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Article Excerpt
IN BRIEF
Editor's Choice
*** Rosnedra this week adjudged Mikhailovsky GOK, a division of Alisher Usmanov's Metalloinvest holding, the winner of a tender for the rights to the giant Udokan copper field in Russia's Chita region. MGOK's winning bid was seen as the "best for the region both from the point of view of social development and investment and technical development." Rostekhnologii confirmed it intends to form a joint venture Metalloinvest to develop Udokan in which it expects to receive at least a blocking stake in the joint venture and could invest approximately $1 billion in the project. MGOK could invest more than 100 billion rubles in the project.
*** Norilsk Nickel, the world's biggest nickel and palladium producer announced this week that it intends to diversify its portfolio and expand into iron ore, coal and copper. Moves into areas outside the group's core nickel and PGMs interests are planned to enhance the company's product mix and safety margins. The moves could become a precursor to rumored tie-ups with Alisher Usmanov's Metalloinvest, and Oleg Deripaska's United Company RUSAL (UC RUSAL) said after buying a blocking stake in Norilsk Nickel in April that it saw Norilsk as a good foundation for its development "as a diversified mining and metallurgical company.
*** Another Russian metals major, steelmaker Severstal, is also looking at diversification, announcing this week that it is also interested in various acquisitions in the mining industry in Russia and abroad, including the production of nonferrous metals and greenfield projects. It is looking to invest $2 billion in coal and iron ore projects. Severstal is also interested in markets in Africa, Latin America, Asia and Eastern Europe. Severstal and Anglo American formed an alliance in the fall of 2006 to prospect for nickel, copper and zinc in Russia. No announcements have been made thus far about the start of any joint projects.
*** Gold production in Russia's Siberian and Far Eastern federal districts could rise seven-fold in 2020 compared with 2007 to 331 tonnes, according to Rosnedra estimates. Rosnedra estimates that the districts could be producing 10,000 tonnes of uranium per year (up 3.3 fold), and 325,000 tonnes nickel (up 325-fold). Mineral extraction in value could rise 21.4-fold to 13.2439 trillion rubles.
*** The Evraz Group this week closed the second stage in the acquisition of a number of Ukraine-based assets. Evraz issued 4,195,150 new shares in favor of its core shareholder Lanebrook Limited in exchange for 48.6% of Palmrose Limited, which owns 99.25% of iron ore producer Sukha Balka, 95.57% of Dnepropetrovsk Iron and Steel Works and shareholdings in three coking plants: 94.37% of Bagley Coke, 98.65% of Dnepropetrovsk Coke and 93.86% of shares outstanding of Dneprodzerzhinsk Coke. Evraz now owns 100% of Palmrose Limited though it has effectively controlled the latter since April 14, 2008, when it completed the acquisition of the first 51.4% of Palmrose for a $1 billion cash consideration.
*** The Federal Antimonopoly Service (FAS) commission this week declared that LLC Evraz Holding abused its dominant position on the coking coal market by maintaining monopolistic prices on coking coal concentrate on the domestic market. In levying a fine on Evraz, the FAS will take into account the company's cooperation as part of an investigation and the measures it took to eliminate the violations. In particular, the FAS will take into account the fact that Evraz voluntarily lowered its coking coal prices to 5,500 rubles per tonne. Peers Mechel and Raspadskaya were earlier also found guilty of similar offences.
TOP STORIES
Metalloinvest wins Udokan copper tender
MOSCOW. (Interfax) - The Russian Federal Subsurface Resources Agency (Rosnedra) has adjudged OJSC Mikhailovsky GOK (MGOK), a division of Alisher Usmanov's Metalloinvest holding, winner of a tender for the rights to the giant Udokan copper field in Russia's Chita region, Anatoly Ledovskikh, the agency's chief, told Interfax on September 10.
Ledovskikh said MGOK's bid would do most to benefit the Chita region. "Their bid was the best for the region both from the point of view of social development and investment and technical development," he said. "The commission voted unanimously," he said.
The Russian Technologies (Rostekhnologii) state corporation confirmed it intends to form a joint venture Metalloinvest to develop Udokan.
A highly placed source at Rostekhnologii told Interfax that the corporation, as proposed, planned to participate in a joint venture with Metalloinvest. "I can confirm that we intend to fulfill our agreement [with Metalloinvest]," the source said.
Rostekhnologii expects to receive at least a blocking stake in the joint venture and could invest approximately $1 billion in the project, the source said.
The source did not say whether a Metalloinvest - Rostekhnologii consortium would involve any other companies, for example Mikhail Prokhorov's Onexim Group, in the project.
A source at the Udokan tender commission told Interfax that MGOK could invest more than 100 billion rubles in the project.
The Transbaikal territory's (former Chita region) Natural Resources and Ecology Ministry told Interfax that the tender was brought forward to September 10 from September 17. A Metalloinvest representative said that a "presentation of the project took place on September 10 and was received very well." Metalloinvest told Interfax that it knew of the tender commission's decision but would not comment on it until written confirmation was received.
Yury Trutnev, the natural resources minister, told reporters on the sidelines of the fifth Baikal Economic Forum only yesterday that the Udokan tender was expected to go ahead as scheduled on September 17.
