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By John Helmer, Moscow

When precious metal geologists kiss their wives good night, and go to sleep, they dream of pushing upstream from river-borne, alluvial or placer deposits of platinum, to strike the mother lode. In geological theory, this is the El Dorado of the platinum business – a bedrock of high-grade platinum ore, not too far underground, easy and cheap to excavate, in much larger volumes than can be extracted from panning or dredging downstream, where millions of years of erosion have washed the metal in grains or tiny nuggets. Unlike their wives or gold, geologists prefer platinum because its value is relatively stable.

This year, for example, look at the moving line and compare the volatility of the gold price (left chart) compared with platinum’s (right):

If you are a goldminer like Polymetal, Russia’s second-ranked producer, with gold and silver production rising rapidly, along with revenues and profits, you might go to bed and dream, but why of the platinum alternative?

According to Polymetal’s 9-month report, issued on October 17, gold output is up 47% on last year, reaching 452,000 troy ounces. Silver is up 52% to 20.5 million oz. Converting the two into a single gold equivalent number, it is up 46% to 819,000 oz. At every one of Polymetal’s mines, gold production is up, compared to last year: at Dukat, up 10%; at Khakanja, up 13%; at Omolon, up 247%; at Albazino, up 795%. Sales revenues have jumped 39% to $1.3 billion for the period.

Things are going so swimmingly, the company has announced it will increase its dividend payout to 30% of net earnings “provided that net debt / adjusted EBITDA is below 1.75”. Vitaly Nesis, Polymetal’s chief executive, summarized the report; “We have demonstrated another record quarterly performance this year, driven by strong operational delivery at both mature and new operations and allowing us to beat our original production guidance. Importantly, during this quarter we have essentially closed the gap between production and sales, resulting in stronger than expected cash flow performance.”

So why has Polymetal decided to buy into platinum, and why a licence area in the Urals region which international platinum miners have combed carefully, and rejected as too low in grade to justify the costs of digging it up?

Not that Polymetal is putting serious money down on the project. Here is the announcement, issued early this week: “Polymetal International plc (LSE: POLY) … is pleased to announce that it has acquired a 24.99% stake in the Svetlobor platinum exploration project from Ubergot Investments Limited (“Ubergot”) in exchange for 130,053 new ordinary shares in Polymetal. Simultaneously, CJSC VTB Capital (“VTB”) has acquired the remaining 75.01% stake in the project from Ubergot in exchange for 390,369 new ordinary shares in Polymetal, and has agreed to sell this stake to Polymetal for US$6.9 million (plus interest) following receipt of regulatory approval (as described below). Polymetal and VTB have together acquired 100% of the shares in CJSC Nevyansk Group (“NG”), a Russian legal entity whose wholly-owned subsidiary holds a mining and exploration licence for the Svetlobor area valid until 30 November 2031, from Ubergot, a Cypriot entity controlled by several Russian individuals.

“Polymetal has purchased a 24.99% stake in NG from Ubergot in exchange for 130,053 new Polymetal ordinary shares. VTB has purchased a 75.01% stake in NG from Ubergot in exchange for 390,369 new Polymetal ordinary shares, which will be subscribed for by a subsidiary of VTB at a total price of US$6.9 million in cash. Polymetal has agreed to acquire this 75.01% stake in NG from VTB for a cash price of US$6.9 million, plus interest from the date of VTB’s acquisition to the date of Polymetal’s acquisition at the rate of 7.25% p.a.”

“Based on the closing price of Polymetal’s ordinary shares on 17 December 2012 (GBP11.81 per share), the total transaction value is approximately GBP6.1 million (plus interest payable to VTB), or US$10.0 million at an exchange rate of GBP1.00 = US$1.6204. The new ordinary shares to be issued to Ubergot and VTB’s subsidiary together represent approximately 0.14% of Polymetal’s increased ordinary share capital.”

In short, VTB has been talked into covering two-thirds of the risk of the venture; and Polymetal is wagering no more than a few shares, plus a loan of $6.9 million, plus interest of about half a million dollars per annum until Polymetal’s board decides whether to dig or drop shovel.

The seller is camouflaged in the Polymetal announcement as a Cyprus company called Ubergot (misspelled German for Super Good). But for some reason the identity of the Russians who own this has been withheld. Kommersant has reported that Oleg Vladimirovich Kiselev confirms he was the seller of Svetlobor. According to the newspaper report, “Mr. Kiselev confirmed this information, saying that co-owners [of Ubergot] are also members of his family…Oleg Kiselev acquired the company [Nevyansk] from Canadian goldminer Placer Dome…”

The platinum prospect has been known in the area for almost a century. In 2009 Yury Telegin, a geologist from Yekaterinburg, reported what was known to date. Sources in the Russian platinum community say that Telegin and his son Alexei have been working on Svetlobor for many years, starting when Telegin senior worked with Canada’s Placer Dome (now absorbed by Barrick Gold), and then with the local Nevyansk group. Telegin and Kiselev were asked to clarify their relationship and also the connexion between Nevyansk in the Urals and Ubergot in Cyprus. Telegin was unresponsive at his email addresses. Kiselev refused to answer questions about Ubergot, the new deal, or the old ones.

