Mining Journal Supplement Russia FarEast 2014

September 2010Mining Journal special publication Tantalum

PROFILE

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Russia Far Eastand Irkutsk

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February 2014Mining Journal special publication Russia Far East & Irkutsk

RUSSIA FAR EAST & IRKUTSK

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CONTENTS

Media

Still a golden opportunity for Russias Far East 2Russia committed to modern valuation code 6Rise in a crisis: the outlook for gold mining in Russia 8

Company profiles:SRK Consulting 4SRK Exploration Services inside back cover

Advertisements:ALS Minerals 9Foraco outside back cover

IMC Montan 7

Cover design: T Peters. Photos: GV Gold; Kinross; Ovaco Gold; Sigma; SRK Exploration

Still a golden opportunity for Russias Far East

As Kinross Gold Corps CEO J. Paul Rollinson reminded us last year, there are few mineral and energy treasure troves on the planet that hold more allure than Russias Far East. The fact that the Canadian gold miner is not beating off the competition with a bigger stick to unlock the wealth is of course testimony to the challeng-es involved in the revealing.

A detailed study on the economic poten-tial of Russias Far East (RFE) produced last year by the Centre for Financial and Economic Research (CEFIR) in Mos-cow, and sponsored by the largest foreign inves-tor in the Russian gold mining sector, Rollinsons Kinross, suggested the Far East region of the Rus-sian Federation has strategic significance for the sustainable develop-ment of the Russian Fed-eration.

The Far East of the Russian Federation is an exceedingly attractive region from an eco-nomic point of view, given its major deposits of coal, gold, copper, diamonds, ferrous and non-ferrous metals and other minerals. It also has a long sea coastline and a land border, which offer considerable advantages for investments and trade, the study said.

Focusing specifically on the role of foreign investment in greater development of RFE, the studys authors, CEFIR professors Natalia Volchkova and Eugenia Bessonova, said the

startlingly low numbers of such foreign companies operating in the Far East meant in-depth interviews could be conducted with nine of only about 30 companies identified as foreign firms with enterprises in the Far East working in the extractive and manufacturing industries. They also interviewed 10 regional experts and officials.

One of the revelations of the study is the significant positive impact that a relatively small number of foreign investments have had on local economies, Rollinson said.

While general living standards in many areas of the Far East continue to be below

those of other Russian regions, he maintained the entry of foreign inves-tors had a positive impact on the social and eco-nomic development of the region.

Apart from significant tax payments to the regional and federal trea-suries, foreign companies have created an impres-sive number of jobs, have brought new and innova-

tive technologies to the region, and have introduced new approaches to operational, technical and environmental management based on their home country and interna-tional experience, he said.

This is not to imply that increased foreign investment is a panacea that can solve all of the social and economic problems inherent in the region. However, the [CEFIR] research does clearly demonstrate that foreign direct investment can help to accelerate the pace of economic development and bring new

approaches and badly-needed additional capital to help develop the vast resource wealth of the Far East.

As a mining company, Kinross is particu-larly interested in the responsible develop-ment of the gold and silver deposits in the Far East, Rollinson said.

Our commitment to working in Russia is unwavering, as is our interest in seeing more investment in natural resources come to the Far East. This is one reason why we are an actively engaged member of the prime min-isters Foreign Investment Advisory Council (FIAC). Within FIAC, we are also a member of the Working Group for the Development of the Far East and Siberia.

There is a real opportunity to improve conditions on the ground, enhance the over-all image of Russia as an investment destina-tion, and drive more of that investment to the Far East. This will achieve the two-fold goal of enhanced economic development sought by

Staff reporters London

Isolation, terrain and a harsh climate are tests for investment

One of the revelations of the study is the

significant positive impact that a relatively

small number of foreign investments

have had on local economies

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Mining Journal special publication Russia Far East & IrkutskFebruary 2014 3


the Russian regional and federal govern-ments, while also providing exciting new opportunities for foreign investors.

More than half of Russias hard-rock gold resources are said to occur in the Maiskoye, Natalkinskoe, Nezhdaninskoe, Olimpiada and Sukhoi Log deposits in Siberia and in the RFE, with over two-thirds of the countrys gold production reportedly coming from six east-ern regions: Amur, Irkutsk, Khabarovsk, Kras-noyarsk, Magadan and Yakutia.

In the past four years, foreign companies have controlled an estimated 15-18% of Russias gold production, the largest share held for any commodity in the Russian min-ing industry. The foreign-held enterprises produce more than 40t/y of gold, with proj-ects being developed by the companies expected to contribute significantly to the growth in Russian gold production over the rest of this decade.

Significant by-product gold is also pro-duced by mining operations of UMMC in the Ural Mountain region and Norilsk Nickels operations in East Siberia on the Taimyr Pen-insula.

But, according to Volchkova and Besson-ova, statistics and the results of their inter-views indicate the investment potential of the RFE region is not fully tapped. Foreign investors already present in the region, while pleased with their success, continue to offer constructive recommendations for further development.

Other companies from abroad appear to be extremely cautious about investing in the region, the CEFIR report said.

