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By John Helmer in Moscow

The Udokan copper deposit, in southeastern Siberia, will not be mined any time soon, according to government and commercial mining sources in Moscow. For miners, who have been watching this particular copper pot pass from one hand to another, including BHP’s very briefly in 1992, this should come as no surprise. According to one of the current stakeholders with the mining licence, Alisher Usmanov’s Metalloinvest, there is simply too much copper in the market to warrant the capital cost of digging more out of Udokan.

Officially, all the closely held Metalloinvest group will say, in a press release dated June 25, is that after a nine-month delay, it has finally signed the Udokan licence agreement with the federal mine licensing agency, Rosnedra, a branch of the Ministry of Natural Resources. The terms have been changed, the release acknowledged: “In the course of negotiations between Metalloinvest and Rosnedra the parties reached an agreement about changes in the terms of the license agreement taking into consideration the interests of the government and the investor.”

A ministry source told Minesite, off the record, that the licence terms have not been changed since Metalloinvest won a state tender for the project last September, and accepted the licence price and terms at that time. A source at Metalloinvest said “the terms are the same as the initial ones.” But he acknowledged that the “time frame” is being renegotiated. In short, the investment spending and production targets set out in the licence agreement remain, but the time allowed to the mining group to reach them is being stretched out. “The timing was set while the copper price and demand for copper were completely different,” Metalloinvest now says, admitting the delay in making payment for the licence, and signing this week’s agreement. “We are delaying, not because of lack of financing, but because we don’t understand whether market needs that much copper soon.”

According to the Russian classification, Udokan, near the Chinese border in Chita region, holds 14.4 million tonnes of copper reserves (B, C1) average grade 1.51%), with resources (C2) of another 5.5 million tonnes. Silver is estimated at 12,000 tonne 9.6 g/t). International studies, which include those by BHP and Bateman, estimate Udokan’s reserves at 27 million tonnes of copper. At the 2008 peak price, the copper resource was worth more than $160 billion. Today, the copper lode is down to $100 billion.

Udokan has been the focus of Russian and international mining interest for more than a decade. First identified by Soviet geologists before the end of the Soviet Union, the deposit’s size has encouraged a variety of small entrepreneurs to speculate on its development. In 1992 BHP lost a bid for the right to do a feasibility study at Udokan as a preliminary to deciding whether to go ahead with a mine. The Australian major lost out to the Arter Group, a group of Russian companies headed by a small entrepreneur from Chita, Andrei Chuguyevsky. He won the mining licence in January 1993. Chuguyevsky’s foreign partners, however, failed to provide the promised financing, and the Australian Stock Exchange in Sydney intervened to suspend trading in the shares of a company claiming to hold a stake in the deposit. Chuguyevsky then offered participation in the project to Anglo American and Bateman. Eight years later, Chuguyevsky lost the licence for lack of investment in the project. Chuguyevsky did financially better out of De Beers, and was last heard of investing in hotels in Morocco.

Only a junior part of the Russian copper-mining consortium that now owns Udokan is publicly listed. The majority stakeholder in Udokan is Metalloinvest, an unlisted private conglomerate, with two steel mills and two iron-ore mines; last year the holding had trouble getting a valuation and an underwriter to list its shares on the London Stock Exchange. It is owned in three stakes, whose magnitudes have never been publicly confirmed or verified, by Usmanov (with about 50%); Andrei Skoch (30%); and Vasily Anisimov (20%). The history of each man’s asset position has been controversial. What is clear is that copper-mining has not been their line. This is in stark contrast to the other contestants in the bidding for Udokan — the Urals Mining and Metallurgical Company (UMMC), Russia’s second copper miner and refiner, owned by Iskander Makhmudov; and Norilsk Nickel, which entered the bidding through separate initiatives of controlling shareholder, Vladimir Potanin, and his onetime partner, now rival, Mikhail Prokhorov. The state-owned Russian Railways Company and the City of Moscow have also been in and out of the bidding over several years, once foreign bidders, particularly the Chinese, were excluded on the ground that the deposit is a strategic necessity to supply Russia’s ore-short copper refineries.

