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One Cannot Conquer Alone in Green Field
// Allied Enterprises
Almost all Russian metallurgists have, among their assets, enterprises producing raw materials, nevertheless, many of them continue to suffer from their shortage. Besides, the deposits developed since Soviet times are inevitably depleted and their infrastructure becomes obsolete. Meanwhile, there are quite a few undeveloped big and rich deposits of iron and non-ferrous metal ores. Potential investors paid attention to them for many years, but very few dared start global raw material projects from green field.
Foreign Intervention
The market of raw materials is s0ubject to cycles. Following a slump in prices of steel, which began in March, the wholesale prices of iron ore on the world market dropped by June. This is why to draw up strategic plans based on the market situation alone will be meaningless for the development of new deposits.
According to experts of “Severstal-resurs” Co., the start of a project from green field may cost the company $1 – 1.5 billion, and the time of the recoupment of investments will take from five to seven years. During this period the market may go up and down, just as was the case of ferrous metallurgy this year. But inasmuch as the development of production requires the diversification of the raw material resources, metallurgists are drawn to new big deposits, first and foremost, the undeveloped reserves of East Siberia.
Taking into account a big volume of the necessary investments in the development of the infrastructure, including the building of railway lines to deposits, foreign mining holdings present considerable competition to Russian companies. Big undeveloped resources of metal ores and coal are concentrated mainly in three regions of the world: Brazil, Australia and East Siberia. This is why it is not surprising that the world's biggest mining company BHP Billiton, according to rumours, carry on negotiations with coal enterprises in Russia on joint projects in the development of new deposits. BHP already takes part in the development of a titanium deposit in Komi.
The Ministry of Natural Resources of the Russian Federation tried to protect Russian metallurgists from foreign participants' competitions in the auctions of licences for the development of deposits. All strategically important reserves of raw materials will be sold at auctions closed for foreign companies. True, the transnational mining holdings can use the mechanism of strategic partnership; they have received the right to take part in auctions on a par with Russian companies in joint ventures, where their share should not exceed 49%.
Most probably, even the big metallurgical companies of Russia which have enough means for working on undeveloped deposit sites will avail themselves of the proposals of strategic investors. The general director of “Severstal-resurs” Co. Roman Deniskin believes that without foreign partners the development of big deposits will be difficult due to the absence of adequate institutions to carry on geological and mining prospecting work.
Rush Around Udokan
Strategic alliances may emerge quite soon. In November an auction will be held on selling the right to use the resources of the Udokan copper deposit (Chita Region). It is the world's biggest, having reserves amounting to 200 million tons of copper ore. Practically all copper companies in the world display interest in it, however, under the new law on using the earth riches, the Udokan deposit can belong only to Russians. This is why of all big foreign companies it was only the American Phelps Dodge that expressed the desire to take part in the auction.
Americans do not seem to wish to cooperate with Russian metallurgists. In order to get permission to take part in the tender, they bought the rights for the development of a small copper-porphyry deposit in the Far East for a period of 25 years, and set up the “Shilko Mining” Co. The new firm has been registered in Chita and the participants in the market are sure that it has been organized only for the purpose of taking part in the tender on Udokan.
The biggest Chilean copper company Codelco can also take part in the auction in a concealed form. Codelco representatives in their conversation with Business Guide rejected the idea, but at a meeting of the Russian-Chilean Commission on trade and economic cooperation on June 28, an agreement was reached that Chilean companies might take part in the auction on selling the Udokan deposit. The leading Chilean producer of copper is interested in the Udokan deposit.
It is asserted on the market that Codelco may go to the auction in partnership with the “Ural Mining-metallurgical Company” (UGMK). Its general director, Andrey Kozitsin, has said time and again that his company intends to participate in the auction. However, in view of the fact that “Norilsky nikel” has also shown interest in Udokan, it's clear that UGMK will have any chances of success only if it has an influential foreign partner. Another participant in the auction will, evidently, be the Russian Copper Company, which may be supported by Kazakhstan's”Kazakhmys.”
