State May Ease Mining Laws

The government is considering an easing of mining laws designed to protect domestic producers because they’re deterring foreign investors and curbing development, Deputy Minister of Natural Resources Sergei Donskoi said.

The government may streamline the approval process for foreign investors, give them tax breaks and increase compensation should the state decide to take back assets.

“We have proposed that the government amend the legislation,” Donskoi said in an interview. “We realize that the new laws are hampering exploration.”

Exxon Mobil and Canada’s Barrick Gold have said the so-called strategic deposit legislation risks damaging the economy to protect local companies as they compete for the country’s mineral wealth.

“The thing with strategic deposit laws is that they are scaring off other investors who were considering coming to Russia,” said Sergei Lobov, manager of Barrick’s Fedorova Tundra project in the country’s northwest, which has been delayed by the legislation.

The laws, which came into force in May 2008, cover deposits deemed to be “strategic.” They include resources of more than 50 metric tons of gold, 70 million tons of oil and 500,000 tons of copper. Developers need permission from authorities including the Federal Security Service and Prime Minister Vladimir Putin.

Russia adopted the rules to clarify procedures after the state forcibly gained control of Royal Dutch Shell’s Sakhalin venture in 2006 and threatened to revoke licenses to TNK-BP’s Kovykta gas field in 2007.

“It was timely in 2007 and early 2008 when prices for deposits peaked,” said Mikhail Leskov, a partner at NBLgold, a consultant advising mining companies including Petropavlovsk. “Now, as the market plunged, it looks like this legislation limits exploration and drags Russia’s mining industry behind international competitors.”

The state can take back a deposit from developers and pay their costs plus a premium of 30 percent to 50 percent. Critics say that deters investors because it ignores the value that exploration companies can add to a deposit by proving reserves.

“Companies may fail to prove large reserves at a field, or they may succeed,” said Lou Naumovski, a vice president at Kinross Gold. “Limiting the amount of return for high-risk exploration ventures makes little sense, as companies are more likely not to bother exploring if they see a limitation on the potential returns for their efforts.”

The Natural Resources and Environment Ministry is proposing to gauge the market value of deposits where licenses have been withdrawn and pay investors half that amount, Donskoi said in a Nov. 10 interview in his office in Moscow.

“No government body is acting independently in Russia” said Konstantin Simonov, head of National Energy Security Fund, an independent consultant. “The ministry obviously reacts to signals sent by Vladimir Putin, who said earlier this year the bureaucratic procedures should be streamlined for foreign investments.”

The ministry’s proposed changes are “all halfway measures,” said Valery Braiko, head of the Russian Gold Producers’ Union. The group is lobbying for the ministry to raise the threshold for strategic gold deposits to 200 metric tons.

The current 50-ton threshold “means investors need to get this multistage approval at as high a level as Putin to develop a pretty small deposit,” Braiko said. “It’s ridiculous.”

Some foreign companies have succeeded in bringing projects into production. London-based Petropavlovsk mines gold in eastern Russia and said last month that an expansion was ahead of schedule at its Pioneer pit. Kinross started output at the Kupol mine last year, becoming the largest gold producer in Russia after Polyus Gold.

Barrick has made less progress and is still renegotiating the right to build its Fedorova mine, having previously been granted an exploration and development license. Robin Young, chief executive officer of Amur Minerals, a London-based miner, said his company faces the same situation with its own Russian project.

Other companies quit Russia altogether. Zoloto Resources, a Canadian gold explorer, stopped investing in the country last year after the laws were passed, company spokeswoman Yana Bobrovskaya said.

De Beers, the world’s largest diamond company, withdrew from a mining joint venture in January after talks with the Federal Anti-Monopoly Service about the processing of gems in Russia, said Tom Beardmore-Gray, a spokesman for De Beers’ former joint Venture partner Archangel Diamond. Lynette Gould, a spokeswoman for De Beers, declined to comment.

Russia has the world’s largest reserves of gold deposits, after South Africa and the U.S. Russia’s production gained 15 percent to 151 metric tons in the first nine months of 2009, according to the producers’ union, driven by output from Kinross and Petropavlovsk. Supply will decline in the “medium term” after smaller foreign miners fled Russia, Vitaly Nesis, CEO of Russian precious metals producer Polymetal, said in October. “Russia obviously has a right to protect its national interests and give some preference to domestic miners,” Naumovski said. “Looking from another angle though, Russia is competing with other countries for investments in its resource sector and may lose this competition unless it considers amending the strategic law.”