Survey: Russian gold production will rise to near 200 tonnes in 2009
MOSCOW. Sept 22 (Interfax) - Data on gold production in Russia published by Rosstat last week painted a somewhat somber picture of the industry: production rose just 10% in the first eight months of 2009 year-on-year after posting growth of over 40% in the first few months of the year. In August, production actually fell, by 4.2% compared with August 2008 and 6% compared with July 2009.
Nonetheless, industry insiders surveyed by Interfax warned against making too much of the less-than-stellar data. They expect gold production this year will be higher than in 2008, although it most likely won't reach 200 tonnes.
Statistics as an inexact science
Rosstat itself does not report absolute production figures. The Gold Producers Union has said Russia boosted mine gold production 21.7% year-on-year in the first seven months of 2009 to 89.18 tonnes and that overall gold production, including mine output, incidental or byproduct gold and secondary production or recoveries from scrap, rose 21% year-on-year to 101.767 tonnes.
Judging from the statistics, the pace of production increases is steadily declining. In the first half of the year, according to Gold Producers Union data, production increased 46% year-on-year in January-April, 44% in January-May and 27% in January-June. Production growth has come mainly at Kinross Gold's Kupol mine in Chukotka, although a number of other projects have also boosted output.
"In fact, there is no global decline in the industry's production," said Viktor Tarakanovsky, head of the Russian Miners Union. "The growth rate is declining because Kupol came on-stream at the end of May last year. In the first half this year Kupol was operating at full capacity, which created the appearance of high growth compared with the same period last year, before Kupol was a factor. In the second half of last year, Kupol's production was included in production, and now we are getting comparable figures that show almost no growth," he said.
In addition, data from Rosstat and the Gold Producers Union on gold production is based on information provided by the refineries. "The companies don't send gold to the refineries every day. So the statistics may not include a portion of the gold that has already been extracted but not yet sent to the refiner," Tarakanovsky said.
Mikhail Leskov, the general director of NBLgold, the precious metals and diamond research and design center, pointed out the impact of seasonal factors.
"In the first part of the year, production is not carried out at placers and other sources operated seasonally, which means only year-round mine production shows growth. Let's say that in the first quarter the statistics are really only comparing production at the big mine operations. Growth in that period was a record, up to 50%. In the second quarter, production at placer fields and a small amount of seasonal mine production starts to get counted, and the situation with seasonal financing of production is far from good this year due to the crisis, just as at the big production sites. Therefore, if only second quarter results are compared to the year-earlier period, growth is about 15%. In the third quarter, production may wind up on the same level as the third quarter last year, and perhaps we will even see a decline due to the crisis and problems at the smaller companies," he said.
Some of the smaller placer and mining companies have had to suspend production operations because they haven't been able to raise loans and don't have enough internal resources.
But in the fourth quarter of the year, when the impact of the seasonal factor loses force, the statistics may well demonstrate growth. Gold production has more or less stabilized now, while in the fourth quarter last year some projects were halted due to the crisis, he said.
Forecasts as a reason for optimism
Experts say real conclusions on the state of gold production in Russia can only be made on the basis of statistics for all of 2009, which will take into account all seasonal factors, production at the Kupol field and the transfer of gold to refining facilities. They say they still expect gold output in the country to rise in 2009.
According to the Russian Gold Producers Union, gold production in Russia rose 13.1% to 163.8 tonnes in 2008. Total production, including secondary and associated output, increased 13.3% to 184.5 tonnes.
Tarakanovsky said gold production in Russia will total about 180 tonnes in 2009 due to the Kupol field as well as the Pioner field in the Amur region, which is being developed by the Petropavlovsk alliance (formerly Peter Hambro Mining).
"Secondary and associated gold production usually adds another roughly 20 tonnes per year. Thus, overall gold production in Russia may not surpass 200 tonnes, but it will be very close to that figure," he said.
"At any event, Russia will receive solid gold production figures this year on the levels seen in Soviet times. Gold production peaked in the Soviet Union at 304 tonnes in 1989 with Russia accounting for about 221 tonnes of that amount," he said.