Kiselev is currently deputy chief executive of RusNano, the high-tech conglomerate in Moscow which operates with state budget money and is headed by Anatoly Chubais. RusNano and Chubais have been the subject of press and parliamentary investigations of abuse of spending, and recently became the target of an Accounting Chamber audit.

Kiselev has a precious metal record of his own. In the 1990s he ran a jewellery fabrication and metals holding called Mosexpo and a junior miner called Evrozoloto, which was associated at the time with the dominant government policymaker in precious metals and diamonds, Valery Rudakov. Together, they failed to develop the Ozernovskoye gold deposit into a mine Placer Dome, or other internationals, wanted to invest in. The story was told a long time ago.

In 2005, when he was a senior executive at Renaissance Capital, Kiselev got mixed up in an alleged plot to capture control of the Mikhailovsky iron-ore mine. What exactly happened and who was behind it remain unclear. Mikhailovsky was taken in the end by Aliser Usmanov and Andrei Skoch of Metalloinvest, while Kiselev and his associates were accused of share fraud. Kiselev went to London for medical reasons and professed his innocence; others were tried, convicted, and did jail time.

According to Polymetal’s announcement this week, “the strategic considerations behind the acquisition are: Gain meaningful exposure to platinum, a precious metal with limited production outside South Africa and Zimbabwe, countries which face a material risk of significant supply disruptions — Acquire a unique early-stage exploration project with the potential to grow into a world-class asset in terms of the size and quality of its mineral resource base — Leverage Polymetal’s presence and skill base in the Sverdlovsk region.”

The company is estimating it will take two years to develop a new reserves and resources count, according to the international JORC standard, for Svetlobor. Nesis is quoted as feeling “very excited about Polymetal’s first acquisition in PGMs. I see great upside in the platinum price and am optimistic about our ability to successfully define the hard-rock source of the largest alluvial platinum deposit in the world.”

Geologists who specialize in this type of wishfulness acknowledge that attempts to follow alluvial gold upstream to a mineable hard-rock source are not uncommon. But the process has been tried in the Russian fareast, and failed. The bedrock at South Africa’s Bushveld platinum mining belt, the largest source of mined platinum in the world at present, has a quite different geology.

An expert source says: “for platinum in the Urals, a unique period of weathering several million years ago released platinum from a particular rock type called dunite, in which there is a consistent background grade of 0.1ppm (or grams per tonne). This will never be economic. However , he weathering was favourable for its dissolution from dunite and then precipitation as tiny and then larger nuggets. The same type of process occurred at Koryak [in the Kamchatka krai of the Russian fareast].”

The Urals region has been producing platinum from alluvial sources since the 18th century – upwards of 16 million oz altogether. But is there a mother lode, and can it be mined profitably?

Telegin says yes, and Kiselev has persuaded Polymetal and VTB to bet on it. According to the Polymetal announcement, “between 1824 and 2003, more than 7Moz of platinum was recovered locally by placer miners in the Is and Tura river valleys, making the area the world’s largest historical alluvial platinum producer. Low-sulfide mineralisation at Svetlobor is associated with olivine and serpentinite rocks of layered ultramafic massifs. The PGM-bearing layers are relatively wide (5-25m) and shallow-dipping, with modest grades (0.5-2.0 g/t platinum). This indicates the potential for open-pit bulk mining. PGM values are found mostly in the form of free platinum and related compounds with relatively large grain size.”

Another platinum miner who has considered mining the deposit says “we have reviewed the data a number of times but have not been enthusiastic.” A colleague concedes that “bedrock platinum is very patchy in the Urals and certainly any production has been very small scale, almost artisanal. Yury is a good guy. You have to admire a geologist who can convince a company like Polymetal, unless of course there are other reasons for the transaction.”

One of those reasons is the suspicion there are higher-grade platinum deposits in the area covered by the Svetlobor licences, which have not been exposed by the exploration, or known to mining companies before. An international geologist who is familiar with the Russian and South African platinum bedrock explains: “the mineralogy of platinum in major hard-rock sources that are currently mined (e.g., Bushveld in South Africa, Stillwater in the US) is not conducive to platinum placer deposit formation. It is only where these hardrock sources are geologically altered that the particle size of platinum minerals increases sufficiently that the minerals can be recovered from derived placers. Essentially, this is how Hans Merensky discovered the Bushveld platinum deposits in the 1920s, at Maandagshoek.”

“The platinum placers in the Urals, in fareastern Russia, and in Alaska are derived from rocks that are very different from those found in the Bushveld. Typically in these ‘zoned ultramafic intrusives’, platinum occurs in close association with chromite, in quite large grains and sometimes at spectacularly high grades. But the associated hard-rock deposits are too small to be mined economically – it is only by erosion of hundreds of these small deposits over millions of years that economically mineable amounts of platinum can accumulate in placers. These small high-grade platinum deposits almost certainly occur (or used to occur, before being eroded) at Svetlobor, and would have been the source of the surrounding placer deposits. But the Russian geologists claim to have also found much lower grade and finer grained platinum at Svetlobor, perhaps a new type of deposit which has not been reported before. This seems to be what Polymetal is targeting.”

If so, the terms of the Ubergot deal released so far suggest Kiselev is letting the asset go cheaply.

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