RUSSIA MINING SECTOR 2019/2020
An EMIS Insights Industry Report
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CONTACT US www.emis.com FOLLOW US ABBREVIATIONS
CAGR Compound Annual Growth Rate
CDDFEC Central Dispatching Department of Fuel and Energy Complex
CIS Commonwealth of Independent States
ECM Equity Capital Market
FASU Federal Agency for Subsoil Use
FCS Federal Customs Service
FMST Federal Ministry of Sustainability and Tourism
FSSNR Federal Service for Supervision of Natural Resource
GVA Gross Value Added
HBI Hot Briquetted Iron
LME London Metal Exchange
MNR Ministry of Natural Resources and Environment
M&Q Mining and Quarrying oz Ounce koz Thousand ounces moz Million ounces
RGMU Russian Gold Miners Union
RUB Russia Rouble Federal Service for Ecological, Technological and Nuclear Rostekhnadzor Supervision USGS United States Geological Survey
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. CONTENTS Polyus Gold ALROSA EVRAZ Metalloinvest Norilsk Nickel 04COMPANIES IN FOCUS Activity M&A DealsM&A MarketGold Diamond Market Nickel Market Iron Ore Market Coal Highlights Timeline COMPETITIVE 03 LANDSCAPE Employment and Wages Foreign Investments Foreign Trade PositioningGlobal Production Main Main 02 Restraining Driving Outlook Sector Sector Sector 01EXECUTIVE SECTORIN FOCUS Market Sector Indicators Indicators Economic Snapshot Overview in Numbers Forces Russia Mining Forces SUMMARY p. p. p.13 p.5 3 2 4 4 CONTENTS Production Regions Focus MiningDiamonds PricesGold Focus MiningGold Main Highlights MINERALS 07PRECIOUS METALS & Copper Price Copper Foreign Trade Copper Production Nickel Prices Nickel Foreign Trade Nickel Production Iron Ore Prices Iron Ore Foreign Trade Iron Ore Production Federal District Focus Coal Coal Production Focus Main Highlights 06COMPETITIVE LANDSCAPE Licences Government Regulations Main Regulatory Bodies 05 REGULATORYENVIRONMENT Exports Events Events Point Point Point Point – – – – Alrosa MiningGold Resources Metal Ore Production by Coal Production by Area Largest Diamond p.5 p p .5 .73 1 6 RUSSIA MINING SECTOR 2019/2020 An EMIS Insights Industry Report CONTENTS
01 EXECUTIVE SUMMARY
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 5 01 EXECUTIVE SUMMARY CONTENTS
Sector in Numbers
12.9% RUB 10.8% of GDP 18.2tn CAGR M&Q Sector Production Production Growth GVA Value 2012–2018
No. 1 No. 2 No. 3 Diamond Producer Coal Reserves Gold Producer Globally Holder Globally Globally
USD USD 1.1mn 290.7bn 5.0bn Mineral Product Sector Exports Net FDI Employment
Source: Statistics Office, FCS, CEIC, USGS, BP Statistical Review of World Energy
RUSSIA MINING SECTOR 2019/2020 6 An EMIS Insights Industry Report 01 EXECUTIVE SUMMARY CONTENTS
Sector Overview
The mining industry is of strategic importance to the Russian economy, contributing about 12% to the GDP, providing jobs to 1.1mn people and contributing a third to government revenues. Since Russia hosts one of the world’s largest mineral resources, its mining sector is an important supplier for the global economy. In 2018, Russia ranked as the largest miner of rough diamonds, the third largest gold producer and the third largest coal exporter. The mining industry is a significant contributor to overall exports and an important source of hard currency for Russia. In 2018, exports of minerals accounted for close to 65% of the country’s total exports.
Entry Modes The government has imposed high entry barriers, restricting foreign ownership and investment in the sector. Foreign investors are allowed to own a stake of up to 25% in any Russian mine and they have to be granted a special permit by the regulator. Local companies are privileged in terms of possession of mines and it is be difficult for a foreign company to get a mining licence. The best way to enter the sector is through joint ventures with local players and minority stake acquisitions. In search of extra cash, the government is offering for sale stakes in mineral raw commodity producers, creating opportunities for new players to enter the market. Foreign investors can participate in this privatisation provided they register a subsidiary in Russia. However, they will only be allowed to buy minority stakes, as control over strategic enterprises must remain within the Russian state.
Segment Opportunities The best opportunities for growth exist in the segment of iron ore mining as the global market is currently experiencing an undersupply due to the collapse of a dam in Brazil in January 2019, which derailed the world's biggest iron ore producer Vale. Strong demand from Asia will support an increase in Russia’s coal exports, which hit record levels in 2017 and look set to continue rising over the next few years as China banned imports from North Korea and continues to eliminate outdated coal capacity. The segment of nickel mining, which is presented largely by Norilsk Nickel, is positioned to gain from the rapidly growing use of electric vehicles (EV). The company is getting involved in battery manufacturing through a partnership with BASF in Finland and plans to expand its nickel production by 15% over 2019–2026.
Government Policy All mineral resources located underground in Russia are the property of the state regardless of land ownership. In order to conduct exploration and mining activities, an entity must obtain one of the three types of subsoil licences: exploration, production or a combined licence. The mining and quarrying sector is highly regulated and foreign players are restricted form entering it.
Source: EMIS Insights, MNR, Company Data, USGS, BP Statistical Review of World Energy, FCS, CEIC
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Sector Snapshot Russia Mining Sector
PRODUCTION RUB 18.2tn USD 291.8bn Value Value Mining of Energy Producing Materials: RUB 14.7tn Mining of Non-Energy Materials: RUB 3.6tn
EXPORTS USD 290.7bn
TURNOVER RUB 17.7tn Mining and Quarrying Industry Sales
Energy Segment: Non-Energy IMPORTS RUB 14.1tn Segment: RUB 3.7tn USD 5.0bn Sales of Energy-Related Sales of Energy -Related Materials Materials
KEY PLAYERS’ REVENUES 1. Evraz – USD 12.8bn 2. Norilsk Nickel – USD 11.7bn 3. Metalloinvest – USD 7.2bn 4. Alrosa – RUB 299.6bn 5. Polyus Gold – USD 2.9bn
Note: Data for 2018. Source: Statistics Office, FCS, CEIC, Company Data
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Sector Snapshot Russia Mining Sector
The Russian mining and quarrying (M&Q) sector generated a gross value added (GVA) of RUB 12tn in 2018, equal to nearly 13% of the country’s GDP. The M&Q production value increased by 34% y/y to RUB 18.2tn in 2018, driven by the segment of energy commodities, which experienced an expansion of 40% y/y to RUB 14.7tn (80% of the total), while the non-energy commodities added 15% y/y to RUB 3.6tn (20% of the total). Due to the depreciation of the rouble, the production value of M&Q grew at the slower rate in US dollar terms of 25% y/y to USD 291.8bn. M&Q trade turnover increased by 31% y/y to RUB 17.7tn, mainly as a result of commodity price rises on the global markets. Coal trade turnover added 29% y/y to RUB 1.7tn, the oil and gas trade turnover rallied by 39% y/y to RUB 12.4tn, while the trade turnover with metal ores experienced a rise of 18% y/y to RUB 1.2tn.
Russia is a major supplier for the global economy both of energy and non-energy minerals. In 2018, the country’s mineral trade surplus widened by 37% y/y to USD 285.7bn, reflecting stronger export demand and rising commodity prices. The overall minerals exports jumped by 36.1% y/y to USD 290.7bn, while imports went up by 11.8% y/y to USD 5bn.
In 2018, Russian coal production hit a 5-year high reaching 440.2mn tonnes, up 6.9% y/y, driven mainly by rising shipments abroad, underpinned by higher market prices. In 2018, iron ore production advanced by 0.9% y/y on stronger global demand as well as supply rationalisation in China, which supported iron ore prices in 2018. Nickel production, on the other hand, dropped by an estimated 1.9% y/y to 210,000 tonnes in 2018, according to data provided by the United States Geological Survey (USGS). Higher global demand from cable and wire manufacturers lifted the Russian copper production volumes by 6% y/y to 747,700 tonnes. The production of gold went up by 4% y/y to 264,400 tonnes, while that of diamonds shrank by 2.8% y/y to 24.4mn carats.
One of the largest players in the mining sector is Norilsk Nickel, which is also the world’s largest producer of nickel and palladium and one of its leading producers of platinum and copper. The company generated revenues of USD 11.7bn in 2018, up 228% y/y. Another major player in the sector is EVRAZ – a vertically integrated steel, mining and vanadium business company. It is among the top steel producers in the world, with revenues of USD 12.8bn in 2018, up 19% y/y. PJSC Alrosa is a government-controlled diamond-mining company that holds 28% of the world’s total diamond production, making it the largest global diamond player. In 2018, Alrosa earned RUB 300bn in revenues, or 9% more than in 2017. Metalloinvest is a vertically integrated iron ore and steel company and the largest iron ore producer in Russia. Metalloinvest had revenues of USD 7.2bn in 2018, an increase of 15% y/y. The largest gold producer in Russia is Polyus Gold. It is also among the top 10 gold producers globally and is the holder of the world’s second-largest gold reserves with revenues of USD 2.9bn in 2018.
Source: Statistics Office, FCS, Ministry of Finance, CEIC, Company Data
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Sector Outlook
Comments Russia’s coal mine production is projected to grow at a CAGR of 2.3% in the 2019–2025 period, underpinned by government investment, solid construction sector growth and vast coal deposits yet to be exploited, according to Fitch Solutions. Domestic demand for coking coal will be supported by the rising activity in the infrastructure and construction sectors. The Russian government wants to develop the country's coal reserves, alongside major investment into logistics and engineering capacities. The expected pick-up in the construction sector will also drive the iron ore mining and processing segment. Over 2019–2025, iron ore production is estimated to grow by a 0.7% CAGR and move towards the 100mn mark in the final year of that period. A major factor expected to hold back the sector’s growth will be waning Chinese consumption. According to Fitch Solutions, Russian nickel output will increase in the coming years, spurred by rising global prices. The country is well poised to be a key supplier of nickel for the growing EV market, which will drive nickel production by CAGR of 1.6% for 2019–2025. Russian gold production growth shall accelerate in 2019 as domestic demand for the precious metal is buoyed by the possibility of further Western sanctions on state banks, which will respond by increasing their reserves of gold. In the longer term, gold production will be supported by a healthy project pipeline.
Sector Forecast
2019f 2020f 2021f 2022f 2023f 2024f 2025f
Coal Mine Production, mn 367.8 376.5 385.5 395.0 403.8 413.48 422.2 tonnes
Iron Ore Mine Production, mn 95.48 95.5 95.0 96.0 96.9 98.4 99.8 tonnes
Nickel Mine Production, thou 213.15 216.4 219.6 222.9 226.2 229.6 234.2 tonnes
Palladium Mine Production, 2.96 3.02 3.08 3.17 3.23 3.30 3.36 moz
Platinum Mine Production, 0.73 0.74 0.75 0.75 0.76 0.77 0.78 moz
Gold Mine Production, moz 10.82 11.3 11.64 11.93 12.17 12.48 12.85
Source: Fitch Solutions
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Driving Forces
Russia is a major producer and supplier of coal, nickel, iron ore, copper, lead, bauxite, gold, diamonds and many other industrial and precious metals and minerals. This, coupled with the growing global economy and the depreciating rouble, has stimulated export shipments and mining production. Commodity prices have rebounded from the low levels of 2016 and given extra incentive to domestic miners. In recent years, due to Russia’s strained relations with the West, domestic miners turned their focus towards Asian countries in an attempt to diversify the export markets away from the traditional European destinations.
External Global demand for commodities remains strong, driven largely by China which is the second largest economy in the world and continues to rise rapidly. On the other hand, since 2016, there has been some rationalisation of China’s metals capacity, the world’s largest producer of many metals. This has led to market rebalancing and supported metal commodity prices. The average prices of industrial metal commodities have rebounded from the low levels of 2016, making extraction more profitable and stimulating production volumes. The average prices for precious metal commodities have been on an upward trend since September 2018, mainly driven by the higher demand for gold. On the domestic market, favourable macroeconomic conditions in Russia and government programmes for infrastructure and residential investments are the main drivers for steel demand. The still weak value of the rouble is improving the competitive position of the Russian mining industry on international markets, as production costs are priced in roubles, while commodities abroad are priced in US dollars.
Internal With its geological peculiarities and vast territory, Russia is one of the world’s richest mineral resources, and as such is a major contributor to the global economy. The sector is also bolstered by the country’s proximity to the EU, one of the biggest markets in the world, with a population of more than 500mn people and its border with China, which has a population of almost 1.4bn people and needs vast mineral resources to fuel its fast-growing economy. Considerable investments in the mining sector in the past have ensured a competitive advantage for domestic companies compared to their global peers, since Russian companies are enjoying some of the world’s lowest extraction costs. The Russian gold producer Polyus Gold, The nickel, platinum and palladium company Norilsk Nickel as well as the Russian diamonds producer Alrosa claim to maintain the lowest cash cost production structure among their global peers.
