Political uncertainty could make Russia the world’s biggest gold producer
By Vladislav Vorotnikov
Gold production in Russia has been steadily growing over the past decade driven by strong demand from the country’s Central Bank and the extremely high investment attractiveness of the industry. This trend is likely to continue and, with the risks of new U.S. sanctions, Russia may soon need more gold than ever.
“The first international sanctions introduced against the Russian economy in 2014 have become a real game changer for the Russian gold industry. This is especially the case for new projects, where it is only possible to launch them with these higher prices,” said Sergey Kashuba, chairman of the Russian Union of Gold Producers. It is the ruble price for gold that actually matters for the Russian gold miners and in the past five years, they have been at a very comfortable level, Kashuba said.
“If the exchange rate would remain unchanged at the 2014 level of 32 rubles per dollar, then Russian gold producers would invest only in the deposits with the highest grades and would have to wait for the increase in the global prices, just like they do in all Western countries,” Kashuba added. The economy restrictions placed on Russia over these years sent the exchange rate to 65 rubles per dollar and made even small deposits with poor grades attractive for investors.
The Russian Economy Development Ministry forecasts that the exchange rate of the Russian ruble would gradually lose its value in the coming years, moving toward 70 rubles per dollar. “The weak exchange rate is going to be the main driver for growth in the Russian gold mining industry in the coming five to 10 years,” Kashuba estimated.
Almost all of Russia’s gold is purchased by the country’s Central Bank, and its appetite seems to only grow. In 2017, the Russian finance regulator purchased 224 metric tons (mt) of gold from 318 mt produced in the country, while in 2018, it purchased 273 mt from 332 mt produced. The domestic gold reserve expanded from 457 mt in 2008 to 2,208 mt as of July 1, 2019. This means that Russia bypassed China and now has the world’s fifth-largest reserves and its total value now exceeds $100 billion.
Everyone believes that Russia’s heavy gold buying, which has hit a six-year high of 145 mt in the first half of 2019, is a political move inspired by the growing risk of sanctions. Over the past few years, Russian officials have repeatedly said that gold stockpiling is an attempt to reduce the Central Bank’s U.S. Treasury holdings, as a means to “de-dollarize” the national economy.
Attracting Foreign Investment
To accelerate growth in the industry and get more gold, the Russian government is now considering inviting foreign companies to develop a large number of small deposits located across the country. In early 2019, the Russian Nature Ministry proposed to introduce a simpler procedure for permitting deposits with gold reserves below 200 mt for non-Russian companies.
“For a non-Russian company to get a gold deposit, it must conduct negotiations with the Russian government to get a license. This procedure was very lengthy and complicated in the past,” said Maxim Khudalov, senior analyst of the Russian consulting agency AKRA. “Basically, the regulation in this area is very strict and there are rather high risks of losing the deposit in the end.”
Kinross Gold has estimated that, if approved, the new rules would attract additional investments of around $1.2 billion into the Russian gold mining industry. Several market players spoke in support of the bill. For example, Petropavlovsk, one of the biggest gold mining companies in the country — said “it was mulling some new purchases in Russia and in this regard was closely following the steps taken by the Nature Ministry aimed at attracting more investments.”
Russian analysts have no doubt that even small gold mining deposits in Russia would be in high demand among foreign investors thanks to rather low production costs. The production costs in the Russian gold mining industry are believed to be one of the lowest in the world. With the devaluation of the ruble, they are estimated to be at least 20% lower than those in the Western countries, Kashuba estimated. And, the trend is expected to continue.
This is also believed to be one of the reasons why the number of gold mining companies in Russia has been growing. In 2018, there were 577 gold mining companies, compared to 550 a year earlier. Many new mines were established at some small gold deposits in Siberia and in the Far East, according to the Industry and Trade Ministry.
“In 2018, Russian gold miners kept their advantage against the foreign companies in terms of production costs. The average cost of mining gold declined to $848 per ounce (oz) from $883/oz a year earlier,” EY said in a marketing report released earlier this year. “With some slight reduction in interest of Western investors in funding new projects in Russia, there are Asian investors who have recently entered into negotiations on quite a few possible ventures,” commented Boris Yatsenko, partner at EY.
Interest in the Russian gold mining industry is projected to remain, simply due to profitability, Yatsenko stressed. This is also evidenced by strong investment activity of the Russian gold miners. A survey, conducted by EY, showed that 87% companies in the industry were planning to finance new projects, such as expansion or modernization. Many (93%) of the gold mining companies said they see Russian gold production growing as new deposits are developed.
