Udokan Copper Tender Attracts Crowded Field

Billionaire Alisher Usmanov's Metalloinvest on Friday joined the race for the Udokan copper field, the country's largest untapped source of the metal, just a few hours ahead of a bids deadline.

The stakes in the fight for Udokan in eastern Siberia, estimated to hold 20 million tons of copper reserves, are high as the country's richest oligarchs vie to win the rights to the lucrative field in a Sept. 14 tender.

The tender will likely become another key metals battleground as Metalloinvest, half-owned by Usmanov, and Oleg Deripaska's Basic Element, another Udokan bidder, could use the field's assets as leverage in the multiplayer struggle for control of the country's biggest mining firm, Norilsk Nickel.

Usmanov and Potanin, who was last week elected chairman of Norilsk, in May formed an alliance to create a global metals and mining giant on the basis of their assets in Metalloinvest, the country's biggest iron-ore producer, and Norilsk. They also agreed to team up on Udokan.

Deripaska and Potanin's former business partner Mikhail Prokhorov, who are also Norilsk board members, are pushing a rival merger plan with Norilsk.

Metalloinvest, whose Mikhailovsky GOK ore processing plant put in the bid, declined to provide further details Friday.

If Metalloinvest's bid succeeds, it could join forces with state corporation Russian Technologies, which holds steel and titanium assets, a source close to Russian Technologies said, Interfax reported Friday.

Russian Technologies, led by Sergei Chemezov, a longtime ally of Prime Minister Vladimir Putin, has said it is teaming up with Potanin and Usmanov to develop Udokan as part of their plans to create a metals giant.

Analysts said that while Metalloinvest had no previous experience of copper extraction, it had access to vast financial resources.

"Metalloinvest wants to diversify its assets to avoid overexposure on iron ore," said Alexei Morozov, a metals analyst at UBS.

Russian Technologies, which was formed last year on the basis of state arms trader Rosoboronexport, would also bring synergies to the Udokan field, in the Chita region, through its interest in neighboring Mongolia's Erdenet copper mining project, Morozov said.

Russian Technologies said Friday that it expected to take control soon of the government's 49 percent stake in Erdenet.

Udokan is estimated to require investment of at least $1.6 billion. The starting price for the 20-year license up for grabs has been set at $192 million.

The deposit could annually produce 187,000 tons of copper, equivalent to 15 percent of Russia's current copper production, according to the Natural Resources Ministry.

The first tender to develop Udokan, originally discovered by Soviet geologist Yelizaveta Burova in 1949, was won by a U.S.-controlled company, Udokan Mining, in 1992. The company lost the license six years later, however, and in 2005, Udokan was declared a strategic field, excluding foreign companies from bidding for the field.

In the current tender, Morozov said the strongest bids were those from Norilsk, already the country's biggest copper producer, and from the Russian Copper consortium, which comprises Urals Mining and Metal Company, the country's second-biggest copper producer, state-owned Russian Railways and the government's Development Bank.

As well as Ural Metals and Mining's industry experience, the Russian Copper bid would be able to rely on Russian Railways for transportation infrastructure and the Development Bank for finance, Morozov said.

Norilsk already has experience with Udokan through its exploration work on the field for the State Nonferrous Metals Engineering Institute and plans to build copper smelters in the Chita region capable of processing 35 million tons of ore per year.

"Norilsk Nickel has also got one of the best credit histories among Russian companies, so it would not have any problems with money," said Vladimir Zhukov, metals and mining analyst at Lehman Brothers.

Olga Mitrofanova, a metals analyst at Aton UniCredit, said the cost of developing Udokan could rise to as high as $2.5 billion, given the difficulties of extraction and a lack of infrastructure in the area.

Temperatures in the area where Udokan is located go as low as minus 50 degrees Celsius, at which point the cold can damage both mining machinery and the quality of the extracted ore.

The field's developers will also face the challenge of processing both oxidized and sulfide ore, which will necessitate the building of twice as many copper smelters, and a lack in Russian companies of some of the modern technologies needed to develop the field.

Zhukov of Lehman Brothers noted that Norilsk had an advantage in technology as it has a cooperation agreement with global mining giants BHP Billiton and Rio Tinto.

If Deripaska won the bid, he would have to recruit a partner with a similar level of international mining expertise, as the Udokan field would otherwise be too difficult to explore, Morozov said.

The game afoot is also bigger than the Udokan field itself, the analysts said.

Deripaska, who controls a majority in RusAl, could get a bigger stake in a possible merger with Norilsk if he also had Udokan.

Conversely, if Usmanov won the Udokan tender, it would give him a potential trump card in pushing his merger plans for Norilsk. Usmanov and Potanin have said they would welcome a three-way merger in Norilsk with Deripaska, currently a 25 percent shareholder, while Deripaska has said he is looking to complete a two-way RusAl-Norilsk merger within a year.

A source in Interros, Potanin's investment vehicle, said Friday that Metalloinvest's bid for Udokan would not be a breach of the agreement between Usmanov and Potanin.

"Applying for the tender is like buying an entrance ticket, nothing more," the Interros source said. "Our agreements are all still in force."

Zhukov warned that whoever won the tender would be taking on quite a commitment at a time of uncertainty over future commodity prices.

"The winners will be assuming [considerable] risk, and that is why it won't be possible to develop the field without a partnership," Zhukov said.

Global copper prices have more than quadrupled since 2002, from $1,600 per ton to more than $8,000 this year, while Lehman Brothers' forecast for 2009 is $9,900 per ton.

"But we think that the prices will later get corrected downward to [about] $6,600 per ton by 2012," Zhukov said.