North of 60 Mining News - The mining newspaper for Alaska and Canada's North

Russia's gold mining industry, once ruled by Stalin's most vicious henchmen, has transformed itself into an attractive prospect for international corporations. Much of the gold mining takes place in the Russian Far East, in Magadan and Chukotka, thousands of miles and several time zones away from Moscow. The industry grew up on the backs of slave laborers, sent here as punishment for imaginary crimes and to carve a nation's wealth out of the permafrost.

Gold was crucial to the economy of the Soviet Union, which sold gold to acquire hard currency to buy Western goods.

Gold also supported the "hard currency ruble," which was used for foreign trade.

Today gold is a vital resource for Russia, too, but for a different reason: gold producers provide employment and pay most of the taxes in some Far East regions.

After Russia began its rapid transition to a market economy in 1991, the inefficiency of the giant state-owned enterprises became apparent and people poured out of the Far East to more prosperous parts of central and western Russia.

In the subsequent decade, corrupt regional administrators and organized criminals took over where Communist Party bureaucrats had left off.

Ruble devaluation, new law help industry

Recent events have dramatically changed the landscape once again.

The first boost for the gold mining industry came in the wake of Russia's August 1998 financial crisis.

"The ruble devaluation and resulting decreased production costs improved the development of the Russian Far East's gold mining industry," according to a 2001 report by Yana Tselikova of the U.S. Commercial Service in Vladivostok.

"Most of the loans taken by gold miners were in rubles, so with the ruble's collapse and with the world's market prices starting to stabilize, the gold mining companies were able to pay them back very easily.

As a result, the profitability of the gold mining industry and its attractiveness for investors grew significantly by the end of 1998."

In the same year, Russia adopted a law releasing the government's strict control over the gold industry and gold exports, and commercial banks started to export Russian gold.

Then, in 2000, billionaire Roman Abramovich was elected governor of Chukotka Autonomous Okrug. Abramovich owned the oil company Sibneft and aluminum producer RusAl. He was also close enough to President Vladimir Putin to avoid the political troubles that landed Yukos oil company CEO Mikhail Khodorkovsky in jail. In October 2002, Magadan Region's Gov. Valentin Tsvetkov was shot dead in Moscow. He had tried to control most major businesses in the region, including gold and fishing. His successor, Nikolai Dudov, has made life easier for Western companies.

Kinross operates in Magadan

"The new governor was always the calmer voice in the room in the previous administration," Chris Hill, Kinross Gold's vice president for investor relations, said of Dudov. "Things are going quite well, he's supportive, he's aware of the size of our tax contributions." Canadian Kinross struggled hard to achieve its 98.1 percent buyout of the Omolon Gold Mining Co. in Magadan, which operates the Kubaka mine. The deal was put together during the Tsvetkov administration and concluded under Dudov.

Omolon also owns a license for the Birkachan gold field, where the company has started prestripping the ore body and is building a road that will be good for about nine months of the year, according to Hill. "We are stockpiling ore in anticipation of the road being completed very soon," he said. "Then we will start processing the ore." The revival of gold mining in the Russian Far East depends largely on the move from mainly extracting placer gold to mining ore gold. Ore gold mining is preferred by investors because it is not seasonal and is economically more effective.

Weather a challenge

The extreme cold in the Russian Far East will always test the endurance of gold miners. Kubaka is only one degree in latitude from the Arctic Circle, and temperatures can plunge to minus 69 F (minus 56 C) in winter. Kubaka is not linked to the rest of Russia by road or rail, and can only be reached year-round by fixed-wing aircraft or helicopter. An ice winter road from Kubaka to the nearest town is open for four months, and supplies for the entire year must be trucked to the site during that period.

"The remoteness can be challenging, but it's the same as operating in northern Canada," Hill said. "Safety standards are the same as in North America." The Magadan administration does not pressure Kinross to work with Russian companies, Hill added. "We're pretty free to tender to whomever we choose to. We tried a Russian supplier of the steel balls we use to grind the ore, but the mill just ate them. They weren't tough enough. So we switched back to a North American supplier. We use a Korean company for cyanide and a Russian company for oil."

Mining activities at Kubaka ended in October 2002 and Kinross is processing relatively lower grade stockpiles there. Production declined from 237,162 ounces of gold in 2001 to 164,006 in 2003, and the figure is expected to be 137,000 this year. The company plans to spend $11.2 million in 2004 on developing the Birkachan test pit. It is also exploring the Tsokol vein, adjacent to Kubaka.

Bema Gold active in Magadan and Chukotka

Another Canadian company, Bema Gold, is active in both Magadan and Chukotka. Bema acquired a 79 percent indirect interest in Magadan's Julietta mine in 1998. The remaining 21 percent interest is held by two Russian companies.

