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Sukhoi Log (in Russian the name means “Dry Gulch”) is no longer an asset in which Kremlin and other government officials see value in mining. Value for themselves, that is.

Russia’s largest unmined gold deposit, and the second largest unmined deposit in the world, Sukhoi Log is located in remote forests northeast of Lake Baikal, in Irkutsk region. The nearest habitation is the old miners’ settlement of Bodaibo, a 30-minute helicopter ride away. Equally far away are electricity, roads, and fuel.

Containing at least 33 million troy ounces of gold, distributed awkwardly underground, there is little that is not already well-known to international goldminers about the deposit. This is because it was the principal asset of the now defunct Sukhoi Log Mining Company (SLMC), which in turn was a 50/50 venture of the Australian junior, Star Mining, also defunct, and the local alluvial mining association, Lenzoloto (“Lena [River] Gold”).

At a gold price of $475/oz, Sukhoi Log’s reserves are worth almost $16 billion. But if the gold price slips below $300, for those who have studied the project carefully, the mine’s profitability begins to look chancy.

The Star group invested more than A$50 million in prospecting, drilling, and preparing a feasibility study of the Sukhoi Log project between 1993 and 1997. Having engaged SRK and other consultants, Star reported on the deposit to several stock exchanges, investors, potential mining partners, and lenders, such as Standard Bank. Star also loaned Lenzoloto US$5 million.

But in 1997 Lenzoloto backed the revocation of the mining licence which it had held in partnership with Star through the SLMC. Lenzoloto then defaulted on the Star loan, which has never been repaid. Star defaulted in turn on financing it had received from Standard Bank. Star’s shareholding in Lenzoloto was subsequently diluted for the reason, claimed by Russians involved, that Star had not met investment targets in the project. At the time, Star was partnered by JCI of Johannesburg, when it was run by Bill Nairn, now of Anglo American.

The government official who arranged Star’s exit was Boris Yatskevich. At the time he was both deputy minister — later minister – of the federal ministry of natural resources, and chairman of the board of directors of Lenzoloto. After he had evicted Star, Yatskevich awarded a temporary exploration licence to Barrick Gold, enabling the big Canadian to drill its own holes, mapping the deposit and estimating the grade. The drill-core samples which Star had obtained were shipped to the SRK consultancy in Johannesburg, where they were assessed for both their gold and platinum value.

Having drawn what value he could from Star, Yatskevich’s action devalued Star’s feasibility study, and opened up new possibilities for, and with, Barrick. However, before he was fired for reasons never disclosed by the incoming President Vladimir Putin, Barrick had turned on Yatskevich, publicly accusing him of “favouritism”. By the middle of 2000, there was no-one in charge at the federal ministry who stood to benefit from the award of the Sukhoi Log licence. Yatskevich’s fate was a signal that there was much at risk in awarding the licence to anyone at all.

For five years, the Sukhoi Log licence remained in limbo, along with the gold price, and Yatskevich was forgotten. Then in May 2004, Putin appointed Yury Trutnev, a wealthy entrepreneur who had served as governor of the central Russian region of Perm. Presidents appoint, but others promote, and also pay. In Trutnev’s case, he was lifted from obscurity by LUKoil, one of the most powerful of Russia’s commercial oil companies, and its dominant shareholder, Vagit Alekperov. His interest and financial clout overwhelmed an alternative candidate proposed by Putin’s personal advisor on mining policy, Vladimir Litvinenko.

Litvinenko is Rector of the St Petersburg Mining Institute. As an academic, Litvinenko supervised Putin’s postgraduate study of natural resource policy. He has been called upon to advise ever since. These days, as Putin moves towards the end of his term in 2008, his subordinates compete for the cash to tide them over the succession. Litvinenko may have Putin’s ear, but he does not have Alekperov’s cash. Sukhoi Log, on whose future Litvinenko has a clear opinion, contains future gold, but does not produce current cash. Litvinenko’s opinion, therefore, has been ignored, while Trutnev sought to exercise whatever decision his constituents wanted, and his ministerial authority allowed him to make.

Within days of his appointment in 2004, Vedomosti, a Moscow newspaper then part-owned by Norilsk Nickel controlling shareholder, Vladimir Potanin, reported that tender conditions were being finalized for Sukhoi Log that would bar foreign-controlled goldminers from competing for the property. This was an obvious sop for Norilsk Nickel to win the bidding. Other contenders, such as Polymetal of St Petersburg, qualified on the national criterion, but lacked the cash to bid and then develop the project. Still others, like Highland Gold, were foreign-listed and tied to foreign miners.