Source: EMIS Insights, Company Data
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Restraining Forces
The rising risks of a global recession going into 2020 is the main restraining factor for Russian miners that rely heavily on the global markets for their commodity shipments. The rising trade tensions between the US and China, coupled with the global trade wars in the steel and aluminium segments challenge the domestic mining industry. Local miners are heavily exposed to the volatility of industrial and precious metals prices; any supply-and-demand imbalance on the global markets could affect pricing pressure and reduce the revenues and return on investment projects for mining companies. Foreign investments in the sector are restricted by the unfavourable regulatory environment, which prevents expertise from entering mining extraction and production.
External There is a rising consensus among economists that the US and the world economy could slump into recession in 2020–2021. This could potentially reduce demand for commodities and put prices under pressure. The situation is further complicated by global trade wars in the steel and aluminium segments as the major producing countries slapped tariffs on imports in recent years. Russian mining companies have been warned they risk direct sanctions, after the US imposed economic sanctions in April 2018 on the Russian tycoon Oleg Deripaska, the owner of Russia’s sole aluminium producer Rusal. There are growing concerns that other miners and investors in the sector might be added to the black list and thus have difficulties of funding their operations with hard currency. Western sanctions constrain Russia’s ability to fund its infrastructure projects, which has negatively affected growth in the mining industry. The mining sector is viewed by the state as strategically important and is a key source for budget revenues and economic growth. Thus, the government regulates the industry heavily and strictly controls mining supply.
Internal Although the country has vast mineral resources, some minerals like gold and iron ore have lower ore quality because the higher-grade portions of the deposits have been depleted. The majority of the country’s mineral deposits are located in remote areas which have a longstanding problem of inadequate infrastructure such as limited capacity of ports and railway transport. The remoteness of the potential mineral facilities entails significant logistics costs which have an impact on the final price of the minerals mined. In addition, ageing metal mines are also a drag on production growth, while the economic crisis prevented the development of new projects. The mining business is capital intensive, requiring large investments and relatively longer payback periods. This, coupled with the government’s protectionist measures that closed the mining industry for foreign investors, decreased competition and a few large players dominate almost all mineral mining segments.
Source: EMIS Insights, MINING.com
RUSSIA MINING SECTOR 2019/2020 12 An EMIS Insights Industry Report RUSSIA MINING SECTOR 2019/2020 An EMIS Insights Industry Report CONTENTS
02 SECTOR IN FOCUS
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Main Economic Indicators
2013 2014 2015 2016 2017 2018 H1 2019
GDP, Current Prices, RUB tn 73.1 79.1 83.1 86.0 92.1 103.9 50.7
GDP Real Growth, % 1.8 0.7 -2.3 0.3 1.6 2.3 0.9
M&Q Sector GVA, RUB tn 5.9 6.2 7.3 7.4 8.9 12.0 6.1
M&Q Sector GVA, % of GDP 9.3 9.1 9.7 9.6 10.7 12.9 12
Population 143.7 146.3 144.98 145.3 145.5 145.7 145.9*
Unemployment Rate, % 5.6 5.3 5.8 5.3 5.1 4.9 4.4
PPI, y/y % change 3.6 6.1 13.8 4.4 7.7 11.9 8.9
Mining & Quarrying PPI, y/y 4.6 6.9 10.9 0.4 16.2 25.3 17.6 change, %
Foreign Trade Balance, USD bn 212.3 211.2 160.8 103.4 130.3 211.1 92.9
Foreign Trade Balance, % of 9.3 10.2 11.8 8.0 8.3 12.8 n/a Nominal GDP
USD/RUB Exchange Rate, 32.7 56.3 72.9 60.7 57.6 69.5 63.1 period-end
Monetary Policy Rate, period- 5.50 17.00 11.00 10.00 7.75 7.75 7.50 end, %
Official Reserve Assets, USD bn 509.6 385.5 368.4 377.7 432.7 468.5 518.4
Net FDI, USD bn 69.2 22 6.9 32.5 28.6 8.8 10.2**
Net FDI in M&Q Sector, USD bn 7.1 4.5 11.5 22.3 8.3 5.0 3.5**
* As of early October 2019; ** For Q1 2019 Source: Statistics Office, FCS, Central Bank, CEIC, UN Population Estimate
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Main Sector Indicators
2013 2014 2015 2016 2017 2018
M&Q Sector Production Value, RUB 9.8 10.7 11.2 11.7 13.6 18.2 tn
Output of Energy Producing 8.8 9.6 9.9 10.2 10.5 14.7 Materials, RUB tn
Output of Non-Energy Producing 1.0 1.1 1.3 1.5 3.1 3.6 Materials, RUB tn
M&Q Sector Trade Turnover, RUB tn 9.1 9.6 11.2 11.7 13.5 17.7
Mineral Product Exports, USD bn 374.6 349.5 219.4 168.4 213.6 290.7
Mineral Products, % of Total Exports 71.0 70.2 63.9 58.9 59.7 64.7
Mineral Product Imports, USD bn 6.4 7.1 5.0 3.2 4.4 5.0
Mineral Products, % of Total Imports 2.0 2.5 2.7 1.8 1.9 2.1
M&Q Sector Employment, thou 1,075 1,064 1,082 1,088 1,127 1,117 people
M&Q Sector, % of Total Employment 1.5 1.5 1.5 1.5 1.6 1.5
Registered Enterprises, thou units 17.4 17.8 18.5 18.2 17.6 17.5
Coal Production, mn tonnes 346.8 355.6 371.9 385.5 411.6 440.2
Iron Ore Concentrate, mn tonnes 102.0 101.7 101.0 101.1 95.0 95.9
Nickel Production, tonnes 264,000 264,000 261,000 223,000 221,000 n/a
Gold Mining, tonnes 215.7 230.7 235.1 237.8 254.2 264.4
Copper Production, thou tonnes 655.0 691.5 711.4 702.3 705.4 747.7
Source: Statistics Office, FCS, RGMU, CEIC
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Production
Comments The Russian mining sector witnessed a record year in 2018 with the mining and quarrying (M&Q) sector production value rising by 34% y/y to an all-time-high of RUB 18.2tn, equal to 17.5% of the country’s nominal gross domestic product (GDP) in 2018. The robust growth was supported by a combination of higher production volumes and prices. Energy-producing materials like oil, gas and coal dominate the sector, accounting for 81% of the total mining and quarrying production value in 2018. The sub-sector’s production value surged by almost 40% y/y to RUB 14.7tn, while the non-energy sub-sector (industrial and precious metals and other non-energy minerals) experienced a rise of 15% y/y to RUB 3.6tn. The mining and quarrying index, which reflects sector production dynamics in volume terms, grew by 3.9% y/y in 2018 and by another 3.7% y/y in the seven months of 2019. Strong export demand has been the major driver of growth. In US dollar terms, M&Q production also expanded at robust rate, growing by nearly 25% y/y to USD 291.8bn in 2018. Energy-producing materials had a 78% share of the total, with coal alone taking 69%. Oil and gas extraction contributed 8.5%, while metal ores production accounted for 7.1% of the sector’s production value. Increased production and rising external demand have supported sales in the M&Q sector, which grew at a CAGR of 14% in the 2010– 2018 period.
M&Q Sector Production, RUB tn M&Q Sector Production, USD bn
14.7 308.9 18.2 33.5% 280.9 291.8 10.5 24.9% 10.2 233.7 9.6 9.9 13.6 8.8 10.0% 11.7 7.5 184.7 175.0 10.7 11.2 9.8 1.3% 9.3 -5.2% 142.7 -9.1% 3.1 3.6 1.8 1.0 1.1 1.3 1.5 -34.2%
2013 2014 2015 2016 2017 2018 H1 2019 2013 2014 2015 2016 2017 2018 H1 2019
Energy Producing Materials Mining and Quarrying Production, USD bn Non-Energy Producing Materials Total y/y change
Source: Statistics Office, Central Bank, CEIC
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Production (cont’d)
M&Q Production Index, y/y change
3.9% 3.8% 3.7%
2.6% 2.2% 1.8% 1.4% 1.0% 1.1%
0.4%
2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan-July 2019
M&Q Production Value by Mineral M&Q Sector Trade Turnover Group, 2018 17.7 31.3% Oil & Gas 13.5 8.5% 11.7 11.2 Metal Ores 9.6 7.1% 9.1 9.0 16.3% 15.9%
Coal 68.8% Others 10.4% 15.6% 5.8% 3.6% 4.0%
2013 2014 2015 2016 2017 2018 H1 2019
Mining and Quarrying Trade Turnover, RUB tn y/y change
Source: Statistics Office, CEIC
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Global Positioning
Major Gold Producers, tonnes, 2018
10. Uzbekistan 5. Canada Production: 105 Production: 185 Reserves: 1,800 Reserves: 2,000
3. Russia Production: 295 Reserves: 5,300
4. USA Production: 210 1. China Reserves: 3,000 Production: 295 Reserves: 5,300 8. Mexico Production: 125 Reserves: 1,400
6. Peru Production: 145 Reserves: 2,600 7. Ghana Production: 130 Reserves: 1,000
2. Australia World 9. South Africa Production: 310 Production: 3,260 Production: 120 Reserves: 9,800 Reserves: 54,000 Reserves: 6,000
Russia is the world’s third largest gold producer after China and Australia, holding about 9% of the global output in 2018, according to USGS estimates. Its leading position in the gold mining segment stems from the fact that the country is the third largest gold reserve holder. The country also hosts the largest reserves of diamonds and ranked on the first spot in terms of diamond production in 2018. With its output of 19mn carats, Russia accounted for a third of the global diamond mine supplies in 2018.
According to USGS, Russia is also among the top countries in terms of iron ore reserves and production. As of end-2018, the country had the third largest iron ore (iron content) reserves amounting to 14,000 tonnes. In 2018, it contributed to about 4.1% of the global iron ore production and ranked as the fifth largest iron ore mining country.
Source: USGS
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Global Positioning (cont’d)
Major Diamond Producers, Major Iron Ore (Iron Content) mn carats Producers, mn tonnes
1. Russia 1. Australia Production: 19 Production: Reserves: 650 560,000 Reserves: 24,000 2. Brazil 2. Australia Production: Production: 17 310,000 Reserves: 120 Reserves: 17,000 3. China 3. Congo Production: Production: 15 210,000 Reserves: 150 Reserves: 6,900 4. India 4. Botswana Production: Production: 7 130,000 Reserves: 90 Reserves: 3,200 5. Russia 5. South Africa Production: Production: 2 61,000 Reserves: 70 Reserves: 14,000 6. South Africa 6. Zimbabwe Production: Production: 2 52,000 Reserves: n/a Reserves: 770 Other Countries Other Countries Production: Production: 1 177,000 Reserves: 90 Reserves: 18,130
World Total World Total Production: 63 | Reserves: 1,200 Production: 1,500,000 | Reserves: 84,000
Source: USGS
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Global Positioning (cont’d)
Comments Major Coal Mining Countries, mn tonnes
Coal Production, mn Russia is the World’s fifth largest coal mining Share tonnes country, holding 6% of the global output, China 1,828.8 47% according to data from BP for 2018. The country US 364.5 9% holds the world’s second largest coal reserves, contributing to 15% of the global total. According Indonesia 323.3 8% to USGS, Russia shares the third place in nickel India 308.0 8% production with New Caledonia, with an Australia 301.1 8% estimated 9.1% share in the global production in Russian Federation 220.2 6% 2018. Russia controls 8.5% of the global nickel South Africa 143.2 4% reserves. The country is among the major copper producers, ranking on the 10th spot in 2018. Colombia 57.9 1% Russia contributes to 3.4% of the global Kazakhstan 50.6 1% production and to 7.3% of the global copper Others 319.1 8% reserves. Total World 3,916.8 100%
Major Copper Producers, thou tonnes Major Nickel Producers, tonnes
Production, 2017 Production, 2018 Reserves, 2018 Production, 2017 Production, 2018 Reserves, 2018 Chile 5,500 5,800 170,000 Indonesia 345,000 560,000 21,000,000 Peru 2,450 2,400 83,000
China 1,710 1,600 26,000 Philippines 366,000 340,000 4,800,000 USA 1,260 1,200 48,000 New Caledonia 215,000 210,000 — Congo 1,090 1,200 20,000
Australia 860 950 988,000 Russia 214,000 210,000 7,600,000
Zambia 794 870 19,000 Australia 179,000 170,000 19,000,000 Indonesia 622 780 51,000
Mexico 742 760 50,000 Canada 214,000 160,000 2,700,000
Russia 705 710 61,000 Others 627,000 650,000 33,900,000 Others 4,250 4,400 210,000
World Total 20,000 21,000 830,000 World Total 2,160,000 2,300,000 89,000,000
Source: BP Statistical Review of World Energy, USGS
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Foreign Trade
Comments Mineral Product Trade Surplus, USD bn
Russia is a major supplier for the global economy 366.8 368.2 both of energy and non-energy minerals. In 2018, 342.3 the country’s positive mineral trade balance widened by 37% y/y to USD 285.7bn on the back of 285.7 rising export demand and higher commodity 214.4 prices. Moreover, mineral imports growth has 209.1 been slower due to lacklustre economic growth 165.2 and the weak rouble, which makes imports 131.7 costlier in local currency terms. Still, the mineral surplus was well below the peak value of USD 366.8bn in 2012, when the oil and gas prices were much stronger. The overall minerals exports jumped by 36.1% y/y to USD 290.7bn, while imports advanced by 11.8% y/y to USD 5bn. 2012 2013 2014 2015 2016 2017 2018 H1 2019
Mineral Products Exports Mineral Products Imports
374.0 374.6 7.2 349.5 36.1% 7.1 26.8% 6.4 38.2% 290.7 5.0 5.0 8.3% 19.9% 219.4 213.6 4.4 0.2% 11.7% 11.8% -2.5% 3.2 168.4 -6.7% 1.7% 134.2 2.4 -23.2% -11.7%
-37.2% -29.5% -36.1% 2012 2013 2014 2015 2016 2017 2018 H1 2019 2012 2013 2014 2015 2016 2017 2018 H1 2019
Mineral Product Exports, USD bn y/y change Mineral Product Imports, USD bn y/y change
Source: FCS, CEIC
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Foreign Investments
Net FDI by Sub-sector, USD mn
26
11
7 7 7 5 5 2 2 1 1 1
0 0 -2 -3 2011 2012 2013 2014 2015 2016 2017 2018
M& Q, Energy M& Q, Non-Ener gy
M&Q Sector Net FDI, USD bn Comments
Net foreign direct investment (FDI) in Russia’s 22.3 32.6% mining and quarrying sector peaked to USD 25.7bn in 2016 thanks to a number of major deals such as
23.5% the sale of a 24% stake in Russian oil company 21.7% Vankorneft to an Indian consortium and the 11.5 18.9% 7.1 privatisation of an 11% stake in diamond producer 8.3 Alrosa. In 2018, the sector’s net FDI plunged by 4.8 13.5% 13.0% 11.2% 63% to USD 5.0bn, with the subsector of fuel and 9.6% 4.5 5.0 3.5 energy materials accounting for all the investment net flows. In terms of overall FDI net flows, the mining and quarrying sector absorbed 22% of the 2012 2013 2014 2015 2016 2017 2018 Q1 2019 total in 2018, up from 19% in 2017.