Neglected Coal Mines
Officially, the licences for the development of the two biggest untapped coal deposits, Elgin in Yakutia and Elegest in Tuva, have already been sold. 29.49% of the shares of the first have been acquired by the company “Rossiiskiye zhelezniye dorogi”; 28.79% belong to “Vostochnaya kontraktnaya stroitelnaya” Corporation; 34.76% are in the hands of the Ministry of Property of Yakutia, and 2.35% to “Yakutugol” Co. The development of the deposit began several years ago, but it was suspended. In April 2004 the construction of a railway line leading to the deposit was resumed, and it was promised to deliver the necessary machines and equipment and begin mining work in 2006.
Russian coal mining and metallurgical experts confirm the fact that this deposit is very promising, but say that without a railway line, the laying out of which costs hundreds of millions of dollars, no proper work can be done there. The project has interested the South Korean LG Int. and the Japanese Sumimoto. On February 17, a memorandum on intentions to take part in the building of the infrastructure of “Elgaugol” was signed.
The rights to Elegest were acquired by “Yenisiskaya promyshlennaya” Co. in 2002. However, the development of the deposit has not yet begun because a railway line should be laid out, the cost of which is estimated at $400-500 million. Foreign partners are sought to start developing work. (According to unofficial information, negotiations are held with the Korean steel company Posco). A share in the project is also offered to the Russian “Severstal” and the Magnitogorsk Metallurgical Plant.
Metallurgists maintain that they are interested in all coal deposits, but unofficially admit that without government support in building the infrastructure, it is not profitable for them to invest their means in the development of East Siberian coal deposits.
Deposit of the World
In April 2004, “SUAL-holding” published its plans to develop the Sredne-Timanskoye bauxite deposit in the Republic of Komi. The deposit has been developed for several years already, and it is planned to increase the output of bauxites from 1.1 million tons to 6 million tons in 2008. In 2002 the company “Komi-Alyuminy” was registered which planned to produce up to 1.4 million tons of alumina and 500,000 tons of aluminium. The design work for building the alumina plant is tackled by the Canadian engineering companies SNC-Lavalin and Hatch. But design work for the construction of the aluminium plant had to be postponed due to the absence of a contract on the supply of electric energy to the future plant.
The absence of price guarantees on the supply of electric energy (its cost comprises 30 to 40% of the production cost of aluminium) did not allow SUAL to conclude strategic partnership with the American company Alcoa. “Russky Alyuminy” Company proved to be the only one who agreed to take upon itself half of all expenses and profits of the “Komi-Alyuminy” project. The agreement on parity participation of “Rusal” and SUAL in the project was singed on April 25.
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“Norilsky nikel's” Plans Were Thwarted by Radiation
In the beginning of June it became known that a serious obstacle cropped up in the implementation of “Norilsky nikel”s project of producing titanium dioxide in Russia. Several years ago NN acquired licences for the development of two big deposits of titanium in Russia to be used for mining raw materials for the production of titanium dioxide, which is necessary for the chemical industry. The company planned to complete investments in the deposits by 2006. The volume of reserves of one of the deposits is estimated at 87 million tons. However, it was established that the titanium ore has a high degree of radioactivity. Technologies for cleansing radioactive ores have emerged comparatively recently, but they are very expensive. Titanium dioxide is not produced in Russia at present. 40% of its deliveries come from Europe and the United States, and 60% of the Russian market of titanium dioxide is taken up by the Ukrainian company “Krymsky titan.” Apart from “Norilsky nikel”, titanium ores are going to be mined by the “Renova” Co. in Ukraine and the British Aricom Pic (branch of the Peter Hambro Mining Pic Co.) in the Far East. “Renova” will be able to start developing the Fyodorovsky deposit in the Zhitomir Region in a couple of years, and the British company plans to start its project in 2007-2008.
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by
Maria Molina, Alexandra Simonenko
All the Article in Russian as of July 20, 2005
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