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By John Helmer in Moscow

The reason for an unexpected Chinese advertisement for a billion-dollar iron-ore and steel complex in a remote part of Siberia became clear in Moscow today. It reveals that, starved for cash as most Russian metal and mining companies currently are, they aren’t yet prepared to let the Chinese build competing mines and steelmills on Russian territory.

According to sources at the federal Ministry of Natural Resources in Moscow, and at the Department of Metal Mining Industry in the Transbaikal Territory administration (Chita region), the Xiyang Group sent a company delegation to Moscow this month to try to head off the revocation of the mining licence it holds for an iron-ore deposit in the region, near the Chinese border. The Chinese were officially warned that the licence for the Berezovskoye iron-ore deposit, which was awarded on May 14, 2005, requires investment of Rb16.8 billion (currently $542 million).

The iron-ore deposit is located about 20 kilometres from the Chinese border. Known to Russian geologists since the Soviet period, the deposit is estimated to hold up to 750 million tonnes of iron-ore. Expert studies have identified special problems with processing this ore into concentrate, and thus for consumption by steelmaking blast furnaces. This, together with the remoteness of the location for electricity, coking coal supply and rail connexion, have deterred development in the past.

Xiyang is a privately owned conglomerate, based across the Russian border in Liaoning province, and active in steelmaking, refractory materials, fertilisers, coal and chemicals. According to announcements by Xiyang executives last Friday and on Monday of this week, Xiyang says it wants to develop an iron-ore mine at the Berezovskoye site, starting in April 2010. The group also claims to be planning a 4 million-tonne per annum steel mill in the area, to consume the iron-ore concentrate from Berezovskoye, convert it to steel billet, and despatch that for rerolling to Chinese mills across the border. This integrated mining and steelmaking project is expected to be completed by the end of 2012, according to Xiyan, at a cost of Yuan 3.3 billion ($483 million). Xiyang has used its briefings on the Chita project to say it is looking for investors and partners for the project to ease its financial pressure.

Yevgeniy Spasskiy, deputy head of the department of metal mining industry in Chita city, told 21st Century Business Herald that Xiyang currently holds the Berezovskoye licence after buying out the licence-holder, another Chinese company called Lunen. It was Lunen, Spasskiy said, which had first acquired the mining licence, paying Rb315 million ($10 million). The licence award came from the Ministry of Natural Resources in Moscow, he said.

But Spasskiy added that the licensing agreement carried investment conditions, which Xiyang has not yet met. “The planned investment was to be Rb.16.8 billion [$542 million], 100% from foreign investment. Lunen did not give the licence over to Xiyang Group. The fact is that Xiyang Group purchased Lunen. But the Chinese can also lose their licence. That is because from the first day they got it, they haven’t done anything at the Berezovskoye deposit. The Chinese, according to the agreement, were obliged to conduct exploration of reserves; to prove them; to build infrastructure; to set up a metallurgical plant there. They’ve done nothing.”

Federal government officials in Moscow are also considering whether the proposed Xiyang plan will require an application to the Foreign Investment Control Commission (FICC), a newcabinet-level body chaired by Prime Minister Vladimir Putin. At a June meeting in Moscow, the state owned Chinese goldminer, China National Gold Corporation, was told that strategic mineral deposits require FICC authorization before investment can proceed.

Svetlana Levchenko, head of staff for the FICC, was asked whether the Berezovskoye iron-ore deposit is classified as strategic, and subject to the Russian exclusion of foreign control. She has promised to respond. One of the problems for the FICC in deciding this point for Berezovskoye is that Xiyang has yet to complete the required exploration and measurement studies in order to have the iron-ore reserves at the deposit officially registered by the State Committee on Mineral Reserves (GKZ), an agency of the Natural Resources Ministry.

“What they want is to extract the ore and take it out to China”, Khapis Bakhramov told Asia Times Online. He is the head of the Department for Subsurface Resource Management of the Transbaikal Territory administration. He told Asia Times Online that early this month, Xiyang sent a delegation to the Ministry of Natural Resources in Moscow. According to Bakhramov, “they were given six months to fulfill the [licensing] agreement, otherwise the license will be withdrawn. They are not extracting anything. They only took samples of the ore and studied extraction technology. Now they should draw up the project plan”, Bakhramov added.

Determined domestic competition has prevented foreign steelmakers from building new steelmills in Russia until now. In the past two years, ArcelorMittal was blocked in the Sakha region, and in Tula, near Moscow; Jindal of India in the Leningrad region; and Kurum of Turkey in Volgograd. Xiyang’s announcement is calculated to wet cash-starved Russian lips in the border region. But further north, where Russian companies mine iron-ore and coal for export to China, and smelt steel also for export to China, calculations are different.

The steelmill owners have told Asia Times Online they aren’t commenting on the Xiyang plan for the time being. Whether they decide to lobby against Xiyang, in order to safeguard what the Russian steelmakers see as their export market across the border, should be visible before Xiyang reaches its six-month deadline at year’s end.

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