By John Helmer in Moscow
Controversy deepens in Moscow over a controversial gold licence extension for Highland Gold, and licence trouble starts brewing elsewhere
Somebody in Moscow seems to think that Barrick Gold, the world’s largest gold miner, is in horticultural terms ‘a weed’.
In one of Jim Thompson’s thrillers, the killer is told by his attorney that there’s nothing wrong with him, except that he’s a weed. That is then defined: “a weed is a plant out of place”. Barrick is very untalkative about its projects, operations, and spending in Russia, but there appears to be nothing wrong with them. But in two parallel attacks in recent days, Barrick has seems to have been targeted for being in the wrong place.
Mineweb has reported at length on the troubles which Highland Gold has been facing this year from the federal government’s mine licensing authority, Rosprirodnadzor, headed by Oleg Mitvol. Barrick controls 33.9% of the shares, and is in operational control of the company in Russia. The company’s board and management are reported to hold 11% of the shares. The precise shareholding stake which Highland co-founder Roddie Fleming retains in the company is unclear. Fleming’s intention to sell has been plain for some time.
Highland Gold’s troubles at its Mayskoye deposit, in Chukotka, have been widely understood in the market, and regularly reported by Mineweb.
A chart of Highland Gold’s share price indicates that it reached peak this year in February at 222p, and fell steadily and dramatically as the bad news about Mayskoye rolled in. The share price then bottomed at 74.5p on September 20.
During this period, the chief regulator Mitvol told Mineweb that the Ministry of Natural Resources, and the licensing branch, known as Rosnedra, should disallow an application from Highland to extend the production deadline for its development of Mayskoye. The current licence requires Highland to produce at least 32,000 oz from Mayskoye this year.
Highland’s response to Mitvol was issued on July 4, when it said “the Company is currently in the process of negotiating the necessary changes to the terms of the Mayskoye licence.This will be the first license extension request since the acquisition of the asset.”
The company then issued a fresh announcement on October 11. This reads as follows:
“Highland Gold Mining Limited (“Highland Gold”, or the “Company”) is pleased to announce the extension of the terms of the operating licence for its Mayskoye project located in the Chukotka region.
“As was previously announced, the Company, in accordance with the established procedure, had submitted all the necessary documents required for the extension of the licence to Rosnedra, the agency in charge of issuing, extending and revoking the subsoil licences. Having studied the submitted documents as well as the flawless results of two Rosprirodnadzor inspections conducted at the site in 2006 and 2007 and the letter in favour of the extension issued by the Chukotka regional authorities, Rosnedra has given its official approval for the extension. The revised clause in the licence agreement now requires that the mine should be commissioned no later than 2010.
Henry Horne, Managing Director said: “We are delighted with this decision. Since 2004 we have invested more than US$100 million in the Mayskoye project and once again confirm our commitment to develop the Mayskoye project in order to commission it in 2010. We will continue to demonstrate our strong support to the Chukotka region and its people. We are satisfied that the licence extension process has come to a positive conclusion.”
The Highland share price duly rose almost 7% on the news, hitting $2.52.
Government sources in Moscow have responded to the announcement of the extension by terming it “magic”. One source told Mineweb that the attempts by the regional branch of Rosprirodnadzor to have its reports delivered to, and considered by Rosnedra, have been frustrated; the source added that the documents he had seen recommended revocation of Highland Gold’s licence for Mayaskoye. Mitvol in the Moscow office of Rosprirodnadzor confirms that this is his view also.
Another source told Mineweb that Vladimir Bavlov, deputy head of Rosnedra, had convened a review commission meeting a week ago in Moscow to consider Highland Gold’s application for extension of its licence terms.
The source claims the documents which Rosprirodnadzor had sent for the review did not arrive, although they had been officially dispatched. At the conclusion of the session, Bagrov had authority to recommend extension of Highland’s licence, but the final decision required sign-off by his boss, Rosnedra head, Anatoliy Ledovskikh. However, the source said that Bagrov informed Highland Gold that the extension had been approved before Ledovskikh had signed. Highland’s announcement came with Bagrov’s endorsement, not Ledovskikh’s, and despite the opposition of Mitvol and Rosprirodnadzor.
What is more, the source told Mineweb, the extension of Highland’s Mayskoye licence has removed the original licensing requirement, which set a minimum mine production of 1 tonne of gold (32,150 oz) in the first year of operation. “Now Highland has a unique document in Russian mineral resources history,” the source said. “Originally, 2002 was the year when the first tonne of gold should have been extracted. This was prolonged to 2005; later to 2007; and now until 2010. However, the minimum volume requirement has been removed. The license doesn’t suppose the extraction of 1 tonne. All that is required now is the start of operations.”
Ledovskikh was asked to say if he had signed the licence extension decision for Highland Gold, and if he approved the change of licence conditions, before, or after, Bagrov and the company announced it. His secretary said he would not answer, and referred to his press secretary. She told Mineweb she could not answer for Ledovskikh.
