The Russian gold industry

Introduction
Official Russian gold production calculated by the independent consultancy company Gold Field Mineral Services (“GFMS”) decreased during 2010 by 2% and totaled 201.35 tonnes. Production is expected to increase during 2011, and the forecast for 2011 is 210 tonnes. Falling alluvial production levels mean that mine production increased by around 1%. In 2010, Russia maintained its position as the world’s fifth largest gold-producing country.

86 % of Russian gold production in 2010 is distributed across 14 regions (of a total 84 in Russia) and since 2003, the leading region has been Krasnoyarsk followed by the Chukotka region, which increased its production by 10 tonnes in comparison to 2009. In third place is the Amour region, followed by the Sakha region, which remains the fifth largest gold region. Unlike oil reserves, of which approximately two thirds are located in western Siberia, the eastern areas of Russia (eastern Siberia, the far east and north east) have the largest gold deposits.

Industrial structure – reduced fragmentation
The Russian gold sector is highly fragmented. There are currently around 400 registered gold companies with the 27 top companies accounting for about 70% of the country’s total production in 2010. The clear leading producer is Polyus Zoloto, formerly Norilsk Nickel’s gold division, whose shares since 2006 have been listed on the London stock exchange. Polyus is responsible for 19.75% of Russia’s total gold production in 2010. The next largest gold producer in 2010 is Tjukotskaja GGK (Kinross), which has begun production at its Kupol mine. As a consequence of the merger between Severstal-Resurs and High River Gold, Severstal- Resurs has now become the fifth largest gold producer in Russia.

Foreign ownership of Russian gold assets does not seem to be such a sensitive issue as it is in the oil and gas sectors, where the latter is practically monopolized through Gazprom. The western-controlled gold companies accounted for almost 27% of the country’s production in 2010.

Distribution of Russian gold reserves and gold production
Russian gold production is characterized by a relatively significant percentage of alluvial gold. The share of alluvial gold production was just under 30% in 2009. However, alluvial production has decreased and reduced by 10% in 2009, harmed by more limited access to capital. Historically, alluvial production has accounted for over 80% of total accumulated Russian gold production. As regards gold reserves, the reverse pattern can be observed. The alluvial share of the total existing Russian gold reserves (estimated at 9,000 tonnes) is calculated at around 18% and at the same time mined gold accounts for 54% of total gold reserves. The residual percentage, 28%, pertains to complex deposits, which also contain other minerals besides gold. Including the total base of gold mineral resources in the gold reserve base, the amount of total Russian gold assets is estimated at 26,000 – 35,000 tonnes. The relatively high percentage of alluvial production can probably be primarily explained by a historic lack of long-term financing on the domestic market. This is because alluvial production is far less capital intensive than mine production.

Like the situation in the Russian oil industry, the reserve life of the Russian gold sector (total gold reserves divided by the annual gold production) significantly exceeds the reserve life in the West. Russian gold reserves are estimated to have a lifetime of 85 years at the current production rate; this can be compared with a lifetime of 15-20 years for countries such as the USA, Australia and Canada. However, the difference in the estimated life of the reserves can also be partly due to various reserve classification methods (see below).

Just like Russian oil reserves, Russian gold reserves are classified in a state register, the so-called GKZ commission, at the Ministry of Natural Resources (Minprirody). This is also represented at regional level. The Russian reserve categories A, B, C1 and C2 roughly correspond to the Western reserve categories “proven and probable”. Similarly, the Russian resources categories P1, P2 and P3 roughly correspond to the Western resources categories “measured, indicated and inferred”.

Production costs
It is difficult to find comprehensive statistics for production costs in Russia. Polyus Gold can be taken as a reasonable approximation, accounting for 19,75% of Russian production in 2010. Polyus also has a good balance between alluvial and mine production. In 2010 an average production cost generated by Polyus Gold Polyus was 554 USD per ounce. Polyus Gold is therefore a large producer, which is why production costs for smaller Russian companies should generally be higher. This can be compared with the estimated global average cash operating cost of 551 USD/oz for the entirety of 2010 according to the consultancy company GFMS.

Refining gold
About ten companies in Russia enrich gold and other precious metals to final market quality. These companies compete and together have a capacity that significantly exceeds current production volumes. Therefore the cost of refining is low, amounting to some 1% of the market price. The most modern facilities are the ones in Prioksk (south of Moscow) and in Krasnoyarsk (eastern Siberia). These two units plus another three had a "good delivery status" on the LME in London in 2002. This enables these refineries to sell gold at a certain premium compared to the average price on the LME.

Legal factors
The main law regulating the Russian mining sector is the “Federal Law concerning Mineral Resources” enacted in 1992 and amended in 1995. Russian minerals always remain in state ownership. A licence holder is only granted the right to exploit the minerals. Precisely as in the oil sector, these licences can pertain to prospecting, production or both. A prospecting licence is currently awarded for a five-year term, a production licence for 20 years and a combined licence for 25 years. The working programme included in the licence must be approved by three bodies – the GKZ-committee (see above), the state Russian mining inspection (Gozgortechnadzor) and also by the environmental authorities.

A second legal act of significance is "The Federal Law regarding Precious Metals and Gems" enacted in 1998. This law in principle says that the rights to any precious metals and gems produced belong to the holder of the production licence (unless otherwise explicitly stated in the licence agreement).