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 KAZAKHSTAN International Business Magazine №5/6, 2008
 Mining in Kazakhstan: Russians Coming
Mining in Kazakhstan: Russians Coming
By Vasily Lukyanchikov, Director of Research and Informational Department, ENRC Management KZ
Despite the on-going global economic crisis, Russian businesses have stepped up their activities in creating new positions and expanding existing ones in Kazakhstan’s mining sector. In addition, current and future purchases of assets are integrated into transnational industrial companies. It is quite clear on the map of joint investment projects that Kazakh mineral resources attract Russian mining giants.
Since its establishment, RUSAL has advanced the implementation of its programme to become one of the most efficient and major international mining companies. As part of this strategic programme, in November 2007, RUSAL and Kazakhstan’s Samruk signed an agreement on the creation of a joint-venture in Kazakhstan that will extract coal on the Ekibastuz coal deposit’s Bogatyr and Severny pits.
As is known, the total industrial reserves on the Bogatyr and Severny coal pits, in Pavlodar Oblast, are estimated at 4.5 billion tonnes. The annual extraction volume stands at 42 million tonnes, accounting for 45% of the country’s total coal extraction. Half of this volume is used for electricity generation in Kazakhstan. In addition to domestic heat and hydropower plants, almost all of the neighbouring Russian industrial districts consume coal from Ekibastuz. RUSAL plans to increase its coal extraction and supplies to 60 million tonnes in 2012.
In April 2008, RUSAL and Samruk signed the documents founding the joint venture, which will operate the Bogatyr and Severny coal reserves. Samruk will pay $345m for the joint venture’s 50% share. Deutsche Bank made the valuation of assets within the agreement. Russian experts believe that this valuation is underestimated because of certain peculiarities in the Kazakh laws that reserve wide authority for the Kazakh government to interfere in foreign investors’ activities. However, the experts assume that this price will be compensated for by RUSAL’s unimpeded access to other mining and energy assets in Kazakhstan. The company’s plan is to build an energy and metallurgical complex, which will include an aluminium plant, using facilities of the purchased coal pits. The Ekibastuz-2 hydropower plant with a capacity of 100 MW will supply electricity to the complex.
In early October 2008, RUSAL’s General Director Aleksandr Bulygin and Kazakh Prime Minister Karim Massimov once again discussed the Russian company’s future involvement in joint mining and energy projects in our country. Particularly, Mr Bulygin confirmed that RUSAL was ready to invest $3.5bn in the construction of aluminium and alumina plants in Pavlodar Oblast. Moreover, the head of RUSAL said that the global economic crisis would in no way impact his company’s plans in Kazakhstan.
“The company is functioning in the real sector of the economy, and the crisis, which predominantly affected the banking system, has nothing to do with its business,” he said.
For justice’s sake, we should note that a number of Russian experts still have doubts about RUSAL top management’s ability to secure the expected long-term investment. The problem with investing in large-scale projects outside Russia is that the company has problematic assets on its balance and too many debts. In the case of a sudden landslide in global prices of aluminium, RUSAL will face the question of where to invest funds and how to pay its debts when loan repayments exceed corporate profits.
In addition, experts do not think that RUSAL’s assets in Kazakhstan are so important that the company will refuse to invest in the Russia-based projects like the Sayanogorsk, Krasnoyarsk and Bratsk aluminium plants, the Sayano-Shushensk hydropower plant and some facilities of Irkutskenergo.
RUSAL was established in March 2007 as a result of the merger of RUSAL, SUAL and Glencore’s alumina assets. At present, RUSAL holds leading positions in the global aluminium industry.
RUSAL accounts for about 12% and 15% of the global aluminium and alumina markets, respectively. The company’s aluminium production reached 4.2 million tonnes in 2007, up by 6% on 2006. Its foundry production with added value grew by 16%, reaching 2.1 million tonnes, in the same period. Bauxite mining remained on the level of 2006, 17.3 million tonnes. The company’s revenues were up by over 11% in 2007, reaching $14.3bn against $12.9bn in 2006. The company’s investment grew by 45% and amounted to $2.9bn.
RUSAL’s representatives are members of the Foreign Investors’ Council chaired by the Kazakh president.
Mechel bought the British Oriel Resources for $1.5bn in April 2008 and plans to create a ferroalloy holding company within the next five years. In addition to assets in Kazakhstan, this company will include enterprises like Yuzhuralnickel and the Tikhvin and the Bratsk ferroalloy plants. The cost of the holding company is estimated at $2.1bn. As part of this move, the managing company Mechel-Ferroalloys has already been established, whose objective is to optimise the management of Mechel’s ferroalloy assets in Russia and overseas.