Our analysis, based on a survey of foreign investors, experts and representatives of regional government bodies, shows main obstacles to doing business in the Far East [include] undeveloped transportation infra-structure, shortage of skilled labour, and lim-ited access to power supplies and high cost of power.

These factors significantly increase the cost of production and transportation in the Far East compared with producers in neigh-bouring countries, and make investments in many types of economic activity unprofit-able.

Another important obstacle that deters foreign companies from coming to the Far East is, according to the survey, high adminis-trative risks due to unpredictable changes in legislation. This is an issue affecting the investment reputation of Russia generally. It is especially manifest in the subsoil resource sector, where the share of foreign investment in the Far East regions is particularly high (although the actual number of successful investments is very low).

The challenge of tackling the regulatory, environmental, institutional, logistical and economic barriers to the further develop-ment of the Far East is immense.

The CEFIR and other reports on RFE sug-gest it is a priority on the agenda of the fed-eral government. This has also been evidenced by central government measures taken in recent years (see box).

A further proof of the seriousness of the states commitment to accelerating the development of the region is the massive provision of resources aimed at implement-ing government initia-tives, the CEFIR study indicated.

The Far East region has considerable poten-tial for economic growth and the development of foreign economic links. The region accounts for more than a third of Rus-sias territory and has huge reserves of natural resources. It also has geographic advantages, such as a long coastline and an external border. Despite these advan-tages, the living standards in the majority of Far East regions are below the national aver-age.

Therefore, the regional and federal authorities consider attracting additional investment to the region to be a key eco-nomic policy priority.

As with many other emerging jurisdic-tions around the world targeted by the extractive industries for investment and development, the RFE region is also, of course, not alone in presenting region-spe-cific geographic challenges. It features vast uninhabited territories, a harsh climate, over-all small population base, and undeveloped infrastructure.

The consequences of these factors for for-eign investors include higher labour costs, additional investment required for basic assets due to climate and permafrost, higher transportation costs, higher energy costs, and higher costs for many supplies and com-modities, the CEFIR study said.

It said Far East foreign direct investment was also unevenly distributed by region and

tended to be concen-trated in the sphere of mineral extraction.

In 2011, foreign direct investment in the Far Eastern Federal Dis-trict represented 17% of total FDI in Russia. How-ever, in absolute terms, FDI is unevenly distrib-uted in the RFE, given that a single province the Sakhalin province accounts for more than 70% of total foreign investment. The remain-ing regions have

attracted far less foreign investment, a mere 6% of the national volume, the study said.

According to Rollinson, Kinross experience in the countrys east since the mid-1990s has been very positive and our Russian opera-tions have become a significant part of our company, which also operates in six other countries.

As a Canadian company, Kinross and its employees are comfortable working in the Russian Far East, which has a climate and geography that are very similar to our home environment, he said.

Tougher times for producersThe company produced its two millionth ounce of gold from its Russian flagship mine, Kupol, in the Chukotka region, early in 2011. Shortly after it acquired the 25% of the asset it did not already own, having bought into Kupol via its takeover of Bema Gold early in 2007.

Described by its owner as a model for success fully operating in a remote region, the 0.50-0.55Moz/y (Au equivalent) Kupol high-grade gold and silver underground mine is some 200km from the nearest major city, Bilib-ino. It has also yielded more than 20Moz of silver for Kinross and in 2013 had published reserves of 2.4Moz Au and 29.8Moz Ag.

A long, open coastline is a key geographic advantage for RFE

The Far East region has considerable potential for economic growth and the development of foreign economic links. The region accounts for more than a third of Russias territory and has huge reserves of natural resources

Some Central Government measures taken in recent years:

Adoption in 2009 of the Strategy for the Social and Economic Development of the Far East and the Baikal Region through to the year 2025;

The creation in 2012 of the RF Ministry for the Development of the Far East; The development and launch of the State Program for Social and Economic Develop-

ment of the Far East and the Baikal Region through to the year 2025; The signing of Federal Law 267 on September 30, 2013, introducing new tax incentives

to encourage investment in the Far Eastern Federal District from January 1, 2014.


Company pro le

Project name: UdokanProject location: Russia

Commodity / resources: copper

Company summary

Russia Cu

SRK Consulting

SRK Consulting is an independent global mining consultancy with a fully-staffed office in Russia. It provides geological, mining, metallurgical, geotechnical, hydrogeological and environmental services. SRK undertakes technical studies to help clients develop optimum solutions for projects and to optimise existing operations, as well as due-diligence services to help clients raise finance and investors seeking comfort in proposed investments. Its local presence provides clients with solutions appropriate for local conditions whilst its global network allows it to source consultants with international best-practice experience.

www.srk.ru.com

ContactSRK Consulting (Russia) Ltd.4/3 Kuznetsky Most Street, build.1, 3rd FloorMoscow, Russia, 125009Tel: +7 495 692 00 95 E-mail: [email protected]

Collecting background data on air quality

Typical settlement in the vicinity of the Udokan project

Far East Russia is a challenging environment, with more than 70% of the land mass influenced by permafrost. It is also remote, presenting exploration with seasonal constraints requiring good planning to ensure the ice road access/seasonal drilling limitations are managed effectively.

