Billionaires See a Golden Opportunity

Itar-TassA mine for a gold-extracting plant in the Krasnoyarsk region opened by Polyus, producer of a quarter of Russia's gold.
The country'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 own gold assets in a country with reserves second only to South Africa's. The wealthiest, Chelsea football 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 is the country's second-largest gold miner by output.

When Hambro, a London-based bullion trader, set up his Russian mining firm in 2004, gold was trading below $400 per 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 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.

Gold Miners in Russia

POLYUS GOLD
Jan. 30 market capitalization: $9.9bln
2006 output: 1.215 million ounces (23 percent of Russia's total)
Long-term forecast: 3.9 million ounces by 2015

PETER HAMBRO MINING
Jan. 30 market capitalization: $2.2bln
2006 output: 261,000 ounces (4.9 percent of Russia's total)
Long-term forecast: 900,000 ounces by 2010 and 1 million by 2011

POLYMETAL
Jan. 30 market capitalization: 2.6bln
2006 output: 256,000 ounces (4.8 percent of Russia's total)
Long-term forecast: 400,000 ounces by 2010

HIGHLAND GOLD
Jan. 30 market capitalization: $1.2bln
2006 output: 167,544 ounces (3.2 percent of Russia's total)
Long-term forecast: more than 200,000 ounces by 2009

KINROSS GOLD
Jan. 30 market capitalization: $13.6bln
Toronto-based Kinross could become Russia's second-largest gold miner when it starts its Kupol project, which is forecast to produce about 550,000 ounces of gold per year from 2009.

YUZHURALZOLOTO
Unlisted.
2006 output: 127,700 ounces

BURYATZOLOTO
Jan. 30 market capitalization: $142m
2006 output: 150,173 ounces

GV GOLD
Unlisted.
2006 output: 86,967 ounces

SEVERSTAL
Jan. 30 market capitalization: $21.7bln
Severstal has been acquiring gold holdings with the aim of creating the country's third- or fourth-largest miner.
- Reuters
But why Russia? Most of its lucrative gold deposits are in remote parts of Siberia and the Far East, where temperatures can plunge to minus 40 degrees Celsius and millions of dollars must be spent on infrastructure.

"Russian businessmen are moving into gold because they are bullish on the commodity itself and bullish on Russia's ... extensive but under-explored mineral base," Troika Dialog metals analyst Mikhail Stiskin said.

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 tons (5.2 million ounces).

Valery Braiko, who heads the Russian Gold Industrialists Union, says 2008 will be a "breakthrough year" -- with rising gold output after five consecutive years of decline, as the cost of developing remote alluvial deposits has risen.

Canada's Kinross Gold, due to launch its Kupol mine in the Chukotka autonomous district, will make up much of the increase.

The fragmented gold-mining sector includes some 600 companies, many of them tiny. The largest, Polyus Gold, mined nearly one-quarter of the country's output in 2006, while its nearest competitor produced less than 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 capitalization of $9.9 billion. Though worth only one-quarter of world leader Barrick Gold, this still values Polyus at four times its nearest domestic rival, making 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," Zhukov said.

Roman Abramovich's investment vehicle, Millhouse, paid $400 million for 40 percent of Highland Gold this month.

The country's top gold miners are each developing projects that will allow them to expand production, and much of the country's potential lies in fields yet to be fully explored. Such deposits form the backbone of the company being built by Severstal owner Alexei Mordashov, a billionaire better known for his background in steel.

Eyes have now turned to a looming showdown for control of the huge Sukhoi Log field, the only gold deposit to be declared strategic by the government and thus off limits to foreign control when sold, possibly this year.

Until recently, Polyus was the clear front-runner for the field, although Abramovich, Mordashov and others may yet muster a challenge.