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Russia Mining Report Q2 2009
Business Monitor International, May 2009, Pages: 64
Russia Mining Report provides industry professionals and strategists, corporate analysts, mining associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Russia's mining industry
The global credit crunch is having a significant impact on the Russian mining industry, particularly among the oligarchs who control many Russian miners. In late October 2008, Russia’s richest man, Oleg Deripaska, was the recipient of a US$4.5bn loan from state-owned Vnesheconombank, which enabled his company United Company RUSAL (UC RUSAL) to maintain its 25% stake in Norilsk Nickel. The money will be used to repay the syndicated loan from foreign lenders that Deripaska used to buy the Norilsk stake in April 2008, it was reported on Reuters.
One further consideration for the Russian authorities will be the maintenance of social cohesion, as several thousand mine workers look set to lose their jobs. The domestic industry is going through a round of severe cost-cutting in order to remain viable as the global economic crisis continues to bite.
No consolidation ... For Now
The Kremlin has ruled out any near-term moves to create a domestic metals giant via merging indebted companies with the world’s largest nickel miner Norilsk Nickel. Such a merger would have seen the miners offload some of their debts to the Russian state in exchange for an equity stake. Reports on Reuters in late February 2009 indicated that President Medvedev does not see any need for a merger at the present time, following a meeting with three key players: Oleg Deripaska, CEO of UC Rusal; Vladimir Potanin, the largest shareholder in Norilsk; and Norilsk CEO Vladimir Strzhalkovsky.
Analysts have suggested that the reason the Kremlin is reluctant to facilitate any merger is the fact that the state does not have any spare cash to help indebted companies sort out their near-term financing requirements. Banning any talk of a merger will therefore force the miners concerned to deal with their own problems.
Speaking a few days after the Kremlin meeting, Norilsk CEO Vladimir Strzhalkovsky confirmed that there are no current plans for a merger between Norilsk and another company, but that he could not rule it out in the future. At the same time, Strzhalkovsky said that his firm was not planning any job cuts, even though sales revenue is likely to halve over the course of 2009.
Other mining companies are still looking to invest. As reported by Reuters in November 2008, Russian state-owned uranium miner Atomredmetzoloto (ARMZ) is planning to invest RUB203.6bn (US$5.9bn) by 2015 as part of a massive expansion plan. In 2008, ARMZ expected to produce 3,880 tonnes of uranium, with output forecast to grow to 4,300 tonnes in 2009. However, backed by external funding and international partners, the company is looking to develop new deposits in Siberia and the Russian Far East. Russia has the 10th largest reserves of uranium in the world and, with demand for nuclear power growing, the country is looking to become a major player on the world market. According to Russia’s Natural Resources Ministry, the country’s uranium reserves stand at around 550,000 tonnes. However, the world’s top three producers of uranium – Canada, Australia and Kazakhstan – hold more than half of the world’s known reserves.
Meanwhile, in January 2009, Polyus Gold signed a deal with Canadian miner Kinross Gold to develop a gold deposit in Republic of Yakutia, as reported by Reuters. According to reports, the two companies are planning to prepare a feasibility study over the next months for the deposit, which has the potential to be Russia’s third-largest gold reserve. Earlier studies claim the Nezhdaninskoye project has up to 500mn tonnes of recoverable gold.
Global Overview
On page 8 of this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector, and what this means for the industry moving forward.
Industry Forecast
In the short term, Russia’s mining sector is facing severe difficulties caused by falling commodities prices. One nickel producer reportedly claimed in late 2008 that it was costing US$26,000 to produce a single tonne of nickel, but prices for the metal were only US$8,000 per tonne. In 2008, BMI estimated the mining sector declined by 5.0% in real terms, while we forecast a marginal contraction in 2009. By the end of the forecast period, however, the market should have returned to strength as commodity prices recover and new reserves are developed. In 2013, we forecast the mining sector will be worth US$175.8bn.
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