The principal challenge for many Russian mines is that the approach towards evaluating a mineral deposit is constrained by historical factors. Typical constraints include:> Resource estimates may have been

developed using polygonal methods. Whilst such methods can provide a reasonable global estimate, they are less suited for optimising mine designs and mining schedules, especially for orebodies with soft mineralisation boundaries or complex three-dimensional shapes;

> The norms and standards which new projects are expected to comply with, have

not been updated to reflect modern technology and best practice;> The approach to estimating costs

often relies on factoring cost estimates derived from base data developed more than 10 years ago;> The evaluation and management of risk can be

improved.

This said, the standard of engineering knowledge is very good overall and the standard of geological data is usually very high.

Case study: UdokanThe Udokan deposit licence holder is Baikal Mining Company, owned by Metalloinvest Holding. The Udokan deposit is the largest undeveloped copper deposit in the world in terms of metal contained, with a JORC Ore Reserve of 16Mt of contained copper with envisaged open-pit mining.

A Feasibility Study (FS) was recently completed by Fluor Canada Ltd in accordance with international standards, whilst preparation of documentation necessary for Russian requirements, including TEO Konditsii, was done by TOMS Engineering (TOMS).

SRK was responsible for supervising the drilling programme, preparing the geological model, developing optimum pit slopes, developing optimal pit contours; preparing geological, hydrogeological, geotechnical, mining and environmental sections of the FS. SRK has been managing the environmental and social baseline studies, and is currently carrying out work on

the ESIA in accordance with Equator Principles and IFC requirements.

SRK and TOMS are working together to develop approaches that allow similarity in results of FS and TEO Konditsii in compliance with both Russian resource estimation requirements and international best practice. This requires bringing in leading Russian and international specialists to develop joint solutions that could be used in both designs (FS and TEO Konditsii). Whilst this approach does take time, the result is an optimal solution which can be approved by the Russian state regulatory authorities as well as comply with international standards for mining projects.

Having a local team available to explain any differences (real or perceived) in the project

evaluation approaches, drawing on global expertise from Chile, Australia, Canada and the UK, has provided SRKs clients with a robust plan which they can take to market.

Drilling in winter

Developing projects in Far East Russia

1p_SRK_profile_Russia_supp.indd 2 25/02/2014 10:28



The Dvoinoye reserve will be mined entirely using underground mechanised mining equipment, similar to that in operation at Kupol

Production of more than 500,000oz at around US$550/oz in 2013 followed the pre-vious years gold equivalent output of 578,252oz at US$472/oz. Kinross said expan-sion of the Kupol mill to 4,500t/d was suc-cessfully completed in July last year.

Quartz veins were originally located in the Kupol area in 1966 during a Soviet Govern-ment-sponsored 1:200,000 regional map-ping programme. The main Kupol deposit was discovered by the Bilibino-based, state-funded Anyusk Geological Expedition (the Expedition) in 1995. Gold, silver, arsenic and antimony anomalies were identified through a 1:200,000 stream sediment geochemical sampling programme. In 1999, LLC Metall, a Chukotka-based, Russian mining cartel won the tender for the Kupol licence and ulti-mately produced a first-time mineral resource estimate under the Russian C1+C2 Reserve system.

In 2002, Russias Chukotsnab purchased 100% of CMGC shares from LLC Metall and then late that year Bema entered into an agreement with Chukotsnab to acquire up to 75% of the project. A first-time NI 43-101-com-pliant mineral resource estimate was pre-pared in 2005 and then a feasibility study, based on an updated mineral resource esti-mate, was completed in late 2005. A com-bined open-pit and underground operation feeding a conventional 3,000t/d mill that used whole-ore leaching and the Merrill-Crowe process was proposed. Mine construct ion started in mid-2006 and first gold production from the project occurred in May 2008.

About 100km north of Kupol, Kinross 100%-owned Dvoinoye mine is also built on a high-grade deposit which started yielding commercial gold last October.

At peak production, Dvoinoye is expected to produce 1,000t/d of ore, which will be transported to the Kupol mill for processing via an all-sea-son road. The Kupol mill has been expanded from 3,500t/d to 4,500t/d to accommodate Dvoinoye ore. Kinross says Dvoinoye is expected to produce 235,000-300,000oz/y (Au equiv) during its first three full years of production, which will be incremental to gold production from the Kupol underground mine.

The Dvoinoye reserve will be mined entirely using underground mechanised mining equipment, similar to that in opera-tion at Kupol, the company has reported. Going forward, Dvoinoye and Kupol results will be reported as a combined operation.

Kinross ordinary course application to renew the Dvoinoye subsoil licence, which was approved in September, extends until

January 1, 2023. Its prospective Vodorazdel-naya property, encompassing about 922km2 surrounding the Dvoinoye licence area, also includes an exploration and mining licence.

