Gold Extraction Trends in RussiaGold Extraction Trends in Russia
By Nikolay Samsonov
08 May 2006 at 10:47 AM EDT
MOSCOW (Rusmininfo.com) -- The gold mining branch of Russia is in a stable condition: the prices for gold high, but rates of extraction have decreased. But the muffled approach by the State concerning new deposits has put the brakes on the industry’s high-grade development.
If Jack London had looked at the conditions today of the gold mining industry in Siberia he would certainly write: "There is no gold here!"
About 100 years ago, in the days of the development of the richest gold deposits in North America, all that prospectors needed was a tray and a shovel and the other expenses for gold mining were minimal.
Today deposits that are much poorer (for example if in the beginning of 20th century 80g/t were considered as the norm, today 10 grams is considered a success) are developed.
However, since those times the value of gold has improved as has the technologies and volumes of its extraction in the world, and the stock quotes of the companies involved in it have also strongly changed. But the attitude in countries with a market economy is that the natural resources are the property of the State, and accordingly, the account and geological prospecting its prerogative. The development of deposits, however, is in the hands of private companies.
The Price, Extraction and a Reserve
Upon analysis of the investment appeal of the gold mining industry, it is necessary to note that the tendency, and the long-term trend of the price for gold, represents a wavy line with rather a number of failures, but also without a lesser number of significant ascensions. The year 2004 became the year of ascension - the period of a long rise in prices was observed. It was a year for the tendency to be kept too.
Nevertheless, the dynamics of the price for gold are unpredictable, as are the fluctuations in the reasons, such as changes on the share or currency markets or political risk. As a result, it is necessary to consider the internal factors on the formation of the gold market.
First of all is the demand from the jewellery industry, which is important, especially in 2003 when the price had averaged $363 an ounce, and in 2004 moved up to $442 (growth - 22%). This means, that in 2004 in the world market, the deficiency of gold (it was observed and within all 2005 with insignificant variability of the price) was felt.
The market of gold "is closely fixed" at a level of the incomes of the population, and any increase in the market of jewellery (on which about 90% of all extracted precious metal are consumed) quickens, and the consumption of gold by the jewellery industry is in an inverse relationship from its price.
The second group of influence are portfolio investors. They by the means of the sale and purchase of gold try to protect themselves from risks in the currency or share markets. Pressure upon the price renders also the "shadow" market. If in a foreign market, a deficiency raises a question of whether the extracted gold inside of the country is in demand.
On the one hand, internal demand is limited. For example, in the State reserve of the Russian Federation it is not possible to buy stocks of "yellow" metal and the country produces 386.3 tonnes, which is 20 times less than the stocks of gold of the U.S. (not less than 8,000 tonnes). But gold and exchange currency reserves of the Central Bank are focused to a greater degree on currency (in their volume cost of gold is not stable moving within the limits of 4%).
On the other hand, the needs of the domestic jewellery industry are strongly narrowed on the real incomes of the population as they grow, but not at rates that allow us to speak about a revival in the jewellery industry.
Russian Production
The forecast about an increase in the extraction of gold to 3-5 tonnes, which Expert-Siberia gave in October of last year, was justified. In 2004, Russia produced 3.6 tonnes more gold than in 2003 - approximately 180.5 tonnes. And this growth is accounted for by an increase in the volumes of the manufacture of secondary gold (of 65%) while extraction at the deposits has increased only 0.5%.
Russia has nevertheless kept a place in the top five world gold mining centres. But within the regions of the country, three leaders were noted.
The second year shows the best results in the Krasnoyarsk region with 30.3 tonnes (84% provided by Polus subsidiary of Norilsk Nickel [OTCPK:NILSY]. It was followed by the Magadan area with 23 tonnes (19% by Omolonsky which is owned by Canadian Kinross Gold [NYSE:KGC; TSX:K]). In third place was the Khabarovsk territory, where volume of extraction was 21 tonne (29% provided by Multitopmost, belonging to the British company Highland Gold Mining [AIM:HGM]).
