Russia's $140b copper prize a political stew
By John Helmer
MOSCOW - The decision last week to award Russia's largest unmined copper
deposit to two companies - Metalloinvest and Russian Technologies - that have
never mined copper confirms just how private Russia's strategic resource and
mining policy remains and how unclear the prospects for the project continue to
be.
All that is certain is that Udokan, a copper Eldorado in the Chita region of
southeastern Siberia, near the Chinese border, is not going to Chinese, Kazakh,
or indeed any other major international copper mining company.
Metalloinvest is an unlisted private conglomerate, with two steel mills and two
iron-ore mines, which has been having trouble
getting a valuation and an underwriter to list its shares on the London Stock
Exchange. It is owned in three stakes, whose magnitudes have never been
publicly confirmed or verified, by Alisher Usmanov (with about 50%); Andrei
Skoch (30%); and Vasily Anisimov (20%).
The history of each man's asset position has been controversial, and is best
left unpublished. What is clear is that copper-mining has not been their line.
This is in stark contrast to the other contestants in the bidding for Udokan -
the Urals Mining and Metallurgical Company (UMMC), Russia's second copper miner
and refiner, owned by Iskander Makhmudov; and Norilsk Nickel, which entered the
bidding through separate initiatives of controlling shareholder Vladimir
Potanin and his onetime partner, now rival, Mikhail Prokhorov.
Another bid, by a unit of the Basic Element holding owned by Oleg Deripaska,
also said it was competing, only to withdraw when it learned it had been passed
over. A holding company announcement claimed that it was "economically
inexpedient to participate in the tender independently". Most of this phrase is
correct, but it was politics, not economics, that in the end excluded
Deripaska.
In Russian mine licensing law and regulation, it is required that deposits
owned by the state should be auctioned publicly and competitively, and that the
award should go to the highest bidder. While bidders may conceal themselves by
multiple nominee identities, the competing prices are usually made publicly
known.
In this case, after more than a decade of deliberation and dickering, the state
decided to reserve its power to make an in camera review of the bids,
and to issue an award without making clear what price has been paid for the
mining right, and what investment obligations have been incurred.
In March, state conglomerate Russian Technologies, headed by Sergei Chemezov -
built on the base of Rosoboronexport, the state arms export monopoly - tried to
persuade the government to conduct a major auction of the Verkhnekamsoye potash
deposits in the Urals (3.8 billion tonnes of reserves) in this in camera
mode. Chemezov was turned down, and the decision was taken at the time to take
the assets to public auction. The outcome was a very costly bidding contest
(US$2.4 billion in toto) - and an expensive victory for Chemezov's partner,
Silvinit, which was pushed to commit $1.5 billion for the mine rights it
wanted.
This time Chemezov has won both rounds, decisively. He also appears to have
avoided the obligation to make a big down-payment. That is the first point of
political significance. The head of the mine licensing authority Rosnedra,
Anatoly Ledovskih, is reported as saying the Udokan license award requires an
initial payment of 4.5 billion rubles (US$176 million), and a total of 15
billion rubles.
The second political point is that Chemezov defeated Makhmudov's partner,
Vladimir Yakunin, head of another rich state corporation, Russian Railways, and
once considered a contender to succeed Vladimir Putin as president. However,
Yakunin has not been the intimate of the Putin circle as was publicly
speculated, and he dropped out of the running in the presidential race early
on. There has been speculation that President Dmitry Medvedev will have him
replaced at the rail company; and that Putin won't mind. Rail company sources
say they have heard nothing yet.
Makhmudov, whose central Russian copper mines are running out of ore to feed
his smelters, and who needs Udokan more than Norilsk Nickel, is one of several
metal oligarchs, who were given their start in business by Mikhail Chernoy
(Michael Cherney) in the early 1990s. Makhmudov, an Arabic-speaking veteran of
the Soviet Ministry of Foreign Trade, told Asia Times Online that in the early
1990s, when he was in a Chernoy partnership, he opted for copper, when aluminum
went to Deripaska. Part of the tale can be found in court papers filed in
Chernoy's UK High Court case against Deripaska.
Makhmudov also took, and still runs, a group of domestic coal-mining companies.
A bid to convert his coal position into a takeover of the Severstal steelmills
failed, not least because Makhmudov lacked the Kremlin clout of his rivals. To
win Udokan, Makhmudov calculated that he needed an influential ally. Yakunin
turned out to be an unfortunate choice.
The third point of political significance in the Udokan award is that Deripaska
has suffered his second major defeat in as many months. Deripaska's nine-month
bid to take over Norilsk Nickel from Potanin, and merge it with United Company
Rusal, was rejected several weeks ago by Putin and his deputy in charge of
resource concessions and metals, Igor Sechin. Once that had become apparent in
the marketplace, it was rumored that Deripaska was staying in the Udokan race,
in order to receive a consolation prize. The reasoning was that Deripaska would
agree to concede on Norilsk Nickel, if he were given Udokan instead.
This not only turns out to be untrue. Twice now, Deripaska appears to have
failed to demonstrate that he has the oxygen Russian oligarchs require to
breathe - that is, clout with Sechin. The implication for Deripaska and Rusal
is serious, especially in London. There, Deripaska faces the possibility that,
if his pending appeal against a High Court ruling in favor of Chernoy is
rejected, he faces what amounts to a trial of his methods in acquiring the
Rusal and Basic Element assets, and a ruling in favor of Chernoy's claim for
shares or compensation, worth more than $6 billion.