Two bidders, MGOK and the Russian Copper consortium, were left in the tender by September 9. Russian Copper includes Russian Railways (RZD), Urals Mining and Metallurgical Company (UMMC) and Russian Bank for Development and Foreign Economic Affairs (Vnesheconombank, VEB).
Five companies applied to bid at the tender, but MMC Norilsk Nickel, Oleg Deripaska's Basic Element, and Mikhail Prokhorov's Onexim Group all pulled out.
A source close to Russian Copper said the consortium had not pulled out and had paid its deposit by the prescribed deadline and submitted technical and economic projections for the project.
Rostekhnologii said in July that it might team up with Metalloinvest to develop Udokan if the latter's bid is successful. Norilsk Nickel unexpectedly pulled out of the tender at the beginning of August, saying that a solo bid was "inadvisable." Rostekhnologii has since said it views Norilsk as a potential partner for the consortium it is forming with Metalloinvest to develop Udokan.
Basic Element told Interfax on September 9 that its SoyuzMetalResource had pulled out of the tender because it deemed this to be "economically unfeasible."
The starting price at the Udokan tender was 4.5 billion rubles. The winner will receive a 20-year license. Rosnedra said in a statement that the license was sold for 15 billion rubles. Rosnedra has 30 days by law to endorse the tender results, after which the 20-year license will be issued to MGOK.
It is thought Udokan could produce up to 187,000 tonnes of copper, or 15% of Russia's annual production of the metal. Up to 180,000 tonnes of copper would be processed each year under the project.
Rosnedra has said that as of January 1, 2008, Udokan contained B+C1 reserves of 14.43 million tonnes copper and C2 reserves of 5.52 million tonnes. The ores have a Cu content of 1.56%.
Udokan is one of the world's biggest copper deposits. It was discovered in 1949 and its reserves have been listed three times.
Norilsk Nickel's Giprotsvetmet institute possesses the most complete data about Udokan's reserves. The institute has been reappraising the field's reserves since the first quarter of 2007 and expects to complete its work at the end of 2009.
MGOK said in a statement that it planned to start building a hydrometallurgical plant in the Chita region in 2010 and that the first stage of the plant, capacity 150,000 tonnes of cathode copper or 12 million tonnes of concentrate per year, should be commissioned in 2014.
Full design capacity of 474,000 tonnes cathode copper per year (36 million tonnes concentrate) should be achieved in 2016. The tender winner has seven years from receiving the license to achieve full capacity.
Planned investment is more than 100 billion rubles.
"Metalloinvest is currently preparing to obtain clearance and approvals for the technical plans, based on a unique combination of hydrometallurgical and re-treatment technology, Metalloinvest said, adding that it wanted to bring the Udokan field on stream as soon as possible.
The tender winner will have 18 months from the date of the license registration to complete an innovation-based technological, geological and economic re-appraisal re-appraisal of the Udokan ores; 30 months to draft project documentation based on proven reserves; 60 months to start commercial mining, building the first stage of a mine for 12 million tpa; and 84 months to reach projected annual capacity for 36 million tonnes of ore per year.
Construction of metallurgical and electrolytic capacity and the first stage of this must be commissioned within 60 months and design capacity of 474,000 tonnes cathode copper and 62,700 tonnes of wire-rod per year must be achieved within 84 months of the license being registered.
OVERVIEW
S&P affirms Russia ratings, maintains positive outlook
LONDON. (Interfax) - Standard & Poor's Ratings Services has affirmed its 'BBB+/A-' long-term and 'A-2' short-term sovereign credit ratings on The Russian Federation, the agency said in a press release.
The outlook on the ratings is positive.
"The Federation is a net creditor in excess of 13% of GDP, up from 6% of GDP in 2006, compared with a median net debtor position of 26% of GDP for single 'A' credits," Standard & Poor's credit analyst Frank Gill said.
"Authorities continue to save a large portion of the energy windfall, with the two fiscal reserve funds currently worth $175 billion or just over 10% of GDP, and steadily increasing. Hence government savings cover nearly twice the stock of government debt, both local and foreign," he said.
External assets of the Federation are also both large and increasing. At $582 billion, reserve levels are the third highest in the world and are set to finish 2008 at just under $630 billion or 1.2x total gross external debt.
While high commodity prices are an all-important driver of Russian growth, there is ample evidence of strong performance and competitiveness of the non-commodity economy.
"The positive outlook on Russia's sovereign rating reflects our expectation of further improvements in the Federation's net creditor position thanks to high fiscal and current account surpluses," Gill said.
"Should the government pursue prudent fiscal and monetary policies, the potential for an upgrade will increase."
For 2008 the fiscal and current account surpluses are likely to top 4% and 7% of GDP, exceeding S&P's earlier expectations by 0.6% and 4.2% of GDP, respectively. Over the longer term, however, the current account surpluses will decline, increasing the importance of financial account inflows as a source of funding for investment activity. Recent moves by authorities to selectively launch investigations against private sector corporations, coupled with the conflict in the Caucasus, helped to trigger the loss of market confidence, leading to capital outflows of 1% of GDP in August 2008.
