Mining Industry in Russia

  8. Uranium

  Uranium mining in Russia was conducted entirely by the corporation JSC TVELs ore mining enterprises, and in particular by open pit mining at its subsidiary JSC Priargunsky Industrial Mining & Chemical Union and also by in situ underground leaching at its subsidiaries СJSC Dalur in the Kurgan region and JSC Khiagda in Buryatia. Annual uranium production was about 3,400 t, of which more than 90% was produced by Priargunsky. Uranium-bearing ores and solutions were processed to generate uranium concentrates, which were shipped for further reprocessing at the JSC Chepetsky Mechanical Plant.

  The country’s annual natural uranium consumption amounted to approximately 9,000 t. According to projections, the demands for uranium by the nuclear industry in Russia will grow by 1.7 times. The “TVEL Uranium” program was launched by TVEL Corporation to further develop uranium production up to 2010; an increase in ore mining to 4,300 t of uranium in 2010 was envisioned. Mining was being developed at the JSC Dalur enterprise in the Kurgan region, which produced about 200 t of uranium in 2005. The enterprise planned to increase production by 15% to 20% annually to produce 1,000 t by 2010. The construction of mine No. 6 at the Priargunsky deposit had been started to increase ore production.

  The JSC Khiagda enterprise was developing a pilot mining operation to mine the Khiagdinskoye deposit in Buryatiya using underground well leaching. Khiagda commenced commercial operations in 2005 and Khiagda planned to have the capacity to produce 1,000 t/yr of uranium by 2012. Total reserves at the JSC Khiagda site reportedly amount to 100,000 t of uranium.

  9. Outlook

  The Russian Ministry of Natural Resources has developed a draft of a long-term program “On the Exploration and Prospecting of Subsoil Reserves and Reproduction of the Mineral Resource Base for a Period until 2020,” but despite this draft, Russia appears to have no clear strategy for developing its mineral resources. Rather, the country is intensively extracting its fuel and nonfuel mineral reserves, which is leading to the depletion of the majority of these reserves before the year 2020, if not much sooner.

  In 2004 and 2005, Russian steel companies presented initial public offerings (IPOs) in the Western markets. This trend of presenting IPOs is set to continue in other sectors of the mineral industry. Consolidation of assets is also a recent trend, which is evident with the creation of Russia’s leading aluminum producer, United Company RUSAL, through such consolidation.

  There is also a trend to internationalize Russia’s mineral enterprises. Russian companies, such as ALROSA, Noril’sk Nickel, and RUSAL, are acquiring major foreign assets. Many of Russia’s leading companies aspire to become major international players. Although Severstal’s bid for Arcelor (which would have created the world’s largest steel company) appears to have failed, it is unlikely to be the last such bid from a Russian corporation.

  Russian mining industry showing some signs of recovery

  Last December, the Russian mining industry felt beleaguered by the global recession. That month, Norilsk Nickel CEO Vladimir Strzhalkovsky issued an appeal to the Kremlin.“The industry is in a very difficult situation now. The revenues of Norilsk Nickel alone will drop 50% [in 2009]. Besides, we are losing in terms of competition, as our rivals don’t pay export duty on nickel and copper. In Russia, it stands at 15%, so we ask you to abolish it.”

  Nickel prices had fallen to around a third of their peak in February 2008, and Russia’s third-largest nickel producer, Ufaleynickel, had stopped production in October as a result of the low prices the metal was fetching. In response, in January, the Russian government cut its export duties on nickel and copper, a move that was expected to save the affected companies up to $300-million this year.

  It has been calculated that the Russian mining sector contracted by 5% in real terms in 2008.The predicament of a number of the country’s biggest mining and related metals companies was such that, in January, there was a widely reported plan to merge them, and have the Kremlin take a 25% share in the resulting group in return for writing off their collective debts, which came to more than $27-billion, most of which was owed to State-owned banks. The companies proposed for this megamerger were Norilsk Nickel, potash- miner Uralkali, iron-ore-miner and steel producer Metalloinvest, and steel groups Evraz and Mechel. Had the megamerger gone through, it would have created a group with a market capitalisation of between $70- billion and $100-billion, sales of $60-billion, and earnings before interest, tax, depreciation and amortisation of $23-billion.

  But it did not happen. Reportedly, the idea was vetoed by the Russian government, apparently because it did not wish to take on the accumulated debts of the companies concerned.So, what is the state of the Russian mining sector today? That is connected to the state of the Russian, and the wider world, economies.