M&Q Sector Net FDI, USD bn Share of Total FDI Inlows
Source: Central Bank
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M&Q Sector Employment
Comments Average Monthly Wages, RUB
The mining and quarrying sector in Russia employed some 1.1mn people at the end of 2018, 127,584 down 0.8% compared to 2017, and accounting for 103,849 1.5% of the country’s total employment. After temporary setbacks in 2013 and 2014, the sector 83,262 74,417 resumed hiring and increased the overall 70,026 60,788 employment, by adding some 53,000 jobs on a 59,708 53,185 net basis in 2015–2018.
The average monthly wage in the sector in 2018 was RUB 83,200, or 92% higher compared to the national average of RUB 43,445. Employees’ 2017 2018 monthly wages vary across the mining segments Sector Average Coal from as low as RUB 59,700 in the coal segment to Oil and Gas Metal Ores RUB 127,500 in the oil and gas sector.
Sector Employment
1,127 1,117 1,080 1,075 1,082 1,088 1,063 1,064 3.6%
1.6% 1.7%
0.6% 0.6%
-0.5% -0.8% -1.0%
2011 2012 2013 2014 2015 2016 2017 2018
Mining and Quarrying Employment, thou persons y/y change
Source: Statistics Office, CEIC
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03 COMPETITIVE LANDSCAPE
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 24 03 COMPETITIVE LANDSCAPE CONTENTS
Timeline Russia Mining 1935 Market Players Norilsk Nickel, the country’s largest diversified mining company, is established.
1992 Market Players
Russia’s leading steel company EVRAZ is established 1994 Market Players Russia enacts the Subsoil Law. Russia privatises Norilsk Nickel. Development Milestones
1998 Development Milestones The government enacts the Law on Precious Development Milestones Metals and Precious Stones. 2004 The Federal Agency for Subsoil Use is established. The agency is in charge of issuing and terminating subsoil licences.
2008 Development Milestones Russia enacts the Strategic Investments Law for FDIs in strategically important sectors, restricting Development Milestones foreign participation in the mining industry 2014 Russia scraps nickel and copper export duties.
Russia and China agree to develop coal deposits in Russia’s Siberia region and the Far East. 2016 Market Players
The government sells a 10.9% stake in diamonds producer Alrosa in a privatisation tender.
2018 Development Milestones Market Players US imposes tariffs on steel and aluminium imports US imposes sanctions against billionaire Oleg Deripaska from Russia. and the eight companies in which he is a large shareholder, including aluminium producer Rusal.
Source:
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Highlights
Overview The Russian mining sector is characterised by limited competition with few players dominating production and exports. The government sees the sector as strategically important and the regulatory environment restricts foreign miners from entering the industry, which further contributes to high concentration in the sector. The nickel and diamond subsectors have near-monopolistic structures, with one producer accounting for more than 90% of the total production. Sub-sectors considered more competitive are coal and gold production. There are 150,00 miners in the coal industry, with the top six players controlling 60% of total production. The leading gold-producing company controls slightly over 20% of the market.
Main Players Norilsk Nickel is Russia’s largest diversified mining company. It mines about 70% of the nickel in the country and holds a 40% share in Russian copper production. The company is also the country’s leading platinum producer, supplying around 75% of the total output, and accounts for all the country’s palladium production. Domestically owned Alrosa dominates the diamonds subsector, as it is responsible for 99% of all rough diamonds produced in the Russian Federation and for 95% of diamond extraction. The two largest coal producers are SUEK and Kuzbassrazresugol, both controlling a combined 37% of the output in 2018. Polyus Gold is the largest gold mining company, which extracts about a quarter of the gold in the country.
Entry Modes The investment environment for foreign companies in the mining sector is unfavourable, especially in light of the continuing tensions between the Russian government and the West. The Strategic Investment Law stipulates that foreign miners willing to enter the sector must obtain a permit from a government commission, headed by the prime minister, and can own a stake of no more than 25% in any Russian mine. As a result, most investors on the M&A deals in the mining sector are Russian. The best way to enter the sector is through joint ventures as well as minority stake purchases. The largest mining companies in Russia are listed on the Moscow Stock Exchange and some of them are on international exchanges in London, New York and Frankfurt.
Source: RGMU, Company Data
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Coal Market
Comments The Russian coal-producing assets are largely controlled by privately owned companies. The top five coal-mining companies supply more than half of the overall coal production. The largest coal company in Russia is the Siberian Coal Energy Company (SUEK), owned by Russian billionaire Andrey Melnichenko. SUEK operates 26 large-scale open pits and underground mines in Siberia and Far- Eastern Russia with total estimated coal reserves of 5.3bn tonnes. The company contributed 25% to the total coal production in Russia and is among the leading suppliers for the global market. In 2018, SUEK sold 55.4mn tonnes abroad, which ranked it as the fourth largest coal-exporting company in the world.
The second largest coal miner is Kuzbassrazresugol which is the coal-mining subsidiary of Ural Mining and Metallurgical Company (UMMC). In 2018, the company held a 12% share of the total Russian coal production. UMMC coal deposits are part of the Kuznetsk coal basin in Kemerovo region, which provides over 65% of Russian coal production. Some 90% of UMMC coal production is open-pit.
Main Coal Domestic Players, 2018 Major World Coal Producers
International Sales in 2018, mn tones Mechel 4% Other 47% Glencore 98.6
Evraz Group BHP Billiton 69.9 5% Anglo-American 61.5
SUEK 55.4 SDS-Ugol 7% Bumi 49.8
Adaro 40.8
Yancoal 37.1
UMMC 12% Kuzbassrazrezugol 30.0 Peabody 29.8
Banpu 26.9 SUEK 25%
Source: SUEK, Company Data
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Iron Ore Market
World’s Top Iron Ore Reserve Holders, Main Iron Ore Domestic Companies, 2017 2017
Rank Company Reserves, bn tonnes NLMK 18%
Severstal 1 Vale 17.5 16% Evraz 12%
2 Metalloinvest 14.2
3 Rio Tinto 4.2 Eurochem 6% Total: 4 BHP Billiton 4 95 mn tonnes Mechel 3%
Others 3% 5 FMG 2.9
Metalloinvest 42% 6 Cliffs Natural Resources 2.3
Comments
The largest iron ore producer is Metalloinvest, which contributed 42% to the overall production in 2017. The company holds the second largest, measured iron ore reserve base in the world, with approximately 14.2bn tonnes of proven and probable reserves. Evraz is Russia’s second biggest coal producer, holding a 12% of total output in 2017. NMLK comes in at third position with an 18% share. The top three iron ore companies mined 72% of the iron ore in the country in 2018.
Source: Company Data, Statistics Office
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Nickel Market
Global Nickel Output Market Structure, Nickel Output Market Structure in Russia, 2018 2017 Jiangsu Anglo BHP 3% Delong 3% American 3% Sumitomo MM 4%
Shandong Other 37% Xinhai 5%
Jinchuan 7% Norilsk Nickel 71% Others 29%
Glencore 7%
Norilsk Nickel 10% Tsingshan Vale 10% Group 11%
Comments
The privately owned Norilsk Nickel is Russia’s largest and the world third largest nickel producer. In 2018, the total nickel production of Norilsk accounted for about 10% of the global total, the company claims. In terms of high grade nickel production, Norilsk ranked first, with a 23% share in the global output.
Based on the latest data from the Federal Ministry of Sustainability and Tourism (FMST) and Norilsk production figures in Russia, Norilsk had a 71% market share in the total production of nickel in 2017. This is down from 82% in 2016 and reflects a loss in production due to the decommissioning of its oldest nickel plant due to environmental and social concerns. After shrinking by 18% y/y in 2016, Norilsk nickel production in Russia shrank further by 14% y/y in 2017, driven primarily by the reduction of low-margin processing of third parties’ feed at Norilsk Nickel Harjavalta due to the downstream reconfiguration. The second largest nickel producer in Russia is the Chelyabinsk-located Ufaleynickel Plant, which has an annual production capacity of 15,000 tonnes of nickel. The financially troubled company has been acquired by Binbank, which is reportedly seeking investors in the plant.
Source: Company Data, FMST, EMIS Insights Calculations
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Diamond Market
Global Market Players, 2018
Petra Diamonds 3% Rio Tinto 13%
Others 33%
De Beers 25%
Alrosa 26%
Russia is the world’s top diamond-mining country in terms of volume and value of the mined rough diamonds. The largest diamond company in Russia, ALROSA Group, had a 26% market share of the world’s diamond mining in natural units. This is unchanged as compared to 2017. In 2018, ALROSA started industrial mining of rough diamonds in new Verkhne-Munskoye deposit, which will help maintain the company’s leading position in the world market. The second largest diamond-mining company in the world is De Beers, which controlled 25% of the global production in 2018. It is an international corporation that specialises in diamond exploration, diamond mining, diamond retail, diamond trading and industrial diamond manufacturing sectors. Next comes the Australian–British company Rio Tinto with 13% and the UK-based Petra Diamonds with 3% of production volumes.
