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. Last Updated: 07/27/2016

Samsung's Bid for Gold in the Caucasus

For MTMustafa Batdyev
Think Samsung, and cell phone ads for the Olympics spring to mind, not mining for gold in the Caucasus.

Yet, the South Korean conglomerate -- the world's largest emerging-market company after Gazprom -- is prospecting for gold, copper and serpentine in Karachayevo-Cherkessia in a venture that could boost the tiny mountainous republic's hard-pressed economy.

The connection, which may not be obvious at first glance, is the raw material that feeds Samsung's sprawling manufacturing empire -- from electronics and chemicals to ships, planes and automobiles.

The extent of Samsung's Caucasus mining venture was signaled late last month during a low-key visit by its managers to Karachayevo-Cherkessia, when the company's British unit signed a memorandum of cooperation with the republic's president, Mustafa Batdyev.

Under the agreement, Samsung UK will look to develop gold fields, a copper deposit and a large serpentine field, said Yury Karnaukh, head of the republic's branch of the Federal Subsoil Resources Use Agency. For Samsung's geologists, the visit was their fourth survey of mineral deposits in the republic since last May.

The project, if successful, could bring much-needed jobs and stability to a republic where about one in five people is unemployed and the authorities have been shaken by protests in the last two years.

It was unclear, however, how much money might be invested in the project.

Samsung UK's CEO, Hg Park, explained the company's interest in the republic's mineral deposits as part of its needs for the raw materials used in electronics manufacturing.

"We lack our own resource base, and that forces us to travel around the world in search of mineral resources," Park said at his Jan. 30 meeting with Batdyev in Cherkessk, the republic's capital, the news agency reported.

"We have successful experience in developing deposits in several countries, and now we would like to set up cooperation with Karachayevo-Cherkessia," Park said.

Park also promised to consider Batdyev's suggestion to build an electronic goods assembly plant in the republic, which would be the first such venture by Samsung in Russia.

Jeongho Jean, head of Samsung UK's metals division, confirmed that the unit had several mining operations worldwide, including in Mongolia, but declined to give any figures or say how much of its metals production is used to provide raw materials for its own electronics manufacturing and how much is sold externally.

"We don't like publicity. We don't attract it," Jean said by telephone from London.

The venture would not be Samsung's first in the CIS metals market, as it was a partner in Kazakhstan's largest copper producer, Kazakhmys, for nearly a decade.

Karnaukh said Samsung also had mining interests in Tajikistan.

In Russia, Samsung was one of the first foreign companies to set up shop during the last days of the Soviet Union in 1991, and already enjoys a strong position in the Russian electronics market.

The company's move into Russian metals, commodity analysts said, makes sense at a time when gold prices are at their highest in 25 years -- and look set to go even higher amid uncertainties over oil and a cheap dollar.

Global prices for copper, too, are at record highs, recently topping $5,000 per ton.

Samsung Group is South Korea's biggest conglomerate, with total revenues of $89 billion in 2004, and employs more than 400,000 employees worldwide in industries as diverse as electronics, chemicals, cars, aircraft and shipbuilding. It also has interests in merchant trade, hotels, amusement parks, skyscrapers, textiles and food.

Samsung follows the vertically integrated Japanese model, in which the conglomerate controls the entire production line, from ore mining to assembly of end products. For example, each step in the making of a home appliance, such as a microwave, can be performed by companies within the conglomerate.

"These companies, like Japan's Mitsubishi or Sumitomo, are so diverse," said William Adams, an analyst with London-based "They are constantly needing to find their own resources."

Timothy McCutcheon, a metals analyst with Aton brokerage, said the Caucasus mining venture fit well into Samsung's regional profile.

"Surprisingly, Samsung has a long history of mining in the former Soviet Union. They certainly have enough internal experience of doing business in this part of the world," he said.

How much the South Koreans would invest -- and whether they would go on to bid for other Russian deposits -- would come down to profitability, he said.

"For Samsung it's just a question of what's available," McCutcheon said.

Mass Protests

The benefits a company Samsung's size could bring to Karachayevo-Cherkessia can hardly be underestimated, said Nikolai Silayev, a researcher at the Center for Caucasus Studies at the Moscow State Institute for International Relations.