Subsequent events highlight the possibility that Russian enforcement of shareholder and property rights is becoming increasingly unpredictable, lowering Russia's attractiveness as a destination for direct investment, S&P said. Further evidence of a marked deterioration in the investment environment could destabilize financial inflows and fan capital outflows on a larger scale, a development which would lead Standard & Poor's to revise the outlook on the sovereign ratings to stable.
"The positive outlook would also revert to stable if the authorities ended the policy of accumulating reserves in the special budgetary funds, or if proposed changes to political structures proved to be destabilizing," Gill said. "Our positive outlook on the sovereign rating incorporates our assumption that Russia's increasingly assertive foreign policy will not end with serious damage of its economic relations with the European Union," he said.
The Russian stock market corrected up following the affirmation by Standard & Poor's of Russia's rating with positive outlook.
Most benchmark stocks had fallen earlier on under pressure from negative external and internal factors. They were still down on yesterday's closing prices, but the slide had slowed by 1:45 p.m.
On the MICEX Stock Exchange, Rosneft was up 0.08%, but there were still drops for Gazprom (2.48%), Surgutneftegas (0.53%), and Tatneft (2.04%).
PRECIOUS METALS
Polyus Gold expects EBITDA to almost double in H1
MOSCOW. (Interfax) - Polyus Gold, Russia's leading gold producer, expects its EBITDA (earnings before interest, taxes, depreciation and amortization) to almost double to more than $230 million in the first half of 2008 compared to the same period of 2007, the company said in materials prepared for the Denver Gold Forum.
The company's EBITDA margin is expected to grow to 45% in the half from 39% at the end of the first half of 2007.
Expenditures are to total $448 per ounce in January-June compared to $326 a year earlier. The growth in costs can be attributed to higher prices for energy, fuel and materials as well as an increase in salaries and the tax burden.
Polyus Gold increased gold production 20% to 559,000 troy ounces (17.4 tonnes) in the first half of 2008 compared to the same period of 2007.
The company tentatively posted unaudited sales revenue under International Financial Reporting Standards (IFRS) of $508 million in the first half of 2008. The more than 60% increase was the result of growth in gold production and sales in addition to higher gold prices throughout the world.
Polyus Gold is the largest gold producer in Russia. In 2006 its gold output totaled 1.2 million ounces. Headquartered in Moscow, Polyus Gold's operating mines and development/exploration projects are located in five major gold mining regions of Russia - Krasnoyarsk, Irkutsk, Magadan, Amur regions and the Republic of Yakutia.
PRECIOUS METALS
Polymetal could boost silver production 12.5% in 2008
MOSCOW. (Interfax) - Polymetal, Russia's biggest silver producer and a major gold producer, could boost silver production 12.5% in 2008 to 529-560 tonnes (17 million-18 million oz), Victor Nesis, the company's chief executive, said in the company's annual report.
Polymetal reduced silver production 8% last year to 15.9 million oz.
By 2011, the company hopes to increase silver production by 50%.
Gold production is expected to total 7.8-8.4 tonnes (250,000-270,000 ounces) in 2008 and then more than double by 2011.
The company also said it plans to increase capital expenditures 17.5% this year to $136 million from $115.7 million in 2007.
At present, Polymetal is actively extracting precious metals at four fields: Dukat, Lunnoye, Khakadzhinskoye (including the satellite field Yurevskoye) and Vorontsovskoye.
Polymetal reduced gold production 5% to 242,000 ounces in 2007 and remained Russia's third largest gold producer behind Polyus Gold and Peter Hambro. The reduction in output last year was the result of a planned decline in precious metal content in the ore of the company's fields.
Under a strategy Polymetal approved in 2007, the company plans to increase gold mineral resources by 214 tonnes to 373 tonnes by the end of 2010 and silver mineral resources by 9,000 tonnes to 25,000 tonnes. The company plans to meet these targets with its own geological exploration as well as new acquisitions.
Polymetal underwent a change of ownership in June, with structures representing Suleiman Kerimov selling a 68% stake to Czech PPF Group (24.9%), Alexander Mamut (19.1%) and IST Group (24.05%).
Polymetal also published a list of the members of its new board of directors.
According to a presentation prepared for the company's general director Vitaly Nesis at the Denver Economic Forum, the new board will include four independent directors: Ilya Yuzhanov, Russia's former Antimonopoly Policy Minister, Russell Skirrow, former ML Metals and Mining board member, John O'Riley, former general director of Lihir Gold and Jonathan Best, former CFO at AngloGold Ashanti. The two latter men are members of the current board.
Representing PPF Group will be Martin Schaffer and from ICT Group - Konstantin Yanakov and Sergey Areshev. In addition, businessman Alexander Mamut will send a representative - Marina Abramova.
It was earlier reported that in June 2008 that a company associated with Suleiman Kerimov sold 66% of its shares in Polymetal. PPF Group of the Czech Republic received 24.9%, Mamut - 19.1% and ICT Group - 24.05%.
The shareholders in Polymetal will elect the new board of directors at a meeting slated for September 25. The makeup of the board will be expanded from seven to nine members while the number of independent...
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