Irkutsk region new leader in the russian gold mining industry
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IRKUTSK REGION – NEW LEADER IN THE RUSSIAN GOLD MINING INDUSTRY. Irkutsk - October 2003. Table of content :. Introduction Section 1. World gold market and prospects for Russia World gold production 1 Gold producers – countries and companies 2

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IRKUTSK REGION – NEW LEADER IN THE RUSSIAN GOLD MINING INDUSTRY

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Irkutsk region new leader in the russian gold mining industry

IRKUTSK REGION – NEW LEADER IN THE RUSSIAN GOLD MINING INDUSTRY

Irkutsk - October 2003


Irkutsk region new leader in the russian gold mining industry

Table of content:

  • Introduction

  • Section 1. World gold market and prospects for Russia

  • World gold production1

    • Gold producers – countries and companies 2

    • Global gold market in 1990s 3

    • Rehabilitation of gold as a valuable asset; major gold producers 4

    • Current events on the world market 5

    • Demand and supply on the world market6

    • Gold as a revenue stabilization tool 7

  • Section 2. Current gold production in Russia 8

    • Major gold fields and miners 10

  • Section 3. Irkutsk Region – a leader in gold mining 11

  • Developing «Lenzoloto» and «Sukhoy Log»

  • as one consolidated company 13

  • Key strategy directions 14

  • Creation of a world class company in Irkutsk Region 16

  • Benefits to the region17

  • Conclusion18


  • Irkutsk region new leader in the russian gold mining industry

    World Gold Mining

    Proved reserves - totally 50 thous. tons

    After ratification of Jamaica Agreement in 1978 gold lost its importance as a world currency. However, being now just an ordinary commodity, it still keeps its position as an international payment tool, featuring the highest liquidity in the periods of political instability and global economical shake-ups.

    Gold reserves in state and private funds, together with industrial, technical and other gold products, are estimated at the level of 145,2 thousand tons. U.S. gold reserve is about 8500 tons, in Germany - 3423 tons, France – 3025 tons, Italy – 2452 tons, Switzerland – 2198 tons. The Central Bank of Russia holds 387 tons, or 9% the country total gold reserve (as of November, 2002).

    In the end of 1990s an energetic process of consolidation started in the gold mining industry.Today about 50% of the global gold extraction is concentrated in hands of 15 leading companies.

    Reserve base - totally 95 thous. tons

    1

    Sourse: USGS


    Irkutsk region new leader in the russian gold mining industry

    Gold Producers – Countries and Companies

    • 5 biggest companies (>100 t/y) mine over 30% of gold

    • After acquiring ZAO Polus, OAO Lenzoloto and OAO Matrossov Mine, MMC Norilsk Nickel took the 10th place in the world gold mining.

    Total 2 587 tons

    2

    * Including ZAO Polus

    Source: GFMS


    Irkutsk region new leader in the russian gold mining industry

    Global Gold Market in 1990s

    • First opinions revising the role of gold in the global monetary and financial system appeared In 1990s. That was a period of aggressive gold demonetization, characterized by diminishing the role of this metal in the structure of gold and monetary reserves of Central Banks, low interest on investors side, transformation of gold into commodity with such typical specifications as cost and consumer value. This situation was caused by following factors:

      • new generation of central bankers advocating for the decrease of the gold proportion in the total volume of gold currency reserves;

      • broad integration of European economies and introduction of a new all-Europe currency;

      • explosive growth of share prices, in particular, of high-tech companies;

      • decline of gold price and gold deposit yield.

    • In 1996 the fall of gold prices restarted, and by the beginning of the 21st century the price came close to the level of extraction cost in major mining countries, resulting in shut-down of gold mines and suspension of new projects.

    • Along with deterioration of economy in emerging countries, the fall of gold prices also threatened the value of gold reserves in developed countries.

    • Furthermore, a threat of gradual exhaustion of existing deposits appeared.

