"I do not know why there was no struggle"
Russia's largest gold deposit of Sukhoi Log in the Irkutsk region, which has not been sold for more than 20 years, on Thursday, January 26 was auctioned off in just 12 minutes. The license for the development of this field the company was transferred to SL Zoloto, which in July 2016 was registered by a gold mining company Polyus (51%) and state corporation Rostec (49%). This was stated by Minister of Natural Resources, Sergey Donskoy.
As Donskoy said, SL Zoloto would pay 9.4 billion rubles to the budget. Thus, the company made only one step in the auction for 855 million rubles; the initial price was 8.55 billion rubles. And its only competitor, Zoloto Bodaibo, a joint venture of VTB Bank and entities of businessman Ibrahim Palankoev, did not haggle.
The auction, which began at 11:00 MSK, was closed to journalists. At as soon as 11:12, a representative of the Natural Resources Ministry told RBC that the bids were completed, that is, the auction lasted only 12 minutes. The auction was attended by Deputy Chairman of the Government of the Irkutsk region, Viktor Kondrashov, members of the commission from Rosnedra, the representatives (SL Zoloto and Zoloto Bodaibo) applicant companies, told RBC the Minister of Natural Resources of the Irkutsk region, Andrey Kryuchkov, immediately after the auction. "I do not know why there was no struggle; auction ended as soon as the first step was made," he added.
Zoloto Bodaibo "had a clear price target for the auction to develop Sukhoi Log," as the representative of VTB answered the question of RBC why the company was so fast to quit the race. "We do not consider the issue of participation in the project anymore," he added. Earlier Kommersant wrote that Palankoev was a partner of Suleiman Kerimov. Not that the Kerimov's son, Said Kerimov, controls Polyus. On Thursday, Palankoev's representative did not respond to a request from RBC.
Ministry of Natural Resources will "monitor the implementation of the project at all stages to ensure that all licensing requirements and compliance with environmental legislation are followed," Donskoy said.
According to the decree of Dmitry Medvedev, Prime Minister, the auction was only for companies in which at least 25% is owned by the government directly or through state-owned corporation or a federal state unitary enterprise (FSUE). Both the applicants comply with this requirement, as they had Rostec (Polyus) and VTB (Palankoev) as partners. "This auction took place largely due to Rostec that helped convince the state that the alliance of Rostec and Polyus will be a structurally correct domestic project shareholder and experienced operator of major gold projects at the same time," as told RBC the director of metallurgy and mining of Prosperity Capital Management, Nikolay Sosnovski.
"We see many opportunities for synergy with our stable operating current assets: Irkutsk region is one of the key regions for Polyus and Sukhoi Log is located just 20 km from the Verninskoye deposits," said General Director of Polyus, Pavel Grachev (his words listed in the press release). He also reminded that in this region, Polyus through Lenzoloto is actively developing alluvial deposits, and in 2015 the construction of power transmission lines (PTL) was completed here.
Polyus expects that the results of the auction will be announced before the end of February, and the issuance of licenses will take up to three months or more, the company said. After receiving the license, SL Zoloto intends to carry out further exploration and a feasibility study (FS), which will take about three to four years, according to the Rostec message. It is planned to attract international industry and engineering consultants.
However, the Ministry of Natural Resources has a more optimistic outlook for the completion of all formalities. The draft executive order on granting the right to use the Sukhoi Log deposit will be sent to the government before the end of the week, ie until January, 27, Donskoy explained to journalists. The license would be given to the winner "in a short time" after the order, he added.
According to the Ministry of Natural Resources, the development of Sukhoi Log deposit will require capital expenditures in the amount of 90-100 billion rubles. ($1.5-1.7 billion by the Central Bank exchange rate). The development of this deposit may require more: not less than $4 billion with the creation of the necessary infrastructure for the project, the head of Union of Gold Miners, Sergey Kaszuba, said. "The cost of development is huge, but for Polyus it is completely bearable, although there are still certain risks in the project," he told RBC. "We have always supported the development of the last nest egg of the USSR," he added. Free cash flow of Polyus at the end of the third quarter of 2016 (for the entire 2016 the company has failed to report) amounted to $664 million, an increase by 1.8 times over the year.
"Of course, we are waiting for substantial investment, we already have preliminary agreements. We want the company to be registered in the Irkutsk region, because our priority is the growth of tax revenues," told RBC Kryuchkov, without disclosing exact figures.
$141 million over five years
Polus, which owns 51% of SL Zoloto, will increase its stake in the project to 74.9%, reported the press services of Polyus and Rostec (another 49%) within a few hours after the victory of the joint venture in the auction. For 23.9% of the project, the gold mining company will pay $141 million. As a result, Rostec will only have 25.1%.
The settlement funds will be paid to Rostec by parts over five years, as follows from the message of the state corporation. However, Polyus will have the right to accelerate the acquisition process, it states.
SL Zoloto with registered capital of 10 thousand rubles was established just six months before the auction, in July 2016, in order to participate in the auction (SL letters in its name are from "Sukhoi Log"). Shortly before that, the general director of Polyus, Pavel Grachev, told Vedomosti, that the creation of a joint venture with Rostec was the only way to ensure the requirement of state participation in the project: only companies with state or state companies shares of at least 25% could participate in the project.
CEO of Rostec, Sergey Chemezov, at the end of December 2016 said that the corporation planned to reduce its stake in the project up to a blocking stake. "We think that 25% [of SL Zoloto shares] we will sell to Polyus, we have signed an agreement with sucn an option," he said then. He also clarified that the corporation may exercise the option as soon as at the construction stage. Chemezov didn't mentioned the share price, but noted that it should be a "money market transactions." The amount Polyus agreed to pay fpr 23.9% of SL Zoloto ($141 million) is almost equal to the payment for the license itself: 9.4 billion rubles, or $158.9 million at the Central Bank exchange rate as of January 26.
The representative of Polyus declined to tell RBC why initially Polyus had had no larger stake in the joint venture by providing Rostec almost half of the project (49%). For example, Palankoev has a 58% share in Zoloto Bodaibo, while VTB entities own 42%.
Sukhoi Log deposit was discovered in 1961 in Bodaibo district of the Irkutsk region. The share of deposits in the country's total reserves of gold is 28%. According to the State balance of mineral reserves as of 1 January 2016, the projected resources of Sukhoi Log constisted of 1.7 thousand tons of gold and 1.5 thousand tons of silver.
The first operator of the deposit, Lenzoloto with an Australian shareholder, got it at the beginning of the 1990s, but violated the terms of development and in 1998 lost the license. Statements about the plans of the new auction for the sale of rights for the deposit since then have been made every year, but everything was limited to pure words.