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. Last Updated: 07/27/2016

Canadian-Led JV to Reopen Dukat




Russia's largest silver mine Dukat will be reopened with the help of a $63.4 million syndicated loan arranged by a finance arm of the World Bank, industry officials said Friday.


The once state-owned mine in the Magadan region was closed down three years ago for lack of working capital.


Now, Canadian-led joint-venture Serebro Dukat, which bought up the mine's mineral rights in a 1997 privatization auction, will use money provided by the International Finance Corporation, a member of the World Bank Group, to reopen the mine, officials said.


Additional financing will be provided by the Vancouver-based Pan American Silver Corporation, a partner in the venture, and the Export Development Corporation of Canada.


The Dukat project has been one of the most closely watched in Russia's precious metals sector because it is seen as providing an indicator as to whether foreign-led investment projects in the sector will be allowed to succeed.


Although the loan deal is already signed, the venture is still awaiting approval from the Russian Central Bank to open bank accounts abroad.


Money from sales of the silver concentrate to foreign smelters will be deposited in these accounts, said Vladimir Kochukov, a senior official at Western Pinnacle's Moscow office.


Without these accounts, the project would likely be derailed, as they are considered collateral by the commercial banks that invested in the project, Kochukov said.


The Dukat mine sits atop the world's third largest known silver deposit and is expected to produce 500 tons of silver and 1 ton of gold over the 15-year life span of the project, according to the IFC.


Analysts said the project is promising, but it remains unclear whether it can earn enough to pay steep Russian taxes and royalties and remain profitable.


Alexander Andreyev, a metals analyst with the Brunswick Warburg brokerage, said foreign investors can usually expect a profit margin of around 10 percent on precious metals projects here, but taxes on profits and earnings, along with a 5 percent commodity export tariff, erase that margin in most cases.


"Taxation is the major problem - it is hard to make a profit after taxes," he said.


However, those directly involved in the project said that the deposits are rich enough to allow it to be profitable.


"Nobody asked for any concessions [from the Russian authorities], and no concessions have been granted," Waldemr Maj, the IFC's senior loan officer on the Dukat project, said by telephone from Washington. "The partners will pay the high taxes and repay their investors on their own."


Pan American Silver Corporation and Western Pinnacle mining, which together own roughly 90 percent of Serebro Dukat, began working with the IFC to arrange a syndicated loan at the beginning of this year, when it became clear that private investors would not risk money without outside guarantees, officials familiar with the project said.


Industry watchers have expressed hopes that successfully financing the Dukat project will clear the way for more foreign investment in the precious metals sector.


However, Andreyev said that high taxation and an unpredictable regulatory environment continue to act as barriers to foreign investment in Russia's precious metals sector. "I don't know if this opens the door to anything else," he said. "It is clearly a promising project, but investment in other projects will still be on a case-by-case basis."