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Mining in Russia Braving the Bear

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Mining in Russia Braving the Bear Mining in Russia Braving the Bear TABLE OF CONTENTS Introduction.....................................................p50 This report was researched and prepared by Global Growth Drivers.................................................p53 Business Reports (www.gbreports.com) for Engineering Equipment.......................................................p56 & Mining Journal. Editorial researched and written Interview with Roman Kopin, Governor of the by Oliver Cushing, Katya Koryakovtseva, Patricia Chukotka Autonomous Region............................p58 Matey Garcia and Madeleine Furuvald. For further Services...........................................................p59 information, contact [email protected] Cover photo: Inside the shaft. Photo courtesy of Shaftproject. A REPORT BY GBR FOR E&MJ FEBRUARY 2012 MINING IN RUSSIA MINING IN RUSSIA often do not. “The mining community it- As a pre-condition to applying for a min- self has a fairer perception than investors, ing license, the applicant must have their re- wherein the problem lies. Investors have serves calculation vetted by the State Com- Mining in Russia seen things happen in Russia, not neces- mission for Mineral Reserves (the GKZ). In sarily in mining, and label it as a dangerous most cases the explorer will have to com- Russia is the world’s largest country and correspondingly rich in minerals. place to go. Some miners have left or refuse mission a JORC or NI 31-101 compliant to come here for reasons that we cannot ex- resource calculation from an external con- Yet, even today, investment capital for the mining industry is insufficient. plain. We are proof that you can make a sultant for internal purposes or in order to se- success of it out here and that there is sup- cure external funding. GKZ is not compatible port for foreign miners. However, there is with JORC or NI 31-101, though the agency room for some tweaking of the system, es- is moving to harmonize its standards with pecially to encourage exploration,” he said. those of Committee for Mineral Reserves In- ternational Reporting Standards (CRIRSCO). Permitting Amur Minerals are a base metals fo- Dr. Sergey Pepeliaev, managing director, Pepeliaev Group The issue of permitting, rather than the cused junior with three projects in eastern laws on strategic assets or political risk, Siberia. CEO Robin J. Young discussed their Country Risk may be the most significant risk associated experience applying for a mining license at Russia was rated the 11th worst mining with mining industry in Russia. the company’s most advanced project, Kun- jurisdiction in the 2010/11 Fraser Institute Companies must bid for exploration li- Manie sulphide nickel, a copper project. Survey of Mining Companies, which mea- censes, which typically last for two years “Typically, applications take six months, sures how political factors affect explora- with the possibility of extension. In a num- but we are dealing with a federal agency. Building a quarry in Oleniy Ruchey. Photo courtesy of Acron. tion investment decisions. However, Russia ber of recent auction rounds, serious appli- Just as in Canada or the US, their calen- has the same foreign currency rating (BBB) cants have been disqualified on technical dar seems to be different from ours. It has as Peru and Brazil and has maintained a grounds at the last moment. For an auction already been 20 months. There are four Russia, the world’s largest country, is also Today, companies are exploring once essentially deem any land it wants as such. stable political and economic environment to be valid, at least two parties must bid. If separate agencies that review the docu- one of the richest mining jurisdictions on again, but the volume of capital being ex- “The Mining Advisory Council helped since the election of Vladimir Putin as Presi- a second party is not present, a new auction mentation, which is eventually given to the earth. From bauxite to iron ore, gold to plat- pended in the country remains low and the submit a 16-page document to the Federa- dent in 2000. must be held and all interested parties must Ministry of Natural Resources, the ultimate inum and a lot of mineral types in between, number of juniors active is derisory rela- tion Council which contained statements Are mining executives and investors re-qualify. license granter. We are now just waiting for Russia ranks amongst the world’s top 10 tive to the sub-surface potential. from economists, lawyers, analysts, and overrating the risk of investing in Russia? Once a company has secured an explo- the fourth agency to submit their report. We in terms of both production and reserves. other professionals regarding the impact of “There is a preconceived idea that Russia ration license and identified a resource, it are making progress, but I have learned in Furthermore, the country is unusual in be- Laws 57-FZ and 58-FZ: these regulations. This document proposed is a