  10. RUSSIAN ECONOMY BLUES

  Russia is still mired in a deep recession. In the first quarter of 2009, the economy contracted by 9,5% in year-on-year terms, with industrial output falling 15%. It is predicted that the country’s economy will shrink by 8,5% this year.

  Inflation reached almost 15% late last year, and this, along with concerns about major capital outflows from the country, caused the central bank to put up interest rates. As a result, inflation has come down a little (it is forecast to remain above 13% for much of this year) but the cost to many Russian companies of borrowing money has shot up from 8% to 25%. Also, the country has failed to develop its own financial markets, with the result that both major State- and private- sector-owned companies rely heavily on loans from foreign creditors, racking up almost $500-billion in foreign debt.

  The financial crisis in the wider Western world has almost closed the credit tap for Russian business. Although the Kremlin has injected massive amounts of money into the country’s banking system, loans are still difficult to obtain. There are reports that Russian companies have reverted to bartering to trade among themselves (a trading system that was common in the country during the 1990s).

  Foreign investment continues to be hampered by a weak and unreliable legal system, political interference (often at local, not national, level), bureaucratic indifference, and corruption. In the latest World Bank survey on how easy it was to do business in countries, Russia was ranked at 120 out of 181 countries – Nigeria had a better ranking.

  The country does, however, have foreign reserves of $380-billion, carefully built up from oil revenues during the recent boom years, which gives Russian enough money to pull through the recession. And the country also has liberal business regulations and low taxes, which help local companies survive and make profits, despite the tough environment.

  Further, the oil price has rebounded, to between $60/bl and $70/bl, from an average of $49/bl in the first half of the year. The Russian budget is predicated on an oil price of $41/bl, and 90% of oil revenues above $25/bl are taken by the State in taxes. Not only does the country remain heavily dependent on oil and gas, it is, if anything, more dependent on these hydrocarbons than it was at the turn of the millennium.

  RESOURCE-RICH RUSSIA

  Russia is, geographically speaking, the largest country in the world, with a total area of 17 075 200 km2, roughly equivalent to 1,8 times the size of the US. Unsurprisingly, then, the country has a huge resources base. Back in 2003 (there does not appear to be a more recent published figure), the value of Russian explored mineral resources was estimated to be $10-trillion and that of its unexplored resources at a minimum of $200-trillion. However, many of these are in places that are hard to access or in deposits that are difficult to exploit.

  So far, some 20 000 mineral deposits have been explored. More than a third of these are now being mined or developed, but while these account for more than 70% of the country’s metals and minerals reserves, they encompass a mere 5% of Russia’s explored metals and mineral resources.

  The country is the world’s biggest producer of natural gas (about 25% of global production) and the second-biggest exporter of oil (Russian oil production is about 10% of total world production). It is also responsible for 20% of global nickel and cobalt production, 5% to 7% of world coal production, 7% to 8% of global iron-ore production, more than 10% of world tungsten, and 12% of the globe’s potash, production, along with significant production shares for non-ferrous and rare earth metals, platinum-group metals, and diamonds.

  Russia reportedly hosts 33% of the world’s natural gas reserves, more than 10% of global oil reserves, 11% of world coal, and 26% of global iron-ore reserves. Other metals and minerals that the country possesses and produces include antimony, barite, bauxite, chrome, copper, fluorspar, gold, lead, magnesium, manganese, mercury, mica, molybdenum, rhenium, niobium, phosphates (including apatite), salt (sodium chloride), scandium, silver, strontium, talc, tantalum, tin, titanium, uranium, yttrium, zinc and zirconium.

  RUSSIAN MINERS

  There are believed to be some 130 mining companies active in Russia, a figure that includes foreign as well as Russian companies. What follows can only be a snapshot of such a large sector. The list of Russian mining and hydrocarbons companies includes some that are undoubtedly global majors, a group that comprises both private-sector and State-owned companies.

  Gazprom, the natural gas giant that holds 17% of the world’s, and more than 60% of Russia’s, natural gas reserves, is such a global major. One of the ten biggest energy companies in the world, it is 50,002%-owned by the Russian State, and its aim is to become a leading global energy company.

  In his statement to shareholders at the company’s annual general meeting (AGM) on June 26, Gazprom management committee chairperson (and deputy chairperson of the board of directors) Alexei Miller stated: “The global financial and economic crisis hasn’t bypassed Russia and its energy industry. Nevertheless, on [sic] the background of the unfavourable financial and economic trends worldwide, our company has again shown high reliability, stability, and potential for sustainable development. We use all the advantages of vertical integration for responding with promptness and flexibility to changes in the market situation . . . . Our present-day task is to retain the accumulated potential and not to lose new opportunities emerging in the period of crisis. Crisis is a flexibility test.”

