Russia Mining Report Q1 2009

Fri. May 22, 2009; Posted: 05:41 AM

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 used by Deripaska to buy the Norilsk stake in April 2008, it was reported on Reuters.

In January 2009, the Financial Times reported Russian mining giant Norilsk Nickel wanted to merge with a number of other mining assets in order to create one of the biggest mining groups in the world. Oleg Derpiaska and Vladimir Potanin, the two largest shareholders in Norilsk Nickel, have proposed the deal as the companies in question seek to restructure large debt burdens. Other companies thought to be involved in the merger include Metalloinvest, which is owned by Alisha Usmanov, steel group Evraz Group, steelmaker Mechel and potash producer Uralkali. The Russian government would receive a 25% stake in the entity in exchange for writing off the combined debts. However, the government is thought to be unimpressed, seeing the move as an attempt to secure a bailout.

However, some 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) rubles 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.

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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