risky place in which to invest. Inves- must apply for a mining license. this business never to project a date”. ing one of the few emerging markets with a A Barrier to Entry? re-evaluating the thresholds for some strate- tors are happy to carry on investing in many well developed domestic service and equip- In 2008, President Dmitry Medvedev signed gic assets and creating thresholds for miner- other countries that are politically unstable. ment industry. Federal Laws 57-FZ and 58-FZ, which als that do not have them under the current Russia is far from politically unstable yet Russia is nearly twice the size of Canada, regulate foreign ownership and control of legislation. For example, the current thresh- investors often treat it with a great deal of the world’s second largest country, and bor- strategic assets and industries, including old for a gold deposit before it is considered skepticism. Managers are quick to blame ders both China and the EU. Russian Rail- certain types of mineral resources. a strategic asset is 50 metric tons (mt); we failures on the country and the press tends ways is the world’s second longest rail net- For a long list of mineral resources, the hope to see that threshold changed to 250 to repeat these excuses. We feel there are work and the country enjoys port access to government has the right to insist that a mt”. a lot of opportunities in Russia which we the Arctic, Baltic, Black Sea and the Pacific. Russian firm own a controlling stake. These Many politicians recognize the need for are capitalizing on,” said Tim McCutcheon, Access to markets is good and the country is laws have had a stifling effect on exploration change and Elena Sokolovskaya, head of CEO, Ovoca Gold. well positioned to benefit from growing de- activity in the country. Should a relatively anti-monopoly group at Pepeliaev Group, The experience of one company stands mand in Asia, though internal infrastructure large resource be discovered, the explorer said: “The Council of the Federation, the out as an example of what can be achieved is in need of substantial investment. may be forced to sell a 50% plus stake in upper chamber of the Russian legislative by a foreign miner in Russia. Kinross Gold Despite the size of its industry, it’s a case it to a Russian company. The definition of assembly, approved a set of amendments to has been active in Russia since 1995. Cur- of ‘good, could do better’ for Russia. During ‘Russian’ excludes any company with for- the law during November. The amendments rently it owns one producing mine in the Soviet times quality exploration work was eign assets or subsidiaries; thus the number seek to ease government control of foreign country and is investing heavily in explo- conducted searching for strategic resources, of potential partners is extremely limited involvement in strategically important in- ration and development. The company’s but with the collapse of the Communist re- and the explorer cannot be certain they will dustries. Exempted will be transactions Kupol mine produced 554,000 oz of gold gime in 1992, state sponsored exploration be able to sell the controlling stake at ‘fair’ involving companies with sub-soil invest- and equivalents in 2010 and 925,000 oz halted and the new market system failed market price. ments that are already 25% foreign owned, in 2009. to attract private sector capital. Russian Executive director of the Mining Advisory where the size of the foreign interest does Kupol qualifies as a strategic asset, but integrated metals operations were hastily Council, Nikolay Matyash, said: “The laws not change, such as if the company issues the Canadian company was allowed to take privatized and fell into the hands of a small are problematic in numerous ways. The def- additional shares. Finally, some activities a controlling interest in the property and number of oligarchs. Due to low commodity inition of what constitutes ‘strategic assets’ will be removed from the strategically im- investing in Russia has proven to be an prices, national politics, and the personal is without clear distinction and logic: copper portant list. In brief, the amendments will extremely profitable endeavor. Even as the sentiments of many of the oligarchs, the is considered a strategic asset, while silver reduce the burden on foreign investors”. operation shifted underground, Kupol pro- 1990s and early 2000s were lost years is not. Additionally, any deposit area that While these amendments have started duced at a cost of $319/oz in 2010, against for the Russian mining sector. Owners sent contains mixed mineralization is to be con- their slow course through the Russian po- a companywide average of $508/oz. capital offshore, using little money to mod- sidered a strategic asset. The determination litical system, many fear that they will take General director of Kinross Far East, ernize already outdated mines and the sec- of land for defense and security is similarly a long time to come to fruition, or will be Warwick Morley-Jepson, argues that, while tor declined.
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