The largest gold field Sukhoi Log sold without competition

Nadezhda Ivanova's picture

When the state has artificially limited the number of possible contenders for the largest Russian gold deposit Sukhoi Log, the auction for the right to develop it, expected by the market for 20 years, was short and boring: only one step has been taken in the course of the trading. SL Zoloto - joint venture of Polyus of Said Kerimov’s son Suleiman and Rostec - expectedly won, paid only 9.4 billion rubles ($150 million) for the license. Normally, gold assets on the market are sold five - ten times more expensive. But the reserves of the Sukhoi Log deposit may be reduced in the course of additional exploration, and then, with investments in the project in the amount of up to $6 billion, its profitability may not exceed 15%.

Yesterday the Federal Agency on Subsoil Usage sold the license to develop the largest gold deposit in the Russian Federation Sukhoi Log (130 million ounces of the reserves and resources) in the Irkutsk region, which the Government tried to put up for sale during about 20 years, for 9.4 billion rubles ($150 million). The outcome of the trading was predictable: one step was taken (10% of the initial price of 8.55 billion rubles), SL Zoloto won, in which 51% of the shares belong to Polyus of Said Kerimov, 49% - to Rostec, head of which Sergei Chemezov was the person that asked to hold the auction in summer of 2015. The second applicant, Zoloto Bodaibo, created by Ibrahim Palankoev and VTB, didn’t haggle.

The presence of only two contenders for the asset was caused by the fact that the state put up stringent conditions, limited foreign participation in the auction, and demanded from applicants to attract state-owned companies in certain cases. As a result, Zoloto Bodaibo was considered to be a formal party required for holding the auction. The Kommersant’s interlocutors in the industry noticed that as the family of Palankoev with Acropol group, the main shareholder of which is the former senator from Ingushetia Ahmet Palankoev, as VTB were partners of the Kerimov family many times. In particular, Musa Palankoev and Sergei Lepeshkin, shareholder of the Acropol bank, were minority shareholders of Polyus Gold International Ltd, and VTB credited Said Karimov under the consolidation of the company at the end of 2015. The Kommersant failed to contact with representatives of the Palankoevs, VTB stated that Zoloto Bodaibo "had a clear price target for the participation in the auction", but didn’t explain why it didn’t enter the auction.

Polyus and Rostec noted "the uniqueness" of the asset and the "great responsibility" for its development. Results of the auction shall be announced before the end of February, the license issuance will take in at least three months. The further geological exploration and feasibility study will take three to four years, the partners evaluate. At the same time, Polyus plans to buy from Rostec 23.9% stake in SL Zoloto for $141 million," which will be paid in installments over the next five years (with the right to speed up the acquisition process)".The parties don’t explain how the price is formed.

The Ministry of Natural Resources expects that with the launch of Sukhoi Log, 80% of which can be developed by open way, an area with the production at the level of 80-90 tons of gold and 20-25 tons of silver per year will be created. The deposit’s proven reserves will be enough for a period of over 50 years, but the Ministry expects "a significant increase in the reserves".

The Union of Gold Producers "is pleased that the biggest producer of the country will be engaged in the development of Sukhoi Log". "Management of Polyus, refreshed after Mikhail Prokhorov left the shareholders in 2013, took into account risks of the recurrence the situation with the Natalka deposit (its reserves should be reduced by half compared with the data of the Soviet geological exploration), the company will carefully explore and confirm the reserves," - said head of the Union Sergei Kashuba. "The successful project implementation requires the joint venture together with the Federal Agency on Subsoil Usage to work out conditions of the license agreement for many years in advance," he says. At the same time, SL Zoloto got the license at relatively cheap price, the expert recognizes. The Bloomberg recalled that the privatization auction for the same Natalka in 2003 led to an increase in the initial prices 13 times.

The reserves of the Sukhoi Log deposit make up 63 million troy ounces, it turns out that, given the option for SL Zoloto, Polyus will pay about $4.6 per ounce of reserves by the State Reserves Committee, and even if only half of the exploration data is confirmed, even the price of $9 per ounce looks quite low, Oleg Petropavlovsky of BCS agrees. In recent years, deals for greenfield projects in the gold industry are priced at $20-30 per ounce, although there can be higher prices for structurally more profitable projects, says director of metallurgy and mining of Prosperity Capital Management Nikolai Sosnovsky.

The latest big deal among the Russian players was made by Polymetal, which in 2014 paid $620 million for Kyzyl mine in Kazakhstan with 7.3 million ounces of reserves (initially it was estimated at 6.7 million ounces). It turns out that Polymetal paid $85 per ounce, but Kyzyl has high gold content in the ore (7.7 grams per ton), which requires much lower capital costs, in addition, there is "clear geology, metallurgy and good infrastructure," Mr. Sosnovsky notes.

According to him, in the mining of 50-60 tons of gold per year at Sukhoi Log the investments in the project could reach $6 billion (the geological exploration and feasibility studies up to 2020 will require about $50 million per year) based on the fact that the processing will require a factory with capacity of 30 million tons of ore per year. And the factory, obviously, must be launched in a number of stages, and the first one - not earlier that in 2025, saysMr. Sosnovsky. At the spot price of gold at the level of $1.2 thousand per ounce the project’s internal rate of return is unlikely to be above 15%, he says. Oleg Petropavlovsky estimates the investments in the project at $5 billion, the expenses for the additional geological exploration and feasibility study - at "several hundred million dollars". If the content of 2 grams per ton in the ore is confirmed, the prime cost of the mining at Sukhoi Log won’t exceed $700 per ounce, he believes. At the same time, the desire of Polyus to increase the controlling stake by purchasing shares from Rostec "looks surprising" in light of the remaining costs for the Natalka deposit and other projects, Mr. Petropavlovsky notes.

SL Zoloto can look for partners, but the Chinese are very careful with greenfield projects, and the North American players are unlikely to be happy to have the status of a minority shareholder and Russian risks, Nikolai Sosnovsky thinks. Sukhoi Log was bought at the price of sunflower seeds, a part of the Rostec’s share is sold at a price of pistachios already, and for the one who will come from outside, it will be sold at the price of pine nuts," - the Kommersant’s interlocutor in the industry sneers. "The alliance of Polyus and Rostec is able and willing to develop the project on its own," - the Kommersant’s source familiar with the situation insists.

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