Source: Company Data
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Gold Market
Comments Top 10 Global Companies by Total Cash Costs, USD/oz, 2018 The largest Russian gold producer is Polyus Gold, which controls about a quarter of the domestic Poly us 348 gold output. The company holds the world’s third- Goldcorp 547 largest gold reserves, with 64.4mn ounces of Newcrest 586 proven and probable as well as 191.5mn ounces of Barrick 588 measured and indicated gold reserves as of end- 2018. Polyus Gold ranked seventh globally in Agnico Eagle 637 terms of production and was the lowest-cost Poly metal 649 producer among its peers around the world in Goldfields 708 2018. The second largest Russian gold Newmont manufacturer is the precious-metals mining 709 group Polymetal that held a 17% share in the Kinr os s 723 overall gold production in Russia in 2017. AngloGold 773
World’s Top 10 Gold Producers, 2017 Production Shares on Domestic Market, 2017 Gold Production, moz Gold Reserves, moz Petropavlovsk Yuzhuralzoloto Barrick 5.3 65 5% 5% Kinross Gold Newmont 5.2 69 7% Highland Gold Mines 3% Anglogold 3.8 50 Nordgold 11% Vysochayshy Kinross 2.7 26 3%
Goldcorp 2.6 44 Others 23% Newcrest 2.3 62
Polyus 2.2 64 Polymetal 17% Gold Fields 2.2 48
Agnico Eagle 1.7 na
Sibanye 1.4 26 Polyus 26%
Source: Company Data, Metals Focus, RGMU
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M&A Deals
Top 20 M&A Deals, Mining, excl. Oil and Gas, 2017–August 2019
Deal Value, Date Target Company Deal Type Buyer Country of Buyer Stake % USD mn
Qatar Investment Authority; Qatar; Singapore; Nov-2017 En+ Group IPO AnAn Group; Russian Direct 1,500.0 18.8 Russia Investment Fund
Aug-2018 Baimskaya copper project Acquisition KAZ Minerals Kazakhstan 900.0 100.0
Fosun International; Hainan Hong Kong SAR, May-2017 PJSC Polyus Minority stake Mining; Zhaojin Mining Industry; 886.9 10.0 China; China; Russia Russian Direct Investment Fund
Institutional and Private Jun-2017 PJSC Polyus SPO na 799.4 9.0 investor(s) Mar-2018 Norilsk Nickel Minority stake Interros Russia 777.6 2.1 Siberian Business Union Mikhail Fedyaev - private Jan-2019 Acquisition Russia 685.0 47.5 (SBU) investor Institutional and Private Mar-2019 Norilsk Nickel SPO na 551.5 1.7 investor(s) Feb-2018 Gold of Kamchatka Acquisition GV Gold Russia 500.0 100.0
Jan-2019 En+ Group Minority stake VTB Bank Russia 451.0 (EMIS est.) 14.6 Open market Vladimir Potanin - private May-2018 Norilsk Nickel Russia 441.8 (EMIS est.) 1.6 purchase investor Jul-2017 Norilsk Nickel SPO Undisclosed na 400.2 1.8 Institutional and Private Apr-2019 PJSC Polyus SPO na 389.9 3.8 investor(s) Jan-2019 En+ Group Minority stake Glencore Plc Switzerland 364.1 (EMIS est.) 10.6 Open market Mar-2017 Norilsk Nickel Undisclosed na 341.7 1.4 purchase Jan-2019 EVRAZ Plc Minority stake Buyer(s) unknown na 327.2 (EMIS est.) 5.6
Sibugol; Sib Coal AG; Artem Sep-2017 Sibenergougol Acquisition Russia; Switzerland 300.0 100.0 Kazakov - private investor
Jul-2019 Chulbatkan gold project Acquisition Kinross Gold Corp Canada 283.0 100.0
CIS Natural Resources Fund; Jan-2017 Bystrinsky GOK Minority stake Russia 275.0 36.7 Interros; ESN Group Institutional and Private Jul-2019 Polymetal International SPO na 256.1 4.5 investor(s) Otkritie Financial Corporation Dec-2018 Polymetal International Minority stake Russia 230.0 (EMIS est.) 4.6 Bank
Source: EMIS DealWatch
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M&A Activity
Number and Value of Deals Number of Deals by Deal Value, USD
36 50.1-100mn; 100.1- 3.6% 500mn; 17.6%
22 19 19 16 16 14 14 14 2,698 13 500.1-1000; 10 3.1% 1,946 1,860 > 1000mn; 1,358 1,316 1,291 1,261 0.5% 1,096 839 843 824 0-50mn; Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3* 62.2% 2017 2018 2019 Undisclosed; 13.0%
Value of Deals , USD mn Number of Deals
* For July and August only
Number of Deals by Deal Type Number of Deals by Region of Investors
Acquisition 26.4%
Undisclosed 5.7% Minority stake Russia Europe 2.6% purchase 87.5% Asia, non- 19.7% China 1.6% Middle East Joint Venture 1.0% Privatisation 0.5% 49.2% China 1.0% IPO/SPO Americas 4.1% 0.5%
Source: EMIS DealWatch
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04 COMPANIES IN FOCUS
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Norilsk Nickel
Highlights Consolidated Income Statement, USD mn
Norilsk Nickel (Nornickel) is the world’s largest producer of high-grade nickel and palladium and 59.1% one of the world’s leading producers of platinum 53.4% and copper. The company also produces cobalt, rhodium, silver, gold, iridium, ruthenium, 43.7% selenium, tellurium and sulphur.
Nornickel’s main operations are located on the 11,670
Taymyr and Kola Peninsulas, in northern Russia, 9,146 6,292 and in the Zabaykalsky Region, at Russia’s 6,231 3,995 borders with China and Mongolia. It also has 3,719 3,059 2,997 production assets in Finland, South Africa and 2,123 Australia. The company’s products are distributed 2017 2018 H1 2019 to 34 countries around the world. Net Revenues EBITDA Net Profit EBITDA Margin Nornickel is majority owned by Russian billionaires Vladimir Potanin (34.6%) and Oleg Deripaska (27.8%). In March 2019, Crispian Consolidated Balance Sheet, USD mn Investments, controlled by Chelsea Football Club owner Roman Abramovich, sold a 1.69% stake in Norilsk, thus reducing its participation in the 2.05 share capital to 2.5%. The company is listed on the Moscow Stock Exchange and the stock exchanges in London, New York, Frankfurt and Berlin. 1.13 18,956 16,635 In 2018, the consolidated revenues of the 15,251 0.78 company grew by 28% y/y to USD 11.7bn, the 8,201 7,051
EBITDA margin rose to 53% from 44% in 2017 and 5,357 4,917 4,658 the net profit went up by 44% y/y to USD 3bn. 3,473 2017 2018 Jun-19 Total Assets Shareholders' Equity Net Debt Net Debt/EBITDA
Source: Company Data
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Norilsk Nickel (cont’d)
Highlights Metal Sales, USD bn
The company’s nickel production increased 1% y/y to 218,770 tonnes and copper production rose by 3.7 3.0 18% y/y to 473,654 tonnes in 2018. The growth 3.0 2.4 2.4 2.3 was driven by the ramp-up of the Bystrinsky 2.3 1.5 Project, rising processed volumes of concentrate 1.4 0.7 0.6 0.6
purchased from Rostec, and reduced metal losses 0.4 0.4 0.3 in recovery of copper into copper concentrate as a result of the Talnakh Concentrator reaching its 2017 2018 H1 2019 design parameters after modernisation. In 2018, Palladium Nickel Copper Platinum Other metals both palladium and platinum were produced solely from the company’s own Russian feed. CAPEX, USD mn Palladium output amounted to 2,729 koz, down 2% y/y, while platinum output reached 653 koz, down 3% y/y. The decrease of 6 PGM* output 2,002 1,654 1,714 resulted from the reduction of third-party feed, 1,553 which Nornickel almost ceased processing in 2018. In H1 2019, total nickel output went up by 6% y/y to 109,682 tonnes supported by an 500 expansion of the carbonyl nickel production capacities at Kola Mining and Metallurgical Company (MMC) and higher processed volumes of 2015 2016 2017 2018 H1 2019 nickel matte produced by the company in Russia. Copper output increased 9% y/y to 251,000 tonnes Production on the ramp up of Bystrinsky Project, increased 2015 2016 2017 2018 H1 2019 mined ore volumes with higher copper grades at
Polar Division and higher volumes of copper Nickel, tonnes 266,406 235,749 217,112 218,770 109,682 concentrate produced at Kola MMC. In H1 2019, palladium and platinum output rose by 10% y/y to Copper, tonnes 369,426 360,217 401,081 473,654 251,304 1,533 koz and by 16% y/y to 388 koz, respectively, Palladium, thou on the release of work-in-progress inventory at 2,689 2,618 2,780 2,729 1,533 troy ounces Krasnoyarsk Precious Metals Refinery and higher Platinum, thou 656 644 670 653 388 PGM content in Russian feed processed at Norilsk troy ounces Nickel Harjavalta. *6 PGM include six platinum group metals: platinum, palladium, rhodium, ruthenium, osmium, and iridium Source: Company Data
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Norilsk Nickel (cont’d)
Map of Norilsk Nickel Reserves and Resources
Kola Peninsula Proven and probable reserves 2,209mn Ni – 581,000 tonnes; Cu – 271,000 tonnes; tonnes Pd – 93,000 oz; 6 PGM – 155,000 oz; Pt – 60,000 oz; Au – 29,000 oz Measured and Taymyr Peninsula Indicated Resources Proven and probable reserves Ni – 6.3mn tonnes; Cu – 11.9mn tonnes; Pd – 92.9mn tonnes; 6 PGM – 123mn oz; Pt – 24.6mn oz; Au – 5.3mn oz 785mn tonnes Proven and Probable Reserves
South Africa Proven and probable reserves Ni – 261,000 tonnes; Cu – 101,000 tonnes; Co 17,000 tonnes; 6 PGM – 2.4mn oz
Australia Measured and Indicated Mineral Resources – 173.3mn tonnes of ore
Note: The Company’s reserves and resources are reported according to JORC standards as of end-2018 and include wholly-owned international assets and exclude ore deposits in the Zabaykalsky Region. Source: Company Data
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Norilsk Nickel (cont’d)
Highlights For 2019–2022, Norilsk is planning investments to the tune of USD 11.5bn, according to the company’s 2018 annual report. Nickel and copper production are set to increase by 15% over seven years to meet the growing electric vehicle (EV) demand. The company also plans to boost the production of platinum and palladium by 25%. About USD 1.5bn–1.7bn of the total investments are planned for mining projects, including for upgrade and expansion at the Talnakh Concentrator and for development projects at the Southern Cluster. Nornickel plans to increase the annual capacity of the Talnakh Concentrator from 10mn tonnes to 18 mn tonnes and introduce new, more efficient concentration technology, which will help process most of Talnakh ores. Total investments for the project will stand at about RUB 40bn, with the project scheduled for completion in 2023. The Southern Cluster is Nornickel’s project to develop reserves in the northern part of the Norilsk-1 Deposit. With project completion in 2027, total mining capacities are set to rise up to 9mn tonnes a year. Investments in the development of the Southern Cluster will exceed RUB 70bn in the space of 15 years.
Prospective Mining Projects
Location Project overview Ore Reserves Average Metal Content
Increasing ore production from 2.0mn tonnes a year to Ni — 3.1% Norilsk Industrial District, Krasnoyarsk 2.4mn tonnes by 2023 by stripping rich and Skalisty Mine 57mn tonnes Cu — 3.6% Territory (Polar Division). сupriferous ores at the Talnakhskoye and 6 PGM — 9.7 g/t Oktyabrskoye deposits. Increasing ore production from 3.8mn tonnes a year to Ni — 1.2% Norilsk Industrial District, Krasnoyarsk Taimyrsky Mine 4.1mn tonnes by 2021 by stripping rich copper-nickel 139mn tonnes Cu — 1.9%; 6 Territory (Polar Division). ores at the Oktyabrskoye Deposit PGM — 4.5 g/t
Ore Output Growth Forecast, mn tonnes
25.0 17.3 6.0 1.7 19.0 15.6
2018 2025f
Talnakh Southern Clus ter Total
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 38 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS
Metalloinvest
Highlights Consolidated Income Statement, USD mn
Metalloinvest is a vertically integrated iron-ore 40.8% and steel company. It is the largest iron-ore 39.3% producer in Russia, accounting for 42% of total 34.0% production in 2018.
The company also claims to be the number one producer of commercial hot briquetted iron (HBI), holding close to 50% of the world production. It 7,187 6,231 also claims to be the largest pig-iron exporter
and the second largest producer of pellets in the 3,584 2,934
world. 2,120 1,647 1,406 1,410 1,234
The company, set up in 1999, extracts iron ore 2017 2018 H1 2019 from the second-largest measured iron-ore Net Revenues EBITDA reserve base in the world, with approximately Net Profit EBITDA Margin 14.2bn tonnes of proven and probable reserves. The group’s iron-ore production facilities in Russia include Lebedinsky GOK and Mikhailovsky Consolidated Balance Sheet, USD mn GOK; steel mills Oskol Elektrometallurgical Plant and Ural Steel; and ferrous scrap enterprise Ural Scrap Company. 1.91 Metalloinvest is 100% owned by USM Holdings, which in turn is controlled by the Russian business magnate Alisher Usmanov (49%) and the 1.25 1.1 companies of billionaire Vladimir Skoch and 8,070 6,808 Everton Football Club owner Farhad Moshiri, who 6,503 hold 30% and 10%, respectively. 4,056 948 3,580 3,227 2,667
Metalloinvest earned nearly 65% of its revenue 1,773 from sales on the domestic market and CIS 2017 2018 Jun-19 countries in 2018. The remaining came from sales Total Assets Shareholders' Equity to Europe (21.1%), Asia (4%), MENA (5.7%) and Net Debt Net Debt/EBITDA others (4.2%).
Source: Company Data
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Metalloinvest (cont’d)
Comments Production, mn tonnes
Metalloinvest iron-ore production volumes 40.7 40.4 remained fairly constant y/y at about 40.4mn 40.3 tonnes in 2018. Pellet production rose by 10.2% y/y to a record high of 27.7mn tonnes, following 27.7 25.2
the growth in market demand and increased 25.1 productivity of production facilities after major 19.7 maintenance works, held at the LGOK plant in
2017. HBI/DRI output increased by 12% y/y driven 14.1 by the launch of the HBI-3 Plant at LGOK in July 7.8 7.0 5.7 5.1 4.8 4.7
2017 and the increase in productivity of the DRI 4.0 3.0 3.0 2.7 2.4 unit 2 at the OEMK plant after modernisation held 1.4 in 2017. 2016 2017 2018 H1 2019
Iron ore production volumes decreased by 1.8% Iron Ore Pellets HBI/DRI Crude steel Hot metal y/y in H1 2019, totalling 19.7mn tonnes, following scheduled maintenance works and changes in ore quality. Maintenance works at blast furnaces Revenue by Product, USD mn, 2018 slashed the production volume of hot metal by 6.3% y/y to 1.4mn tonnes in H1 2019. Crude steel Hot Briquetted Iron ; production declined by 2.7% y/y to 2.4mn tonnes Iron Ore 1,263; 17.6% Pellets; due to plant reconstruction at Ural Steel as well 1,414; 19.7% as changes to the product mix at the OEMK plant.