  Last year, the company increased its A+B+C1 gas reserves by 11% and its oil reserves by 6%. Last month alone, Gazprom signed a $2,5-billion deal with Nigeria’s State-owned NNPC to create a joint venture company to be called Nigaz, that will build refineries, pipelines, and gas-powered power stations in the African country, and a deal (value undisclosed) with Azerbaijan to import 500-million cubic metres of natural gas from the Central Asian country and then export it to Europe.

  Russia’s largest oil company, Rosneft, is another leading State-owned minerals com- pany, with the Kremlin holding 75,16%. Despite the recession, the company enjoyed excellent results for 2008 and, at its June 19 AGM, was able to announce a dividend to shareholders that was 20% higher than the dividend for 2007. However, its net income for the first quarter of this year, which amounted to $2,06-billion, was a decrease of 50,7% in comparison with figures for the first quarter of 2008, although a 165,8% increase in relation to figures for the last quarter of last year.

  Company president Sergei Bogdanchikov commented during the first quarter: “Rosneft demonstrated outstanding flexibility in managing costs and product flows . . . . Throughout 2009, we will continue to focus on cost improvements, net debt reduction, strategic projects . . . and further progress with government on tax and monopoly tariff reform.”

  On June 9, Rosneft was able to announce that it had repaid a $1,85-billion loan that it had taken out almost a year earlier from a syndicate of international banks. Between the end of September 2007 and the end of March 2009, the company was able to reduce its net debt by more than $8,5-billion to $19,2- billion, and Rosneft recently signed a 20-year, $15-billion loan agreement with the China Development Bank.

  Russian diamond major Alrosa, which is majority-owned by the Russian State, and which is the world’s number two producer of the gems, with a 25% share in the world diamond market, has been able to meet its operation targets only because it was able to sell rough diamonds to the Gokhran agency. Gokhran is the Russian State’s diamond, jewellery, and precious metals depository and is a branch of the Ministry of Finance. Indeed, for the four months from December 2008 to March 2009, Alrosa sold its entire rough output to Gokhran.

  Speaking to the Interfax news agency in April, Alrosa president Sergei Vybornov affirmed: “I believe that there is a very good outlook in terms of demand for Russian rough . . . . As soon as we feel upturn trends in the market – and here I mean Russian rough – we shall just increase the number of long-term clients. Maybe we shall sell something on the spot market, but the amount will hardly be great.”

  Russia’s leading private-sector mining company is Norilsk Nickel. It is the world’s number one producer of nickel (18,8% of global output) and palladium (46,3%) and is the fourth-biggest producer of platinum (12%), while its share of world copper production is 2,7% (these figures are all 2007 estimates). As by-products to these metals, it also produces cobalt, gold, iridium, rhodium, ruthenium, selenium, silver, sulphur and tellurium. It has functional operations in Botswana, Finland, South Africa and the US, as well as in Russia, but its operations in Australia have been suspended “for an indefinite period” because of the global recession.

  Total group revenues for 2008 came to $13,98-billion, a decrease of 18% in comparison with 2007 revenues, which were almost $17,12-billion. Last year was the first in which the group made a loss.

  In terms of physical volumes of metals sold, the 2008 figure for copper was down 5% in comparison with figures for 2007, the figure for palladium was down 7%, platinum was down 18%, and gold down 15%. The physical volume of nickel sales fell only fractionally: 287 000 t was sold in 2008 compared with 288 000 t in 2007.

  However, the revenues gained from nickel dropped by 40% in 2008 in comparison with figures for 2007. Nickel sales accounted for 51% of the group’s total revenues last year. Copper sales contributed 25% of total revenues and were down 2% in value compared with figures for 2007. Palladium’s share was 11%, and the revenues gained by this metal were down 3% on those for the previous year. Norilsk was also hit by impairment charges of $4,7-billion.Still, Strzhalkovsky was able to tell the shareholders at the AGM on June 30 that Norilsk had returned to profit during the first half of this year, and that he expected the company to achieve revenues of $7,5- billion to $8-billion and core earnings of $1,8-billion to $2-billion this year. He also revealed that Norilsk was on the acquisition trail again. “The funds from the sale of utility assets could be spent on the purchase of a certain core asset,” he said, without identifying the likely target.

  Meanwhile, Ufaleynickel resumed nickel production at the start of February. Its shutdown had lasted three months.Another private-sector mining major in Russia is Metalloinvest. This company is the fourth-largest iron-ore-miner, and possesses the largest iron-ore deposits in the world. It is also Russia’s number five steelmaker.

