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In Russia, All That Glitters Isn't Nickel


Norilsk Nickel. The name says it all: Russia's largest metals producer dominates the global market for nickel, used in everything from batteries to stainless steel alloys. But isn't nickel a trifle prosaic? Maybe Norilsk needs something more exciting -- like a trip to the gold fields.

Over the past 18 months, in fact, Norilsk has spent some $1.57 billion to acquire a hefty portfolio of gold assets. The biggest deal: Norilsk's decision in April to pay $1.16 billion for 20% of South African company Gold Fields Ltd., the world's fourth-largest gold miner.

Owned by tycoon Vladimir O. Potanin, Norilsk started gold shopping when it spent $226 million to acquire Polyus, Russia's largest gold producer. Last year, Norilsk paid $187 million for stakes in two other locals, Lenzoloto and Matrosov Mine. Why such a spree? "The outlook for gold looks great, and it's a natural hedge against a global downturn," says Leonid B. Rozhetskin, deputy chairman.

Gold production in Russia is indeed rising rapidly. It was was up some 10% a year between 1999 and 2003, underlining the potential for investment and new technologies to revitalize the once-neglected industry. Russia is the world's fifth-largest gold producer, turning out 5.9 million ounces in 2003, and is set to become No. 4 this year, behind South Africa, Australia, and the U.S.

TIGHT SUPPLIES

Russian cheap labor and energy keep production costs low: a mere $130 an ounce, vs. $200 or more in most countries. In South Africa, for example, strong unions have driven up wages. And as mines age, miners have to dig deeper, boosting costs.

Meanwhile, the price of gold, at $395 an ounce, is the highest it has been in a decade, with investors piling in as they traditionally do when the dollar is weak. What's more, production is flat or declining in South Africa and Australia, so supply will stay on the tight side, providing a firmer floor than usual to prices. Prices also tend to hold up better when the global economy slows down, making gold a hedge against falling prices of industrial metals such as nickel and palladium. And Russian gold deposits are dirt cheap: The country's murky politics deter full-fledged bidding by foreign investors. Norilsk paid just $10 per ounce of reserves for Polyus -- less than a third of the cost of reserves in other countries. Norilsk, in fact, paid far more for its South African gold than for its Russian deposits. "I do not see what the synergies are between acquisitions abroad and operations in Russia," says Maxim Matveyev, metals analyst at Russia's Alfa Bank.

Gold Fields, however, could share its industry knowhow with the Russians. Gold Fields has perfected advanced mining processes such as bioleaching, which uses bacteria to separate gold from ore. Bioleaching is more effective than traditional techniques when the gold concentration in the ore is low, as it is in Russia.

Fedor Tregubenko, metals analyst at Brunswick UBS, speculates that Norilsk may even up its stake in Gold Fields to 50%, with Gold Fields getting a stake in Norilsk's gold assets in return. Norilsk could eventually spin off these properties into a stand-alone venture. Gold company shares traditionally fetch much higher prices than those in basic metals companies. Sure, nickel can have a nice shine. But winners go for the gold.

By Jason Bush in Moscow


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