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Posts Tagged ‘Severstal’

Russia: Silent Mining Giant

June 16, 2011 Comments off

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

Figure 1 - Russian mining production and reserves

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.

Corporate Landscape

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.

Figure 2 - Russian and global GDP growth

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.

Attracting investment

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Severstal plans London gold listing

September 23, 2010 Comments off

“Severstal, the Russian steel company, is preparing to list its gold division in London this year in a deal expected to value the business at about $4bn, several people close to the company have confirmed.
Severstal – majority owned by Alexei Mordashov, a close ally of Vladimir Putin, Russia’s prime minister – plans to retain a stake of 65-70 per cent in the new company.

Nomura analysts this week valued Severstal’s gold division at $3.6bn. One banker involved in the transaction said the valuation was likely to hit $4bn or possibly $5bn as details about the assets and the company’s growth plans were disclosed to the market.”

Source: Financial Times, September 21, 2010

Observations:

  • Severstal has invested heavily in expanding the gold business through M&A and organic growth in the last years, growing into the second largest Russian gold miner (behind Polyus Gold) at 670 thousand ounces annual output.
  • Over 50% of the total exploration expenses in the mining industry are for gold exploration. This surge in exploration has resulted in a long list of deposits that might be developed profitably across the world.

Implications:

  • Severstal is developing projects in Burkina Faso, Guinea and Kazakhstan. The money raised with the IPO may be used to fund these developments, raising the output of the company. However, a major part of the money might be used by the steel division of the company to improve operating performance in steel making, which has been a loss making activity in 2009.
  • The spin-off of the gold division is a logical move of the company at the current demand for gold, which has driven gold prices to stable levels above $1000. Up to a few years ago, most gold mines were using long term gold prices of $300 in the feasibility analysis of mining projects. However, projects are started now that require prices above $600 to be feasible. The Financial Times provides a good overview of the development of gold prices in an interactive graph.

©2010 | Wilfred Visser | thebusinessofmining.com

Mining groups target West Africa / A richer seam

May 22, 2010 1 comment

The Financial Times published two articles this week on the increasing impact of international mining companies in Africa. The combination of articles provides a good insight into the political sensitivity and the importance for the development of the region:

Mining groups target west Africa (Financial Times, May 18 2010)

Six of the world’s biggest mining and steel companies have converged on an unprecedented scale on a mineral-rich corner of west Africa beset until recently by civil war. The companies plan to spend billions of dollars in Guinea, Liberia and Sierra Leone, where some of the world’s richest deposits of iron ore, the raw ingredient of steel, are found.
The groups are Vale, the Brazilian iron ore miner, Rio Tinto and BHP Billiton, the Anglo-Australian mining houses, ArcelorMittal, the UK steel company, Russia’s Severstal, and Chinalco, the state-owned Chinese mining company.”

Strategic resources: A richer seam (Financial Times, May 21 2010)
“China has vied with western groups in Africa for oil and minerals for the best part of a decade. But it also has ambitious nuclear power targets and its quest for uranium – repositories of which are few and far between – has thrown the rivalry into sharper focus. …

In the past three years, as China embarked on its new thrust into Africa, relations between Niamey and Paris plunged. The award of uranium concessions to China’s Sino-U and other prospectors broke the de facto 40-year monopoly of Areva, France’s state-controlled nuclear group.
The competition has seen work start on Niger’s first refinery and a $700m hydroelectric barrage, not to mention hundreds of millions of dollars in “signature bonuses”, courtesy of Beijing. It helped the country wring tougher terms from France before granting permission for Areva’s vast new mine, which will make the country the world’s second-biggest uranium producer after Kazakhstan.”

Observations:

  • This month’s acquisitions of Vale and Vedanta and earlier investments by Bellzone in Guinea count up to over $5 bln of investments. Over 50% over these investments will be in infrastructure, helping not only the resonsible mining company, but as well contributing to development of the country.
  • Total development aid to Africa in 2008 was $26 bln. Foreign Direct Investment in infrastructure related to mining is quickly bypassing this figure. Total FDI in Africa was $88 bln in 2008 (UNCTAD WIR), of which a very significant part is related to mining & metals.

Implications:

  • Although the Chinese approach of buying resource access by offering infrastructure development and more symbolic gifts is still regarded to be unethical by many westerners, western companies are working hard to catch up with the Chinese, trying to secure access to the good resources in central and west Africa.
  • Infrastructure developments are arguably the most important capital investments required for economic development of a country (J. Sachs).
  • Key problem for African leaders is the vicious circle of the resources trap they are in. Africa needs the infrastructure investment to develop the economy, but needs the resources that are shipped abroad in exchange for the infrastructure development in order to create an industry of value adding services.