Polymetal Will Cut Investment in 2009

Polymetal, the country's biggest silver miner, will cut investment in exploration and modernization by 30 percent to 40 percent next year because of the financial crisis, chief executive Vitaly Nesis said Tuesday.

The Albazino and Amursk smelting projects, which are the company's highest priority sites, will not be affected, Nesis said at a mining conference. Polymetal has said it was planning to invest $30 million for exploration this year and another $30 million on modernization. Nesis declined to give figures for 2009.

Polymetal, which is also the country's third-biggest gold producer, will not cut production and will try to save jobs, Nesis said. He added that a devaluation of the ruble would "very much help mining companies" because it would help them keep costs at lower levels.

"It would be logical for Polymetal to cut exploration costs," said Tim McCutcheon, a partner at DBM Capital Partners, an asset management company that specializes in mergers and the acquisitions in the precious metals market. "The company has been very aggressive in its strategy of opening up greenfield projects. Now, it's time to go more conservative."

"It would be better for Polymetal to buy the assets around its current mines to get a synergy effect," McCutcheon said.

Polymetal's shares dipped 0.4 percent on the MICEX on Tuesday.

Nesis also said he expected that many of the country's small, inefficient producers would soon be forced to close.

"As a result of the crisis, a lot of the companies that mine from 500 to 1,000 kilograms of gold per year will be closed because of the lack of financing in the next six to nine months," Nesis said in an interview on the sidelines of the conference. "Nobody will want them, because the quality of their work is very poor. So I call this process a rationalization."

Polymetal, by comparison, produced 3 million tons (2.7 billion kilograms) of silver and gold last year, and Polyus Gold, the country's biggest producer of the metal, had output of 9.4 million tons.

"Afterward, the strongest and most qualified companies will remain on the market," Nesis said.

The 20 largest miners control around 95 percent of the market, while about 500 smaller producers are also operating in the country, McCutcheon said.

"Those 500 are mainly alluvial miners, highly inefficient, and sometimes even criminal. They have been leaving the market anyway," McCutcheon said. "The crisis has only sped up the process."

But McCutcheon also cautioned that the closures would not result in a consolidation of the market — just a thinning.

"No one wants to spend cash, because they don't know whether there will be any more," McCutcheon said.