In the first half of 2019, the production of pellets Pig Iron; 852; rose by 3.1% y/y to 14.1mn tonnes due to 11.9% completion of the 1st phase of scheduled Iron Ore; maintenance works at Pellet Plant 3 at MGOK, 505; 7.0% which is expected to increase its productivity by Steel and Ferrous Rolled Steel; Scrap; 11; 5%. HBI/DRI output increased by 0.7% y/y driven 2,970; 41.3% 0.2% by the increase in equipment productivity at the Other; 173; 2.4% LGOK plant and reduced maintenance works at the OEMK plant
Source: Company Data
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Metalloinvest (cont’d)
Operational Footprint In 2018, the domestic market accounted for 40.1% of the company’s consolidated revenue. Sales to Europe made up 22.7%, while Asia and the CIS had shares of 5.9% and 5.3%, respectively. Only sales to Eastern Europe witnessed a decline in their share to 10.9% in 2018 from 13.7% in 2017.
OEMK Belgorod Region
Mikhailovsky GOK Kursk Region
Lebedinsky GOK Belgorod Region
Zheleznogorsk Gubkin Stary Oskol
Novotroitsk
Ural Steel Orenburg Region
Sales by Region and Product
21% 6% 65% 4% 4% Iron Ore, Pellets, Iron Ore, Pellets, Iron Ore, Pellets, Iron Ore, Pellets, Iron Ore, Pellets, HBI/DRI HBI/DRI HBI/DRI HBI/DRI HBI/DRI 17% 16% 28% 6% 33% Pig Iron and Steel Pig Iron and Steel Pig Iron and Steel Pig Iron and Steel Pig Iron and Steel Products Products Products Products Products
Middle East & Europe Russia Asia Other North Africa
Source: Company Data
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EVRAZ
Highlights Consolidated Income Statement, USD mn
EVRAZ is a vertically integrated steel, mining and vanadium business, with main operations in the 29.4% Russian Federation, but with significant production capacities also in Ukraine, the USA, 24.2% 24.1% Canada, the Czech Republic, Italy, Kazakhstan, Switzerland and South Africa. The group is listed
on the London Stock Exchange and is a 12,836
constituent of the FTSE 250. 10,827 2,470
The largest shareholder in EVRAZ is billionaire 6,140 1,482 759 Roman Abramovich, holding a 30.5% share as of 3,777 344 2,624 end-2018. Other major shareholders are magnates Alexander Abramov (20.7%), Alexander Frolov 2017 2018 H1 2019 (10.3%) and Gennady Kozovoy (5.8%). Net Revenues EBITDA Net Profit EBITDA Margin EVRAZ is the largest coking coal producer in Russia, supplying 40% of coal output in 2018. The market share of EVRAZ in terms of rebar sales Consolidated Balance Sheet, USD mn came in at 9% in 2018. 1.51 The company’s market share in the segments of structural shapes and beams was 45% and 63%, respectively. According to EVRAZ calculations, the 1.09 company accounted 16% of the global vanadium 0.95 production in 2018. Almost all of the company’s
internal consumption of iron ore and coking coal 10,380 9,826 is covered by its mining operations. 9,373
In 2018, the company’s iron-ore production 3,966 3,650 3,571 2,292 declined by 2.9% y/y to 13.5mn tonnes, while the 2,026 1,938 production of steel shrank by 7.1% y/y to 13mn 2017 2018 Jun-19 tonnes. Total Assets Shareholders' Equity Net Debt Net Debt/EBITDA
Source: Company Data
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EVRAZ
Production, mn tonnes Consolidated Revenue by Region, 2018
24.2 23.3 Asia 21% Americas 23%
13.9 14.0 13.5 13.0 13.8 Europe 11%
7.2 7.0 CIS 7%
Rest of World 2% Russia 36% 2017 2018 H1 2019
Coking Coal Iron Ore Crude Steel
Consolidated Revenue by Segments, CAPEX, USD mn 2018
Steel, North 603 America 18% 527
428 428
Steel 62% 309 Coal 16%
Others 4%
2015 2016 2017 2018 H1 2019
Source: Company Data
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Alrosa
Highlights Consolidated Income Statement, RUB bn
PJSC Alrosa is Russia’s leading diamond- producing company, accounting for 95% of the 52.1% country’s output. The government-controlled firm holds the world’s largest rough diamond reserves and was responsible for 26% of the world’s diamond production in 2018. The company had an 46.1%
estimated 1,148mn carats of diamond reserves as 300 of end-2018. 275 45.0%
The Federal Agency for Management of State 156 127 125 90 Property holds 33% of the equity capital, while 79 56 the Republic of Sakha (Yakutia), represented by 38 its Ministry of Property and Land Relations, owns 2017 2018 H1 2019 a 25% stake. The company’s shares are listed on Net Revenues EBITDA Net Profit EBITDA Margin the Moscow Stock Exchange and its free float is 34%.
Alrosa diamond production is mainly located in Consolidated Balance Sheet, RUB bn the Far East region of Russia and is diversified between different mines and deposits. Some 93% 0.70 of the company’s production assets are located in the Republic of Sakha (Yakutia), while 7% are in Arkhangelsk Region. 0.43 In 2018, the production of diamonds declined by 428 428 7% y/y to 36.7mn carats due to closure of the Mir 411 mine and the completion of open-pit mining at 266 254 the Udachnaya pipe in 2017. The company’s 248 overall diamond sales were 38.1mn carats, down 0.00 86 74 67 8% y/y, while diamond sales in value terms rose by 6% to USD 4.4bn on the back of stronger prices 2017 2018 H1 2019 and improved mix of gem-quality diamonds. Total Assets Shareholders' Equity Net Debt Net Debt/EBITDA
Source: Company Data
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Alrosa (cont’d)
Asset Geography Barnaul
Antwerp, Udachny Nakyn Belgium
New York, USA Moscow Aikhal Nyurba
Arkhangelsk
Yakutsk
Vladivostok
Mumbai, India
Romat Gan, Mirny Israel
Geological Exploration Departments Rough Diamond Mining
Sales Department
Polished Diamond Production Dubai, UAE
Trading Companies Luanda Republic Hong Kong, Representatives Offices of Angola SAR P.R. of China Branches
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 45 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS
Alrosa (cont’d)
Key Investment Projects
Udachny UG mine VM deposit Zaria pipe Maiskaya Pipe VG deposit
Type of mining Underground Open-pit Open-pit Open-pit Alluvials
Production start 2014 2018 2020 2025 2022
Ramp-up 2021 2020 2021 2027 2022
Target annual ore output, 4.0 3.0 1.2 0.3 1.1 mn carats
Target annual production, 5.6 1.8 0.4 1.2 0.4 mn carats
Total CAPEX, RUB bn 63.9 25 8.4 5.6 2.3
Resource base, mn 59.3 38.2 3.5 13.8 3.8 carats
CAPEX, RUB bn Diamond Production, mn carats
39.6 38.3 37.4 38.0 38.2 36.9 36.2 36.7 36.1 34.2 31.8
26.9 27.8
8.4
2013 2014 2015 2016 2017 2018 H1 2019 2013 2014 2015 2016 2017 2018 2019f
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 46 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS
Alrosa (cont’d)
Alrosa’s Position in the Global Diamond Industry
ALROSA Rio Tinto ALROSA De Beers PetraDiamonds De Beers
PetraDiamonds De Beers
De Beers
Russia
Canada
ALROSA
Rio Tinto PetraDiamonds
Tanzania Angola Zimbabwe Namibia Australia Botswana
South Africa
Company 2017 2018 y/y change
ALROSA 39.6 36.7 -7%
De Beers 33.5 35.3 +6%
Rio Tinto 21.6 18.4 -15%
Petra Diamonds* 4.2 4.4 +5%
Total 98.9 94.9 -4%
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 47 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS
Polyus Gold
Highlights Consolidated Income Statement, USD mn
Polyus Gold is the largest gold producer in Russia (20% share) and the fifth largest globally. The 66.3% company holds the world’s second-largest gold reserves, with 64.4mn ounces of proven and probable as well as 191.5mn ounces of measures 64.0% and indicated gold reserves.
The company’s operations are located in 62.6% 2,915 2,721 Krasnoyarsk, Irkutsk and Magadan regions and 1,865 1,702 the Sakha Republic (Yakutia) and include 5 1,648 1,241 operating mines, alluvial operations and several 1,092 608 advanced development projects. The company 474 benefits from an average mine life of 2017 2018 H1 2019 approximately 26 years, which is twice as high as Net Revenues EBITDA Net Profit EBITDA Margin the average mine life of its top ten global peers.
Polyus Gold is controlled by the family of billionaire Suleiman Kerimov (82.4%). In June Consolidated Balance Sheet, USD mn 2017, Polyus successfully placed shares and GDRs on the Moscow and London Stock Exchanges and 1.81 increased its free float from 6.76% to 16.34%.
In 2018, Polyus successfully ramped up operations at Natalka, located in the Magadan Region on the northern Pacific coast of Russia, in one of the coldest and most remote parts of the 7,249 6,447 country. It is a major open-pit gold deposit which 6,023 1.7 1.7
was discovered in 1942. 1,202 3,639 3,077 3,086 564 450 In 2018, Polyus sold gold to the tune of 2,333 koz, which was an increase of 8.1% y/y. The production 2017 2018 H1 2019 of refined gold came in at 2,184 koz, up 9.7% y/y. Total Assets Shareholders' Equity Net Debt Net Debt/EBITDA
Source: Company Data
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Polyus Gold (cont’d)
Mining Activity Processing Activity 38,025 28,663 26,445 24,823 21,185 116,987 99,481 88,418 73,420 61,794 2,184 1,990 49,933 1,841 1,744 1,153 42,841 37,810 29,607
2017 2018 H1 2019 2015 2016 2017 2018 H1 2019
Total Rock Moved, thou m³ Stripping, thou m³ Ore Processed, thou tonnes Ore Mined, thou tonnes Total Refined Gold Output, koz
CAPEX, USD mn Gold Sales, koz
2,333 1,440 2,158
1,915
804 736
525 466
268 253
2013 2014 2015 2016 2017 2018 H1 2019 2016 2017 2018
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 49 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS
Polyus Gold (cont’d)
Production Assets
BLAGODATNOYE ALLUVIALS Location: Krasnoyarsk Territory Location: Irkutsk Region Share in Company Production: 17% Share in Company Production: 6% Share in Company EBITDA: 19% Share in Company EBITDA: 3% Total Cash Costs, USD/oz: 360 Total Cash Costs, USD/oz: 746 Employees: 1,488 Employees: 2,925 Processing Capacity, mn tonnes/year: 8
OLIMPIADA Location: Krasnoyarsk Territory Share in Company Production: 54% NATALKA Share in Company EBITDA: 61% Location: Magadan Region Total Cash Costs, USD/oz: 267 Share in Company Production: 5% Employees: 3,321 Share in Company EBITDA: 1% Processing Capacity, mn tonnes/year: 13 Total Cash Costs, USD/oz: 747 Employees: 1,590 Processing Capacity, mn tonnes/year: 10.1
KURANAKH Location: Republic of Sakha (Yakutia) Share in Company Production: 8% Share in Company EBITDA: 7% Gold Total Cash Costs, USD/oz: 511 Production Employees: 1,869 by Mine Processing Capacity, mn tonnes/year: 6.5 133 199
223 VERNINSKOYE 2,440 Location: Irkutsk Region 148 thou ounces 1,322 Share in Company Production: 9% Share in Company EBITDA: 10% Total Cash Costs, USD/oz: 369 416 Employees: 1,289 Processing Capacity, mn tonnes/year: 2.9
1,737.5
Krasnoyarsk Cluster
Source: Company Data
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05 REGULATORY ENVIRONMENT
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 51 05 REGULATORY ENVIRONMENT CONTENTS
Main Regulatory Bodies
Ministry of Natural Resources The Ministry of Natural Resources (MNR) is the federal executive body which drafts the strategy for the development of the mining sector and regulates activities related to the use of subsoil resources and the development of Russia’s mineral resources. The ministry keeps public records and maintains a register of activities related to the exploration of subsoil resources and subsoil plots allocated for mining activities. MNR organises and, within the limits of its authority, ensures compliance with the obligations arising from international agreements of the Russian Federation.
Federal Agency for Subsoil Use The Federal Agency for Subsoil Use (FASU) is the federal executive authority performing the functions related to rendering state services and federal property management in the sphere of subsoil use. It is under the authority of the MNR and awards mining licences and organises tenders for the right to use subsoil resources. The agency organises economic-geological evaluations and cost estimates of mineral deposits and subsoil sites and rates mineral reserves as economic or sub-economic reserves.
Federal Service for Ecological, Technological and Nuclear Supervision The Federal Service for Ecological, Technological and Nuclear Supervision (Rostekhnadzor) exercises control over the sector’s players to ensure the safety of operations related to the use of subsoil resource industrial operations, as well as to preventing negative impacts on the environment. It is also responsible for drafting and implementing government policy and legal regulation in the field of technological and nuclear oversight.
