Russia Mining Report Q4 2008

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.

The motivation behind the loan was arguably political, with Russia keen to maintain control of strategic mining assets. Deripaska has already lost control of other non-mining assets around the world as a result of the credit crunch and Russia would not have wanted to see the 25% stake in Norilsk fall into Western hands. Russia has already stated that is ready to lend up to US$50bn to any domestic company having trouble refinancing existing loans with the West.

Where this leaves the recent trend towards consolidation among Russian mining players remains unclear.

Earlier in 2008, there was a spate of M&A activity among Russian miners. This was tacitly encouraged by the Kremlin as it would strengthen the position of Russian companies on world markets. An asset swap deal in late May 2008 between Alisher Usmanov and Vladimir Potanin allowed Usmanov to acquire 10% of Russian palladium and nickel giant MMC Norilsk Nickel, while Vladimir Potanin gained a 25% stake plus one share of Russian iron ore and steel producer Metalloinvest. In April, Mikhail Prokhorov's ONEXIM Group bought a 14% stake in aluminium local UC RUSAL, as part of a deal in which UC RUSAL, controlled by Oleg Deripaska, acquired 25% plus one share of Norilsk Nickel. A three-way merger of Norilsk Nickel, Metalloinvest and UC RUSAL had been seen as a possibility earlier in 2008, although short-term economic difficulties may now preclude this.

Looking at foreign players active in the Russian mining sector, Canadian miner High River Gold's future was in severe jeopardy as this report went to press. The company has said that its Berezitovy Rudnik subsidiary does not currently have enough funding to make a scheduled US$15.2mn payment to Nomos Bank due on November 21.

In terms of both area as well as the sheer variety of endowments, Russia figures as a major mining nation of the world. It is home to an array of minerals and metals including nickel, platinum, bauxite, cobalt, coal and tin. Siberia hosts the bulk of Russia's nickel, platinum and diamond deposits, and despite the harsh geography and weather conditions, it remains an attractive destination for mining players from around the world. Russia-based Norilsk Nickel, ALROSA, UC RUSAL and Polyus Gold are some of the major local mining players that have established a strong presence.

However, in order to leverage these opportunities fully, Russia needs to improve its stance on certain parameters. Topping the list are bureaucratic delays and instances of corruption that substantially escalate the costs of doing business. On the mining front, safety issues and environmental standards continue to challenge the industry, in spite of the government's efforts to review mines for compliance with technological documentation, estimated project capacity and safety regulations.

The Russian state holds rights over all mineral endowments. Historically, mineral resources have been auctioned to mining companies for development. However, a new methodology is on the anvil, whereby the decision to grant licences will be based on the applicant's processing capacity. As mentioned above, the government also plans to stiffen regulations concerning foreign participation in the mining industry.

Industry Forecast Owing to its large metal and mineral base, Russia can continue to derive benefits from the boom in the global metal prices. Diamond mining augers a healthy outlook for the Russian mining industry.

According to this report, the domestic mining industry is forecast to register an average growth of 7.7% a year over 2008-2012, reaching a total value of US$216.1bn.

At the present time, the ongoing economic crisis gripping world markets is continuing to play out. BMI is choosing to wait until the Q109 reports to carry out a comprehensive review of its mining sector reports, in light of the current economic difficulties.