According to its corporate development programme, the Mechel Group plans to build ferrochrome and ferronickel plants in Kazakhstan until 2013. Their annual capacity will be 250,000 and 20,000 tonnes, respectively. The total amount of investments in Kazakh projects will reach $1.35bn.
The ferroalloy plant will be constructed on the industrial ground of the Vostok chrome deposit in Aktobe Oblast. Proven reserves of the ore with 40% of chrome content stand at 19.51 million tonnes. As part of this project, Mechel, on 22 September 2008, launched a mining and ore-dressing plant, Voskhod Chrome, with a design capacity of 1.3 million tonnes of chrome ore per year (the plan is to reach the design capacity by the end of 2009). It is expected that 950,000 tonnes out of these 1.3 million tonnes of ore will be used for concentrate production. About 360,000 tonnes of concentrate will be sent to the Tikhvin ferroalloy plant and the rest will be exported to Great Britain and China.
Investment in the construction of Voskhod Chrome amounted to $120m, which includes a $60m loan attracted from the Eurasian Development Bank. The foreign banks, WestLB and HVB, provided the rest of the funds.
Mechel plans to base the ferronickel plant at the Shevchenkov nickel-cobalt deposit in Kostanai Oblast. Proven reserves of nickel stands at 21.4 million tonnes, and probable reserves at 83 million tonnes. The company plans to build another ferronickel plant with an annual capacity of 20,000 tonnes in Russia’s Orenburg Oblast, which neighbours on Kazakhstan.
Also, the company is considering plans for developing manganese ore deposits in Kazakhstan. Its experts are currently studying the geology of those deposits.
The Mechel Group was founded in 2003. Presently, it has the control stocks of metallurgical, hydrocarbon and power companies and commercial ports.
Mechel is Russia’s second largest producer of rolled section steel and the biggest producer of special steel and alloys, as well as a wide range of products made of these materials. It accounts for 39% of Russia’s special steel production.
In 2007, Mechel produced about 6.09 million tonnes of steel, 5.127 million tonnes of metal-roll, 3.685 million tonnes of cast iron, 3.886 million tonnes of coke, 683,000 tonnes of hardware and 37,800 tonnes of ferrosilicon.
The SeverStal Group as represented by its subsidiary, SeverStal Resources, bought 22% of shares of the Irish Celtic Resources for $55m, in August 2007. Thus, it gained access to the development of Kazakhstan’s Suzdal and Zherek gold deposits and the Shorskoye molybdenum deposit. Within ten months following the signing of the agreement, SeverStal Resources took full control of these deposits.
In August 2008, the company purchased 100% of shares of the Kazakh Balazhal company that developed the gold mine of the same name in East Kazakhstan Oblast for $26.6m. Its total extractable gold reserves are estimated at 20 tonnes, and can be increased to 30-40 tonnes. A pit was earlier built on the deposit, which still has facilities to extract and concentrate gold using heap leaching. Considering this, SeverStal Resources plans to resume extraction in 2009 and to increase the annual gold production to 2 tonnes until 2011.
The SeverStal Group was founded on the base of the SeverStal metallurgical company in 2002. At present, the group includes the iron-ore mining plants Karelsky Okatysh and Olcon and the Vorkutaugol coal mining company.
In 2007, these enterprises produced 5.8 million tonnes of coking coal concentrate, 1.8 million tonnes of coking coal, 1.8 million tonnes of power station coal, 10 million tonnes of iron-ore pellets and 4.7 million tonnes of iron-ore concentrate.
SeverStal in 2007 came into the gold extracting business after buying Celtic Resources Holdings, Neryungri-Metallik (in Russia’s Sakha (Yakutiya)) and the Aprelkovo mine (Zabaikalsky Krai). Developing production in Celtic Resources’ functioning plants in Kazakhstan, SeverStal’s gold extracting subdivision, SeverStal Resources, purchased licences for geological exploration and future gold extraction in Zabaikalsky Krai, Irkutsk Oblast and Buryatiya.
SeverStal Resources’ plants produced 5.3 million tonnes of gold in 2007. At present total gold reserves, including the newly purchased Balazhal ore deposit, are estimated at about 445 tonnes of gold.
In September 2003, Polyus Gold officially confirmed talks with the KazakhGold Group Limited on the possibility of the purchase of 50.1% of its share. So far, Polyus Gold had not had any assets in Kazakhstan, but analysts agree that KazakhGold Group is a promising company and the Russian company will undoubtedly benefit from purchasing it.