Kinross said the Dvoinoye project was completed on budget and on schedule, pro-ducing about 30,000oz of Au equiv by the end of 2013. It is the fourth mine Kinross has operated in Russia.

Overall company output from the RFE operations in 2013 fell by 5% to 550,000oz compared with 2012, primarily due to lower grades at Kupol and a less favourable gold equivalent ratio, partially offset by an increase in tonnes of ore processed and higher-grade ore from Dvoinoye.

In 2014, Kinross expects to produce 690-730,000oz of Au equiv from its current operations. Production cost of sales is expected to be US$560-590/oz of Au equiv for 2014. The company has forecast an all-in sustaining cost of US$950-1,050/oz of Au equiv sold and per gold ounce sold on a by-product basis for full-year 2014. Material assumptions used to fore-cast 2014 production costs are: a gold price of US$1,200/

oz, a silver price of US$18/oz, an oil price of US$100/bbl, and foreign exchange rate of Rb33 to US$1.

Elsewhere in the region, Petropavlovsk plc produced 741,200oz of gold in 2013, sustaining its position as one of Russias larg-est gold producers. The company operates four hard-rock gold mines in the Amur region in the RFE, which lies across one of the

worlds major belts of mineralisation.The region benefits from good infrastruc-

ture and access to hydroelectric power and boasts a strong mining tradition, the Lon-don-listed miner said.

Petropavlovsk is a leading regional employer and contributor to the develop-ment of the regions local economy. Its focused exploration programme has an excellent track record of success in identify-ing potential targets, increasing the groups reserves and resources and prolonging the life-of-mine at the groups projects. The group has operated in Russia since 1994 and today is a leading Russian gold producer.

Debt-burdened Petropavlovsk reported last month its total cash costs of production in 2013 were expected to be in line with its guidance at about US$1,000/oz compared to the US$1,519/oz average realised gold price (including hedging).

Unaudited net debt of around US$945 million at the end 2013 ahead of target and down 11% year-on-year is the primary fac-tor slowing investment by Petropavlovsk in its pressure oxidation hub (POX Hub) in the region, which will ultimately be pivotal to exploitation of vast refractory gold resources and reserves.

In 2013, gold miners and the holders of gold ETFs, bought as a hedge against eco-nomic upheavals, were caught off guard by the fall in the price of gold, said Peter Ham-bro, chairman of Petropavlovsk.

It seems that this was caused by massive and unexplained short-selling of paper gold on COMEX while at the same time the demand for gold in physical, small bars from residents in China and India reached unprec-

Continues on p7

The Amursk hub is Polymetals largest project and the first gold POX producer in RussiaPhoto: Polymetal




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There is an old adage that money has to be spent long before mines start churning cash. For Russia, rich in mineral resources and territory just waiting to be explored, this makes development of a modern and efficient financial infrastructure for mining investments a top priority.

Resources and reserves reporting stand-ards in Russia and former Soviet Union countries have not changed much since Soviet times. At the same time, reporting and valuation codes have been actively developed in Australia, Canada and South Africa, primarily driven by the ever-increasing requirements of national capital markets and international mining investors.

As Russia and the former Soviet countries look to boost investment appeal of their natural resources sector, they need to develop their own valuation codes for extractive activities based on internationally accepted principles. Since these countries share a common history and have similar mining industry regulation, it may even be a joint code, similar to the JORC code of practice for resources and reserves reporting.

For more than 10 years, Russia has been actively working with other members of the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) to bring its national resources reporting standards into line with internationally accepted frame-works.

As a result of these efforts, today Russia has its own code for public reporting of explor-ation results, mineral resources and mineral reserves the NAEN code which was success fully admitted to the CRIRSCO family of mining codes in 2011.

The code sets minimum public reporting require ments by Russian mining and explor-ation com panies. The code was developed by the National Association for Subsoil Examination (NAEN), which comprises 57

representative members of Russias leading mining companies, industry research centres and regional subsoil survey centres, along with the Russian Society of Natural Resources Experts (OERN), the State Commission on Reserves (GKZ), the Pan-European Reserves and Resources Reporting Committee (PERC) and members of CRIRSCO.

Currently, the NAEN code may be used in Russia along with the GKZ code which had historically been the countrys only reporting standard but which may ultimately be replaced altogether by the NAEN code.

Next stop valuation codeThe next step is developing a mineral assets and equities valuation code similar to Austra-lias Valmin, Canadas Cimval and South Africas Samval codes, which set the benchmark for the wider industry by com-plementing their existing resource reporting codes JORC, NI43-101 and Sam-rec, respectively.

To facilitate develop-ment of a national valua-tion code, the OERN decided to create a new mineral economics chapter to complement its existing divisions focused on mining, petroleum and water use. Together, the four divisions are working to promote developing modern infrastructure to encourage mining investment into Russia.

The mineral economics chapter and its members have already been very active in

organising several professional conferences, seminars and round table discussions, attending MINEX events in Moscow, Astana and London, and speaking at Russian parliamentary hearings on investment in natural resources.

The Russian mineral resources valuation code, which is presently under development, is expected to take inspiration from codes that have already been developed in other countries. It will also incorporate the latest thinking in international financial reporting standards (IFRS) for extractive industries, a project which first started in the early 2000s, but sadly lost momentum and was indefinitely postponed following the fallout from the 2008 financial crisis and was never developed into an IFRS standard.

Neighbouring Kazakhstan, Kyrgyzstan and Ukraine are closely watching the development of the Russian code and have voiced an interest in following in its footsteps.

Risk and opportunityThe risk profile of mining makes stock exchanges an important source of capital for the industry and public trust is a priority for financial regulators in every country. This is why the basic principles of mining projects valuation are so important for countries developing financial infrastructure to facili-tate their extractive industries.

This has been seen recently in Hong Kong, where special listing requirements have been introduced for companies operating in the extractive industries, and in Singapore, where the stock exchange has eased listing require-

ments in a bid to woo junior mining companies looking for primary and secondary listings.

It is expected that the Russian mineral pro-perties and equities valuation code will be accepted by the Moscow stock exchange and will lead to more listing opportunities for Russian mining companies. A joint project between OERN experts and the Moscow stock exchange is already under way.

A new valuation code has arrived just in time for the Russian mining industry, which hopes to see improved investor sentiment and ultimately the recovery of the sector, which may come earlier than some sceptics expect.

Alexander Lopatnikov is managing director of American Appraisal and a board member of OERNs mineral economics chapter. Mikhail Leskov is a board member of the Union of Gold Producers of Russia and head of OERNs mineral economics chapter.

Russia committed to modern valuation code

For more than 10 years, Russia has been actively working with

other members of CRIRSCO to bring its

national resources reporting standards

into line with internationally

accepted frameworks

Alexander Lopatnikov and Mikhail Leskov Moscow

New valuation code will change Russias mining landscape

A modern valuation code will send the right signals to investors




edented levels. The miners hardest hit were those who had decided, on the back of the buoyant gold market in 2012, to mine and recover gold from low-grade/high-strip-ratio ore.

The resulting high cash costs meant that the sharp decline in the price of gold made 2013 a horrendous year; and the heavy rains in the Far East of Russia could have made things even worse for the company. Luckily, though, an adroit decision to sell forward around half of Petropavlovsks production before the price collapsed and a coura-geous and balanced effort on the part of the operations team in its response to the effects of flooding prevented external events from producing a disaster. This operational suc-cess has been augmented by a successful cost-cutting programme and a deep strate-gic review of the business plan, calling for a postponement of pressure oxidation of refractory ore and a reliance on production from existing facilities, which treat non-refractory material.

The exceptional wet weather hampered exploration for new gold reserves but, thanks to the expertise of the geologists, the need for additional non-refractory ore was met

and 2014 is expected to be the year in which these resources are transformed by tighter drill grids into reserves.

Pressure oxidation is still of great impor-tance to the future of our group and it is expected that, once the present implementa-tion hiatus is over and cash again becomes available, this investment will be completed and will contribute substantially to the groups economic performance. In the mean-time, the cutbacks on capital expenditure, a drive to reduce operating costs and the improvement in the grades mined has

enabled the group to make a substantial reduction in its net debt.

The continuing volatility in the gold price, the difference between physical and paper markets and the looming delivery physical crisis on COMEX do not give me confidence that the financial world is in a stable state and I believe that the potential exists for a dra-matic change in the price of many assets; gold included. This makes our forward plan-ning very difficult.

However, I can state with some happiness that our 2014 gold production target of 625,000oz of gold is confirmed.

Hambro said the companys ongoing exploration success had established suffi-cient non-refractory reserves (in accordance with the Russian Classification System) to cover production until 2019, hence the deci-sion taken to postpone completion of the POX Hub facilities.

Nevertheless, brick lining of the four auto-claves by specialist German contractors was completed in the December quarter. Work on the foundations and erection of the steel framework for the neutralisation building began during the period. The oxygen plant is said to be 90% complete. Work in 2014 on the POX Hub will be restricted to activities that

Continues from p5

Petropavlosk has put its POX hub commissioning on ice




8

are subject to existing contractual commit-ments.

Petropavlovsk has cut its overall 2014 capex budget to US$94 million with the deferral of the POX Hub commissioning. It expects to spend US$34 million on explora-tion in Russia this year, and some US$60 mil-lion on development and maintenance. This will go predominantly to existing POX Hub contractors plus expansion of its tailing dams at Pioneer and Albyn.

The groups 2014 production guidance is based on JORC-compliant Reserves of non-refractory ores and provides for 625,000oz of gold production at an estimated total cash cost for hard-rock operations of around US$950oz, a reduction of approximately 5% of the estimated 2013 total cash costs, Pet-ropavlovsk said.

The decrease in production comes par-tially from the disposal in H2, 2013 of high-cost alluvial assets. Hambro said the 5.7Moz rise in the companys non-refractory resources in 2013 came primarily in areas near existing processing facilities. An explo-ration report and a new JORC mineral resources and ore reserves statement was to published in the current quarter.

Meanwhile, another UK-listed Russian gold producer, Polymetal International plc, says its newish pressure oxidation plant achieved design throughput and recovery levels in August and October 2013, respectively.

The Amursk hub, Polymetals largest proj-ect and the first gold POX producer in Russia, draws ore from two high-grade refractory gold deposits, Albazino and Mayskoye, and three processing facilities: the Amursk hydro-metallurgical plant; the Albazino concentra-tor; and the Mayskoye concentrator. The Amursk hydrometallurgical plant uses POX and cyanidation technologies to process refractory concentrates which require pre-treatment oxidation before conventional cyanidation to extract the sulphur compo-nent.

Construction of the Amursk POX plant was completed in December 2011 and the first gold was poured in April 2012. Amursk hub design capacity is about 225,000t/y of con-centrate, resulting in gold output of about 400,000oz/y, with inclusion of concentrate from Mayskoye.

The POX facility is in Amursk, a city with a population of some 43,000, on the northern bank of the Amur river in the Khabarovsk ter-ritory, 54km from the large industrial city of Komsomolsk-on-Amur.

Polymetal said Amursk was selected as a POX facility site due to the availability of a stable and highly qualified labour force, excellent transport infrastructure including railroad, motorways and a river port, and grid power (installed capacity of the local coal and gas power plant is 260MW, only half of which is used during the peak hours).

Sergei Kashuba and Mikhail Leskov Moscow

Rise in a crisis: the outlook for gold mining in RussiaRussian gold mining is witnessing a resurgence when other producing countries are seeing a decline

Russia was the worlds third-largest gold- producing country in 2013, yielding a record 8.14Moz of the yellow metal for the period. This was a historical record for the country and all the more remarkable when you con-sider that it occurred during the financial cri-sis something never achieved, even in more favourable economic times.

Last year, 0.8Moz of additional gold was produced in Russia compared with the previ-ous year, marking the countrys gold mining industrys third year of stable growth. Ignor-ing small local declines which have occurred from time to time, the industry has grown steadily since 1998 when Russian gold production was at a low of 3.4Moz/y.

Gold winning Despite the gold rushes seen in North America and Australia in the second half of the 19th cen-tury, historically, Russia was always the largest gold-produc-ing country in the world until the discovery of Witwatersrand in South Africa in 1886.

Even after that point, for a very long time the Soviet Union consistently maintained its position in second place above and below various other leading gold-producing coun-tries. During this period, the most significant proportion of gold mined each year in the Soviet Union came from alluvial deposits.

Following the collapse of the Soviet Union in 1991, alluvial golds share of the countrys total annual gold output was around 80%. This was primarily due to the presence of extremely rich placers in many parts of Russia from the Urals to the Far East and the very simple techniques used to produce gold in these areas.

However, most of the newest discoveries during Soviet times were made in hard-rock gold and a major share of those discoveries was only distributed between mining com-panies in the 2000s.

Very few of the relatively large deposits, such as Vorontsovskoe in the Urals, Olimpi-ada in Siberia, Pokrovskoe in the Far East and Kubaka in Magadan, came on stream in the mid-to-late 1990s, which meant that hard-rock golds share of the market grew progressive ly bigger. Since then, an increas-ing number of hard-rock operations have been created or reconstructed and started product ion, resulting in more and more hard-rock gold being produced year-on-year.

While the hard-rock part of the sector continued to flourish, the alluvial part gradually began to stagnate: in 2000, there were around 650 gold mining compa-nies in Russia, about 400 of which were producing less than 3,215oz/y of gold; each year thereafter, Russia saw 30-35 companies close their doors and around 20 new companies start

operations. As a result, in Russia today, around 420

mining companies are producing gold. Again, some 270 of these are small produc-ers, generating less than 3,215oz/y. Over the past five years, the number of small-cap com-panies has also been growing slowly, which means little in the way of stability has come to this part of the sector in recent years.

Survival tacticsThe fluctuations in the gold price in 2013 posed plenty of difficulties for gold mining companies of all sizes across the world. In Russia, the situation for many companies was even worse due to a very inertial regulation system protecting the so-called State Natu-

Historically exploration in

Russia has always been riddled with

problems

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Breaking boundaries: technology and tools to promoteexploration success With the largest network of geochemical labs globally, we are continuously expanding our regionalpresence to provide faster analyses to the exploration industry. We are serving the mining sector inRussia from our labs in Moscow and Chita providing ISO 9001:2008 and 17025:2005 locally accredited analyses.

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10

ral Reserve Balance from too large write-offs and the tax authorities from the rapid reduc-tion of taxes. This is mainly why gold mining companies have been undertaking a differ-ent course of actions to keep business run-ning even in the current challenging environment.

The most common approach globally has been so-called high-grading, whereby com-panies mine the richest portion of reserves. It usually gives short-term positive results, but can also have a very negative long-term impact.

In Russia, however, under current regula-tions, it is almost impossible to high-grade and consequently many companies have instead focused on trying to increase product ion by cutting unit operating and administration costs in effect, replacing high-grading with low-costing. Many gold miners finally managed to increase produc-tion last year and this was one of the main reasons why the country achieved record gold output in 2013.

In a bid to cut costs, a number of compa-nies have announced staff redundancies. The best-known example is Petropavlovsk plc, which announced in July 2013 that it was axing more than 700 workers, but it is surely not the only one.

One other approach adopted by several companies was reducing investments in exploration works and projects. As just two examples, Polymetal International plc reduced early-stage exploration at its Sopka Quartsevaya, Kutyn and Maminskoe depos-its, while Nord Gold NV reported an almost 40% decrease in its exploration budget in the first half of 2013. Many other Russian miners, even purely exploration-focused compa-nies, also reduced their exploration budgets and this looks to be a trend set to continue in 2014.

Another very common method used to fight rising costs has been suspending production at low margin deposits. A number of com-panies did this last year and some will likely continue this practice this year. Poly-metal, for instance, opted to put on hold low-grade deposit development at its Birkachan gold mine in Magadan and other companies may follow in its footsteps this year.

It is the same story with reducing capex and postponing large-cap projects. Nord Gold has already delayed the start date of its Gross project in Yakutia from 2013 to 2014. Polyus Gold International Ltd has said the same about its giant Magadan-located Natalka project, now planning on commis-

sioning the project in 2015, and Petropav-lovsk also postponed its POX plant commissioning from 2014 to 2019. Many other companies will no doubt follow suit until the gold price improves.

As with 2013, Russian miners are expected to continue to sell large stakes in projects where they are finding it difficult to go alone, or, in many cases, sell whole projects to other companies. For instance, in 2013, Petropav-lovsk sold its stake in OJSC Berelekh, a com-pany that holds licences to mine and explore alluvial operations, to local Magadan-based gold mining company OJSC Susumanzoloto. Many other, even large and stable compa-nies, are considering putting their projects up for sale.

How to keep growingThe aforementioned approaches are likely to bring about the most stability for Russias gold mining sector in 2014. Some additional help might introduce a proper sale strategy for gold production, but in most cases it is probably already too late to launch hedging programmes.

It is the same problem with dividend strategies: those companies still lucky enough to be making a profit are deciding to not pay dividends, opting instead to reinvest profit to support their business sta-bility.

However, none of this seems to be enough to help Russia maintain the record gold production levels reached last year. The most problematic issue is the lack

of new deposits with good grades, large size, simple ore and well-developed infrastructure nearby. Without these, there is no basis for even stable mid-term production, let alone for product ion to grow in the current finan-cially straitened times.

Historically, exploration in Russia has always been riddled with problems, suffering from underfunding, and recent legislation is creating more obstacles to making new, large discoveries than ever before.

Finally, however, some people in power are recognising the problem and acknowl-edging that it needs to be resolved sooner rather than later.

Since the start of 2014 there have already been a few positive and supportive changes to the industry. In five Far Eastern regions, all in the south of Russias Far East, rules for pros-pecting licensing have been significantly lib-eralised. A zero-profit tax rule has also been enacted for all new projects in the Far East and other changes are expected to be announced soon.

According to the most recent Russian sur-vey prepared by the Union of Gold Producers, today 21 companies producing around 65,000oz/y together yield more than 60% of the total gold produced in Russia each year. For more than five years, these companies have held a cumulative share in the countrys total gold output.

This does not mean that their potential to grow has been exhausted. Instead, they will continue to play a very important role as well-distributed stability centres for the industry, providing the rest of the sector with best practice, high skills and advanced tech-niques.

At the same time, almost 65% of Russian gold mining companies, which together pro-duce less than 5% of the countrys gold each year, have seasonal alluvial operation in remote areas where there are usually little prospects for growth.

However, in many cases, these companies are the only cash-generating businesses in these areas and help support local infrastruc-ture even ones that are severely lacking often offering support to exploration companies and their business activities there.

It is clear that a combination of exploration and producing assets might be just the golden ticket that will guarantee an investor both stability and some significant opportu-nity to grow in the Russian market.

It does mean, however, that the consolida-tion process at the large-cap Russian compa-nies in the gold mining sector is almost over. Instead, M&A will continue to knock on the doors of mid- to small-cap companies, and the space for M&A will remain very large in Russia for some time.

Sergei Kashuba is chairman and Mikhail Leskov is a board member of the Union of Gold Producers of Russia. For more information, visit: www.goldminingunion.ru

Russia was the worlds third-largest

gold producing country in 2013,

yielding a record 8.14Moz of the

yellow metal last year

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1992 20130

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SRK Exploration Services Limited (SRK ES) is part of the international SRK Consulting Group which comprises 22

independent consulting practices operating from 50 offices in 21 countries globally. SRK ES is unique within the SRK

Group because it is the only discipline based practice. SRK ES was established in Cardiff, UK in 2003 to meet the

changing requirements of the junior and mid-tier exploration sector and has worked extensively across the Russian

Federation, as well as gaining a wealth of experience globally.