The demand for gold in Russia is set to grow even further, as Russian President Vladimir Putin has recently signed a bill cancelling a 20% VAT on gold investments. This is considered to be a new step in the national program of getting away from “the dollar needle.”
“The existence of VAT meant that the difference in price between selling and purchasing gold in Russia minimally was 20%. This made all investments into gold among business people senseless,” said Alexey Zaitsev, vice president of the Russian bank Otkritie.
The abolition of the VAT is aimed to secure at least twofold growth in the domestic demand for gold in Russia, according to Deputy Finance Minister Alexei Moiseev. Russian Union of Gold Producers estimated that the demand for gold from the Russian business people and ordinary citizens could be up to 50 mt/y.
Some forecasters say that the gold investment markets that were virtually non-existent in Russia, could boost the domestic demand for gold to 400 mt per year (mt/y) to 450 mt/y, taking into account the purchases made by the Central Bank. To meet that demand, the country would need to mine more gold than any other country in the world.
New Mining Assets
In 2018, Russian produced 332 mt of gold, an increase of 4.3% compared to the previous year, including 297 mt as primary gold. The growth is likely to continue this year, as the production could add around 3% and the production of primary gold is predicted to exceed 300 mt for the first time in Russian history, Russian Union of Gold Producers said. On the other hand, Russia’s Finance Ministry estimated that gold production amounted to 306.9 mt in 2017 and 314.32 in 2018.
By developing new deposits, Russia could increase gold production by 4.94 million oz (153 mt) per year in 2025 and 7.76 million oz (241 mt) per year in 2030, said Mikhail Leskov, general director of the Russian Institute of Geotechnologies. This would drive the overall production to 16.6 million oz (516 mt). There are several projects that would secure that production growth in the coming years.
In particular, Petropavlovsk earlier reported it expected to experience a steady recovery in production in 2019. The company has recently doubled production volumes at its Malomir mine and reported on a ramp-up of its new POX Hub processing facility in Amur region. This is expected to push the production by 10% or 15% to 450,000 oz to 500,000 oz in 2019.
Between 2013 and 2018, Petropav- slovsk cut production by 43% to 422,300 oz in 2018, the company reported.
“The successful commissioning of the POX Hub and ramp-up of concentrate production from Malomir are transforming our business, with 27% of sales in the first half of 2019 coming from our refractory ore reserves. POX has seen a steady increase in throughput, reaching its design capacity in record time,” Petropavlovsk CEO Pavel Maslovskiy said earlier this year.
Petropavslovsk earlier said it would target production to 500,000 oz to 550,000 oz between 2020 and 2022. This could be achieved with the new flotation facility at Pioneer, one of the Petropavslovsk’s flagship assets. The company broke the ground on that facility in June and it is slated to be completed in the fourth quarter of 2020, when it will double the company’s refractory ore processing capacity to 7.2 million mt/y, from the current 3.6 million mt/y.
Another Russian mining company Nordgold reported its Gross open-pit mine in the Yakutia Republic reached the full designed production performance in late 2018. The company earlier estimated it would be able to produce 12 million mt/y of ore with a yield of 220,000 oz/y of gold at that deposit. The Gross deposit was estimated to contain proven and probable gold reserves of 192 million mt of ore grading 0.73 grams/mt gold and 2.3 g/mt of silver, which means it contained around 4.51 million oz of gold.
“Based on the ore grade alone, the Gross deposit should produce 6 mt to 7 mt of gold,” said Nikolay Zelenskiy, general director of Nordgold.
Thanks to the new deposit, Nordgold would be able to achieve its long-term production target of 1 million oz/y of gold, said Mikhail Leskov.
Highland Gold Mining has embarked on a capacity expansion program at the Kekura and Klen gold mining deposits in Chukotka. The company set respective production targets of 290,000 oz to 300,000 oz in 2019, and it plans to significantly expand in early 2020, when operations begin at the new deposits.
Kekura hosts a large JORC compliant resource base of 2.45 million oz with an average grade of 8.1 g/mt. When production commences, the output would be around 800,000 mt/y of ore feed, which, with anticipated recovery levels of 90%, would result in annual production averaging 170,000 oz of gold over the first eight years of production, the company estimated.
