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Russia-Chinese cooperation in mining industry gains momentum

The rapidly changing geopolitical situation in the world, Western sanctions against Russia, Ukrainian crisis, and other things make one fact obvious – it becomes difficult, or even impossible, to raise investments from the Western countries in exploration operations and development of Russian gold deposits. That is why we are turning to investors in China, India, Singapore and South Korea, said Sergei Kashuba, Chairman of Russia’s Gold Producers Union, in an interview with PRIME.

“The union started considering this idea already in spring. We have considerably analyzed the character and the volume of Chinese investments in the Russian industry of mining precious metals and poly metals. Since 2005, the union registered the first participation of Chinese companies in Russian auctions, but the activity was low, about one or two deals per year. Currently, the Russia-Chinese cooperation in the mining industry only gains momentum, and is not systematic, despite the fact that the Chinese investors are almost 10 years on the Russian market”, he said.

To expand the cooperation, representatives of the union and the China Gold Association met and agreed on further cooperation. There were meetings with the representative of large Chinese banks, including Industrial and Commercial Bank of China (ICBC), Bank of China, Minsheng Bank, China Construction Bank. “They all demonstrated interest in cooperation, but, you know, the sanctions problem with a number of Russian banks, we will not get through this easily”, Kashuba added.

“We have offered various kinds of cooperation at the meetings with the representatives of the leading Chinese gold mining companies, namely investments in the exploration operations, joint processing of refractory gold ores in Russia, as well as in China. Also, we have discussed investments in large gold deposits and participation in its development, current financing of gold mining companies by providing credit lines to Russian banks or directly to Russian companies” he also said.

The union created a special page on its web site for Russian companies, which will help them to know about the peculiarities of work with China. The union also provides consultations and helps to prepare documents for submission to Chinese investors.

“Chinese are not fast with their investments in new countries and regions. They make it very carefully, after the thorough study of the local legislation. They are supported by the government, which provides state guarantees, supports Chinese embassies and trade representatives. They have limits in the volumes of foreign investments in the mining industry. The problem is that the process became more difficult and there are several reasons for that. The first wave of investments was completed and there were some non-returns on the invested funds, which forced them becoming more careful. The second problem is that in the current price conditions on raw commodities in the world, there are no so much good projects and you need to prove the necessity of foreign investments”, Kashuba said adding that the process of arrival of Chinese investors in the Russian gold mining projects will not be as fast as we would like.

“Most likely, it will start with a few "pilot" projects, two or three in the Baikal Region and in the Far East. As there are almost no examples of successful Chinese investments in Russian gold projects, it's also complicated the selection of the regions and projects”, he added.

As for the gold mining industry as a whole, the largest obstacle for the Chinese investors is the limit of 50 tonnes of gold reserves for strategic deposits and the limit for foreign ownership in the Russian companies. The Chinese consider perfect the following terms, namely full or 51% control over the asset, the right to export all or at least half of raw materials to China for further processing, Chinese staff at Russia-Chinese joint ventures, as well as usage of Chinese mining equipment in operations.

As for a possible participation of Chinese companies in development of the Natalka gold deposit in the Magadan Region, which is operated by Russia’s leading gold producer Polyus Gold, Kashuba said that they can take only 25% in the project, because it is not allowed to own more in the strategic deposit.

In mid-November, Polyus Gold has indefinitely delayed the launch of the Natalka deposit from 2015 due to downward revision of reserves and resources. Preliminary findings suggest a 15%–20% downward revision in the resources to 48 million–50 million ounces and a 55%–65% reduction in the reserve estimates to 11 million–14 million ounces due to a change in the interpretation of the deposit mineralization. As of now, the company has already invested 41.9 billion rubles in the Natalka project, according to the company's representative. The commissioning of Natalka was initially scheduled for June–August 2014, but in December 2013, Polyus Gold announced the decision to postpone the development of the project to June–August 2015 due to a material gold price decline.

Kashuba continued that the only problem with Natalka now is the estimate of its value. “I think it is the only reason why Chinese sent its group of geologists and miners at the site a month ago. The main thing is that they represent leading gold mining companies in China. It means that the Natalka valuation is underway and that the project may be launched with fewer capital spending. It may be gravitation and flotation, while the concentrates will be sent for processing in China, it is rather logical from the point of economy.

In mid-November, Russia's Mangazeya Mining, controlled by Russian businessman Sergei Yanchukov, has agreed to sell its 80% stake in Geotsvetmet, which holds a license to develop the Drevny gold deposit in the Magadan Region, to China's Tyan Khe. The 20% stake in Geotsvetmet belongs to a shareholder, who is the third party in the transaction. The cost of the deal was not disclosed. As a result, Tyan Khe will consolidate 100% in the company. The deposit's gold reserves amount to 13.7 tonnes of gold under C2 Russian classification.

Speaking about the above-mentioned transaction, Kashuba said that he is aware of it. “The deal is in the active phase and it is profitable for the Russian company. It will be a third asset for the Chinese Tyan Khe in the Magadan Region. It is absolutely clear that the company is setting up a kind of cluster for exploration operations in the region”, Kashuba added.

He also said that there will be a lot of such merger and acquisition deals on the market, if gold price remains below U.S. $1,200 per ounce and if government does not support the industry.

“There is a large number of protocols of intentions signed; the valuation processes are going on for the purchase and sale of assets. Wait, the 2015 will come, and we will see many deals to come. The alluvial mining companies have already started the transactions. Petropavlovsk has agreed to sell its second alluvial asset Koboldo”, Kashuba added.

Speaking about the current gold price, the expert said that it is becoming more difficult to survive if gold price falls below $1,200 per ounce.

“Grades are falling and the companies made everything last year to reduce production costs, including the disposal of non-core assets, postponement of new capacities, etc. Currently, the interior instruments for economy have almost depleted, and not only in Russia but all over the world. I think that the first threshold then companies may start suspending operations will become the price of $1,100 per ounce, because the $1,200 level is the level of zero profitability. The longer we stay in the price range of $1,100 per ounce, the higher the number of enterprises will stop. Companies with only one deposit are in even harder situation”, Kashuba said adding that it will be easier for load gold mining companies with seasonal operations, for example, companies with heap-leaching operations.

End

10.12.2014 15:14

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