Leskov also predicted that gold production would rise by 15% to about 200 tonnes this year. "We aren't likely, however, to surpass the plank of 200 tonnes in 2009, although we might have been able to if not for the crisis and the timely reaction from the Natural Resources Ministry and other agencies regulating gold production. Considerable growth has been forecast for 2009 earlier and it would have been realistic to increase production by at least 30%," he said.
Associated gold production, which is carried out alongside the production of nonferrous metals, will decline slightly this year compared to 2008 since nickel and copper prices are currently down, which has a direct effect on several production projects, Leskov said. The refining of scrap gold will remain close to last year's level. Primary output at gold placer fields is expected to contract by 5-7 tonnes this year after falling 5 tonnes to a little over 54 tonnes in 2008. The growth in gold output in Russia this year will come from a significant increase in production at gold ore fields. "Ore production will rise by at least 15 tonnes," he said.
Kinross is capable of increasing production by roughly 10 tonnes in 2009 from 11.5 tonnes in 2008, Leskov said. The Pioner field could boost output by 4-5 tonnes. "In addition, additional gold will be provided this year by a whole slew of projects at which production started last year and will increase this year thanks to high dollar prices on gold and reduced dollar costs thanks to changes in the ruble's exchange rate versus the dollar," he said.
Valery Rudakov, chairman of the Chamber of Commerce and Industry's committee on support to entrepreneurship in the extraction, production, refining and trade of precious metals and stones, said gold production will amount to about 190 tonnes in 2009. Growth in gold production will slow slightly in the fall due to the end of placer production operations, he said.
"I expect the growth rates in gold production in the country to increase. There are grounds and many opportunities for this, and gold production in Russia could rise to 370 tonnes per year by 2010 and put our country in first place in gold production throughout the world," he said.
One of the most important factors in the production of gold is the market price for precious metals. Analysts earlier forecast that this year would see substantial price growth and, it seems, that their predictions were not off the mark. In September, gold topped $1,000 per ounce for the third time in history and is trading at $1,032.7 per ounce, not too far from a record.
Leskov said that the price of gold would continue to increase further but would likely fluctuate at $850-$1,150 per ounce in the near future. However, he said that the price could make a substantial jump to $1,200 per ounce. "But this is not always good. Expensive gold means a weak dollar and weak dollar includes an increase in costs. So an increase in prices does not mean growth in production revenue," he said.
The strengthening dollar and devaluation of the ruble last year unexpectedly helped Russian gold production companies, which are selling precious metals at dollar-based prices but carrying costs in the national currency. The general director of Polyus Gold , Yevgeny Ivanov, said a year ago that the devaluation of the ruble automatically gave a 59% premium to ruble-based revenue posted by gold companies. Leskov said that last year's picture would not be repeated in 2009. "Prices are already going up, partially owing to the ruble's stabilization, while payments and other costs will gradually recover. Therefore, a decrease in margins is entirely possible. This is not fatal but it should be prepared for," Leskov said.
Leskov said that, under current conditions, many gold production companies would be looking for ways to sell off a portion of their assets. "Earlier companies acquired many assets at varying stages of readiness, including unsurveyed sections. And this strategy was in accordance with those economic conditions. But now the circumstances have changed. Therefore, many companies will sell a part of their less priority assets and concentrate on developing those projects, which they consider essential," he said.
He said that already surveyed sections with gold reserves would demand the most investor attention. The main transactions, Leskov added, would take place between companies in possession of these assets. He said that none of the sections put up for auction this year by Rosnedra are of significance. "Now not even fields are being put up. In the vast majority of cases there are not only no C1 resources but also no P1 resources. Therefore, in the current circumstances obligations for investment of funds are being put up for auction no guarantee for their return," Leskov said.
He added that even the leading companies could always now complete the development of "advanced" projects on time. He commented: "There are many projects ready for production and the number of project companies in Russia has not changed. There are also Western companies but they are not experienced as they are not in the condition to prepare documentation according by Russian standards independently without the help of Russian partners. It is necessary to provide Russian documentation to Rostekhnadzor, Rosnedra and other agencies. We see how these companies operate. They advance very quickly as much as is generally possible. However, this pace is not enough for the country's scale while also bearing in mind the number of tasks at hand."
Leskov added: "This, of course, complicates the possibility of developing the sector at faster rates despite the obvious increasing interest in it during the crisis period."