COMMENTARY — Russia offers tremendous opportunity

Despite the recent political turmoil in Russia, a tremendous opportunity exists for Western-based mining companies.

Russia accounts for about one-eighth of the world’s land mass, second only to Canada. However, it is comparatively lacking in large-scale mineral deposits, except perhaps for diamonds in Siberia and nickel at Norilsk. In North America, we have explored ground, re-explored and re-explored again and still find new, major deposits. Yet, considering the size and geology of Russia, surprisingly few of the country’s deposits are awaiting development. Russian mines generally do not operate as efficiently as those in the West. In addition, economics tended not to be a factor in past development decisions.

Exacerbating the situation is the geography of a country many of whose operations are remote from existing infrastructure and suffer extreme climatic conditions. By Western standards, a deposit would have to be spectacular to offset these factors.

The average grade of many of Russia’s mines (based on recent information) appears to be below the average of comparable Western operations. Yields from ores, for example, contain 1.8 times less zinc, 4.6 times less lead, 1.8 times less molybdenum and 1.5-1.8 times less iron than typical Western mines. The situation is made worse by the lack of integrated operations and the poor quality of various products. For example, the average dore bar from a Russian gold mine is only about 70% gold and 10% silver, with the balance copper. Base metal mines may produce a concentrate but are unlikely to have a related smelter or refinery.

However, while Russian mining may seem somewhat chaotic, there are considerable opportunities for Western mining companies to establish a presence in the country. More than 7,000 joint ventures (all industrial) have been created from an investment of nearly US$7 billion, resulting in employment for 273,000 people. Moreover, the privatization process is expected to increase dramatically this year. More than 40 of the joint ventures have been in oil and gas, and these account for a significant portion of the investment funds.

A “best guess” is that 15-20 mining joint ventures have been created. This continuing trend, combined with new legislation, will result in even more joint-venture opportunities. While exploration for mines on a co-operative basis entails considerable logistical problems and is still in its infancy, there is potential for obtaining interests in existing operations by providing technical expertise for upgrading operations and thereby sharing in the higher output.

— Michael Newbury, executive director of the Russian Project Finance Bank, served formerly with Credit Suisse Canada.