OPINION: Problems of private investment in geological explorations in Russia

Contributed by Viktor Ivanov, chairman of Russia’s Gold Producers Union

MOSCOW, Jan 25 (PRIME) -- Insufficient investment in geological exploration of gold deposits resulting from the liquidation of the national fund for replenishing Russia’s mineral resource base in 2002 is one of the key barriers for the development of gold mining in Russia.

According to a program for 2004–2010, both federal and private annual funding for the geological exploration of all kinds of mineral resources quadrupled to 197 billion rubles in 2010 from about 50 billion rubles in 2004.

The government strategy for the geological development in place until 2030 envisages a 20% increase in investment in 2015, as well as a 40% increase in 2020, and a 50% increase in 2030 from the 2010 level.

Funding in Russia may, therefore, reach the amount of 300 billion rubles per year, which is the amount required for the realization of full-scale geological exploration projects.

Funds from the federal budget are expected to amount to 29 billion rubles in 2012, 35 billion rubles in 2013, and 41 billion rubles in 2014. However, most funds are still expected to be contributed by private investors.

It is commonly understood that the situation needs to be changed; otherwise we will deplete our mineral resources base. Also, the current system of mineral development still remains the main obstacle for the growth of junior companies, small and medium-sized mining businesses.

In July 2011, state holding Rosgeologiya was founded. Its key activities are geological exploration and the discovery of potential minerals on sites in Russia for the replenishment of the country’s mineral resource base. It is obvious that the holding will fulfill the task to replenish resources base for large mining companies, while all the rest will remain unchanged.

Total investment in precious metal and diamonds exploration amounted to about 20 billion rubles in 2010, of which 2.5 billion rubles were provided from the federal budget and 17.5 billion rubles by private investors.

The potentially gold-containing Levoberezhnoye field in the constituent republic of Kabardino-Balkaria was discovered and the Drazhnoye gold ore deposit in the constituent republic of Sakha (Yakutia) was founded using funds from the federal budget.

Meanwhile, private investment contributed to a 610 tonne increase in lode gold reserves; a 1,403 tonne increase in silver reserves; and a 620 tonne increase in platinum group metal reserves. Also, the exploration of the Grib diamond deposit in the Arkhangelsk Region with total reserves amount of 98 million carats and the Dvoinoye hard rock gold deposit in the Chukotka Autonomous District with reserves of 64 tonnes, were completed through funding from private investments.

The results of private investments might have been more significant, if expenditures on buying licenses for geological exploration of deposits at auctions were not that large.

According to our estimates, 173 auctions were held in 2007–2011 for the geological exploration of mineral resource sites. These sites were actually areas with projected resources, where investors might discover new gold deposits.

As the result of these auctions, the government received more than 4.2 billion rubles, which are broken down in the chart below:

	2007	2008	2009	2010	2011
Number of auctions	26	19	1	43	84
Starting price, mln rbl	318.3	1279.1	7.0	371.1	579.3
Actual payment, mln rbl	491.9	2255.4	7.7	449.7	1004.8

The world’s average cost of gold deposit discovery amounts to about U.S. $70 million. The discovery of economically promising mineral reserves takes 10 years on average.

Over the last five years, $140 million was paid by mining companies only for the opportunity to investigate Russian sites with projected resources. If these funds had been used efficiently, there would have been enough money to open and prepare two large gold deposits for operation and allow the government to receive up to $200 million worth of taxes annually from the companies operating there. In addition, more jobs would likewise have been created.

It should be emphasized that the price for deposits tendered at auctions is set based on estimates made by the regulator, who bears no responsibility for this estimate; and insurance of such responsibility is consequently not envisaged.

Below are examples of sites with projected resources of gold, which were given a value by the regulator’s experts despite the fact that no survey had been held there and no deposits had been discovered. The groundlessness of these estimates is obvious.

