By John Helmer in Moscow
Prime Minister Vladimir Putin has put his signature on one of the strangest mining prospector’s pay-sheets ever drafted in the history of mining.
According to the prevailingRussian law, now one year old, if a miner does not qualify as Russian, and if what he discovers is big and valuable enough, he must hand over what he’s found to the state, which may then auction it to the highest domestic bidder. In compensation, Putin’s formula, according to a decree he signed on March 10, will provide reimbursement of prospecting expenses, plus a finder’s fee ranging from 25% to 50% of these expenses, depending on how inhospitable the territory that has been explored.
There’s also a catch — the expense reimbursement, and the premium, cover only those costs for exploring, finding, and proving the deposit which the state takes back. Thus, the unlucky prospector has to be really lucky to hit paydirt with a single drill-core, otherwise Putin will slam the pay-window down on his fingers. A prospector might count himself more fortunate if he should find much less than the state, or his Russian rivals, would like to acquire.
In practice, the Putinformula encourages the very schemes which Oleg Mitvol, Russia’s mining regulator until he was ousted last year, attacked as boosting London-listed share prices, instead of investing in mining as such. It remains to be seen whether the formula proves to be El Dorado for consolidators of junior assets and M&A speculators.
A year ago, the Russian parliament enactednew legislation setting out a list of 42 strategic sectors and metals, and also thresholds for mineable reserves of oil, gas, copper and gold that identified such deposits as “strategic”. The purpose was to protect the national resource base from takeover by cash-rich internationals. After several years of argument over the thresholds, the new legislation fixed the foreign exclusion limit for oil at 70 million tonnes (490 million barrels); gas at 50 billion cubic metres; gold at 50 tonnes (1.6 million ounces); and copper at 500,000 tonnes. A zero threshold was fixed for the mining of uranium, diamonds, quartz, cobalt, nickel, platinum group metals, beryllium, and lithium.
What this meant wasthat deposits above the thresholds cannot be owned and brought into production by mining companies, whose non-Russian shareholding exceeds 50%. Finding such deposits thus carries the risk for foreign miners that they would be obliged to give up their find.
According to Putin’s Decree No. 206, the terms of this surrender require that, once the reserves have been verified by the State Reserves Commission (GKZ), itself a protracted and expensive process, a compensation agreement should be drawn up. This provides full repayment of the audited expenses for exploration and proving the find. The covered expenses also include interest paid on borrowed funds up to a limit of 15% per annum.
The premium offered by Putin’s decree, on top of the expense reimbursement, has a sliding scale. In the oil and gas sector, the finder’s fee would be 50% of the allowable expense total for projects and deposits located in the remotest areas of eastern Siberia (Yakutia, Kamchatka, Chukotka), and the Bering Sea. As the territory is less remote from roads and airfields, and the ice-pack breaks up, the premium drops — 40% for areas north of the Arctic Circle in northwestern Russia; 35% for offshore sites in the Azov, Baltic, Caspian and Black Seas, and 25% for everywhere else in Russia.
The premium offered for findingdiamond, uranium, quartz, and some rare earth minerals is 50%. But nickel, cobalt, tantalum, platinum group metals, beryllium, lithium, and niobium will fetch only 40%. Copper and gold finds are at a discount, and the finder’s fee would be just 30%.
The Ministry of Natural Resources, which supervises mining and licensing, and drafted the threshold legislation, as well as the new prospectors’ compensation, told Minesite that Putin’s decree is the final offer, and that in the process of drafting it, the ministry had been trying to take into account the interests of investors. Ministry sources were unwilling to identify what alternative compensation formulas had been considered, and who had been lobbying them.
International veterans working in Russia say the new scheme is commercial nonsense, because it opens one large loophole for the government to cheat the prospector; and another large loophole for foreign-listed miners to cheat the government.
According to the internal calculations of an international gold major, about 0.3% of drilled targets materialize as deposits of economic viability. In short, a prospecting programme requires about 300 raw prospects before a viable orebody find is likely. The source says the odds against making a serious find are so high, “the real cost of discovery is about three hundred times what one would spend on a single prospect that may be classed as a deposit with a certifiable reserve, according to the State Reserves Committee. Therefore, the math they’ve legislated here is completely out of touch with the reality. The compensation is idiotically insignificant in relation to the real costs incurred.”
There are very few examples of foreign miners making major finds in Russia. The most notorious was the discovery of the Grib diamond pipe in 1996 by a joint venture of Russians with Archangel Diamond Corporation, a Canadian-listed junior. It had carefully structured its stake in the project to fall below the 50% foreign ownership threshold and qualify for development of the project. But the licence was withheld by the Russian partner, in what ADC court claims have called a racket and a steal. The Russian courts disagree.
