Russia Mining Report Q3 2009

Russia Mining Report Q3 2009

The Russian Gold Industrialists Union has claimed that gold output increases by 37.8% in the first four
months of 2009 to 43.28 tonnes. The production increase has mainly been attributable to the recent launch
on new processing facilities by Kinross Gold at its Kupol Mine in Chukotoa and Peter Hambro Mining
at its Pioneer Mine in the Amur region. The increase in output is especially positive as the sector has
witnessed a decline for much of the past five years. Many leading Russian miners increased capacity in
2008, while exploitation of the gold reserves in Siberia and the Russian Far East could see production
increase by another 20% by 2015. After South Africa, Russia has the largest gold reserves in the world.
Gold has been one of the few commodities to prosper in the current economic crisis and the global
uncertainty has driven investors to plough money into gold and silver as a safe haven.
Yet not all precious goods are performing well. In April 2009, Russia’s largest diamond producer,
ALROSA, cut its diamond production outlook by 20% in view of the constriction of demand for precious
stones occasioned by the global financial crisis. Russia’s luxury market has ground to a halt as the
country’s wealthy elite have seen their fortunes eroded. Consumer spending throughout the economy has
slumped as salaries are cut and jobs are lost. Reduced lending from banks has also affected big-ticket
purchases such as diamonds. Consequently, ALROSA now plans to produce US$1.87bn worth of
diamonds in 2009, compared with US$2.36bn in 2008. In the past few months, ALROSA has been selling
almost all of its output to Gokhran, the Russian government’s precious metals and gems repository.
However, if the company wants to meets its production plans for the year it will have to find new
customers, as Gokhran is planning to buy just US$1.34bn of diamonds and precious metals this year.
It is BMI’s view that the current economic crisis affecting the Russian mining sector could allow the
government to purchase assets at discounted prices. Indeed, in June 2009, it was revealed that the Russian
state-owned bank VEB had acquired a 3.68% stake in Norilsk Nickel at the end of 2008. The bank has
refused to comment on the story, claiming only that it bought some stakes in bluechip companies at the
end of 2008. The Russian government earmarked RUB175bn (US$5.6bn) to invest in the troubled stock
market; however, a wide-scale bailout of the mining sector is still not on the cards. Despite this there is a
possibility that the government will continue to increase its stake in some key mining assets. For example,
in May 2009, state-owned Russian Technologies admitted that it would be interested in taking a 40%
stake in Norilsk Nickel if the company failed to re-pay its debts to the state. In October 2008, UC RUSAL
took a US$4.5bn loan from VEB, putting its 25% stake in Norilsk Nickel up as collateral. Norilsk’s major
shareholder, Vladimir Potanin, has secured a US$3bn loan from VEB, putting his 16.7% stake in Norilsk
as collateral.
Global Overview
On page 9 of this report, BMI examines the phenomenon of increased Chinese activity in the global
mining sector, and what this means for the industry moving forward.
Industry Forecast
In the short term, Russia’s mining sector is facing severe difficulties caused by falling commodities
prices. In 2008, BMI estimated the mining sector declined by 5.0% in real terms, while we forecast a
marginal contraction in 2009. By the end of the forecast period, however, the market should have returned
to strength as commodity prices recover and new reserves are developed. In 2013, we forecast the mining
sector will be worth US$175.8bn.

Executive Summary .5
SWOT Analysis7
Russia Political SWOT...... 7
Russia Economic SWOT ... 8
Russia Business SWOT ..... 9
Special Focus: Outlook For Global Mining........10
Table: Biggest Chinese Acquisitions In Australia Since 2005........ 12
Table: Global Mining – Top Five Companies By Market Capitalisation (US$mn).... 14
Table: Global Mining – Key Players’ Future Investment Plans (selected projects)... 15
Industry Trends And Developments 17
Overview....... 17
Regulatory Structure And Developments ... 18
Key Projects...21
Metals.. 21
Bauxite And Alumina ...... 21
Iron...... 22
Gold..... 23
Copper. 26
Nickel... 26
Platinum Group Metals (PGM) ........ 28
Uranium........ 29
Zinc...... 30
Minerals ....... 30
Coal ..... 30
Diamonds...... 32
Table: Mines In Russia ... 34
Mining Business Environment35
Regional Overview – Europe And Central Asia . 35
Table: Europe Business Environment Ranking... 35
Limits Of Potential Returns...... 36
Risks To Realisation Of Returns ....... 36
Legal Framework... 37
Table: BMI’s Legal Framework Ratings.... 39
Labour Force 40
Table: Demographic Indicators, 2000-2030....... 40
Table: Labour Force Quality... 41
Foreign Investment Policy ....... 42
Table: FDI Inflows Into Central And Eastern Europe And Central Asia, 2005 And 2006 .. 43
Table: Russia’s FDI Inflows, 2001-2006 ... 44
Political Environment ..... 44
Table: Political Overview........ 46
Foreign Policy ....... 47
Industry Forecast Scenario ......49
Metals Price Outlook...... 49
Table: BMI Aluminium Forecast ...... 51
Table: BMI Copper Forecast... 53
Table: Stock Levels At London Metals Exchange Warehouses (tonnes)... 53
Global Industry Overview........ 53
Regional Analysis .. 54
Russia – Mining Industry Forecast ... 56
Table: Russia Mining Industry Forecast.... 58
Competitive Landscape..60
Table: Russia Mining – Key Players. 60
Company Monitor...61
United Company Russian Aluminium (UC RUSAL)..... 61
Polyus Gold Mining Company. 62
Mining and Metallurgical Company (MMC) Norilsk Nickel. 64
ALROSA Company. 66
Appendices ....67
Appendix A: Global Assumptions ..... 67
Global.. 67
Table: Global Assumptions, 2007-2013..... 68
Economic Activity .. 68
Table: Global And Regional Real GDP Growth, 2006-2012 (% change y-o-y) 69
Table: Developed States’ Real GDP Growth, 2008-2010..... 70
Table: Emerging Markets’ Real GDP Growth, 2008-2010... 71
Monetary Policy..... 71
Table: Developed Market Exchange Rates, 2006-2010 (average) .. 72
Table: Emerging Market Exchange Rates, 2006-2010 (average) ... 72
Commodities . 73
Appendix B: Business Environment Ratings....... 74
Ratings Overview... 74
Table: Mining Business Environment Indicators 75
Table: Weighting Of Components..... 76