With the price of commodity aluminum falling, and resource company shares
declining sharply in value, Deripaska's standing internationally shrinks in
proportion. His borrowing capacity declines concomitantly. The overhang of his
buyout obligations to his shareholding partners in Rusal, and of the enormous
debt Rusal is carrying, grows heavier, and heavier. If he is now perceived as
lacking the necessary political support of the Kremlin, then one of the key
undertakings the underwriters of last year's Rusal London listing bid demanded,
a letter of support from the Kremlin, would be forfeit. All the cards
foretelling Deripaska's future appear to have passed into Chernoy's hand.
But what of the fourth point in the Udokan affair, the much reported political
influence of Usmanov?
On the eve of Tuesday's Udokan announcement, Usmanov was granted an audience
with President Medvedev. Fully televised, this was one of the rare solo
appearances Usmanov has been granted at the Kremlin. The presidential release
suggests he and the president talked of Metalloinvest's plans to expand
iron-ore output at the Lebedinsky and Mikhailovsky mines - two of the three
largest in Russia - and also of Usmanov's problems in London. According to the
Kremlin statement, "Dmitry Medvedev has taken an interest in whether Alisher
Usmanov and his partners face any complexities in the placement of investments
in other countries."
The statement also winds up with a pat on Usmanov's back for the creation of a
fund for "the support of the suffering people of South Ossetia". The fund, with
a target of 1 billion rubles, is described as Usmanov's initiative, but others
are intended to contribute.
Before the Udokan award, Usmanov had been designated by then president Putin to
assist Potanin in the latter's scheme to resolve his shareholding conflict with
Prokhorov, and ward off the takeover attempt by Deripaska. In February, when
the terms of the Potanin-Usmanov arrangement were disclosed, followed Potanin's
meeting with Putin, the plan was for a cross-shareholding arrangement between
Potanin's Interros holding and Usmanov's Gallagher group, to be the precursor
for a merger of Metalloinvest assets with Norilsk Nickel.
Subsequently, Usmanov couldn't get Potanin to accept his valuation of
Metalloinvest, and they began to dicker. Usmanov said he would prefer an IPO in
London to fix Metalloinvest's value. Further reinforcement of their intention
to combine against Deripaska was called for. Again, Potanin met Putin, and on
May 29 a public statement was issued by Interros to the effect that
"considering the high potential for the growth of Norilsk Nickel value,
Gallagher company expressed its intention to acquire up to 10% in this company.
In its turn Interros considers the possibility to buy 25% plus one share in
Metalloinvest holding and intends to file an appropriate request to Russian
antitrust authorities."
It is not clear whether Gallagher has accumulated anything like a 10% stake in
Norilsk Nickel. If it has, there is likely to be far less cash in the
Metalloinvest till to meet the the investment terms which the award of the
Udokan project require. A release by Metallonvest reports that the total will
exceed 100 billion rubles. Metalloinvest does not have that kind of cash.
Together with Russian Technologies, it is far from certain that, in present
market conditions for copper mining projects, Usmanov adds to the international
bankability of the project. Their combination, however, should assure at least
$1 billion in funding from state banks Sberbank and VTB.
But there are signs that Chemezov doesn't have, and doesn't intend to put up,
the cash required to secure a half-share in the project. The Metalloinvest
release reports that "the underwriting share of Rostechnologii will make not
less than 25%. The parties agreed that the participation of other stakeholders
in the project will not be excluded."
After years of debate, foreign copper miners from outside Russia - notably,
Kazakhmys, the Chinese and Chileans, BHP Billiton, and Rio Tinto - have shown
interest in Udokan, and in taking an equity and development financing stake in
return for offtake. The Russian government reaction has been to exclude foreign
participation and curtail future exports until and unless Russia's expanding
domestic demand for copper concentrate is fully satisfied. The reference to
other stakeholders probably does not refer to foreigners.
The terms of the license award, disclosed this week by Metalloinvest, call for
considerable copper-mining experience. The terms include completion of
feasibility studies within 18 months; reserve confirmation within 60 months;
startup of a mine plan with annual capacity of 12 million tonnes of ore within
60 months; achievement of design capacity of 36 million tonnes of ore output
within 84 months; and within the same period, construction of a smelter at the
town of Yasnogorsk to turn out 474,000 tonnes of cathode copper and 62.7
million tonnes of copper wire rod per annum.
The timing is tight. According to the project schedule reported in the
Metalloinvest announcement, "the construction of the hydrometallurgical complex
on the Udokan copper field will start in 2010. The first section of the mining
and metallurgical complex with the production capacity of 150 thousand tones of
cathodic copper (12 million tonnes of the concentrate) per year will be put
into operation as soon as in 2014. The design capacity is expected to be
reached in 2016." The cost of power, roads, rail links, seismic protection, and
other infrastructure appear to be allocated to the state.
The obvious candidate to help accomplish all this, and to become third
stakeholder, is Potanin, and for a mine-operating partner, Norilsk Nickel. And
so who wins is a harder question to answer than who loses.
What has been awarded is this: Russian studies indicated a year ago that
Udokan's mineable ore reserves break down into sulfides 43%, mixed 40%, and
oxides 17%. Official reserves, according to the Russian classification, amount
to 1,310.8 million tonnes of ore, 19.7 million tonnes of copper (average grade
1.51%) and 11,900 tonnes of silver (average grade 9.6 g/t). International
studies, which include BHP and Bateman, estimate Udokan reserves at 27 million
tonnes of copper.
At the current copper price, the project resource is worth at least $135
billion, plus another $4 billion for the silver.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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