian steel giant Severstal’s decision to scrap a London listing of its gold mining arm Nordgold last week reflects this skepticism among investors. Nordgold, Russia's second largest gold company, had set its price range at between $4.7 and $6.2 per share, valuing the company at between $4.0 to 5.1 billion. Severstal opted to scrap the listing due to weak market conditions.

McCutcheon said perceptions of how hard it is to do business in Russia are having a negative impact on the attractiveness of Russian gold assets and their value on international exchanges. “We’re battling with perceptions, it’s a slow process, but it’s the cost of doing business in Russia.”

For Robert Mantse, the director and senior metals and mining analyst for the equity research group at Otkritie Bank, these risks have been exaggerated. “There is too much government involvement. However, I think the perception is worse than the reality,” he said. Mantse further called for analysts to give potential investors an independent opinion about mining companies, so that they have a clearer idea of the situation and can make more informed investment decisions.

There are many other issues preventing further growth in the industry that gold companies, the central government and relevant regional governments in Russia could work together to improve. These include amending legislation, improving infrastructure and raising the profile of Russian gold assets abroad.

A number of logistical difficulties pose problems for both Russian and foreign investors alike. The location of many of Russia’s gold assets means that miners have to deal with major climate and transport issues, as well as struggle to find talented and qualified local staff. “We’ve had a huge problem with drill contractors in the Far East,” said McCutcheon.

A major challenge for players in the Russian industry is capitalizing on the expertise of foreign partners eager to enter the Russian market. These investors and experienced mining companies could both speed up the production process and make it more efficient, but many are put off by the investment climate in the country. One problem is the shortage of junior mining companies operating in Russia. Acquiring one of these firms, which take on the risk of exploration in the early stages of mining development, is a common way for foreign investors to enter the market.
“The key thing Russia needs is exploration. There are virtually no junior mining companies here,” said McCutcheon.

Another barrier to attracting foreign investment is not unique to the mining sector. In April of 2008 Russia passed Federal Law 57 to protect what it considers to be “strategic industries.” The law restricts the involvement of foreign investors and companies in certain sectors, including the exploration or production of natural resources. The State Duma is due to review this law in May, but for the moment foreign mining companies have to deal with a prohibitive amount of bureaucracy. This is true for companies mining gold as well as silver, such as Silver Bear Resources.

Randolph Lewis, managing director of Silver Bear Resources, said: “It is more difficult to work in Russia because there are too many instances when a company needs something from the government. It would be better if companies were able to do things more independently.”

The company has been in Russia for five years and is working on a silver mine project in Sakha Yakutia. “I do think Silver Bear is a success, but not completely. We’ll be a success when we have opened a mine in Yakutia. Success will be when we’ve created an actual resource, but that silver is still in the ground,” Lewis said, adding that a major hurdle in the future will be converting the company’s current license to explore to a license that will allow Silver Bear Resources to mine

Posted in: world news