Federal Service for Supervision of Natural Resource Federal Supervisory Service for Nature Management (FSSNR) is under the authority of the Ministry of Natural Resources of the Russian Federation. It exercises state management in the sphere of organisation and functioning of specially protected natural areas of federal importance. It supervises on the mineral and living resources conservation on the continental shelf of the country.
Source: MNR, The Russian Government, FSSNR, Rostekhnadzor, FASU
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Government Regulations
Ownership and Acquisition Rights All underground mineral resources in Russia are the property of the state, regardless of land ownership. The state grants the right to use mineral resources by issuing subsoil licences (for exploration and/or production) after holding a tender or an auction. Once extracted, the mineral resources become the property of the respective licence holder. In the auction mechanism, the winner is the applicant who makes the highest bid. The tender mechanism is a competitive procedure for the allocation of subsoil plots, where the winner is chosen according to qualitative criteria such as the scientific and technological level of the applicant’s programmes. Rights for conducting exploration activities for subsoil resources are granted to the user through an auction, while rights for conducting mining activities are provided in the form of a mining allotment.
Foreign Ownership The Russian regulatory environment restricts foreign investment from entering the country's mining sector. Under the existing legislation, any activity related to subsoil exploration and mining on federal subsoil plots qualifies as having a strategic importance. As a result, foreign investors can acquire control in Russian mining entities only after a special procedure and the government has the right to terminate the licence for mining and exploration of a newly discovered subsoil plot by a foreign investor. Control is defined as either ownership of 25% or more of voting shares, or a right to appoint an executive body or 25% or more of the members of the management bodies, or alternatively, an ability to control the decisions of the strategic company.
Export Duties and Restrictions Generally, there have been no export restrictions and duties over the last few years as Russia gradually lifted export duties on its mineral resources. However, exports of certain precious metals and natural diamonds require export licences in accordance with the applicable quotas. Export duties are also still in place for tungsten and for scrap of most mineral resources. Duties on the import of metals and minerals into the country are established by the Eurasian Economic Commission, and vary from 0% to 10% depending on the type of metal or mineral.
Source: Thompson Reuters Practical Law, ICLG
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Government Regulations (cont’d)
Taxes and Royalties Mining companies are subject to a corporate tax set at the maximum rate of 20%. As much as 2% of that tax revenue goes into the federal budget and the remaining 18% to the budget of the region in question.
Russia also applies mineral tax rates (MTR) imposed on the value of the mineral resource extracted, except for coal, for which the tax base is calculated using the volume extracted. MTR varies according to the mineral. For copper, MTR is set at 8%; for gold at 6%, and for iron ore at 4.8%.
Tax amortisation for ore assets is 2 years, or the period of licence validity, while for plants and machinery it is 10 years, which implies rates of amortisation for tax purposes of between 5% and 20%. There are also tender and auction fees and state licence fees.
Processing and Sale of Mineral Resources There are no restrictions or limitations for the subsoil licence holder on processing mineral resources that are extracted. Exception is the processing of precious metals (gold, silver, platinum and platinum group metals) must be processed by a specialised company set out in the official list of companies authorised by the Russian government. Violating this requirement can result in criminal liability. The federal and regional authorities have the pre-emptive right to purchase precious metals and stones from subsoil users.
Russia restricts the trading of uranium and other radioactive metals like plutonium as all the radioactive materials are subject to state accounting and control. The import and export of such metals require a licence from the Federal Service for Technological and Export Control.
Source: Thompson Reuters Practical Law
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Licences
In Russia, in order to conduct exploration and mining activities, an entity must obtain one of the three types of subsoil licences: exploration, production or a combined licence.
Exploration Licence – usually granted for five years and allows for conducting exploration operations, including exploratory boring. The exploration licence holder cannot undertake production activities. An exploration licence can be provided for up to 7 years for exploration operations carried out in Yakutia, Kamchatka, Khabarovsk, Sakhalin and certain other regions and up to 10 years for exploration operations carried out within internal seawaters, territorial sea or continental shelf of the Russian Federation. Exploration licences are awarded without a tender or auction and depend on the decision of The Federal Agency for Subsoil Use.
Production Licence – production licences are awarded upon a tender or auction with respect to deposits with proven reserves that have been registered in the state balance of reserves. The term for a production licence can be as long as required by the feasibility study, but according to Reuters, in practice it is usually no more than 25 years. The holder of an exploration licence can obtain a production license under a simplified procedure, or without any tender or auction on discovery of deposits.
Combined Licences – combined licences can be awarded upon a tender or auction with respect to deposits that have proven reserves but require additional exploration. The term of a combined licence is 25 years, split between exploration and production. The term of the combined licence can be extended at the request of a subsoil user for the purposes of completing exploration of the deposit, or to complete liquidation or conservation activities.
Russian regulations do not allow the rights granted to a subsoil licence to be subleased, assigned, sold or otherwise transferred. An exception to this is when transferring the shares or the participating interest in the capital of the legal entity holding the subsoil licence.
Source: Thompson Reuters Practical Law
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06 COAL & METAL ORES
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 56 06 COAL & METAL ORES CONTENTS
Highlights
Overview Russia has abundant resources of metal ores and is a major global producer and exporter of metal commodities. The country is among the leading producers of nickel, platinum and palladium, iron ore, lead, copper and bauxite. Russia holds 25bn tonnes of crude iron ore reserves, ranking second in the world after Australia. The country had an estimated 30mn tonnes of copper reserves in 2018, half of them located in the Udokan deposit in eastern Siberia. Russia holds 160.4bn tonnes of coal reserves, which represents 15.5% of the global total and ranks the country as the second largest reserve holder after the US. Coal production has been rising in recent years mainly on rising export demand, predominantly from Asian countries, but also from the European markets.
Challenges The global trade wars are the main challenge for the Russian commodity miners and exporters. The escalation of the US–China trade dispute throughout 2019 threatens to seriously slow down the global economy and demand for commodities as both China and the US are major consumers of metal minerals as well as coal. The growing environmental concerns around using coal in the energy mix is another issue for the Russian coal-mining sector. In late 2017, Reuters reported that the far eastern Russian port of Nakhodka on the Sea of Japan has been swathed in coal dust, which is believed to have caused a rise in respiratory diseases in the area. Recently imposed US sanctions on Russian companies and oligarchs connected to mining companies could have a negative impact on funding their operations with hard currency and even jeopardise their existence.
Outlook The Russian coal sector is expected to be supported by government investment, solid growth in the construction sector and vast coal deposits yet to be exploited, according to Fitch Solutions. Production will rise by a CAGR of 2.3% in 2019–2025 and exports will increasingly shift eastwards to cater for the Asian market. Russia’s iron-ore production growth will remain muted over the 2019–2025 period, rising at a CAGR of just 0.7%, as Chinese consumption eventually wanes and prices of iron ore come down from current levels. According to Fitch Solutions, Russia’s construction sector will grow by an annual 4.3% average of over 2018–2027, which will increase domestic demand for coking coal. Russia is well poised to be a key supplier of nickel for the growing EV market. As a result, nickel production in the country is projected to grow by a CAGR of 1.6% in 2019–2025. A lack of new projects, however, will affect production growth.
Source: EMIS Insights, USGS, Reuters, BP Statistical Review of World Energy, Fitch Solutions
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Main Events
§ In September 2018, Norilsk Nickel (Nornickel) kicked off the Sulphur Project at the company’s copper plant. Following the project completion, Nornickel will be able to capture 1.5mn–1.7mn tonnes of sulphur dioxide a year by 2023. It will then be converted to up to 280,000 tonnes/year of elemental sulphur and 5mn tonnes a year of gypsum. The Sulphur Project covers a large scope of work at Polar Division’s Copper and Nadezhda Plants.
§ Baikal Mining Company, owned by Russian billionaire Alisher Usmanov, said in September 2018 it was in talks to raise USD 1.25bn from Russian banks to finance the construction of a mining and metallurgical plant at Russia’s biggest untapped copper deposit, Reuters reported. With total reserves of 26.7mn tonnes of copper, Udokan is one of the biggest untapped deposits in the world. However, it remained undeveloped since its discovery in 1949 due to lack of technology for its unique and difficult-to-extract ore. Usmanov bought the right to develop Udokan for USD 500mn from the Russian government just before the 2008 financial crisis. It has taken 10 years for Baikal Mining Company to solve the technical challenges of the project. The company wants to build a plant capable of mining 12mn tonnes of ore a year and producing 130,000 tonnes of copper from it.
§ In 2018, Nornickel and Russian Platinum signed a framework agreement on a strategic partnership to set up a joint venture for developing one of the world’s largest PGM deposits located in the Norilsk Industrial District.
§ In April 2019, the government of the Murmansk Region and the Russian nickel producer Nornickel entered into a supplementary agreement to the special investment contract to upgrade company’s Kola MMC division. The upgrade and reconfiguration at Kola MMC covers all of the Company’s production sites in the Murmansk Region: Zapolyarny, Nickel, and Monchegorsk. The Company is planning to spend more on the reconfiguration, ramping up its CAPEX by 32% from RUB 25.7bn to RUB 34bn. The project is scheduled to run until 2023, with local government revenues potentially growing by RUB 5.4bn over the five years.
§ In August 2019, Russian President Vladimir Putin has asked the government to review a mineral extraction tax for the Russian coal industry by end of October, Euronews reported. It was unclear if the review would bring potentially lower or higher level of taxation for coal miners.
Source: Euronews, Reuters, Company Data
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FOCUS POINT
Coal Production by Area, 2018
28,000 tonnes Ural Area 270.1mn tonnes 10.1mn tonnes West Siberian Area North Area
79.4mn tonnes East Siberian Area
198,000 tonnes Central Area
74.1mn tonnes Far Eastern Area 5.3mn tonnes North Caucasian Area
Source: CDDFEC, CEIC
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Coal Production
Coal Production Volumes Coal Production by Type of Mining, 2018
411.6 440.2 6.8% 6.9% 371.9 385.5 346.8 355.6 4.6% Underground 3.7% 247.2 Mining 25% 2.5%
-1.0% Surface -1.9% Mining 75%
2013 2014 2015 2016 2017 2018 Jan-Jul 2019
Coal Production, mn tonnes y/y change
Comments
Coal is an essential energy resource for the Russian economy, taking a 17% share in the power mix as of end–2017. The country is home to the world’s second largest coal reserves with a share of 24% in 2018, according to BP. There are 22 coal basins and 129 separate deposits in the country. Coal is mined in 25 regions of the Russian Federation by 150,000 miners and close to 75% of the total output is from open-cast mines, which are generally more cost efficient. In 2018, Russia was the sixth largest coal producer, ranking after China, US, Indonesia, India and Australia. Around 80% of the coal output was bituminous, while brown coal represented 18% of total output and anthracite coal 4%. The country’s coal production is heavily concentrated in the Kuznetsk Basin in Siberia’s Kemerovo region, which is responsible for 60% of total output, while another 15% is mined in the Kansk-Achinsk Basin. The remaining production is spread across Eastern Siberia and the country’s Far East. In 2018, the Russian coal production hit a 5-year high at 440.2mn tonnes after it increased by 6.9% y/y. The main reason for the rise was stronger export shipments to Europe and Asia, underpinned by higher market prices. The government plans to invest around USD 22.4bn (RUB 1.5tn) in its coal industry and port infrastructure.
Source: CDDFEC, Statistics Office, CEIC, BP Statistical Review of World Energy
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Coal Exports
Comments Coal Export Volume
Russia is the world’s third largest coal exporter after Australia and Indonesia. In 2018, the country 14.1% 199.5 shipped coal to 65 countries with main markets 153.2 181.4 including Japan, China, South Korea, Turkey, the 159.0 10.2% 152.7 10.0% UK, the Netherlands, Germany, Ukraine, Poland 139.0 9.4% and Taiwan. 6.6% In recent years, Russia has moved to diversify 84.8 4.1% export destinations away from the traditional European market by increasing shipments to Asia and China in particular. In 2014, after Russia -0.3% annexed Crimea, the Western world, led by the US and EU, imposed economic sections on the 2013 2014 2015 2016 2017 2018 H1 2019 country. In its efforts to reduce its reliance on Bituminous Coal Exports, mn tonnes y/y change European markets, the Russian government increased coal shipments to Asia. Whereas in 2010, Europe accounted for 72% of total coal Coal Export Value exports in volume and Asia took a 27% share, in 2018, Europe’s share went down to 51% while the 17.0 Asian share climbed to 44%. 58.7%
In 2018, coal exports hit a five-year high of 13.5 11.8 11.6 199.5mn tonnes, rising by 10% compared to 2017. 9.5 The strong export figures reflected the fact that 8.5 25.9% 7.2 the average free-on-board (FOB) coal prices for 14.6% the Atlantic and Pacific markets were both higher than in 2017, which increased incentives for the -1.5% Russian producers to boost shipments abroad. -9.1% -10.1% Still, Russian producers continue to seek -18.6% domination on the European market and have been putting in a lot of effort to grab more 2013 2014 2015 2016 2017 2018 H1 2019 market shares on the Asian markets such as Bituminous Coal Exports, USD bn y/y change South Korea and Taiwan.