  Last month, the company signed a licence agreement with the Russian Subsoil Agency (also known by the acronym Rosnedra) to develop the Udokan copper deposit.And early this month, it was reported by Russian business newspaper Vedomosti that Metalloinvest had reached an agreement with some of its creditors for a four- to five-year extension on the repayment of $2,2-billion in debt. The newspaper added that Metalloinvest’s total debt was some $5,4-billion to $5,5-billion, of which $1,5- billion was scheduled to be repaid this year, and that the company was in talks with other creditors to repay its debts once the steel markets recovered. A spokesperson for the company would only say that “consultations are under way with financial institutions”.

  Uralkali is the world’s largest, publicly traded, purely potash-mining company. Speaking at the company’s AGM on June 30, CEO Vladislav Baumgertner stated: “[The year 2008] was a difficult and complex year for our company . . . In the first nine months of 2008, world demand for potash fertiliser grew consistently . . . . However, the global economic downturn . . . had an effect on everybody. Our production has slowed down, and we are prepared to respond to a market situation that will continue to remain unstable for some time. Under these conditions, our priorities are to preserve jobs and the company’s workforce capacity, [as well as] reduce costs and [optimise] expenses.”

  On July 9, Uralkali was able to announce a 12,5% pay increase for its employees, effective from August 1. Board of directors chairperson Dmitry Rybolovlev stated: “Uralkali’s staff is the foundation of the company, its core asset. Retaining our personnel, we will be able to see the crisis through.”These companies, although industry majors, are far from the whole of Russia’s mining industry. Thus, there is the State- owned uranium-miner, Atomredmetzoloto, which, in November last year, announced plans to invest $5,9-billion by 2015 to expand its operations. And private-sector Polyus Gold, Russia’s biggest gold-miner, producing 38 t of the yellow metal in 2008, in January signed a deal with Canada’s Kinross Gold to develop the Nezhdaninskoye project, in Yakutia, Russia.Overall, the Russian mining industry is expected to contract again this year, although only slightly. From next year, it is forecast to return to growth, and consultancy MarketResearch.com expects the Russian mining industry to be worth $175,8-billion in 2013.

  11. The Russian mining industry has returned to the past

  During the 1990s, the Russian mining industry took a step in the direction of the Western industrial structure. With the opening decade of the 2000s, however, the mining industry has been organized into a form that corresponds to a surprising extent to the mining industry structure of the old USSR. This information emerges in the doctoral thesis A Return to the Past? An Institutional Analysis of Transitional Development in the Russian Mining Industry, by Veikko Kärnä, Master of Economic Sciences. This thesis study in the business economics, management and organization field shall be examined at Turku School of Economics on Friday, 1 June 2007.

  The Russian mining industry was privatized at the outset of the 1990s. At the same time, the ministries working in the field in Moscow were suspended. For a moment in time, the mines were autonomic. Nevertheless, the mines were quickly merged as part of the groups of companies owned by the oligarchs. These companies assumed the role of the branch ministries of the past. In addition, many of the groups of companies have returned to the vertical integration structure inherited from the times of the Soviet Union.

  “In the vertical structure, the same company both produces the raw materials and processes them as end-products. For example, an electric company owns coal mines whose coal as produced is incinerated in the company’s own power plants,” Veikko Kärnä explains. On behalf of his job, Mr Kärnä has been involved with the mining industry of the Soviet Union and Russia since the beginning of the 1980s. The theme of the study has arisen from Mr Kärnä’s own observations, which he wanted to test empirically.

  Power is concentrated in Moscow The majority of Russia's mines are located on the geographical periphery. During the autonomy phase in the 1990s, the mines got to decide for themselves with regard to, e.g., their equipment purchases. Currently the power has nevertheless been concentrated in Moscow.

  “The mines have lost their possibilities to have any influence as part of the groups of companies," Mr Kärnä states. “These days, they have very much the same kind of production unit position that they had during the period of the USSR.” In the decision-makers’ view, the Soviet Union period model is the right one The development of Russia’s mining industry is reviewed in the thesis study via the ‘new institutional’ theory. This return to the old times is explained as the rebirth of an institution. The structure of the old industry is, cognitively speaking, an institutionalized model. For a brief period, it was prohibited as a result of state resolutions, but was taken into use when the conditions once again allowed it. “The decision-makers' cognition was that the 'right' structure for industry was a vertically integrated Soviet model which, given the suitable opportunity, would be reborn,” Veikko Kärnä reckons. 
 
 
 
 
 
 
 
 

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