Although Russia accounts for about 14% of global mining, most professionals in the industry know very little about Russian mining. Apart from a few large steel companies most large Russian mining firms are unknown in the market, and few people could name the most important Russian mines or mining districts. However, driven by the huge potential of its reserves and the modernization of its industry the country is slowly gaining a more prominent position on the international mining stage.
This article explores the current situation of the Russian mining industry and identifies two key trends that will shape it in the next decade: a struggle for competitiveness; and internationalization of the key players.
Russia’s Reserves & Production
Russia has been blessed with a large variety of mineral reserves across the country. The peninsulas in the northwest, the Ural mountains, Siberia, and the Far East all house important mining districts. Crucial inputs for economic development, like iron ore and coal, are abundant. The country holds 15-20% of the world’s reserves for these resources. The country’s position in reserves of gold and diamonds is very strong too. For a few minerals with only a small global market, like palladium and magnesium compounds, the country even has the potential of dominating the market. The most important observation when comparing the share of world reserves and the share of current global production is that for almost all key minerals the share of reserves exceeds the share of production (See Figure 1). In other words; it is likely that Russia will become more important in the global mining industry.
Current production in the country is more than sufficient to satisfy domestic demand, making Russia a net exporter of mineral goods. The country’s net export balance for ores, slag & ash was $1.3bln and for iron & steel over $14bln in 2010 (Source: ITC), with China being the largest trade partner for ores and Italy being the primary (initial) destination of Russian iron & steel.
Balancing domestic supply and demand
Russia is growing, and mining is needed to fuel this growth. Russian annual GDP growth varied from 4.7% to 8.1% in the period 2001-2008, outpacing growth in the western world (Figure 2). The economic crisis has hit Russia hard, making the economy shrink by almost 8% in 2009; recovering by 3.8% in 2010. However, growth is expected to outpace western growth in the coming years.
As a result of the high growth of the domestic economy, various industry development could take shape. If productivity increases, the potential of Russian reserves will enable a combination of exports and domestic sales, enabling rapid growth. However, if the Russian companies do not succeed in significantly increasing capacity, productivity will be too low to support both domestic and foreign growth. In this case export restrictions to protect the national growth could be instituted.
The structure of Russia’s current mining production is largely shaped in the Soviet period. Mining districts were set up to provide the country with mineral self-sufficiency decades ago. After privatization in the ‘90s most of the state owned assets have been combined in the current private companies. The privatization and the poor financial situation of the Russian government at the time has led to a typical characteristic of the Russian mining industry: the importance of tycoons. Many private companies are owned and controlled by one or a few founders. These founders were at the right place at the right time and knew the right people at the time of privatization. Their position has further been strengthened by the government’s desperate need for funds, resulting in large amounts of debt being issued to the tycoons.
Whereas company owners in the rest of the world typically try to gain control over companies via the stock market, the large ownership stakes held by the tycoons in Russia lead to frequent power struggles among major shareholders. The struggle for control over Norilsk Nickel is the most recent example: Interros, controlled by Vladimir Potanin, and Rusal, controlled by Deripaska,both try to gain the majority in the board of Norilsk Nickel, one of the world’s largest suppliers of nickel and copper. In the last years the power struggles have led to the emergence of clear domestic champions for most of the key commodities: Rusal for aluminium; Norilsk Nickel for nickel and copper; Suek and Mechel for coal; Alrosa for diamonds; TVEL for uranium, etc. For steel and gold the landscape is (and probably will stay) more fragmented.
“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.
The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.
Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”
- Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
- The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.
- The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
- Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.
©2011 | Wilfred Visser | thebusinessofmining.com
“Jinchuan Group Ltd. is offering to buy Continental Minerals Corp. for about 432 million Canadian dollars (US$419 million), marking the latest move in China’s buying spree in the global mining sector. Jinchuan would acquire the Vancouver-based mining company—whose board is recommending the deal—at C$2.60 each, representing about an 18% premium to the stock’s average trading price over the last 30 days.
Continental is a junior miner active in Asia, focusing currently on the Xietongmen copper-gold property in Tibet. Jinchuan is an integrated company engaged in mining, concentrating, metallurgy and chemical engineering. It is the largest producer of nickel and cobalt in China.”
Source: Wall Street Journal, September 18, 2010
- Continental Minerals is in the permitting process to obtain mining licenses to start developing a mine that will extract 116 million pounds of copper and 190 thousand ounces of gold in 14 years in the deposit discovered in 2005. Another deposit, named Newtongmen, is in the exploration phase.
- Jinchuan has been planning to raise money on the stock market for many years. Current plans are to have an IPO in 2011 in order to raise money for expansion and potential further acquisitions.
- The 18% premium offered by Jinchuan indicates that limited synergies are expected to be achieved. Jinchuan is mainly producing nickel and cobalt, while the Xietongmen mine will produce copper and gold, limiting management, trading and processing benefits of the expansion. The company tries to increase its copper output, currently being the 4th largest copper producer of China.
- It is unlikely that any companies without gold/copper interests in China are willing to bid more for Continental Minerals. High transportation costs from Tibet will force the buyer to process the ore near the mine and customers will mainly be in mainland China.
©2010 | Wilfred Visser | thebusinessofmining.com
“Anglo-Australian miner Rio Tinto PLC Tuesday said it will invest $469 million to build the Kennecott Eagle nickel and copper mine in Michigan after receiving the final environmental approvals for the project.
Rio Tinto plans to produce an average of 17,300 metric tons of nickel and 13,200 tons of copper metal annually over six years from the new mine. Construction of the mine and mill will begin this year and first production is expected in late 2013.
“The long-term demand outlook remains strong for both nickel and copper and bringing Eagle on stream will give us greater benefit from that growth,” said Andrew Harding, chief executive of Rio Tinto’s copper division. “
Source: Wall Street Journal, June 16 2010
- The investment in Michigan is one of the first large mining investments in the area in decades. Michigan’s environmental regulations are among the strictest in the US.
- The $0.5 bln will be spend on development of an underground mine, rehabilitation of an existing mill and infrastructure.
- Copper and nickel prices have recovered after the crisis, although nickel price recently dropped some 30%. Rio Tinto is clearly convinced the prices will stay above crisis level for an extended period of time, as the new mine will certainly not be a low cost producer.
- Building the only large scale nickel mining operation in the US, Rio Tinto will certainly benefit from low transportation costs to market on the US East Coast. However, in the longer term competition from African seaborne nickel trade might put this position under pressure.
©2010 – thebusinessofmining.com