Among other conditions of the proposed auction for Sukhoi Log, the newspaper reported that the winner would be obliged within four years to produce not less than 10 metric tons (320,150 oz) of gold, and in three further years to ramp production up to 25 tons per annum (804,000 oz).

This upped the cash requirement for first-stage development of the mine. Total investment obligations in the project were estimated at between $800 million and $1.5 billion, according to the newspaper report. Star had calculated similar numbers eight years earlier, proposing a mining plan that would have concentrated the initial pit excavation at the site of the highest-grade ore, and used the proceeds to move across the vast tract of the deposit to the lower-grade ore bodies, keeping the initial costs down. One of the biggest up-front costs, however, remained the infrastructure of power and roads, which the site lacks.

A compensation payment was reported to be included in the tender conditions. This purported to indemnify costs of development already incurred by Lenzoloto. In fact, it had been Star, which had done that work, not Lenzoloto, which is primarily an alluvial operator. This proviso was ostensibly also a payback to Norilsk Nickel itself, which had acquired Lenzoloto in 2003 – or to any other beneficiary Norilsk Nickel and Lenzoloto had in mind. Neither Norilsk Nickel, nor Lenzoloto had any intention of compensating Star.

Vedomosti‘s press leak came from Trutnev’s new team at the Ministry of Natural Resources in Moscow, where he had evicted as many officials, cooks, and drivers as he deemed to be potentially disloyal, or who stood in the way of the patronage he intended to award. That produced disgruntlement, and it was therefore no surprise when officials at the Ministry’s licensing division refused to confirm what they were intending to do with Sukhoi Log.

For several years there had also been serious differences between this Ministry, the federal Ministry of Economic Development and Trade, and the regional government of Irkutsk over the terms of the Sukhoi Log tender. The latest press leak suggested that Trutnev was trying to force an award in Norilsk Nickel’s direction, but could not quite pull it off.

Litvinenko, for example, hinted that he did not favour Norilsk Nickel, so long as Potanin and partner Mikhail Prokhorov controlled the shareholding. Litvinenko had told Mineweb that Norilsk Nickel’s shareholding should be restructured, and a controlling “golden share” vested in the government. He was silent on how he thought to do this. The mechanism was probably a back-tax or fraud claim against Norilsk Nickel, repayable in equity and assets, along the lines of the claim the Kremlin had pursued against the Yukos oil company and its principal shareholders.

Litvinenko also told Mineweb that, since Sukhoi Log had initially been discovered during the Soviet period, it was a state asset from which foreign miners should be excluded, since they had contributed nothing to find or prove it. Litvinenko was dismissive of Star’s role in the 1990s.

A senior Irkutsk region official in charge of mineral resources suggested that the compensation provision in the tender terms was to be divvied up with the governor and his men. “Currently, the volume of the compensation is uncertain, but it is written down in the project [terms]”, he said.

In Russian licensing practice, the region where a mineral resource is located must agree with two federal government ministries, the Ministry of Natural Resources and the Ministry of Economic Development and Trade, before a tender can be officially issued, and bidding commence. Try though Trutnev might, with encouragement from the Irkutsk governor, the Ministry of Economic Development was reluctant. And behind them all, Kremlin officials were reviewing what reward they might draw from the process if they used their power to select the winner.

The “compensation” payout was far too little for them, not least because there were too many people already standing in line for it. Asked if the compensation were proposed as a fixed amount, or as a percentage of the winning bid, the Irkutsk official told Mineweb “there are too many ways to calculate, so I don’t think I can tell you now how it will be counted.” He also added that “the amount should be not more than the winner will pay for its license.” He indicated that in the draft terms agreed by the Irkutsk regional government, the starting bid price for the license would be Rb960 million (US$33 million).

Some of those who did not stand to share in the payout complained publicly. A senior official in the Ministry of Economic Development and Trade told Mineweb that his ministry has not agreed to compensation for past works at Sukhoi Log. “Currently this question is under review,” the source said. “The decision will be made by the end of the May, hopefully. Currently, we cannot announce the Ministry’s position for that question.”

A few days later, in June of 2004, Trutnev made his first public move. If the Irkutsk governor had been modest in arranging a share of a relatively low auction price, Trutnev was more ambitious. He went public, critizing the Irkutsk tender proposal for setting too low a reserve of between $10 million and $15 million in rouble equivalent. “Preliminary calculations show the lowest starting price at the auction is unlikely to be less than $150 million,” Trutnev announced.

He then proposed to change the licensing law, so as to favour the one bidder with enough cash to bid almost immediately, Norilsk Nickel. At the time, government and miners agreed, Russian law required six months between the official announcement of a tender for a mining licence award and the award itself. Accordingly, it was thought in the Russian mining community that the award of the project could not be effected until 2005. But Vladimir Sklyarov, head of the Irkutsk regional department of natural resources, told Mineweb that the six-month waiting period could be shortened to 45 days by an amendment of the law. “If the changes will be applied in July-August and results of tenders will be given not within six months but within 45 days,” Sklyarov said, “we will be able to manage the tender even this year.”