On September 9, when the Udokan award was announced, Metalloinvest was in an alliance with the state industrial conglomerate, Russian Technologies, controlled by Sergei Chemezov. Subsequently, it was reported that Norilsk Nickel might join the group with technical expertise, if not equity capital. Metalloinvest holds a stake of about 4% in Norilsk Nickel, but Usmanov and Potanin are not willing allies. After Metalloinvest failed to list its shares last year, there is no international market exposure to the new project. But the latest news suggests that project revenues are a long way from realization. Norilsk Nickel has little interest in seeing new copper mined at Udokan, and the one Russian copper producer, who needs the ore most urgently, Makhmudov of UMMC, was beaten out of the bidding.

Last September, the licence terms required a down-payment of Rb4.5 billion (then $176 million), and the balance of Rb10 billion (now $313 million) within an unspecified period. The completion of feasibility studies was set down within 18 months; reserve confirmation within 60 months; startup of a mine plan with annual capacity of 12 million tonnes of ore within 60 months; achievement of design capacity of 36 million tonnes of ore output within 84 months; and within the same period, construction of a smelter at the town of Yasnogorsk to turn out 474,000 tonnes of cathode copper, and 62.7 million tonnes of copper wire rod per annum.

According to the project schedule reported in the September 9, 2008, Metalloinvest announcement, “the construction of the hydrometallurgical complex on the Udokan copper field will start in 2010. The first section of the mining and metallurgical complex with the production capacity of 150 thousand tones of cathodic copper (12 mln tones of the concentrate) per year will be put into operation as soon as in 2014. The design capacity is expected to be reached in 2016.” The cost of power, roads, rail links, seismic protection, and other infrastructure appear to be allocated to the state.

The down-payment was made on time. This week, Usmanov told a Moscow newspaper that he intends to keep to the original undertakings. “Understanding the importance and strategic value of the Udokan deposit for Russia, we keep our word and we will execute all the announced plans. The licence payment will be made in full, under the pre-crisis price. Payments will be executed within the next few days…. The contest terms were formulated, when everything was at the peak…but force-majeure took place, that is, the crisis. First, we even thought to abandon the project, but did not do it…The only thing that we have asked from the state is rescheduling of the terms for the deposit development towards their extension.” This understanding has yet to be turned into a concrete revision of timing and production targets.

Whether the intervening months of plummeting metal and stopck prices, and shortage of cash and credit, will lead to a change of Russian mind on the foreign exclusion from Udokan is a question now worth contemplating. Last July, just before he sewed up his successful bid for Udokan, Usmanov tried an alternative to a direct listing of Metalloinvest. According to the market reports, he made a reverse takeover bid for the Kazakhstan copper miner, Kazakhmys, which was already listed on the London Stock Exchange (LSE). On July 14, Kazakhmys announced it was in negotiations with an unnamed party; it was subsequently identified in the market as Metalloinvest. Then a day later, Kazakhmys followed with a second announcement that it was “not currently contemplating the implementation of such a combination through a structure that would be classified as a reverse takeover under the rules of the UK listing authority”. This followed London reports that the Financial Services Authority (FSA) had warned Kazakhmys that the proposed takeover would oblige the LSE to suspend trading in Kazakhmys’s shares, while an investigation was undertaken into the corporate governance of the bidder, Metalloinvest.

In retrospect, for Usmanov to have contemplated reversing into Kazakhmys must have meant that he and Chemezov had taken soundings with Prime Minister Vladimir Putin and his resources chief, Deputy Prime Minister Igor Sechin — they head the state commission on foreign investment — for assurance that Kazakhmys would not be excluded from the Udokan licence, if Usmanov were to become a Kazakhmys stakeholder.

But now, if protracted delay and lack of cash and enthusiasm mean that Udokan will have to wait another decade or more for production, the copper supremos must face a new policy choice: either there will have to be a relaxation of the foreign exclusion in favour of Usmanov. Or else, Usmanov and his partners may face a reshuffling of the cards in favour of Makhmudov and his partners. Right now, though, noone is in a hurry to reheat this pot.

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