It is known that KazakhGold’s main deposits are Aksu, Bestobe and Zholymbet in Kazakhstan’s Akmola Oblast. One of the country’s major mining companies, Kazakhaltyn, is developing the fields. In terms of reserves, these deposits are among the most significant ones in the country.
In addition, experts note comparatively favourable mine technical conditions for gold extraction. This makes it possible to keep the gold production cost low, $262 per ounce, which is $86 cheaper than the Russian gold.
According to expert estimates, Polyus will be able to increase its production by almost 20% if it buys KazakhGold.
It is expected that 70% of the KazakhGold shares' cost will be paid for with Polyus shares, and 30% with cash. The seller’s representatives announced that the offer to purchase the control stock in KazakhGold provides for paying a 0.298 share of Polyus Gold and $7.95 per each security of the Kazakh company. Thus, the amount of transaction will be about $390m, including $210m that Polyus may pay with cash.
In late October 2008, Polyus’ general director Yevgeny Ivanov once again confirmed his plan to buy 50%+1 share of KazakhGold. He said that the purchase of KazakhGold’s control stock was reasonable and positive for the cost of Polyus Gold shares.
Experts from UnicreditAton also confirmed this, saying that the transaction with KazakhGold is profitable for Polyus because of the shares’ high quality and the Kazakh company’s decreasing price against the global crisis. “The British merger regulator must also approve the transaction but we believe that it will receive approval and add about $0.6 to the share rating,” says a report by UnicreditAton.
Speaking about Polyus’ investment potential, experts also said that the Russian company possessed funds in the area of $1.4bn, which guaranteed the implementation of current operations and the funding of the investment programme within two years. Polyus could also provide debt financing of KazakhGold to support the Kazakh company's liquidity and the implementation of its development plans.
Though Polyus Gold’s de facto control stock belongs to Mikhail Prokhorov, Vladimir Potanin still remains the owner of the company’s considerable proportion. Despite recent reports about the signing of the letter of intent in line with which Potanin’s share in Polyus will go to Prokhorov, the talks on the division of shares have not finished yet.
In addition, Suleyman Kerimov's Nafta Moskva company offered $1.6bn ($25 per share) for Vladimir Potanin’s shares in Polyus Gold.
KazakhGold is a major gold mining company in Kazakhstan and, according to research by Thomson Reuters Extel Survey, the county’s best public company. The company’s control shares belong to the family of Kanat Assaubayev, the chairman of the company’s board of directors. KazakhGold’s headquarters is based in London and its GDR are traded on the London Stock Exchange. In 2007, KazakhGold extracted 232,060 troy ounces of gold. The company’s revenues and net income amounted to $177m and $19.4m, respectively, in 2007. According to an official report by KazakhGold, the company extracted 1.4 million tonnes of ore and produced about 66,860 ounces of gold. It plans to increase the annual extraction to 1 million ounces until 2013. KazakhGold’s reserves are now estimated at 59.6 million ounces.
The Russian Metalloinvest company in July 2008 launched preliminary talks over the merger with Kazakhmys. According to available reports, Lehman Brothers is Metalloinvest’s adviser in the potential transaction. According to experts’ evaluation, the merger’s capitalisation can approximate to $50bn.
The possibility of the merger of Metalloinvest and Kazakhmys by transferring the control stock to the Russian company’s shareholders is under consideration as one of the possible mechanisms for the merger. In this case, Metalloinvest will not have to make its own fully-fledged initial public offering.
At the same time, Russian experts note that what is important for Metalloinvest shareholders is that Kazakhmys has a blocking stake in ENRC, a producer of iron-ore.
However, on 17 October 2008, Kazakhmys distributed a report that it stopped the merger talks with Metalloinvest. Metalloinvest spokespersons have neither denied nor confirmed the Kazakhmys report.
In Kazakh and Russian experts’ opinion, it is more likely that the talks were not ceased but just suspended. It must be said that the global crisis, a slump in stock prices and production cuts are not the best conditions for signing win-win deals.
Metalloinvest includes the Lebedinsky and Mikhailovsky ore-dressing plants, the Oskolsky electrometallurgical plant, UralMetCom, Ural Steel and SVIB Commercial Bank. In 2007, the holding company's plants produced about 6 million tonnes of steel and 40 million tonnes of raw iron ore. Metalloinvest’s revenues approximated $5bn in 2007. The holding company’s shareholders are Alisher Usmanov (50%), Andrei Skoch (30%) and Vasily Anisimov (20%).

Table of contents
Competitiveness: Our Place 66  Sergey Gakhov, Elena Zabortseva 
Experts recommend. How to increase the rating  Margareta Drzeniek Hanouz 
Mining in Kazakhstan: Russians Coming  Vasily Lukyanchikov 
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