Region	Site	Expert’s estimate of projected resources, concentration	Starting price, mln rbl	Actual payment, mln rbl	Date of auction
Buryatia	Perevalny	P3 – 60 tns, 0.4-6.8 gr/tn	12.000	18.000	04.15.2008
Chelyabinsk Region	Zaitsevsky	4 tns,1.1-1.4 gr/tn	5.000	26.000	02.28.2008
Krasnoyarsk Region	Verkhnekadrinskaya	P2 – 83 tns; P3 – 40 tns, 2.1 gr/tn	23.000	25.300	06.30.2010
Primorsky Region	Blagodatnensky	P2 – 850 kg, 40 mg/cubic meter; P3 – 70 kg, 325 mg/cubic meter	4.400	16.720	07.12.2010
Krasnoyarsk Region	Sergiyevsky	P1 – 2.257 tns, 4.2 gr/tn	5.000	6.000	02.02.2011
Krasnoyarsk Region	Olginskaya	P1 – 28 tns; P2 – 44 tns; P3 – 36 tns, 2.9 gr/tn	15.500	18.600	02.02.2011
Orenburg Region	Podolsky	P3 – 99 tns, 0.6 gr/tn	8.500	10.200	03.11.2011
Zabaikalsky Region	Pokrovsky	P1 – 6.4 tns, 5.3 gr/tn	17.400	19.140	07.06.2011
Primorsky Region	Namovsky	P2 – 18 tns, 5 gr/tn	9.800	10.780	08.16.2011
Primorsky Region	Gordeyevsky	P3 – 20 tns, 6.0 gr/tn	4.950	5.445	08.16.2011
Khabarovsk Region	Kherpuchinskaya	P2 – 9 tns; P3 – 12 tns, 3.0 gr/tn	5.000	6.050	10.20.2011
Zabaikalsky Region	Barsuchikhinskaya	P2 – 30 tns, 2.0 gr/tn	11.500	12.650	12.28.2011
Zabaikalsky Region	Kostromikhinsko-Troshikhinskaya	P1 – 8 tns; P2 – 80 tns, 3.0 gr/tn	32.000	35.200	12.28.2011

Mineral developers pay for such sites, because there is no other licensing system in Russia. Regulators “do not notice” the damage incurred by the government because of the current legislation.

According to current legislation, the minimum single payment for a site is set at 10% of the average annual royalty tax for the projected capacity of a plant, which is to operate on the tendered site.

A mineral developer has yet to discover a deposit, if it exists, while the regulator has already determined the projected capacity of the yet-to-be established mining plant.

After a mining company discovers a deposit using its own funds within the licensed area, it should obtain a confirming certificate, as per legislation. In order to obtain the certificate, a regulator’s estimate is required, which envisages assessing the reserves under the C1+C2 category.

Below are examples of the so-called “deposits”, confirmed after their discovery using the private funds of mining developers:

Region	Deposit	Reserves, kg	Resources, tns	Company
Irkutsk Region	Ozherelye	C1+C2 – 3,864	P1 – 33; P2 – up to 400	ML
Irkutsk Region	Ykanskoye	C1+C2 – 4,784	P2 - 83	ML
Irkutsk Region	Golets Millionny	C1+C2 – 1,323	-	Daksib
Irkutsk Region	Cherkesskoye	C1+C2 – 476	-	Golokon
Magadan Region	Olcha	C1+C2 – 8,700	-	Ovoca Gold

The examples show insufficiency of survey and geological research; these sites should rather be categorized as potentially metal-yielding.

The deposit should be regarded as the result of assessment with a complete geological model describing the actual borders of this deposit in three dimensions, with qualitative and quantitative estimate of C2 reserves and projected P1 resources, as well as with a technical and economic decision on the reasonability of further exploration.

For instance, the Drazhnoye deposit, discovered in 2010 through the use of federal budget funds, and having C2 gold reserves of 35 tonnes and projected P1 resources of 49 tonnes, may be tendered at an auction. But if a similar deposit is discovered by a private investor, such a deposit should be given to this investor for further exploration without any auctions, a tactic that will promote private investment in exploration.

According to the current classification, deposits are divided only into estimated and surveyed ones. Meanwhile, both estimated and surveyed deposits have assessed calculated based on their temporary and constant conditions, while deposits are discovered after a survey is made based on the qualitative and quantitative assessment of C2 reserves and projected P1 resources. In order to officially acknowledge such deposits, the category of “discovered deposits” should also be included in the classification.

After a deposit is discovered using the mineral developer funds, the minimum single payment is calculated under an increased ratio, which is designed to protect the government from risks of a delay in the start of operations at the deposit. A mineral developer has yet to carry out exploration, and if reserves are confirmed, to start extraction. But if reserves are not confirmed, the mineral developer will have to stop operations and lose all invested funds; however, the developer is already charged royalty under an increased ratio.

The government not only refrains from stimulating mineral developers, but also imposes additional taxes, which is against common sense. Mineral developers paid more than 4 billion rubles in 2007-2011 for the possibility to search new gold deposits. After the search, they would have to find additional funds to start this risky business.

Projected resources are only probable estimates of whether a site is promising, and sites with only projected resources estimated should not be tendered at auctions.

Private investor applications for licenses permitting geological exploration need to be introduced. The procedure of reviewing an application should be as simple as possible and strictly regulated, while payment for the license should be small.

End

(30.8752 rubles – U.S. $1)

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