In the initial wave of foreign gold-mining in Russia during the 1990s, the case of Star Mining, an Australian junior, was also notorious. It secured title to develop the already proven Sukhoi Log gold deposit in a 50/50 partnership with a Russian mining group, Lenzoloto. But the latter arranged with federal mining officials — one of them a board member and insider– to cancel the mining right, and return it to the state for an open licence auction. Star lost its investment, and went bankrupt. Lenzoloto was then acquired by Polyus Gold, but even minority Russian shareholders are still crying foul. Charges are about to be laid before the London regulator of Polyus, the Financial Services Authority (FSA). The Sukhoi Log licence has still not been auctioned.
International miners don’t dispute that if the Russian government wants to reserve the right to develop large resource projects for Russian miners, it may be reasonable to do so, so long as the outcome encourages, rather than deters the capital-raising and technology applications required for the process. Whatever the intention, the consensus is that the Putin formula cannot do this. “What would be fair,” suggests one international, “would be a Net Present Value-based compensation formula for the asset. That would reward the company for exploring, and thereby encourage the process. It would also get the deposit into government hands, if that’s what is really intended.”
Supervising the government’s intentions is acommittee of ministerial officials, which was brought into being last April. This is the strategic foreign investment review commission.Prime Minister Putin is the chairman. Another 16 officials are members. They include most of the cabinet, including Deputy Prime Minister Igor Sechin, the overseer of the energy and resource sector; Deputy Prime Minister Igor Shuvalov, President Dmitry Medvedev’s placeman; Deputy Prime Minister Sergei Ivanov, the head of the military-industrial complex in cabinet; and Yury Trutnev, Minister of Natural Resources. Sergey Kirienko, who as head of Rostom supervises uranium mining and fuel processing, is a member, and so is the chief of the FSB, the state security agency, Alexander Bortnikov. The secretary of the commission, and the day to day chief of the commission’s operations is Igor Artemiev, who is the head of the Federal Antimonopoly Service (FAS).
But the commission has met just twice so far. Once, last October, it approved a joint venture to mine the Grib diamond pipe, in which ADC and De Beers held a 49.9% stake. But additional conditions and costs were imposed by the commission, and the deal collapsed within three months. The second meeting of the commission, in February of this year, considered an application by the Indian state-owned Oil and Natural Gas Corporation (ONGC) to buy London-listed Imperial Oil, which holds development licences for 17 oil deposits in the Siberian region of Tomsk.
According to data provided by Imperial, proven and probable reserves (classified P1, P2 in the US, C1 and C2 in Russia) totalled 118 million tonnes, well over the exclusion threshold. But although relatively concentrated in geographical terms, Imperial claimed there was no single, geologically definable deposit larger than 19 million tonnes, far below the threshold. Imperial also reported possible reserves (P3), but this count was ignored, because the reserves have not been certified by GKZ. If they had been, two of the fields would rise above the strategic threshold.
During 2008 Mitvol had attacked Imperial’s reserve counts for exaggeration and share boosting, but he admitted to Minesite that whatever number lay underground, “I don’t think this company’s [assets] are strategic.” Putin’s commission agreed — and allowed ONGC to complete its ₤1.4 billion takeover. Thus, a prospector can shield his finds from state takeover, if he can make sure the drilling programme allows enough geological ambiguity to prevent connecting the dots underground.
There appears to be another catch, which isn’t in Russian law or regulation yet, and which noone in Moscow was expecting, until it materialized by surprise early this week. Call this the bunker-buster strategic projection.
On March 17, during a presentation of Russian defence spending and military strategy to staff generals, the Defence Minister Anatoly Serdyukov announced that the United States is a strategic threat to Russian mining interests outside Russian territory. According to the text of Serdyukov’s speech, and confirmed by his spokesman, he claimed: “U.S. aspirations have been aimed at getting access to raw materials, energy and other resources of the CIS [former Soviet] countries. Active support was given to the processes aimed at pushing Russia out of the sphere of its traditional interests.”
Serdyukov was asked to say what raw materials and resources he was referring to, and what US mining threats, in what countries. His spokesman was surprised to be asked, but refused to say.
The rest of the government was flummoxed. The Minister of Natural Resources, Yury Trutnev, declined to elaborate. The Prime Ministry said it would not be commenting on ministerial speeches that aren’t the prime minister’s. The Natural Resource Committee of the State Duma said it didn’t have jurisdiction outside Russia, and hadn’t caught the defence minister’s drift. The pro-government United Russia party in parliament, and the opposition Communist Party, promised to consider what Serdyukov was aiming at, but haven’t answered.