It was a clever move, but the Irkutsk men had not lined up all their ducks in Moscow. The Committee on Natural Resources of the State Duma, which has jurisdiction over mining legislation and must approve such proposed amendments before they can go to a vote in parliament, had not seen the Sukhoi Log speedup coming.. Anatoly Fedorenko, deputy chief of the committee staff, told Mineweb: “maybe it exists as a project in the Ministry of Natural Resources. But it has not come to us yet.” According to Fedorenko, his committee had been reviewing an amendment to simplify licensing procedures, and eliminate the role of the regional governments in setting tender terms. Proposed by Trutnev’s ministry, this amendment was naturally opposed by the regional governors. “There is nothing about changing the timing of tenders,” Fedorenko said. But he conceded that the timing issue could still come up. ” It depends on volume of lobbying from all sides, and the work of Duma.”

Trutnev showed how responsive he was to the lobbying when he issued a statement in July of 2004: “we cannot commission a lot of large deposits for this simple reason, that, under the current law, from the date of the announcement of tender conditions to the award, it is necessary to wait about one half-year…We want to reduce these terms to 45 days.fThere is an]other problem – the interaction between regions and the federal authority.”

But Trutnev also conceded that not everyone was agreed, and that he needed more time to persuade them. He therefore acknowledged that his proposed amendments to shorten the tender period and reduce regional involvement in mine licence awards could not be finalized by the government before “the end of this year”. Trutnev’s spokesman, Nadezhda Kleymenova, confirmed the ministry view that “the earliest realistic time for the [amended] law to start working is spring 2005.”

The timing in mid-2004 was particularly difficult for Norilsk Nickel. Although not admitted until later, it was then that Kremlin officials were reviewing the activities of Norilsk Nickel shareholders, Potanin and Prokhorov. In the forefront of the review was their acquisition of a 20-percent stake in South African miner Gold Fields on March 29 for $1.16 billion; and a bid that followed by the German firm Siemens to take a controlling stake in Potanin’s heavy engineering firm, Siloviye Mashiny [“Power Machines”]. Kremlin officials told Potanin they did not approve either, and for months Potanin was not sure how things would turn out – for his assets, or himself.

In time, Siemens was not allowed to make its takeover bid, and the state-controlled utility, Unified Energy Systems, took its place. In parallel, Kremlin officials were putting two even more valuable state takeovers in place — the takeover of the Yukos oil company by Rosneft for $9 billion, and the takeover of Sibneft by Gazprom for $13 billion.

The model for these takeovers is simple. It converts the bureaucratic power to regulate commercially owned assets into personal stakes in the current and future cashflow of state controlled assets, with commissions demanded, and paid up front for the deal arranging.

For Norilsk Nickel to win Sukhoi Log, Potanin’s and Prokhorov’s bid would also have to be approved by the Kremlin. Norilsk Nickel spokesman Elena Sherbinina has said she has no information on when the company’s management believes the Sukhoi Log tender will be issued. From this it can be understood that Norilsk Nickel, and its gold spinoff Polyus, do not have Kremlin support for the acquisition. Without that, Trutnev can do and say whatever he likes – he is impotent to make the licence award.

For Polymetal, the St Petersburg-based goldminer which has been Norilsk Nickel’s main rival for the project, the bidding is altogether too costly, and the outcome too uncertain. Polymetal is now for sale. But if Barrick and Anglo Gold Ashanti, two of the contending buyers, were to acquire Polymetal, Trutnev and Litvinenko are likely to rule them out of contention for Sukhoi Log, albeit for different reasons.

Just how powerless Trutnev is was evident from a statement made by an erstwwhiie subordinate this past March. Anatoly Ledovskikh, head of the Federal Agency on Sub-Soil Resources (Rosnedr), told Mineweb that the auction of the mining licence for Sukhoi Log will not be held this year.

Sources in his agency told Mineweb that although, bureaucratically Rosnedr is a part of Trutnev’s ministry, Ledovskikh has autonomous powers, and in this matter he was not acting as Trutnev’s subordinate. Trutnev’s spokesman, Rinat Gizatullin, was under orders from Trutnev not to respond to Mineweb questions.

The announcement from Ledovskikh indicated, not so much that Trutnev had had a change of mind regarding the future he has wanted for Sukhoi Log; but rather that, despite his ministerial rank, he lacked the power to overrule what others think best for the Russian gold sector. The move by Ledovskikh also indicated that it was higher authority in the Kremlin, which is now refusing to agree to hand the deposit over to anyone, least of all to Potanin and Prokhorov. At least not this year.

