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. Last Updated: 07/27/2016

Battle for Russian Gold Draws Western Miners

Itar-TassRussia, seen as one of the world's biggest unexploited gold fields, is attracting gold firms from older crowded markets.
Political risk abounds and business is plagued by murder and organized crime -- but it takes more than that to put off foreign pioneers lured by Russian gold.

Driven by booming prices, Western players are overcoming their caution and starting to tiptoe through tricky local legislation to tap one of the world's biggest unexploited gold fields.

The fragmented gold industry could be at a turning point and is seen as ripe for consolidation.

"Russian gold is not quite like drugs, not like prostitution anymore," said Pavel Maslovsky, joint head of Peter Hambro Mining, a London-based firm operating in the Far East.

"It's not like a dog sled race through Alaska during the Gold Rush. It's not about thrill-seekers who used to operate in Russia in the 1990s, but about some serious Western players."

Gold firms looking to branch out of traditional but crowded markets like South Africa say now is the time to try their luck in riskier territories such as Russia.

They are snapping up gold mines across Siberia and pressing ahead with ambitious projects, brushing off attempts by local tycoons to protect their territory.

"The 1990s were marred by constant battles between foreign firms and regional tsars over licenses. Most companies withdrew from Russia as costs associated with risk were too high for the benefits," said Maxim Matveyev, mining analyst at Alfa Bank.

"Now the market is a lot more attractive because of high gold prices and Russia's relative sovereign stability."

Moody's rating agency raised its rating on Russian sovereign debt this month, meaning risks are expected to abate further.

The turf wars are not over.

The governor of a remote gold-rich province was shot dead on a Moscow street a year ago. Russian media said he was killed because he was trying to crack down on illegal gold trade.

A manager of Norilsk Nickel, Russia's biggest gold company, was killed in April.

High gold royalties, at 6 percent compared to the world average of 1 percent, are eating into companies' revenues, Matveyev said.

"At least foreign companies see that the federal center is finally willing to step in and protect them in case of trouble with regional bosses," Matveyev said.

Several recent deals by newcomers such as Britain's Highland Gold and Canada's Barrick highlight unprecedented activity on the Russian market.

With both London and Toronto vying for Russian gold, analysts say the auction in the second quarter of 2004 of the giant Sukhoi Log deposit in eastern Siberia is likely to turn into a major battle for control over Russian gold and draw some major foreign names.

Norilsk -- whose main gold asset is in Krasnoyarsk, a gold-rich Siberian region run by its ex-CEO -- seems determined to win the second-biggest undeveloped gold field in the world, but foreign firms were not prepared to leave it uncontested.

"The primary driver here is: Let's get a window of opportunity to see what else is there," said a Barrick spokesman after the world's third-largest gold-mining firm announced plans to buy a stake in Highland and perhaps bid for Sukhoi Log.

Highland's months-long tussle with Far East authorities over the lease at its core gold mine, Mnogovershinnoye, is typical of the problems investors face in the country, and sparked fears that Highland may have to abandon the project and quit Russia.

After it won the license, Highland discovered it had to then tender for the mine's physical property. After negotiations with authorities, it paid an additional $26.7 million to secure it. The mine previously belonged to Russian oil major Sibneft.

Analysts said Highland overpaid when it spent $35 million on the largely undeveloped Maiskoye deposit in Chukotka, a Siberian region run by billionaire Roman Abramovich -- who owns the English soccer club Chelsea and was formerly the holder of a majority stake in Sibneft.

Despite risks and high costs, Highland says it is determined to go further and wait until its efforts pay off in the country experts say could also serve as a bridge to other gold-mining places such as China and Mongolia.

Peter Hambro Mining operates in the minerals-rich Far East, where it bought the vast Pokrovsky deposit, with reserves of about three million ounces of gold.

Although the company lost an auction in August to Norilsk to develop the huge Matrosov mine in Magadan -- whose governor was assassinated in Moscow -- it says it may compete for Sukhoi Log.

"We plan further expansion," Maslovsky said.

"We have an 'active outlook on life,' like young Communists used to say."