    3


    Irkutsk region new leader in the russian gold mining industry

    Rehabilitation of Gold as a Valuable Asset

    With purpose to restore the role of gold in the global economy and stabilize its price, in September of 1999 fifteen Central Banks of the Western Europe, including European Central Bank, entered into Agreement on the limitation of gold sale on the market (with annual quotas not exceeding 400 tons), and on the allocation of gold deposits until 2004. The Agreement was supported by the U.S. Federal Reserve System, Central Bank of Japan and International Monetary Fund.

    These measures, accompanied by global economic decline, especially visible on stock markets, made the investors to change their feelings towards gold.

    • Gold has kept its stabilizing role in world crises.

    • What do we see today:

    • the global investors community regards gold as a mechanism of protection against U.S. dollar and stock market devaluation, and gold becomes an attractive asset from the viewpoint of risk diversification;

    • to miners and metal producers gold is of paramount importance as it guarantees a stable in-flow of revenues in the periods of sharp fluctuations of prices for other metals.

    4


    Irkutsk region new leader in the russian gold mining industry

    Current Events on the World Market

    1.Gold price has increased by 35,3% from January 2002 till October 2003.

    2.Major price-increasing factors.

    A. Grown demand from the investors’ side caused by stock market volatility, low yield from other tools, and need to diversify assets.

    B. Since 2000 many large gold companies have been reducing their hedging portfolios, which results in buyback of gold futures realized in the past period.

    C. Consequences of the Middle East war: geopolitical instability, high energy cost.

    D. Bankruptcy of several large corporations; weakening of American economy.

    Steep growth of investors’ demand is caused by the following factors:

    а) search for a “shelter” in the troubled environment after September 11, 2001;

    b) capital spillover from falling stock market to a reliable and capaciousmarket, where price growth is better compared to the majority of other commodities and financial assets;

    c) slump in USD exchange rate vs. EUR and Yen; global economic slowdown in 2003;

    d) persistent low rates on money markets;

    e) replenishment of investment portfolios with longer gold futures (from 3 months to 5 years). Note: the major part of capital responsible for the price growthis owned not by long-term investors who are more loyal to the market, but by institutional investors who saw a quick way to earn money on the price boost.

    3.The greatest influence on the general supply/demand picture is currently exerted not by gold production dynamics, but by gold recycling, operations of central banks and producers’ hedging policy.

    In 2002 gold extraction fell for the first time since 1995. Production decline was about 2% (60 tons). Future production hedging was decreased by 352 tons. Central Banks’ sales grew by 44% within the last 5 years and reached 549 tons.

    5


    Irkutsk region new leader in the russian gold mining industry

    Supply and Demand on the World Market (in tons)

    6


    Irkutsk region new leader in the russian gold mining industry

    Gold as a Revenue Stabilization Tool

    Gold

    USD/oz.

    S&P 500

    index

    Gold prices change in counter-phase to key indices of economic activity and prices for industrial-purpose metals, thus allowing the gold producers to obtain revenues in the periods of industrial cycle downward movement.

    7


    Irkutsk region new leader in the russian gold mining industry

    Current Gold Production in Russia

    • Russia possesses over 20% of the world’sinferred gold reserves, however, proven reserves are below 7%. Poor exploration level may be explained by lack of investments within the last decade.

    • Processes of reformation and fast privatization in the Russian gold-mining industry resulted in its decomposition.Over 600 small companies exist now, but they are mostly small and low-effective, operate out-of-date technology and mine some tens or hundreds tons per year. Labor productivity in these companies is 1-1.5 kg/worker, compared to the world’s 8-8.5 kg/worker. Low capitalization of Russian mine assets attracts international portfolio investors and speculators who prefer quick profits and are not interested in long-term investments in the industry development. All this leads to the following:

      • Deposits are “moth-balled”, not under operation;

      • Underground reserves are exclusive State property, but traded by companies;

      • Resource base of professional mining organization being eroded;

      • Industry disunity and poor control diminish tax payments to federal budget.

    8


    Irkutsk region new leader in the russian gold mining industry

    • Entering a new stage of industry development, it is crucial for Russia to make an accurate assessment and exploit properly the existing ADVANTAGERS

    • 1.Abundance of long-term gold reserves.