Source: Statistics Office, CEIC, EIA
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Coal Exports (cont’d)
Comments Coal Export Volumes by Major Markets, 2018 In 2018, South Korea was the largest foreign Turkey 5.9% The market for Russian coal producers. The country Netherlands Taiwan 4.7% absorbed 12.9% of the total coal exports, followed 6.0% by China with 11.3% of shipments and Japan, Poland 6.6% which took a 9.1% share. However, the European Germany Others countries were the ones to register the strongest 6.9% 29.4% annual rise in export volumes: Ukraine (53% y/y rise), Germany (42%), Poland (74%), the Netherlands (10.9%). Ukraine 7.1%
Shipments to Taiwan went up by 6.2% y/y, South
Korea lifted its buying of coal from Russia by Japan 9.1% 9.8% y/y, while coal exports to China remained at South Korea their level from 2017. China 11.3% 12.9%
Coal Export Volumes by Region, 2010 Coal Export Volumes by Region, 2018
Asia 44%
Asia 26.5% Europe 71.5%
Africa 1.9% Others 4%
Europe 51%
Source: FCS, CEIC
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FOCUS POINT
Metal Ore Production by Federal District, RUB bn, Jan–July 2019
RUB 75bn (9%) Urals RUB 117bn RUB 91bn (14%) (11%) Siberian Northwestern
RUB 318bn (37%) Far Eastern
RUB 216bn (25%) Central
RUB 38.9bn (5%) Volga
RUB 1.1bn (0.1%) North Caucasian
Source: Statistics Office, CEIC
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Iron Ore Production
Comments Russia holds 25bn tonnes of crude iron ore reserves and 14bn tonnes of pure iron content reserves, ranking second in the world after Australia, according to USGS data as of 2018. At the same time, the country is the fifth largest iron-ore mining country, holding about 4% of the global supplies in 2017. Iron-ore production in Russia has been on a downward trend, falling from as high as 104mn tonnes in 2012 to 95mn tonnes in 2017. In 2018, iron-ore production grew by 0.9% y/y and is about to rise further in 2019. For the first seven months of the year, it expanded by 2.4% y/y to 56.5mn tonnes. Stronger global demand as well as supply rationalisation in China supported iron ore prices in 2018, while a supply shock due to Brazil’s dam collapse in January 2019, which derailed the world's biggest iron-ore producer Vale, sent global iron-ore prices up in 2019. This stimulated production and export shipments out of Russia. Modernisation and expansion plans at the major iron and steel producers have lifted capacities in recent years and so ensured adequate supply potential in coming years. The continuing modernisation of public infrastructure and the government construction programmes will be key source of growth for the construction industry, and indirectly for the steel and iron sector.
Iron Ore Concentrate Production, mn tonnes
103.6 104.0 8.0% 102.0 101.7 101.0 101.1 95.0 95.9
2.4% 0.9% 56.5 0.4% 0.0% -0.3% -0.7% -1.9%
-6.0%
2011 2012 2013 2014 2015 2016 2017 2018 Jan-July 2019
Iron Ore Concentrate, mn tonnes y/y change
Source: Statistics Office, CEIC, USGS
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Iron Ore Foreign Trade
Comments Russia is a net iron ore exporting country. In 2017, the volume of iron ore exports exceeded imports by 12.6mn tonnes. The country generated a USD 1.0bn surplus on its iron ore foreign trade account in 2017. In 2011–2016, iron-ore exports were in decline, both in volume and value terms, due to weaker foreign demand, mainly from China and to the iron-ore price plunge in USD terms. In 2011–2016, iron ore volume exports declined by a cumulative 30%, while export value shrank by 75%. However, from the beginning of 2017, iron-ore prices rebounded strongly as the global supply/demand situation rebalanced. The market value of Russian iron-ore exports doubled to USD 1.6bn in 2018, up from USD 0.8bn in 2016. In January–May 2019, export shipments surged by 37% y/y to 9.6mn tonnes, while in value iron-ore exports jumped by 61% y/y to USD 9.6bn as the average global price of iron ore continued to climb. Besides China, other export destinations for the Russian iron ore are countries from the EU like the Netherlands, Slovakia and Italy. Russia imports smaller quantities of iron ore than it ships to foreign markets. (imports of 7.2mn tonnes of iron ore in 2016). Almost all the iron-ore imports come from countries of the Commonwealth of Independent States (CIS).
Iron Ore Exports Iron Ore & Concentrates Imports
27.5 10.4 3.2 25.5 25.7 10.4 23.0 1,537 21.3 21.1 19.4 8.1 8.5 2.5 2.4 19.0 8.2 7.6 7.2 2.0 1.6 1.6 9.6 835 829 1.0 788 0.8 0.9 532 440 383
2011 2012 2013 2014 2015 2016 2017 2018
Jan-May 2019 2011 2012 2013 2014 2015 2016 2017
Ex port Volume, mn tonnes Ex port Value, USD bn Import Volume, mn tonnes Import Value, USD mn
Source: Statistics Office, FCS, CEIC
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Iron Ore Prices
Iron Ore Average Monthly Producer Iron Ore and Ore Concentrates Average Price, RUB/tonne Monthly Export Price, USD/tonne 3,000 120
2,500 100
2,000 80
1,500 60
1,000 40
500 20
0 0 Jul- 17 Jul- 18 Jul- 19 Jul- 17 Jul- 18 Jan-17 Jan-18 Jan-19 Jan-17 Jan-18 Jan-19 Mar-17 Mar-18 Mar-19 Mar-17 Mar-18 Mar-19 Sep-17 Nov-17 Sep-18 Nov-18 Sep-17 Nov-17 Sep-18 Nov-18 May- 17 May- 18 May- 19 May- 17 May- 18 May- 19
Comments
Global iron ore prices have been rising since the beginning of 2017 due to the closure of high-cost, polluting plants in China while demand remained strong. A significant reduction in iron-ore stockpiles in China and ongoing fallout from a Brazil mine disaster have pushed global iron and metal prices up. China is the world's biggest consumer of iron ore and a fall in the amount of iron ore held at Chinese ports helped increase an industry benchmark price. Between January and May 2019, the average Russian iron-ore and ore concentrates export price surged by 16% to USD 100 per tonne, according to the most recent data from the National Statistics. Additional factor behind the rise in global iron ore prices was the dam collapse in January in Brazil, which killed more than 240 people, and derailed the world's biggest iron-ore producer Vale. As a consequence, Vale mines, which produced the equivalent of about 6% of the total annual seaborne iron-ore market, have been closed. With the time-frame still uncertain for the recovery of Brazilian operations, iron-ore prices are highly likely to continue their upward trend.
Source: Statistics Office, CEIC
RUSSIA MINING SECTOR 2019/2020 66 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Nickel Production
Comments Russia is a major global supplier of nickel, stemming from its rich nickel metal resources and long- established mine production base. However, in recent years, production suffered from the decommissioning of the oldest Russian nickel plant in 2016 due to environmental and social concerns. As a result, the operator of the plant, the privately owned Norilsk Nickel, which controls about 70% of the country’s total nickel production, shrank its output by 18% y/y in 2016 and further by 14% y/y in 2017. In 2018, the company’s Russian production rebounded by 0.4% y/y to 158,000 tonnes, which can be attributed to an expansion of the carbonyl nickel production capacities at Kola MMC division and to an increase in the production of nickel concentrate for sale to third parties. In the first half of 2019, production growth accelerated to 6% y/y as the company produced 80,000 tonnes of nickel. Growth was primarily attributed to the expansion of carbonyl nickel production at Kola MMC as part of a strategic diversification of sales into premium products. Norilsk Nickel is planning to expand its nickel production by 15% over the 2019–2026 period to meet the growing EV demand. For that purpose, the company will invest about USD 1.5bn-1.7bn for mining projects, including for an upgrade and expansion at its Talnakh Concentrator and for development projects at the Southern Cluster.
Russian Nickel Production Norilsk Nickel Domestic Production Volumes 269,000 275,000 228,438 12.6% 222,016 239,000 6.0% 7.8% 220,000 182,095 214,000 210,000 158,005 157,396 0.4% -1.4% -2.8% -2.7% -1.9% 80,039
-13.1% -13.6%
-18.2% -18.0%
2013 2014 2015 2016 2017 2018e 2014 2015 2016 2017 2018 H1 2019
Nickel Mine Production, tonnes y/y change Nickel, tonnes y/y change
Source: USGS, Norilsk Nickel
RUSSIA MINING SECTOR 2019/2020 67 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Nickel Foreign Trade
Comments Nickel and Products Foreign Trade, USD mn Russia exports nickel mainly to Switzerland, Finland and the Netherlands. The three 4,185 countries held a combined share of 97% of the total exports of nickel from Russia in 2018. Switzerland was the top market with a 42% share, followed by Finland with 31% and the 2,733 Netherlands with 24%. The exports of nickel in 2,714 volume declined from 238,400 tonnes in 2014, 2,113 2,186 down to 135,100 tonnes in 2018 on reduced 4,021 production volumes. In 2018, the nickel exports went down by 0.9% y/y in volume but surged by 2,662 25% y/y in value to USD 1.7bn. During 2018, the 2,605 2,082 average price of nickel on the London Metal 2,021 604 Exchange (LME) jumped by 26% as global markets were in deficit, driven by resilient 587
demand growth in stainless steel and the 71 92 17 - - - 104 109 - - 164 booming battery sector. In H1 2019, nickel - 2014 2015 2016 2017 2018 Q1 2019 exports increased by 4% y/y to 71,400 tonnes, but fell by 8% y/y in value to USD 872mn due to Ex ports Imports Balance the nickel price pullback on the global markets.
Unprocessed Nickel Exports Nickel and Products Exports by Country, 2018
238.4 226.4 Finland 31% 3.9 185.7 Netherlands 136.3 135.1 2.6 24% 1.7 1.7 71.4 1.4 0.9
2014 2015 2016 2017 2018 H1 2019 Others 3% Switzerland Volume, thou tonnes Value, USD bn 42%
Source: FCS, CEIC
RUSSIA MINING SECTOR 2019/2020 68 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Nickel Prices
World Nickel Price, USD/tonne Average Export Price of Raw Nickel, USD/tonne 25,000 20,000 18,000 20,000 16,000 14,000 15,000 12,000 10,000 10,000 8,000 6,000 5,000 4,000 2,000 0 0 Jul- 15 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Apr-14 Oct-16 Apr-19 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17 Feb-19 Jan-13 Jun-13 Jan-18 Jun-18 Mar-17 Feb-15 Nov-13 Sep-14 Dec-15 Aug-17 Nov-18 May- 16
Comments
In 2018, the global nickel market has been in deficit at approximately 6% of the global consumption, driven by resilient demand growth in stainless steel and booming battery sector, according to Norilsk Nickel. This supported the global market prices with the LME price going up by 26% y/y on average. A drawdown in inventories by 47% y/y also helped prices increase during the year. However, in the second half of 2018, nickel prices became bearish as trade tensions between US and China intensified, with fears that the situation might result in a full-scale trade war. China is the largest consumer of nickel and base metals and any slowdown of the Chinese economy could derail global demand. In addition, the Chinese nickel producer Tsingshan announced plans to build a high-pressure acid- leaching nickel plant in Indonesia in a joint venture with GEM, BRUNP, and Indonesia Morowali industrial Park with a target capacity of 50,000 tonnes at a record low capital cost. In H1 2019, the nickel price was volatile due to the global economy slowdown and the uncertain environment around trade tensions between US and China. On average, nickel prices were down by 11% y/y in the first half of the year, despite which the market has been still in a deficit.
Source: Statistics Office, CEIC, Norilsk Nickel
RUSSIA MINING SECTOR 2019/2020 69 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Copper Production
Comments Russia’s copper mine production edged up 0.7% y/y to reach 710,000 tonnes in 2018, according to preliminary estimates by the USGS. Growth was supported by robust global demand, which, according to Wood Mackenzie, rose by 3% y/y on rising supplies to cable and wire manufacturers. Consumption in pipe, flat rolled products and billet production segments saw moderate growth. In 2018, Russia exported about 87% of the total copper produced. Russia’s copper reserves totalled an estimated 30mn tonnes as of 2018, half of them being located in the Udokan copper deposit in eastern Siberia. Norilsk Nickel is the leading producer, holding 11.8mn tonnes of proven and probable reserves and 22.3mn tonnes of measured and indicated reserves, located on the Taymyr Peninsula. Besides Norilsk Nickel, which accounts for 40% of the country’s copper output, two other companies are active in the sector: Ural Mining and Metallurgical Company (with a 44% share in total production) and Russian Copper Company (16%). More than 50% of copper produced in Russia is used in electric applications like wire, cables and connectors. Another 30% is consumed by the construction industry.
Copper Production
691.5 702.7 713.1 711.4 702.3 705.0 710.0 655.0 638.0 5.6% 4.0% 2.7% 2.9% 1.5% 0.4% 0.7% -1.3%
-10.5%
2010 2011 2012 2013 2014 2015 2016 2017 2018e
Copper Production, thou tonnes y/y change
Source: FMST, CEIC, Wood Mackenzie, Norilsk Nickel
RUSSIA MINING SECTOR 2019/2020 70 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Copper Foreign Trade
Comments Refined Copper Exports
Strong production volumes of copper in 2018
helped boost export shipments. Russia exported 4.1 652,200 tonnes of refined copper in 2018, up 10.6% y/y. Exports were also supported by the 3.6 weakness of the rouble, which depreciated by a fifth against the US dollar in 2018. Higher 3.1 copper prices also played a role.