The Klen deposit will be an open-pit operation allied to a conventional gravity and cyanidation process plant. It is expected to produce 50,000 oz/y to 60,000 oz/y of gold with as much as 400,000 mt/y of ore being processed, having an average head grade of 5.14 g/mt.
Both deposits are expected to be put into operation in 2023. Highland Gold Mining was planning to begin gold mining at Kekura in 2021, but had to push back those deadlines due to “logistics challenges.”
“The shift in timeframe is associated with the natural problems of transporting, installing and launching of the mining equipment,” Denis Alexandrov, director of Highland Gold Mining, said. “Kekura is located far away from logistics centers and all connection with the deposit is taking place through only zimniks [Russian term for temporary winter roads, constructed every year in winter on snow].”
The overall investment cost of the Kekura deposit is estimated at $229 million, while the investment cost of Klen remains unknown.
Russia may also expect to get some additional production quantities of gold from the Nezhda gold mining deposit in Yakutia, which is believed to be the fourth biggest gold deposit in the country. In the fourth quarter of 2018, Polymetal completed a feasibility study for the Nezhda project and began construction.
Mineral Resources comprise of 12.4 million oz of gold equivalent with an average ore grade of 4.5 g/mt. Total capital costs for Nezhda project in 2019-2021 are estimated at $234 million. Vitaly Nesis, general director of Polymetal, earlier disclosed that the company expected to produce between 200,000 oz to 250,000 oz of gold from the mines at the Nezhda deposit. First production at the mine is expected soon, Nesis said.
New deposits are also being developed by the Russian companies outside of the list of the biggest gold producers. In particular, Russian gold producer Sigma has recently reported it harbored plans to expand Ozernovsky Mining Works in Kamchatka in the Russian Far East, taking production to 2 mt of gold, according to Nikolay Leonov, chairman of the board of Sigma. There are also plans to build the second stage of the project and double its overall designed production capacity by 2025.
Kinross Gold has recently completed negotiations to purchase Chulbatkan deposit in Khabarovsk Krai from N-Mining Ltd. for $283 million. Chulbatkan is one of the biggest deposits in that region, with resources estimated at 3.91 million oz of gold. The capital cost of the project is estimated at $500 million, and Kinross Gold already disclosed that it expected to produce 1.8 million oz of gold during the first six years of running the project. The production costs are estimated at $550/oz.
Ivan Bakulev, spokesperson for N-Mining Ltd., said the company was searching for new deposits in Russia to sell to interested investors. Aside from Chulbatkan, the company had been working on one deposit in Primorsk Krai and four deposits in Khabarovsk Krai in Russia.
Russian government is helping miners with some projects. In particular, it has provided a preferential tax regime to Highland Gold Mining under its gold mining projects, granting them a residency in a special economy zone. Another company, Daltsvetmed has filed an application to the federal government seeking a state aid of Rub726 million ($11 million) to build the relevant infrastructure on the Russian Far East to get communications to the Nasedkino gold deposit.
Over the past few years, this was a common practice, as numerous mining companies have been asking the government to provide some assistance and help with infrastructure. Almost all deposits are located in Arctic, Siberia and Far East, poorly populated regions with harsh climate conditions.
While there are dozens of small projects being considered, it is especially important to note that the gold mines currently operating, as a rule, have a good resource base and projected lifetime, according to Sergey Kashuba. There are deposits Tarasun and Talalui in Siberia, where the resources have been depleting, but there are also deposits like Sukhoi Log operated by the Russian biggest gold mining company Polyus Gold and Maisky by Polymental, where the resource bases have been recently increased, Kashuba said. All in all, this means the Russian gold industry has all the resources it needs in order to significantly expand production capacities in the next several years.
Gold Mining Neighbor
Russia is not the only country in the post-Soviet space putting a lot of efforts to expand the domestic gold production. Uzbek President Shavkat Mirziyoyev has recently signed a comprehensive program for gold industry development in Uzbekistan. The government wants to invest a record-breaking $275 million to explore the gold deposits in the country and to put them in operation.
The target is really ambitious — to double gold production to 300 mt by 2021. It is yet to be seen whether this task could be really achieved in that timeframe. Uzbek Central Bank promised that the country’s gold mining companies in the next few years would be given a right to sell their products to customers at the global market. Right now, the country prohibits gold exports. And Russia is believed to be among the most attractive export destinations.