      • While the biggest world deposits are close to exhaustion, Russian resources are plentiful: Sukhoy Log, Natalka, Kuranakh Group, etc. Volume of measured but still not operated reserves amounts to 2 500 2. Countries – competitors are facing serious problems.

      • А.Largest gold reserves are located in South Africa. Internal political instability in the country not only prevents the gold mining companies from investing into new projects but also threatens further operation of several largest companies.

      • В. Gradual degradation of ores in world largest deposits. World spendings in the exploration of new deposits, according to Raw Materials Group,declined fromUSD 3,6 blnin 1997 toUSD 1,4 bln in 2000. If mining companies maintain the existing mining rates, they will see the depletion of measured reserves in 12-15 years.

      • С. Extensive use of cyanides and danger of resulting technogenous catastrophes cause extremely negative reaction from non-government environmental organizations and society, primarily in North America and Europe.

    • 3. Improvement of investment climate in Russia.

    • 4. Human resources and advanced technologies in gold mining and processing. Dueto specific historical role of mining industry, this sector of our domestic economy is well staffed with highly qualified and experienced personnel. High qualification of Russian geologists and mining engineers is recognized all over the world.

    • Although new modern processes are available today (such as bio-leaching), only a few companies may afford them, as huge investments are needed for their implementation.

    9


    Irkutsk region new leader in the russian gold mining industry

    Major Gold Fields and Mines

    10


    Irkutsk region new leader in the russian gold mining industry

    Irkutsk Region – A Leader in Gold Mining

    Mayskoye

    138t

    Ametistovoye

    90t

    Most important gold fields

    Kubaka

    80 t

    Pechenga

    Large and unique gold deposits

    Natalka

    243 t

    Kuchus

    157 t

    Magadan

    Nezhdaninskoye

    450t

    Yakutsk

    Norilsk

    Mnogovershinnoye

    120t

    Moscow

    Penskiy region

    Kuranakh

    230 t

    Darasun

    50 t

    Deposit names and gold reserves (tons)

    Chertovo

    Koryto

    80 t

    Sukhoy Log

    1029 t

    Vorontsovskoye

    100 t

    Olimpiada

    450 t

    Pokrovskoye

    100t

    Udokan

    Ekaterinburg

    Berezovskoye

    50t

    Irkutsk region

    Khabarovsk

    Darasun

    50 t

    Kochkarskoye

    46 t

    Krasnoyarsk

    Blagoveshensk

    Baley

    109 t

    Irkutsk

    Chita

    Vladivostok

    Ulan-Ude

    Zun-Kholba

    60t

    Kazakhstan

    China

    Mongolia

    11


    Irkutsk region new leader in the russian gold mining industry

    • The town of Bodaibo celebrated its centenary in the summer of 2003. This is the center of unique gold-bearing region that played a significant role in the modern history of Russia.Over 95% of Irkutsk gold is being mined in Bodaibo region. 1/3 of gold in pre-revolutionary Russia was mined in this region, and approximately 1100 tons of accounted metal was extracted here in the last 150 years.

    • Gold mining has stimulated the infrastructure development in Lenskiy gold-bearing region:

      • In 1896the first Russian electric railroad was constructed on river Nygri (powered by thermoelectric station);

      • In 1896 mining engineer L.F.Graufman, Chief executive of Lenzoloto, constructed the first Russian 300 kW hydropower station on Lena River;

      • In 1895,together with the Great Siberian Railway, the construction of Bodaibo railroad (BRR)was started, going along the bank of Bodaibo River and coming close to the “Bodaibo Residence” (not a town yet at that time).

    • 320 placers and 6 ore deposits have been measured in this region (Sukhoy Log, Golets Vysochaishiy, Verninskoye, Pervenets; indicated: Dogaldinskoye, Centralnoye, Yubileynoye, Nevskoye, Caucasus, Yergozhu, Gurbey; about 40 promising ore manifestations). Gold reserves of the region are number one in the country, thus making it the most attractive for investing in gold mining.