Foreign companies extract up to 16% of Russian gold. In the Siberian region, some appreciable foreign players operate. So, Highland Gold Mining, with the participation of Canadian Barrick Gold [NYSE:ABX; TSX:ABX] develops Darasunsky, Novoshirokinsky and Taseevsky deposits in the Chita area. High River Gold Mines owns a controlling stake in Open Society Burjatzoloto, and in 2004, obtained the license for geological prospecting Novofirsovsky deposit in the Altay territory. And the British Trans-Siberian Gold [AIM:TSG] conducts geological-prospecting in the Krasnoyarsk region on the Veduga deposit.
Actualization of work of these companies is in the near future, and considering their powerful investment opportunities, this will give the "foreigners" an opportunity to step over the 20% boundary of the Russian gold mining.
Alluvial Gold
The amount of the extraction of radical (ore) gold in the country has decreased over the last two years. In 2002, it increased by 12.1%, in 2005 all on 1.4%.
Alluvial gold is more convenient and does not demand significant investments and complex technologies for extraction, but such deposits will not produce much.
In 2003, the number of the companies working with alluvial gold produced 403 kilograms (in total they have extracted around 11 tonnes), and in 2004 were down to 357 kilograms (12.6 tonnes) - at a level of profitability of extraction on such deposits of 50%-60%.
It is now the time when the State has two options. The first option is the State does the geological prospecting, puts in the means, and after that sells a deposit for good money. The second is to create interest for the private companies in geological prospecting (for example, by lowering the profit tax). That way the State ownership on natural resources is kept. But by its own admission, the State is not capable of being engaged in the development of deposits of gold. It needs to do only the prospecting of deposits of real gold - and prepare the feasibility reports to organise auctions and to sell licenses.
It is remarkable that under the current legislation the company that leads the investigation does not mean that it will automatically receive this deposit to develop. The principle of a competition for the right of extraction is simple: who will pay more.
The largest gold mining deposit in Eurasia, the Sukhoi Log (Irkutsk area), with confirmed stocks of more than 1,000 tonnes of gold, is a future tender. There is an important nuance: this deposit is not fully reconnoitred, therefore nobody speaks about imbalanced stocks or about the extraction of other precious metals - platinum and a palladium.
The question asked before exploration is just how great the other deposits are. Therefore, if Sukhoi Log were sold exclusively as a gold deposit, it is obvious that the State will lose out. Its starting price is not less than $150 million dollars, though the real cost is way above that today. Applicants for participation in auction, which could take place possibly at the end of 2005 or early 2006, are Norilsk Nickel, Polymetal and the company Basic Element.
The State conducts protectionism in relation to so-called strategic deposits, limiting access to them by foreign companies (in which the share of the Russian shareholders own not less than 51% of the capital). So, the Minister of Natural Resources of Russia, Yury Trutnev has declared that Sukhoi Log in particular is subject to this restriction so foreign companies will be excluded.
Demand From Investigation
As world prices for gold grow rapidly upwards. It would seem that it is necessary to increase the extraction to the maximum to benefit the industry. But there are two factors constraining its development.
First is the weak financing of geological prospecting during the period of the 1990's and the frequent use of the out-of-date technologies at the deposits of all types, alluvial and seam. The attention to gold mining from the Ministry of Natural Resources (MPR) amplifies this, so in 2004 the federal budgets allocated 624 million roubles for investigation of gold ($23 million), and in 2005, more than 1.3 billion ($48 million).
However, it does not solve the important problem - the risk of the formation of a time lag when even intensive rates of investigation will not provide loading capacities of the gold miners using today stocks that were reconnoitred several decades ago. According to MPR, the maintenance of a modern level of extraction of alluvial gold to profitable stocks maintained will now be settled by 2015, and on radical to 2011.
The global statistics testify that within 4-5 years of a gold deposit being discovered, 3-4 years are required on its investigation and as much again on the construction of an extracting complex. So, already it is looking like in less than 10 years there will be nothing to extract - the majority of the medium-sized companies will reduce extraction or in general will leave the industry. Then the condition of gold mining industry will be dependant on decisions from the State government.
Copyright © www.rusmininfo.com 2006. Translated by Roman Karimov. Russian language source www.metaltorg.ru.
Rusmininfo is a news gathering company based in Siberia, Russia which gathers, translates and distributes news on the minerals, mining and metals industry in Russian and the Former Soviet Republics.