"That was a brutal time to be in gold mining, let alone gold mining in Russia," said Ian MacLean, Bema's manager for investor relations. "The ruble collapsed, our financing collapsed, we had to get a different loan structure. But we took measured risks. When we went into Chile in 1988 it wasn't considered favorable for mining. Now it is one of the best countries in the world. We decided to gamble again in Russia, and we've been rewarded - we discovered the Kupol project."

In December 2002, Bema and the government of Chukotka concluded an agreement which allows Bema to acquire up to a 75 percent interest in the Kupol property. Bema began exploring Kupol last year. Chukotka is the closest region of Russia to the United States, a short hop across the Bering Strait from Alaska. Gov. Abramovich has invested hundreds of millions of dollars in the region's infrastructure, to stimulate the economy, and his administration welcomes Western investment. Abramovich himself spends much of his time in the United Kingdom, where he owns Chelsea Football Club.

"We've had nothing but good experiences in Russia," said MacLean. "We have paid back our loan for the Julietta mine. The workforce is very strong. The Chukotka administration with Abramovich is the most progressive government we've dealt with there. They understand Western business, as business partners they've been terrific. They have no problem with us using Canadian equipment. Russians are being trained to use Canadian drill rigs." A high proportion of Russian workers in the gold mining industry are university-educated, ranging from about 30 percent to 60 percent at each site.

The Julietta mine produced 118,145 ounces of gold in 2003 and the figure is expected to be 102,000 this year. The mine has 395,000 ounces of proven and probable reserves; 110,000 ounces of measured and indicated resources, and 139,000 ounces of inferred resources. Bema currently owns 30 percent of Kupol, which has 1.4 million ounces of measured and indicated resources, and 3.2 million ounces of inferred resources. It also has 14.3 million ounces of measured and indicated silver resources and 41.8 million ounces of inferred resources. Production at Kupol is due to begin in late 2007, subject to feasibility and financing.

Peter Hambro Mining works just in Russia

Unlike Kinross and Bema, which have operations in several countries, United Kingdom-based Peter Hambro Mining focuses exclusively on Russia. Its properties are dotted across Siberia and the Far East, in Amur and Magadan regions, as well as the Republic of Buryatia and Yamalanetsky Autonomous Okrug in the Urals. Executive Chairman Peter Hambro started out in Russia 25 years ago as a gold trader, in partnership with the Foreign Trade Bank.

"Peter Hambro was one of the first pioneers who entered the market after the collapse of Communism," said the company's spokeswoman, Alya Samokhvalova. "He was lucky to get a very good Russian partner, Dr. Pavel Maslovsky." Maslovsky, who was formerly a professor at the Moscow Aircraft Technology Institute, is now deputy chairman of the company. He acquired the license for Peter Hambro's flagship Pokrovskiy deposit in Amur Region. That open-pit mine saw an increase in production of 74 percent in 2003 compared with 2002, from 70,000 ounces to 121,000 ounces. In total Peter Hambro has 13 projects of its own and six joint ventures.

There are 30 banks in Russia that have licenses to buy gold. "There is a lot of competition between banks to buy the gold," Samokhvalova said. We trade with Sberbank, one of the biggest banks. Sberbank brings the salaries for the miners and picks up the bullion. It goes to the refinery in Krasnoyarsk." People are keen to work for Peter Hambro at salaries of $250-$300 per month, which is very respectable in the Russian Far East. They work 15 days on, 15 off, and many of the employees are also subsistence farmers in their home regions. However, there is a shortage of young mining specialists in Russia and Peter Hambro funds scholarships for students.

Highland Gold also works just in Russia

Highland Gold's executive chairman is Lord Peter Daresbury, a British businessman. The management team is a mix of Russians and non-Russians; the company's managing director is 35-year-old Ivan Koulakov, a former chairman of an oil company. Highland's properties are all in Russia - in Khabarovsk, Chita and Sakhalin regions, and Chukotka Autonomous Oblast. It began work in 1999 with the Mnogovershinnoe deposit in Khabarovsk, which is now Russia's second-largest operating gold mine, producing approximately 193,000 ounces of gold a year.

Highland acquired a license for the Mayskoye deposit in Chukotka in September 2003. Once again, it is hoped that the rewards of working in one of the world's most desolate and inaccessible areas will outweigh the difficulties. Mayskoye is located in remote tundra upland where the most common economic activity is reindeer herding. Access and supply is via the Arctic seaport of Pevek, which also has an airport, and is open from May to October. Mayskoye is "one of the largest undeveloped gold deposits in Russia," according to Highland, and production is expected to begin by 2006.

Gold mining companies show no signs of being deterred by the Yukos affair, which caused some Russia observers to wonder if President Putin was about to embark on a large-scale re-nationalization program. They believe that their importance to the economy of the Far East is appreciated. "Yukos was an internal thing, Khodorkovsky overstepped his balance on the federal stage," said Bema's MacLean. "The problem is optics, it doesn't look good, obviously. But as far as we can tell, the door's still open to foreign investment."