Businessweek Archives

Digging For A Mother Lode In Mother Russia


Industries

DIGGING FOR A MOTHER LODE IN MOTHER RUSSIA

Under a larch-covered mountain slope in Russia's remote far east, 290 miles from the grim port city of Magadan, lies the Kubaka gold deposit, one of the country's richest. So rich, in fact, that one U.S. company, Cyprus Amax Minerals Co. of Englewood, Colo., is braving Russian winters, rough operating conditions, and the risks of a first-of-a-kind joint venture to get at it.

It seems like a well-timed foray for Cyprus and its five Russian partners, which include Geometal, a private company, and Dukat, a government agency. World gold prices have risen from $330 an ounce in January, 1993, to about $390 now, giving Cyprus faith that it can turn the mine into a moneymaker. The company hopes the mine will produce up to 315,000 ounces a year. On the Russian side, the government has been wrestling with ways to revive its flagging gold production, so it is eager for more efficient Western technology and outside investment.

The venture spells major change for Russia's mineral-rich far east, which remained largely off-limits to foreigners almost until the end of the Soviet era. Historians estimate that more than a million people perished in a brutal network of Magadan gulag camps set up to mine the gold and other minerals. Today, the gulags are gone and the area is opening up, with direct flights linking the regional capital of Magadan to Anchorage, Alaska. The success of the Cyprus venture, called Omolon Mining Co. after a nearby river, could usher in even greater change. "People are watching this very carefully," says Marc D. Cohen, an analyst with Kidder, Peabody & Co. "If they can make it work, I think it could attract other major gold producers into the area."

But even officials at Cyprus Amax, which has $2.5 billion in revenues, acknowledge the big risks involved. "This is the hardest project that I've ever worked on in my life," says Michael Harrington, a Cyprus vice-president for development who has made more than 30 trips to Russia. "How it's going to turn out, God only knows."

A big problem is logistics: No road connects Kubaka to the outside world--except one made of ice that's open only in winter. Cyprus, which has pledged to protect the delicate tundra, cannot build an all-weather highway to truck in equipment during the short but crucial summer season. Another problem is the impact of inflation and unforeseen expenses on the estimated cost of the project, which has gone from $105 million to $180 million in one year. And Cyprus now says it will not open the mine in 1996, as originally envisioned.

An airstrip planned for the site should help. So will $105 million in loans from the European Bank for Reconstruction & Development and the U.S. government's Overseas Private Investment Corp., which has also insured the project for $150 million. Cyprus hopes it has won the goodwill of the local reindeer herders, known as Evens. According to Andre Khalkatchan, an Even native, Russian miners destroyed large stretches of pasture: "In those places, there are no animals and birds."

Cyprus promises that the open-pit mine under construction will disturb only a tiny part of the tundra and will meet U.S. environmental standards by recycling any dangerous chemicals used in extracting the gold. The joint venture has also flown some of the native leaders to North America to visit mine sites, and it has vested the regional native association with a 6.6% interest in the project.

AIRLIFTS. The generosity of the native deal, as well as the other costs, leaves some in the U.S. wondering if Cyprus is imperiling the venture's profitability and setting a standard other U.S. outfits might find hard to match. "A lot of people think they gave away the store," says one U.S. mining official. Says Harrington: "If we didn't think we could make money, we wouldn't be there."

One factor that could put the whole project at risk is the role of the Russian government, which remains the monopoly buyer of gold. Government payments to the mining industry are mostly in rubles and frequently come months late. With Russian inflation high, the payments often end up far less than the world price, according to Illya Rosenblum, the geologist who represents Cyprus Amax' Russian partners. As a safeguard, the joint venture has negotiated the right to sell gold directly to international buyers if the government fails to pay on time. Of course, the government must still make good on that pact once the mine is opened.

Then there's the risk--literally--of highway robbery. Some Russian studies estimate that as much as 30% of the Magadan gold is sold through the black market, and the region is a hotbed of smugglers. Last January, Magadan militia arrested members of four gangs and charged them with carrying out attacks on the gold fields. Cyprus officials hope Kubaka's remoteness and their plan to fly the gold out will foil the brigands. However the project turns out, this is one case of gold fever that will cost plenty.Hal Bernton in Magadan, Russia


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus