Polyus Gold plans ambitious expansion

Anchorage, Alaska — Apparently at least one Russian oligarch isn’t too worried about being forced out of the country or arrested. Vladimir Potanin is so confident of his position that he’s hosting the Russian version of reality TV show The Apprentice, called Kandidat. If Potanin has managed to trump his rivals, it’s partly down to political savvy (he’s a member of President Vladimir Putin’s newly formed Public Chamber) and also thanks to his ownership of mining giant Norilsk Nickel (NILSY-O, MNOD-L).

Potanin and his business partner, Mikhail Prokhorov, have big plans for Norilsk spinoff Polyus Gold (OPYGY-O). The two men are tied as 89th-richest in the world, worth an estimated $6.4 billion each, according to Forbes magazine’s 2006 list, and they are hoping that their gold projects will make them even richer. Polyus’s board of directors rolled out an ambitious strategy in mid-September that would make the company a top-five global gold producer by 2015, with annual output of at least 3.9 million oz. Polyus produced 1.1 million oz. gold in 2005.

The Moscow-based company is already the largest gold mining company in Russia, representing 20% of the gold produced in that country. It dwarfs foreign upstarts like Highland Gold, (HGHGF-O, HGM-L), Peter Hambro Mining (POGNY-O, POG-L) and Bema Gold (BGO-T, BGO-N, BAU-L).

At the Denver Gold Forum in September, Polyus CEO Evgueni Ivanov was also keen to emphasize that Polyus is not lacking in experience.

“Although we are quite new to the market as a publicly traded company, we’re quite old as a private company, with a track record of gold mining, discoveries and construction of mills in Russia in different regions for twenty-five years,” Ivanov said.

Polyus was founded in 1980 as a co-operative of miners by Hazret Sovmen, who was appointed by the government to develop gold mining in Siberia’s Krasnoyarsk region. Sovmen is now president of the Republic of Adygeya in southwestern Russia. Under his watch, Polyus developed its flagship operation, the open-pit Olympiada mine, 600 km north of the city of Krasnoyarsk. Norilsk Nickel acquired Polyus as a subsidiary in 2002, and in March 2006 Polyus was relaunched as a public company.

Polyus owns six of Russia’s 10 largest gold deposits, according to the Russian government’s own estimates of their size. The largest deposit in the country, containing an estimated 33.1 million oz. gold, is Sukhoi Log in the Irkutsk region of Siberia. The Russian government owns Sukhoi Log and has not held an auction for the licence to develop it, although there have been behind-the-scenes talks between the Kremlin and Norilsk Nickel in the past few years. The Ministry of Natural Resources’ Central Exploration and Research Institute for Non-Ferrous and Precious Metals (TsNIGRI) contracted with Polyus in September to perform exploration drilling at Sukhoi Log and produce a new valuation of the deposit.

Russia’s second-largest gold deposit is Nezhdaninskoye, in the Republic of Sakha (also known as Yakutia), a far northeastern region best known in the mining industry for its diamonds. Sakha-based mining company Alrosa sold Yakutskaya Mining to Polyus in September 2005. Yakutskaya Mining owned 50% of Nezhdaninskoye’s licence-holder, Yuzhno-Verkhoyanskaya Mining, in partnership with London-based Celtic Resources (CER-L) (20%) and two offshore companies from the British Virgin Islands. Celtic initiated lawsuits to defend its interest in Nezhdaninskoye, but in February 2006 agreed to drop its claims in return for a cash payment of US$80 million.

Nezhdaninskoye contains an estimated 15.3 million oz. gold, according to the Russian government. Polyus inherited a scoping study for Nezhdaninskoye from Alrosa, which the company is not too happy about, and part of its plan for the next decade is to reassess the concept of how to mine “this terrific deposit,” Ivanov said in Denver.

Polyus also recently acquired Russia’s 10th-largest gold deposit, Kuranakh, from Alrosa. Kuranakh is in the Republic of Sakha and contains an estimated 3.7 million oz. gold.

Despite the acquisitions, most of the increases in Polyus’s gold reserves are coming from exploration, according to Ivanov. The company had 13.3 million oz. gold in reserves at the beginning of last year and ended the year with 25.1 million oz., he said. The largest contributor to the exploration success was the discovery of the Blagodatnoye deposit in Krasnoyarsk region, described by Ivanov as the largest gold discovery in Russia in the past decade. Blagodatnoye is Russia’s seventh-largest gold deposit, containing an estimated 7.2 million oz. It is only 26 km from Olympiada and will share much of that mine’s infrastructure, such as repair shops and the workers’ camp.

“Exploration is something that we consider to be a very important activity of the company,” Ivanov said, adding that over the next few years the company will spend US$368 million on exploration.

“The business rationale for spending so much money on exploration is our belief that Russia is the country to spend exploration money today, we have a proven record of discoveries, exploration costs at Blagodatnoye were less than one dollar per ounce of reserves, and we expect to increase the reserves of the company in the next five years by fifty-eight million ounces of gold.”

A further increase in reserves is expected from the exploration project at the Natalka deposit in the northeastern Magadan region, where Polyus has spent US$65 million since 2004. Natalka will undergo an international audit next year and Polyus will then be able to make the re-evaluation public. The deposit is currently Russia’s sixth-largest, containing an estimated 7.9 million oz. gold.

Natalka is “an extremely huge project,” Ivanov said. It will cost Polyus around US$1.5 billion to develop and should be the largest contributor to the company’s output by 2015. Polyus hopes that the Russian government will include Natalka in its investment fund program that provides financing for road construction and power supplies in remote regions. That could save the company up to US$100 million in capital costs. Total capital costs for all of Polyus’s projects are expected to reach US$3.4 billion by 2015.

All of the regions where Polyus is active have extremely cold climates, and as a consequence the company has developed an in-house, bio-oxidation technology for its mills that is efficient at air temperatures of minus 35 to minus 40 Celsius. A new mill to be built at Olympiada in 2007 will use this technology.

— The author is a freelance writer based in Anchorage, Alaska.