In value terms, the copper exports grew by 13% 2.4 y/y to USD 4.1bn in 2018. Major export 2.1 1.9 1.9 652.2
destinations for Russian copper are the 589.9 1.6 563.2 Netherlands (35% share in volume), China 511.1 (23%), Germany (17%), Switzerland (7%) and
Egypt (7%). The UK and Belarus took a share of 340.0 290.2
3% each. 253.9 222.3
In 2018, Russia imported copper and copper products worth USD 790.1mn and the positive 2012 2013 2014 2015 2016 2017 2018 Q1 2019 balance on the copper account came in at USD 3.3bn, up from USD 2.8bn in 2017. Volume, thou tonnes Value, USD bn
Copper and Copper Product Imports, Copper and Copper Product Export USD mn Markets, 2018 Germany 17% 971.6 Switzerland 888.1 826.1 7% 812.5 790.1 China 23% Egypt 5% United 474.6 446.6 Kingdom 3%
Belarus 3% 168.6 Others 7% Netherlands 2012 2013 2014 2015 2016 2017 2018 Q1 2019 35%
Source: FCS, CEIC
RUSSIA MINING SECTOR 2019/2020 71 An EMIS Insights Industry Report 06 COAL & METAL ORES CONTENTS
Copper Price
Average World Copper Price, USD/tonne Average Export Price of Russian Refined Copper, USD/tonne 9,000 9,000
8,000 8,000
7,000 7,000
6,000 6,000
5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0 Jul- 15 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Apr-14 Oct-16 Apr-19 Jan-13 Jun-13 Jan-18 Jun-18 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Mar-17 Feb-15 May- 13 May- 14 May- 15 May- 16 May- 17 May- 18 Nov-13 Sep-14 Dec-15 Aug-17 Nov-18 May- 16
Comments
Copper prices were volatile throughout 2018 amid concerns of global economic slowdown and an escalation of the trade tension between the US and China. The average LME copper price increased 6% y/y to USD 6,523 per tonne in 2018, on a strong demand coming mainly from China. Copper prices rose to a 4.5-year high of USD 7,300 per tonne in the second quarter of 2018 amid expectations of potential labour-related supply disruptions at copper mines in Chile and Peru, strong demand from EV manufacturers and low level of exchange inventories. Prices fell to USD 5,800 per tonne in August 2018 following the successful negotiations between miners and trade unions in Latin America and an escalation of the US-China trade tensions causing concerns over weaker demand. In Q4 2018, the price stabilised in the range of USD 5,950 and USD 6,300 per tonne. Stronger US dollar and worse-than- expected industry fundamentals pushed the copper price to USD 6,000 per tonne in May 2019 with the average LME copper price for the first half of 2019 falling by 11% y/y to USD 6,165 per tonne. Sluggish global demand growth because of the global economic slowdown and continuing trade tensions between the US and China, coupled with stable production volumes were the main driving factors for the price setback.
Source: Statistics Office, CEIC, Norilsk Nickel
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07 PRECIOUS METALS & MINERALS
Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 73 07 PRECIOUS METALS & MINERALS CONTENTS
Highlights
Overview Russia is a major holder and producer of precious metals and minerals and acts as an important supplier for the world market. With an estimated 5,300 tonnes of gold reserves, Russia hosts the third largest gold reserves in the world, according to USGS. In 2018, the country produced 264,400 tonnes of gold, up 4% y/y. The largest gold-mining regions are the Krasnoyarsk Territory and the Magadan Region with 23% and 14% of total production. Russia holds 650mn carats of natural industrial diamond reserves as of end-2018, which account for more than half of the world’s total, according to USGS estimates. At the same time, the country is the world’s second largest industrial diamond producer, with an output of 17mn carats in 2017, or close to 27% of the global production. 90% of the country’s diamond production assets are located in the Republic of Sakha (Yakutia) while 10% are in Arkhangelsk Region.
Challenges The slowdown of the global economy that started in the second half of 2018 and continued into 2019 and which is widely expected to turn into recession in 2020–2021 will affect demand for precious metals and have a negative impact on the mining of precious metals. Demand for precious metals is highly sensitive to the economic cycle and any economic downturns generally cause price volatility for precious commodities, which hurts the sales of precious metals. Other challenges include the global competition in the sector of precious metals, the danger of potential trade wars and possible sanctions against Russian precious metals companies from Western countries. The prospective precious metals deposits are generally situated in hard-to-reach regions and places that require costly infrastructure investments.
Outlook Russian gold production growth is expected to accelerate in 2019 as domestic demand for precious metal is buoyed by the possibility of further Western sanctions on state banks, which will respond by increasing their reserves of gold, according to Fitch Solutions. Gold-mine production is likely to increase by 4% y/y to 10.82 moz in 2019. In the longer term, Fitch Solutions expects gold production to be supported by a healthy project pipeline. Polyus Gold's Natalka mine will be the key driver of Russia's gold production growth over the coming years. The mine poured first gold in December 2017 and is expected to have an output of 420–470 koz per year. Russia's gold output will likely grow from 10.8 moz in 2019 to 14.7 moz in 2028 which would represent an average annual growth of 3.5% for the period.
Source: Fitch Solutions, EMIS Insights, USGS, ALROSA
RUSSIA MINING SECTOR 2019/2020 74 An EMIS Insights Industry Report 07 PRECIOUS METALS & MINERALS CONTENTS
Main Events
§ In April 2019, Russia’s largest diamond miner Alrosa launched diamond production at the Zarya pipe, Aikhal Mining and Processing Division. The new deposit’s expected life exceeds ten years. The development of Zarya primary diamond deposit of Aikhal Mining and Processing Division is one of the company’s major investment projects with a total investment of RUB 12bn. Zarya pipe is located in the operational zone and 3 km from Aikhal Mining and Processing Division.
§ In June 2019, Russian privately held gold miner Polyus Gold announced the results for the Sukhoi Log scoping study. The asset is expected to produce 1.6 moz annually at a total cash cost of USD 420/oz–470/oz. The investment decision and start of construction capital expenditure are planned for 2021; production is expected to start around 2026. The Sukhoi Log, Russia’s largest gold mine, is located in the Irkutsk district and estimated to hold close to 63 moz of gold.
§ In July 2019, Alrosa extracted a large rough diamond from the Zapolyarnaya pipe of the Verkhne- Munskoye deposit. The gem-quality rough diamond is 63.15 carats. The crystal has an octahedral shape with small chips on the edges and tops. The mined diamond is transparent with a yellow hue. In March 2019, Alrosa conducted an experiment to clarify the diamondiferous nature of the northwestern part of the Zapolyarnaya pipe at the Verkhne-Munskoye deposit. The company extracted 239 large (over 8 carats) diamonds from the Zapolyarnaya pipe.
§ In October 2019, Alrosa launched commercial production of the VerkhneMunskoye diamond deposit. The deposit is situated in the west of Yakutia, 170km off the town of Udachny. At present, four kimberlite pipes (Zapolyarnaya, Demos, Novinka and Komsomolskaya Magnitnaya) have been explored. The deposit will bring 1.8mn carats per year, with its reserves being sufficient for production for more than 20 years. The development of the Verkhne-Munskoye diamond deposit is the largest investment project of ALROSA. At the preparatory stage of production, the investments amounted to RUB 16bn, while the total investments, including production maintenance, up to 2042 are estimated to be equal to RUB 60bn.
Source: Company Data
RUSSIA MINING SECTOR 2019/2020 75 An EMIS Insights Industry Report 07 PRECIOUS METALS & MINERALS CONTENTS
Gold Mining
Comments Russia holds the world’s third-largest gold mine reserves – estimated at 5,300 tonnes as of end-2018, equal to 9.8% of the global reserves, according to USGS. Russia holds one of the largest gold deposits in the world, the Sukhoi Log, which is located in Russia’s Irkutsk district and estimated to hold close to 63 moz of gold, according to Polyus Gold, which is the operator of the deposit. In terms of gold production, Russia ranks third, behind China and Australia. In September 2017, the largest Russian gold producer, Polyus Gold, launched a mining and smelting facility to develop the Natalka gold deposit in the country's Magadan Region with an expected annual gold production of 13 tonnes. According to Polyus, this will make Russia the second largest gold producer in the World after China. The largest producing regions in Russia in 2018 were the Krasnoyarsk Territory and the Magadan Region with 23% and 14% of the total production. Gold production in Russia is on an upward trend, rising from 215,700 tonnes in 2013 to 264,400 tonnes in 2018. In 2018 alone, production went up by 4% y/y, while according to the recent data from the Ministry of Finance, gold production surged by 12.5% y/y to 61,500 tonnes in January-April 2019.
Gold Mining Volumes Gold Mining Volumes by Region, 2018
Irkutsk Region 10% Amur Region 264.4 Khabarovsk 254.2 12.5% 9% 230.7 235.1 237.8 Territory 10% 215.7 Chukotka Republic of 9.0% Area 8% Sakha (Yakutia) 7.0% 6.9% 11% Zabaikalsk Territory 4% 4.0% 61.5
1.9% 1.2% Magadan Others 10% Region 14% 2013 2014 2015 2016 2017 2018 Jan-Apr 2019 Krasnoyarsk Gold Mining, tonnes y/y change Territory 23%
Source: Finance Ministry, RGMU, CEIC
RUSSIA MINING SECTOR 2019/2020 76 An EMIS Insights Industry Report 07 PRECIOUS METALS & MINERALS CONTENTS
FOCUS POINT
Gold Mining Regions, 2018, kg
28,796 Republic of Sakha 20,486 (Yakutia) Chukotka Area
36,718 60,577 Magadan Krasnoyarsk Region Territory
24,803 Irkutsk Region
5,741 Kamchatka Territory
26,914 Khabarovsk Territory
23,612 Amur Region
5,280 1,456 1,448 10,859 Sverdlovsk Republic Republic Zabaikalsk Region of Khakassia of Tyva Territory 6,982 Chelyabinks 5,678 Region Republic of Buryatia
Source: RGMU, CEIC
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Gold Prices
Average Gold Producer Price, RUB/kg
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
07/2014 11/2014 03/2015 07/2015 11/2015 03/2016 07/2016 11/2016 03/2017 07/2017 11/2017 03/2018 07/2018 11/2018 03/2019 07/2019
Gold Price, Bank of Russia, RUB/g
3,500
3,000
2,500
2,000
1,500
1,000
500
0
07/2014 11/2014 03/2015 07/2015 11/2015 03/2016 07/2016 11/2016 03/2017 07/2017 11/2017 03/2018 07/2018 11/2018 03/2019 07/2019
Source: Central Bank, Statistics Office, CEIC
RUSSIA MINING SECTOR 2019/2020 78 An EMIS Insights Industry Report 07 PRECIOUS METALS & MINERALS CONTENTS
Diamond Mining
Diamond Gems Production Volume Industrial Diamonds Production, mn carats
26.2 17.4 25.1 16.8 22.7 24.4 16.3 23.0 9.4% 15.2 15.3 20.9 21.1 21.0 8.5% 13.9 14.1 14.0 7.1%
0.8% 1.1% 0.3% -0.6%
-2.8%
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Diamond Gems Production, mn carats y/y change
Comments
Russia holds 650mn carats of natural industrial diamond reserves as of end-2018, which account for more than half of the world’s total, according to USGS estimates. At the same time, the country is the world’s second largest industrial diamond producer, with an output of 17mn carats in 2017, or close to 27% of the global production.
Its biggest diamond producing firm is government-controlled Alrosa Group, which accounts for 99% of all rough diamonds produced in the Russian Federation and 95% of diamonds extracted. The group also holds 74% of all the diamond reserves in the country. 90% of company’s production assets are located in the Republic of Sakha (Yakutia) while 10% are in Arkhangelsk Region.
In 2018, ALROSA mined rough diamonds volume to the tune of 36.7mn carats, down 7.3% y/y. For 2019, the company plans to produce 38mn carats, which would be an increase of 3.5% y/y. The production decline in 2018 was due to closure of company’s Mir mine and completion of open-pit mining at the Udachnaya pipe in 2017.
Source: FMST, CEIC, USGS
RUSSIA MINING SECTOR 2019/2020 79 An EMIS Insights Industry Report 07 PRECIOUS METALS & MINERALS CONTENTS
FOCUS POINT
Alrosa Largest Diamond Production Regions in Russia, 2018
10% 90% Arkhangelsk Republic of Sakha Region (Yakutia)
1,147 mn carats Total Resources, including reserves
653 mn carats Total Reserves
Alrosa Diamond Mines in Russia
11.8 mn carats 7.7 mn carats 4.2 mn carats (32.2% of total) (21% of total) (11.4% of total) Alkhal Division Nyurba Division Mirny Division
5.4 mn carats 3.9 mn carats 3.6 mn carats (14.7% of total) (10.7% of total) (9.9% of total) Almazy Anabara Udachny Division Severalmaz
Note: Alrosa owns 32.8% of Catoca Ltd. (Angola) Source: Company Data
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