Commodity Blog

Russia’s metals billionaires are moving into gold, attracted by record prices and the prospect of carving a share of production that is forecast to rise 40 percent by 2015.
Six of the 10 richest Russians ranked by Forbes magazine own gold assets in a country with reserves second only to South Africa’s. The wealthiest of all, Chelsea soccer club owner Roman Abramovich, is among the latest to join the gold rush.
“There’s definitely a move, both internally and externally, to become involved in gold in Russia. The price is one of the things driving the frenzy,” said Peter Hambro, whose eponymous company
When Hambro, a London-based bullion trader, set up his Russian mining firm in 2004, gold was trading below $400 an ounce. Today’s prices above $920 have never before been seen.
Average gold prices are set to rise another 20 percent in value this year and retain most gains in 2009 as U.S. dollar weakness, market turmoil and inflation fears stoke investor interest, a Reuters poll of 50 analysts and traders showed.
“Everyone is extremely buoyant about the gold price. They are seeing this as an industry they want to be in,” said Henry Horne, managing director of Highland Gold Mining Ltd.
But why Russia? Most of its lucrative gold deposits are in remote parts of Siberia and the Far East, where distances are vast, temperatures can plunge 40 degrees Celsius below zero and millions of dollars must be spent on building infrastructure.
“Russian businessmen are moving into gold because they are bullish on the commodity itself, and bullish on Russia’s potential as a place with an extensive but underexplored mineral base,” Troika Dialog metals analyst Mikhail Stiskin said.
‘BREAKTHROUGH YEAR’
Russia is the world’s fifth-largest gold miner, accounting for about 6.6 percent of world production. Output last year is believed to have been about 161 tonnes (5.2 million ounces).
Valery Braiko, who heads the Russian Gold Industrialists Union, says 2008 will be a “breakthrough year” — the first year of rising gold output after five consecutive years of decline, as the cost of developing remote alluvial deposits has risen.
Canada’s Kinross Gold Corp, due to launch its Kupol mine in the Chukotka region, will make up much of the increase.
Russia’s fragmented gold-mining sector accommodates around 600 companies, many of them tiny in scale. The largest miner, Polyus Gold, mined nearly a quarter of Russia’s gold in 2006 while its nearest competitor produced under 5 percent.
“In Russia, gold remains one of the least consolidated sectors,” said Vladimir Zhukov, senior mining analyst with Lehman Brothers in Moscow.
Polyus, which plans to triple output by 2015, has a market capitalisation of $9.9 billion. Though worth only a quarter of world leader Barrick Gold Corp, this still values Polyus at four times its nearest domestic rival.
This makes acquisitions realistic.
“A few hundred million dollars can get you full control or a decent-sized stake. In steel or base metals, the cost of entry is much higher,” said Zhukov.
Roman Abramovich’s investment vehicle, Millhouse LLC, paid $400 million to acquire 40 percent of Highland Gold this month.
SUKHOI LOG
Braiko forecasts gold output will reach 225 tonnes by 2015.
Russia’s top gold miners are each developing a series of projects that will allow them to expand production. Yet much of the country’s potential lies in fields yet to be fully explored.
Such deposits form the backbone of the gold firm being built by Severstal’s owner Alexei Mordashov, a billionaire better known for his background in steel.
Russia’s richest men also have an eye on a looming showdown for control of the huge Sukhoi Log field, the only gold deposit big enough to be declared strategic by the government and thus off limits to foreign control when sold, possibly this year.
Russia’s top miners all have declared an interest. Analysts say the likely winner will combine mining expertise with the financial and political clout of a Kremlin-backed businessman.
Until recently, Polyus was the clear front-runner. Abramovich, Mordashov and others may yet provide competition.
Zhukov said: “The ultimate goal for both is to say, ‘Look: here’s a Russian company willing to participate in the future of the country’s gold sector’.”