Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Rich Palladium Mine Pulls U.K. Firm to Urals




NIZHNY TAGIL, Ural Mountains -- A group of British bankers tramping through a mosquito-infested forest outside Nizhny Tagil was the last thing the Russian couple picking blueberries were expecting to see. But this forest is full of something other than blueberries. It is full of palladium.


Located about 150 kilometers north of Yekaterinburg in the Ural Mountains, these city types were on their first-ever trip to Russia to take a look at Eurasia Mining PLC's palladium mine. And they were excited by what they saw.


At the Baronskoye site, Eurasia's most promising prospect, there isn't much to see. In a small clearing in the woods, three men were working a small rig, drilling a series of holes that will show the shape of a vein of platinum and palladium ore running under their feet.


Unlike coal and iron, which are found in big concentrated seams, these light precious metals are usually found together in a complex f the platinum group metals, or PGMs. The black complex usually contains platinum, palladium, rhodium, ruthenium and iridium. Often, copperand gold are also found nearby, as is the case in Baronskoye.


The initial drilling tests show that the seam is about 20 meters wide and maybe 1 to 3 kilometers long with a grade of approximately 4 to 6 grams of platinum to a ton of rock. In some places there are "pipes" of platinum ore with grades of up to 250 grams per ton f what mining chief Bill Andersen calls "bonanza grades."


What these numbers tell experts is that this is a very rich deposit. For comparison: In South Africa, one of the world's major suppliers of PGMs, mines typically work ore with a grade of 3 grams per ton at more than 1,500 meters below the surface.


HISTORY


Yekaterinburg was founded as a trading center for fur trappers but quickly became a mining town after extensive mineral deposits were discovered about 375 years ago.


Platinum mining started in the region in 1824, only two decades after a British chemist, William Hyde Wollaston, first isolated the metal. By the start of World War II, the region was producing 10 percent of the world's supply.


Lying about at the surface, the ore was easy to mine. At the Solovyov Hill deposit, the second most promising of Eurasia's sites a few kilometers away from Baronskoye, ore is washed down into the Chayuzh River. Workers used to sluice the river silt by hand over ribbed wooded boards to separate the coarse platinum grains out from the earth.


In 1904, more sophisticated dredges were introduced, but the principle was basically the same. At the peak, 30 dredges were working their way along the PGM fields.


Then at the start of the '40s, work around Yekaterinburg was largely abandoned. So many of the men that worked on the dredges were killed during World War II that finding work crews became difficult. But more importantly, the discovery of huge nickel and PGM deposits in Norilsk in the far north of the Urals district meant that the Soviets simply moved to where the work was easier, despite the fact there were several untouched deposits still left to work.


Today Norilsk Nickel, controlled by Vladimir Potanin's Interros group, produces a third of the world's palladium and the same amount of nickel, and earned about $1 billion in profits in 1999.


"Because of the discovery of Norilsk and the centralized government, the dredges were stuck in the middle of the Chayuzh River and never worked known deposits or explored further. We have already discovered more deposits to the north," said Andrew Counsell, Eurasia's chairman.


Three dredges are working on the Chayuzh River today, but with their turn-of-the-century technology, at least half the PGMs of a finer grain that could be recovered with modern methods are being thrown away. And this is not counting what is lying more than the 10 meters underground that dredgers dig or the areas beyond the traditional mining area, which remain untouched.


Eurasia began exploring the region with some geographical detective work. Going through 200-year-old documents, they tried to determine where the deposits were and how far mining had progressed before it was abandoned.


These studies estimate that from 1 to 3 tons of platinum were extracted annually during the peak period, which means that several tons of PGMs should be still at Solovyov Hill works, not counting the new deposits at Baronskoye and other untouched deposits.


Palladium buyers would love to see a new supplier of palladium on the market, as Norilsk Nickel has been unpredictable in the past.


DEMAND


Baronskoye is at the very first stage of digging a mine. The metal is there, but before extraction can begin in earnest, money needs to be raised, and to do this the mine must be shown to be commercially viable. With the prices for PGMs f and palladium in particular f soaring, this doesn't look like it is going to present much of a problem.


Palladium is the lightest of the PGMs, and about two-thirds of the world's palladium is used as a catalyst in the catalytic converters of cars. As both the European Union and the United States are imposing increasingly strict emission laws, the demand for palladium has gone ballistic in the last year.


