Gold Miners May Have To Dig Deeper to Grow

SEVERO-YENISEISKY, Krasnoyarsk Region -- Cutting the ribbon at Russia's largest gold mill this week, Krasnoyarsk Governor Alexander Khloponin forecast a huge increase in production by the time gold medals are handed out at the 2014 Winter Olympics.

The country's miners are investing billions of dollars to turn reserves second only to South Africa's into gold. If its top three miners fulfill their promises, output will more than triple by 2015, a year after the country hosts the games. But investors, awaiting evidence that these long-term plans will bear fruit, have become more conservative as gold prices draw breath after rising over 50 percent in the last two years.

Polyus Gold, which produced 23 percent of the country's gold last year, built the new mill at its Olimpiada mine from scratch -- an achievement that CEO Pavel Skitovich believes bodes well for future projects. "The important thing is proving to the market that we can build plants, and will continue to do so to keep on target," Skitovich said after the opening ceremony.

Polyus plans to more than triple output to 3.9 million ounces by 2015 by developing several large fields in remote regions. Yet its London-traded stock is down 13 percent this year.
"This is the Polyus story: great reserves, but issues with execution. If people believed all the reserves will be taken out of the ground, the valuation would be higher," said Vladimir Zhukov, senior metals and mining analyst at Alfa Bank.

Second-ranked Peter Hambro Mining has the opposite problem, Zhukov said -- a strong track record of production but less certainty about conversion of its resources into reserves. Olimpiada is the country's largest gold mine, contributing 16 percent of national output last year. Three times per week, rock is blasted from the pit face and scooped into trucks with wheels that dwarf their drivers. A new lighting system guides excavators around the pit after dark.

"We've been through a difficult period. Now, I think the mining sector in Russia is getting better," Vladimir Sushkevich, who heads the technical department at Olimpiada, said at the base of the 400-meter-deep pit.

The country's gold output has declined in the last two years to sixth place in the world rankings. In the short term, output will fall further as open-pit alluvial deposits -- where the metal is found close to the surface -- are depleted. Miners are going to have dig deeper to find the gold on which their growth forecasts are based. The Russian Gold Industrialists' Union forecasts output will drop by 2 percent to 4 percent in 2007 from 164.32 tons (5.28 million ounces) last year.

"We see growth starting from 2009," said Valery Braiko, the union's head. "I can't speak for every single project, as there are many, but the plans announced by Polyus and Polymetal are very reliable projects."

Polymetal, the country's third-largest producer, sees output rising 56 percent to 400,000 ounces by 2010. Investors are also becoming more selective. GV Gold, the country's seventh-largest gold miner, has twice pulled plans to float shares in London this year.

Source: The Moscow Times, Friday, July 20 — 2007