An official statement from Rosprirodnadzor was issued to Mineweb: “Instead of putting the licence up for auction, Rosnedra prolongs the licence [for Highland Gold], and thus has brought losses to the state. Rosprirodnadzor will start a check of Mnogovershinnoye soon.” Mayskoye is Highland’s largest resource, but Mnogovershinnoye, in Magadan, is the only gold producing asset the company currently has, and its sole source of operating revenues.
In its interim financial results report, issued on September 24, Highland said it had generated gold revenues in the first half of this year of $43.4 million; this was down 8% on the same period of 2006. Volume at Mnogovershinnoye was down 9% to almost 63,000 oz. Total cash cost per ounce sold jumped 46% to $458. Profit from the mine fell 35%, despite the higher gold prices, to $5.7 million. This turned into a bottom-line loss of $2.8 million, after counting expenses from the Darasun mine disaster of last year.
This tale of woe had nothing to do with the announcement from Highland that its chief operating officer, Rene Marion of Barrick Gold, was resigning. “It is with regret,” the company said on September 24, “that Highland Gold announces that after almost 12 years with Barrick Gold, Rene Marion has resigned from Barrick to pursue other career opportunities in the industry. As a result, Rene will be stepping down from the Highland Gold Board of Directors and as Chief Operating Officer effective October 24. Barrick management has confirmed that they will provide a seasoned successor to Rene in the position of Chief Operating Officer prior to Rene’s departure to ensure a smooth transition.”
Vince Borg, Barrick’s senior vice president in charge of corporate communications, is reluctant to speak about the company’s Russian projects, intimating they are minuscule in comparison with Barrick’s assets and production volumes elsewhere. He is also vague in responding to questions about another Barrick asset at the opposite end of Russia, which has been almost unheard of until now.
This is known as the Fedorova Tundra project, and it is located in the Murmansk region of northwestern Russia. It is believed to hold mineable quantities of platinum group metals. Mitvol has told Mineweb he is commencing a review of the licence conditions and compliance of Barrick and its partners in the mining venture.
According to Mitvol, the deposit, Fedorovo Tundra, contains platinum, palladium, and gold, and was first discovered in 1935. In 1995 a licence to explore and develop a mine was acquired by BHP, but it sold it to a group called Kaskadia, and in 2001, Barrick bought a 50% stake in the project. Borg told Mineweb: “Barrick is the managing partner and has a 50% interest with a right to earn up to 29%. The balance will be owned by several other companies including Pana – a Russian company located in Murmansk – and Cem Minerals. I understand that the requirements are typical of those contained in Russian license agreements. The pre-feasibility study has been completed and we are making steady progress with the Federova project. The Federova resource will be updated at year end. No date has been set as yet but usually around mid-February.”
Mitvol said he believes that investment promised of more than $630 million, with a mine start-up date in 2009, are unlikely to be fulfilled.
Officials at the Murmansk branch of Rosnedra confirmed that a meeting of the State Committee on Reserves this week should finalize approval of the reserves figure for the deposit. According to Sergei Zhabin in Murmansk, “the history of this deposit is very old. Nobody has looked for platinum in the Murmansk region before; it was considered unpromising.
Then at the beginning of the 90s, the Geological Institute of the Kola Academy of Science started to work on the deposit. They created AO Pana to do a geological survey, which was financed at different times from different sources. This Pana company worked on the Fedorova and Pana Tundra deposits; currently, the reserves are being confirmed for Fedorova Tundra.
In the Pana Tundra project, there are four licenses, but they are relatively small. As to the financing – there were BHP, Barrick, the regional administration of Murmansk, and some federal budget money. It is difficult to say who is partnering Pana now, as the stakes were sold from one company to another.” The Geological Institute of the Kola Academy confirms its role in establishing Pana. But there is no confirmation of who is behind Cem Minerals, referred to by Borg.
mitriy Zhirov, at the Kola Institute, told Mineweb that Fedorova’s reserves should be officially confirmed “any day now. We have had public hearings and all other procedures have been passed during the last half year. Pana is an innovative enterprise in undertaking geological surveys founded by our institute. The work on Fedorova Tundra will be turned into a joint venture for exploitation.” He said he expected the parties to the JV will be Bema Gold and Barrick Gold, adding “I don’t know how they deal with each other, and who is the boss there.”
The general director of Pana, Alexey Korchagin, was travelling and unavailable to answer questions about the project, its size, or estimated value.
Apart from the single mention by Zhirov, no trace of Bema Gold can be found in the Fedorova project. Bema was acquired early this year by Kinross, but a search of the Kinross website reveals no mention of the Fedorova Tundra project, or of a stake carried over from Bema to Kinross. The only precious metal projects Kinross now carries in its inventory are Julietta, in Magadan region, which is producing about 75,000 oz of gold, and holds substantial reserves of silver; and Kupol, a mine in development in the Chukotka region, with an estimated 3.3 million oz of gold reserves and resources, and 41 million oz of silver.
Until Mineweb asked the Murmansk sources, and Barrick, what they knew about Mitvol’s review of their licence, starting next week, they appear neither to have known of it, nor anticipated trouble.
At Barrick, Borg was asked how the company is assessing the situation in Murmansk, following the announcement of the Rosprirodnadzor review. He declined to say what Barrick would do in the event that the inspection now under way finds violations.