Several days ago, a reporter from Reuters was told to repeat the message. Dutifully, she claimed that “a source close to the Kremlin” had said that “officials in Putin’s office are focusing increasingly on projects linked to the 2007 parliamentary and the 2008 presidential polls – mainly in the oil, media and telecoms sectors. The Kremlin has concentrated on a number of projects that cannot be left unfinished before the election. They do not have time for other things.”

The literal and the commercial meaning of what was said are almost identical, though unprintable, with one qualification. In the sale of his stake in Power Machines, Potanin demonstrated the willingness to share his profit, and pay the price required for Kremlin approval to the buyer designated by Kremlin officials. That he and Prokhorov (gold is more Prokhorov’s line of business in their partnership) have not succeeded with Sukhoi Log, as Trutnev and the Irkutsk government wished for them, suggests that the real obstacle is the reluctance of Kremlin officials to agree on the price and conditions of the deal, and the future structure of Norilsk Nickel and Polyus.

If the obstacle were any lower in the Russian government, the deal would already have been done. But at the Ministry of Economic Development this week, the press spokesman replied to Mineweb‘s questions about the future of Sukhoi Log, saying: “we have no reply to your questions. We delivered your questions to the office of [Deputy Minister] Andrei Sharonov, who should be in charge of mineral sector decisions and business, but we received no reply.” He conceded that the decision on the Sukhoi Log licence is being taken elsewhere.

Litvinenko’s influence with Putin has been ebbing, and he has nothing to gain from making public his disagreements with Trutnev. He and Trutnev are both silent on the question of Sukhoi Log. The parliamentary Committee on Natural Resources declined to respond to the same questions for want of anything to add.

Valery Braiko, a veteran goldminer himself and head of the Russian Union of Goldminers, concedes the obvious: “The delay was expected. We are already not waiting with impatience, and if the question will wait for review until the next government [2009], then the delay could be even further. It is really difficult to identify the background for all of this, so I prefer not to form any hypotheses.”

Braiko is being understandably cautious. For the time being, there is no telling what further mining assets will be restructured for the benefit of state officials in the course of the Putin succession.

Silent though Trutnev himself has become on the subject of Sukhoi Log, his talkativeness on other mining prospects indicates how far afield his interests have ranged. Avoiding once again the questions of Mineweb, Trutnev authorized the text of the following communique to be issued, following his meetings last week with South African minister of minerals and energy, Lindiwe Hendricks.

“On October 5th the Minister of Natural Resources of the Russian Federation Yury Trutnev has held a working meeting with the Minister of Minerals and Energy of the Republic of South Africa, L[indiwe]Hendricks. During [the] meeting there have been spelled out directions of cooperation between Russia and the Republic of South Africa in the field of use of mineral resources. They include, first of all, training of professional geological staff, realization of joint projects on extraction and processing of nonferrous metals, and also an exchange of technologies. Yury Trutnev has supported active development of these directions of cooperation.

The [Russian] Minister of Natural Resources also has emphasized that interaction within the limits of the mixed Intergovernmental committee on trade and economic cooperation between the Russian Federation and the Republic of South Africa [known in Pretoria as ITEC] has allowed to realize successfully projects on investigation, extraction and processing of manganese ores in the Kalahari Manganese Field.”

This last reference is Trutnev’s endorsement of a project by the Renova company, a US-registered holding of Russian metals oligarch Victor Vekselberg. Trutnev has promoted Vekselberg’s bidding at every opportunity, acting as Renova’s lobbyist in South African to ensure that Hendricks’ ministry would issue manganese exploration and mining licences to Renova’s black empowerment partner, Pitsa ya Setshaba.

Trutnev was over-enthusiastic in his communique. The licences were issued in July, but to date there has been little exploration, and no extraction or processing. Of course, Trutnev’s reference is a reminder to Hendricks to keep up the good work.

If Hendricks were aware of the Sukhoi Log saga, there is no sign that she mentioned it to Trutnev as of interest to her constituents, such as Anglo Gold Ashanti, Gold Fields, Harmony Gold, or JCI. Her subordinates at the Department of Minerals and Energy (DME) are well aware that Trutnev has been promoting Russian entry into South African mining, at the same time as he backs the exclusion of South African mining companies from the bidding for Sukhoi Log.

The DME officials qualify their inaction on the matter by telling Mineweb that South African goldminers have not requested them to seek reciprocal access to mineral deposits from Trutnev on parity with Renova. If, however, they have been exchanging technologies with their Russian counterparts, as Trutnev’s communique suggests, then there could be another, technological explanation.

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