As a specialist exploration practice, the company is composed of highly experienced geoscientists who are skilled in

exploration for all commodities. SRK ES staff hold particular experience in the provision of field services to clients

including geology, geophysics, geochemistry, geological mapping, drilling, structural analysis and full exploration and

logistical management. SRK ES combine this with office based data management, remote sensing and geological

modelling services and provide an effective link to further downstream SRK consultancy services.

Corporate Profile

SRK ES - Cardiff, UK

12 St. Andrews Crescent Cardiff CF10 3DD

UK: +44 (0) 2920 233 233 Moscow: +7 (495) 692 24 28 Copenhagen: +45 373 088 71 Email: [email protected] Web: www.srkexploration.com

To find out more about our technical services or discuss your project specific needs, please contact us;

SRK ES prides itself on the ability to deliver high quality

field services in remote locations. It aims to be the

partner of choice for mineral exploration companies by

leading position in the industry. SRK ES geologists

endeavour to build an impartial and honest relationship

with clients whilst providing independent geological

guidance and dependable expertise.

Since its creation, SRK ES has assisted over 60 projects

in the Russian Federation. Many of which located in the

Russian Far East regions of Chukotka, Yakutia,

included:

Projects have targeted a wide range of commodities

including gold and precious metals, rare earths, platinum

group elements, base metals, industrial minerals, bulk

commodities such as coal and iron ore and diamonds.

Due to demand, SRK ES opened its first satellite office in

Moscow in 2010. Composed of a number of multilingual

Russian geologists and supported by the UK office, it

has rapidly become a key player in managing and

supervising numerous exploration projects throughout the

Russian Far East and further afield.

SRK ES has grown to over 40 permanent staff and long

term associates employed within the main office in

Cardiff as well as offices in Moscow and Copenhagen.

The tenth anniversary of SRK ES in October 2013 marked

a decade of providing respected and valued support to

over 500 clients on projects in over 100 different

countries.

SRK ES - Moscow

4/3 Kuznetskiy Most Street, Building 1, Office 401 125009, Moscow, Russia

Western and GKZ Compliant Exploration Design;

Geological Mapping;

Target Generation;

Geochemical Sampling;

Geophysics;

Drill Programme Planning, Management and Supervision;

GKZ Reporting; and

Technical Training Courses.

SRK Exploration Services Limited (SRK ES) is part of the international SRK Consulting Group which comprises 22

independent consulting practices operating from 50 offices in 21 countries globally. SRK ES is unique within the SRK

Group because it is the only discipline based practice. SRK ES was established in Cardiff, UK in 2003 to meet the

changing requirements of the junior and mid-tier exploration sector and has worked extensively across the Russian

Federation, as well as gaining a wealth of experience globally.

As a specialist exploration practice, the company is composed of highly experienced geoscientists who are skilled in

exploration for all commodities. SRK ES staff hold particular experience in the provision of field services to clients

including geology, geophysics, geochemistry, geological mapping, drilling, structural analysis and full exploration and

logistical management. SRK ES combine this with office based data management, remote sensing and geological

modelling services and provide an effective link to further downstream SRK consultancy services.

Corporate Profile

SRK ES - Cardiff, UK

12 St. Andrews Crescent Cardiff CF10 3DD

UK: +44 (0) 2920 233 233 Moscow: +7 (495) 692 24 28 Copenhagen: +45 373 088 71 Email: [email protected] Web: www.srkexploration.com

To find out more about our technical services or discuss your project specific needs, please contact us;

SRK ES prides itself on the ability to deliver high quality

field services in remote locations. It aims to be the

partner of choice for mineral exploration companies by

leading position in the industry. SRK ES geologists

endeavour to build an impartial and honest relationship

with clients whilst providing independent geological

guidance and dependable expertise.

Since its creation, SRK ES has assisted over 60 projects

in the Russian Federation. Many of which located in the

Russian Far East regions of Chukotka, Yakutia,

included:

Projects have targeted a wide range of commodities

including gold and precious metals, rare earths, platinum

group elements, base metals, industrial minerals, bulk

commodities such as coal and iron ore and diamonds.

Due to demand, SRK ES opened its first satellite office in

Moscow in 2010. Composed of a number of multilingual

Russian geologists and supported by the UK office, it

has rapidly become a key player in managing and

supervising numerous exploration projects throughout the

Russian Far East and further afield.

SRK ES has grown to over 40 permanent staff and long

term associates employed within the main office in

Cardiff as well as offices in Moscow and Copenhagen.

The tenth anniversary of SRK ES in October 2013 marked

a decade of providing respected and valued support to

over 500 clients on projects in over 100 different

countries.

SRK ES - Moscow

4/3 Kuznetskiy Most Street, Building 1, Office 401 125009, Moscow, Russia

Western and GKZ Compliant Exploration Design;

Geological Mapping;

Target Generation;

Geochemical Sampling;

Geophysics;

Drill Programme Planning, Management and Supervision;

GKZ Reporting; and

Technical Training Courses.

SRK_Explor_profile.indd 1 25/02/2014 10:02

Forcao_EDC.indd 1 24/02/2014 14:32

Documents

Mining Journal Supplement Russia FarEast 2014