In April 1999, the world supply for palladium was just over 5 million ounces and world demand was 5.13 million ounces. By the end of the same year, demand had risen to 9.2 million ounces, with no real increase in output.


What is special about the Russian deposits is that they contain much higher proportions of palladium than is usual for PGM deposits, and it is palladium that is in short supply today.


"Russia has squeezed the markets in the past by restricting supplies [of palladium]," says Jonathon Guy, a mining specialist with the London investment firm David Williamson Assoc. Ltd. "They caused a panic and sent the price upwards and then sold through traders in places like Switzerland."


As gold has plummeted to under $300 per ounce, the price of palladium has more than doubled f it rose from $350 per ounce in February 1997 to a record high of $768 per ounce at the start of this week. Platinum, also used in catalytic converters, has seen similar increases last month hitting an 11-month high of $580 per ounce.


With world average extraction costs of around $300 per ounce at these prices, a palladium mine is a money-making machine. And following the devaluation of the ruble, Eurasia thinks they can extract the PGMs for as little as $100 to $150 per ounce.


COMPANY HISTORY


But there is a long way to go as Eurasia is still at the very beginning. Eurasia is the brainchild of Counsell, who has been roaming around in Russia since the early '90s and picking over projects until finally settling on precious-metal mining in the Urals.


An Australian and former chairman of the Adelaide Stock Exchange, Counsell started by floating just under 1 million Eurasia shares on the Alternative Stock Market in London in October 1996 at pounds 3 ($4.50) per share. Since the initial public offering, the company has had a roller-coaster ride and has always been short of cash.


Initially, Eurasia concentrated on the Karabash gold deposits, and exploration results looked good. Counsell was in talks with Canadian mining giant QEX Resources Inc. in December 1997 when everything seemed to go wrong at once.


First, the news of a massive gold scam in Borneo broke that cost several multinational companies billions. QEX suddenly became wary of little start-up mines in faraway places and pulled out.


Then the international price of gold began to tank and eventually fell to below $300 per ounce. Finally, the Russian economy went into meltdown in August 1998. Eurasia's share price says it all. Over this period, shares plunged from pounds 3 a share to a low of 11 pence (16 cents).


"We have a total of about 30 projects that we are looking at, but following the crisis, there is not much activity as people are afraid to invest. But we are hopeful that there will be more interest because of the Ural's massive potential," Counsell says.


For the last two years, the company has been living hand-to-mouth, selling off stock in dribs and drabs to find the money to keep exploration going. Their saving grace is the rocketing price of palladium, and interest is finally perking up.


At the moment, they are drilling holes across the Baronskoye deposit and will move onto the Solovyov Hill when this is finished to determine the actual shape and size of the two PGM deposits.


The next stage will be to sign agreements with the local authorities to provide rail links, power and water to the site. One of the big advantages of Baronskoye is that unlike most mineral deposits, it is only a short ride from a big city, and hooking the site up to the local infrastructure will be simple and cheap.


Eurasia is also talking to the Vyssokogorsky plant, which processes copper from another mine. It hopes that with few modifications, the plant can turn over one of its lines to extracting palladium and platinum, which would mean Eurasia doesn't have to build its own processing plant, significantly cutting both capital costs and the risk of the project.


The last, and most difficult, hurdle to jump is an export license.


So far the Russians have only granted one precious-metal export license to a joint venture, a gold mine in the Far East. Export licenses were needed to export precious metals until a change in the law in 1994 allowed joint ventures to export gold through Russian banks, which is how they do it now.


Only the Kubaka mine in Magadan, which produces 350,000 ounces of gold annually, has an export license.


It will be difficult to organize, but Counsell says that until Eurasia gets a license, it can sell its production on the domestic market, where prices are not much lower than international prices.


The plan is to produce about 10,000 ounces in the first year and get a cash flow going while exploration continues. After that, production can hopefully increase to between 150,000 and 200,000 ounces a year, generating between $100 million to $140 million a year. Not bad for a company with a current market capitalization of about pounds 8 million ($12 million).


"This project has great potential as it is f after Norilsk f the most interesting palladium project in Russia," says mining specialist Guy. "But there are still lots of questions to be settled. We will be watching it closely."