"For decades, you could not talk about big investments in Karachayevo-Cherkessia -- there weren't any. This could be a very important precedent," Silayev said.

The company's investment could also bolster the position of Batdyev, who has faced mass street protests against his rule twice in the last two years -- the first time over allegations his son-in-law was involved in the slaying of business rivals, and the second over a controversial transfer of land away from the Abazin minority community.

The protests came against the background of ethnic tensions between the Karachai, who make up about one-third of the republic's population, and the smaller Cherkessk and Abazin minorities.

The ethnic tensions resurfaced most recently this weekend, when a public congress of the Cherkessk from Karachayevo-Cherkessia and the neighboring republics of Adygea and Kabardino-Balkaria called for the formation of a unified Cherkessk republic. The congress was apparently a response to plans reportedly being considered in the Kremlin to merge the mostly ethnic Cherkessk Adygea republic with the Stavropol region.

Silayev said, however, that the political risks for Samsung in Karachayevo-Cherkessia were not serious, as it would be in the interests of all the republic's rival clans to support such a major investment.

"Also, we're talking about strategic minerals and metals here. I'd be surprised if Samsung has not cleared this deal with the Kremlin. It's not just a local question," Silayev said.

The republic was not known to have large metals deposits, but that could be partly due to the Soviet system of having republics specialize in particular industries, said Alexander Mikhailov, principal geologist at Cardiff, Wales-based SRK Consulting, which works with the biggest gold and nickel producers in Russia.

"In the Soviet Union, exploration was region-specific," Mikhailov said. "Uzbekistan produced gold, Kazakhstan produced gold and uranium. The Caucasus was designated as a producer of zinc, lead and copper," Mikhailov said.

Since Karachayevo-Cherkessia was not associated with gold, Soviet geologists did not look for it there, he said.

"But I'm sure it has good potential for it," Mikhailov said. Just one viable deposit and processing plant could produce anywhere from 200 to 2,000 local jobs, he said.

Kazakh Experience

As a model for its North Caucasus venture, Samsung can draw on its experience with Kazakhmys, which grew to become one of the world's top 10 copper producers during their partnership.

In 1995, the South Korean conglomerate invested $250 million into the Kazakhmys plant in southeast Kazakhstan in return for a 42 percent in the copper producer.

Samsung UK was just one of several Samsung units, including those in Germany and Hong Kong, that acted as metals traders for Kazakhmys or had stakes in the company, according to a 2003 KPMG audit report of Kazakhmys posted on the Kazakhstan Stock Exchange web site.

In the Kazakhstan operation, Samsung's British unit acted mainly as a zinc concentrate trader, while Samsung Group bought a total of one-third of Kazakhmys' output in 2002, including its entire silver production, for close to $40 million. Other Samsung units bought jewelry and copper, the report said.

In 2004, Samsung completed a sale of its stake in the company to Kazakhmys managers, including CEO Yong Keu-cha, a former Samsung executive.

A Kazakhmys spokesman said the company had "no mutual business interests" with Samsung at the moment.

It was unclear why Samsung had divested from Kazakhmys.

Serpentine Deposit

In Karachayevo-Cherkessia, Samsung is bidding for licenses to develop two gold deposits and a copper sulfide deposit, said Karnaukh, the subsoil resources official.

Gold and cathode copper, which is made from processed copper sulfide, are used in the manufacture of electronic goods.

In April, Samsung also plans to bid for a license to develop a deposit of 1.7 billion tons of serpentine, a massive find that the company's geologists have deemed commercially viable.

Serpentine, a greenish mineral that is used as a source of magnesium and asbestos and an ingredient in talcum powder, is employed for road construction, insulation, fireproofing and even fertilizers.

Serpentine used for road base and asphalt typically sells for between $3 and $5 per ton, while talc prices start at about $150 per ton.

With the current high prices for gold and copper, Samsung may prefer to trade its Caucasus metals deposits rather than use them in manufacturing, said Vladimir Zhukov, a metals analyst with Alfa Bank.

Yet what price the metals might fetch by the time they are mined in five to seven years is difficult to predict, Zhukov said.