    • Today we have a real chance to restore leadership of this region not only in Russian, but in the global gold-mining industry.

    • To maintain and strengthen the region’s leading position in Russia it is necessary to undertake the following measures:

    • To overcome the disunity of gold producers and to consolidate gold companies (even the leading Lenzoloto is actually a holding company comprised of 9 subsidiaries with annual output of 200-1500 kg). 41 small companies have received quotes for 2003, and some 15 artels operate as subcontractors without individual quotes;

    • To involve new long-term investors into industry development. Only large mining companies with deep knowledge of this industry and positive experience in comprehensive project implementation can be profitable for the region.

    • Irkutsk Region traditionallyholds the 3rd or 4th place among Russian gold-mining areas (with 10% of total Russian output), the greater part of metal coming from alluvial deposits. Gold extraction In 2002 exceeded 16 tons, a record level for the whole period of gold mining. The industry employs approximately 9,5 thousand people and provides for 2,5% of the total industrial output in Irkutsk Region.

    12


    Irkutsk region new leader in the russian gold mining industry

    Developing Lenzoloto andSukhoy Logas one consolidated companywill allow Irkutsk Region to become a leader in the world’s gold-mining industry

    • Proposed strategy of project implementation:

    • Project realization period — less than 5 years.

    • Already in 2 years a large world-class gold-mining company will be established, enabling the region to increase its total gold extraction.

    • When the deposits of the Bodaibo gold-bearing region, including:

    • Sukhoy Log (1 029tons, average content 2,76 g/t), Zapadnoye (ОАО «Lenzoloto», 13 t, average content 2,7 g/t)

    • will be put into operation in framework of consolidated mining industrial complex, the following results will be achieved:

      • Total extraction in the region - approx. 58 tons a year (including consolidated output of Lenzoloto and Sukhoy Log of at least 50 tons);

      • Cost of extraction — approx. 150 $/oz.

    13


    Irkutsk region new leader in the russian gold mining industry

    KeyStrategy Directions

    • ОАО “Lenzoloto” — development of placers and small ore deposits.

    • 1.To increase extraction from placers and ore deposits up to 17 tons a year the following measures shall be taken:

      • retrofitting of existing facilities within two year period;

      • development of efficient and transparent financial policy.

    • 2.To optimize technological solutions and reduce environmental risks.

    • 3. To reorganize the internal corporate structure of OAO “Lenzoloto”: to develop and introduce a transparent financial model of the company operation, to determine strategically important directions for further development (in areas of mining and auxiliary works). To improve legal status of principal company and subsidiaries.

    • “SukhoyLog” — deposit development schedule:

    • Three years after the license state registration to commission the first plant line with a capacity of 8 mln tons of ore and annual gold production of 15 tons.

    • Five years after the license state registration to commission the second plant line with a capacity of 8 mln tons of ore and cumulative annual gold production of 30 tons.

    • Polyus and Irgiredmet are assessing the possibilities to increase ore extraction so that the plant annual production could reach 40 tons of gold.

    14


    Irkutsk region new leader in the russian gold mining industry

    Key Strategy Directions

    • Geological exploration in Lensky gold-bearing region

    • We believe that Lensky gold-bearing region possesses a unique geological potential, and there is a high probability of finding new large gold deposits. Discovery of new gold manifestations and deposits will allow to compensate for the depletion of existing placers, thus resolving problems with exhausted recourses and population employment in Bodaibo region.

    • In 2004 – 2005 we plan to file a request with Irkutsk Regional Administration to obtain rights for geological exploration of underground reserves in promissing areas.

    • Geological exploration will be financed from the Company’s own budget. Annual spendings for prospecting and exploration are estimated at the level of USD 10 mln. Primarily Irkutsk geological organizations will be involved in this work.

    • Supporting small gold-mining companies

    • 1. Our company does not intend to develop small alluvial deposits being the major resource base for small artels of gold-digger.

    • 2. Investments in infrastructure development at Sukhoy Log will allow small gold-mining companies to increase their extraction volumes.

    • 3. Provided the interests of gold-digging artels are taken into account, and existing small mining companies stay in place, the region could achieve social stability.

    15


    Irkutsk region new leader in the russian gold mining industry

    Creation of A World-class Company

    • MMC Norilsk Nickel is the only Russian company capable to develop large deposits in a short period of time. It possesses the following competitive advantages:

      • Transparency, predictability, openness;

      • Availability of financial resources required for the development of big gold deposits, possibilities to attract foreign investments;

      • Unique experience in construction and operation of large mining facilities;

      • Equipment and technology for gold ore extraction from open pits;

      • The Company was first in Russia to construct a plant for processing stubborn gold-bearing sulphide ores (based on bio-leaching process);

      • The Company has its own team of geologists and may finance geological exploration;

      • The Company considers Irkutsk region as an area of strategic importance for its long-term outlook.

    • Norilsk Nickel Group is ready to set up the largest Russian gold mining company of world class, based on OAO “Lenzoloto” company and “Sukhoy Log” deposit. If the Group obtains rights for the development of local underground resources, the following scenario will be possible:

    • 1. Norilsk Nickel is ready to invest necessary assets in the deposit development and facilities retrofitting.

      • 2. Elimination of “speculative games” around deposits and changes of assets owners.

      • 3. The deposit will be developed by the largest company with highly qualified personnel and substantial financial and technical possibilities.

      • 4. In the nearest future a new world-class mining enterprise will be constructed in Irkutsk region.

      • 5. After commissioning Sukhoy Log and some other deposits, the share of mining industry in the total industrial production of Irkutsk region will reach 10%.

    16


    Irkutsk region new leader in the russian gold mining industry

    Benefits to the Region

    • Implementation of this program will allow to create in Irkutsk region a gold-mining company of world class, producing 50 mln tons of gold annually. Lensky gold-bearing region will join five largest gold producers in the world: WITWATERSRAND (SOUTH AFRICA), NEVADA (USA), WESTERN AUSTRALIA, ONTARIO (CANADA), IRKUTSK REGION (RUSSIA).

    • Establishment of this new company will ensure the following benefits:

    • Significant increase of regional economic potential; 10-11% GRP (Gross regional product) growth;

    • Taxation base expansion. Additional payments to the region’s consolidated budget will amount to USD 70 mln. (mining tax – 16 mln, profit tax – about 49 mln). A large world-class company, operating in accordance with international standards, is more transparent, and this will ensure higher tax collection;

    • Reduction of the regional budget dependence on power generation and aluminium industries;

    • Socio-responsible partnership with regional authorities (1 500 – 2 000 new working places for local population);

    • Infrastructure development (construction of roads, bridge on Vitim River, power transmission lines, residential housing);

    • Preferential purchases of local products;

    • Higher level of environmental safety, meeting international standards;

    • Strengthening of the State’s regulative role in the development of gold-mining industry;

    • Investments in target R&D programs, opening a breakthrough to new technologies.

    • A large mining company will allow:

      • To avoid disputes and controversies connected with processes of authority and responsibility distribution among numerous local gold-mining companies;

      • “To personify” the responsibility for gold extraction at key deposits.

    17


    Irkutsk region new leader in the russian gold mining industry

    Conclusions

    1. Gold still plays its role of “reserve” or “stabilizing”asset in the global economy.

    2. Availing of existing competitive advantages, the Russian gold-mining industry restores its almost lost positions and becomes one of the most attractive and rapidly developing industries.

    3. New stage of the industry development is marked with consolidation of producers, realization of new big projects, and establishment of large national gold-mining companies of international scale.

    4. Irkutsk regional gold reserves comprised of numerous ore deposits and placers, provide us with objective prerequisites for creating a large mining company rated first in Russia and the fifth in the world.

    5. Only large national mining corporations will allow Russia to solve new important tasks: geological exploration of underground resources, attraction of foreign investments, introduction of advanced technology, development of scientific, technical and labor potential.

    6. Only one Russian company – MMC Norilsk Nickel - has enough capacity to attract significant long-term investments and to develop the largest and the most complicated gold-bearing deposits.

    18


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