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Russian gold miners are profitable, low-cost producers

Since the 50% devaluation of the ruble after 2014, Russian gold miners have been the most profitable and lowest-cost in the world, but market valuations have not reflected this yet, according to Boris Yatsenko, head of metals and mining in Russia at EY.

Speaking at the Minex Forum in Moscow Oct. 6, Yatsenko said Russian companies PJSC Polyus Gold, Nord Gold SE and Polymetal International Plc were the three cheapest global producers, with all-in sustaining costs of US$610 per ounce, US$683 per ounce and US$733 per ounce, respectively.

The miners' profitability has reflected this, with all three reporting EBITDA margins of 46% or above, according to their 2015 full-year financial reports.

In fact, Yatsenko said Russian gold miners' EBITDA margins averaged 44.1%, compared to an average of 36.9% for the biggest gold producers abroad.

But this low cost, high-profit position is not being reflected in stock valuations, he said.

The ratio of enterprise value to proven and probable reserves averaged US$220 per ounce for Russian gold producers, compared to US$274 per ounce for international companies, suggesting investors have been applying as "Russian discount" to gold mining assets in the ex-Soviet nation.

But despite their high profitability, Russian miners are spending, on average, less than international counterparts on exploration.

Last year, Russian miners spent US$421 million on drilling, ranking the country eighth in the world in terms of overall exploration spending that year, well behind Canada, Australia, Chile and even Mexico.

Russia, meanwhile, rated far lower on the Canadian Fraser Institute's investment attractiveness index, at 47th place, Yatsenko said, reflecting concerns among mining investors about mining policy, political risks and high levels of red tape.

But he showed that the country also ranked 17th on the institute's Best Practices Mineral Potential index, indicating investors still see Russia's geological resource base as attractive. It was the policy risks, not the the geology, that was holding the country back, he said.

In order to improve Russia's standing and attract investment into mining, the government must act to improve the business environment, stimulate investment using tools like government-backed development funds and tighten up mining regulation, Yatsenko noted.

He said a pilot government initiative should focus on the far-eastern federal district, including investing in the upgrade of the Baikal-Amur Mainline rail tracks, which many mining companies use to transport bulk commodities through eastern Siberia to the Pacific coast.

More investment was necessary to improve ports and infrastructure on rivers in the far east region, including the Lena and Aldan rivers, while tax breaks were also needed for projects developing hard-to-reach deposits.

On regulation, Yatsenko called for a loosening in the criteria for Russia's law on strategic deposits, which presently obliges companies seeking to exploit mineral deposits deemed "strategically important" to jump through burdensome administrative hoops.

For gold, a strategic deposit was any deposit above 50 tonnes. He suggested lifting this limit to 250 tonnes, with lifts also suggested for other "strategic" minerals, including palladium and diamonds.

He also stated that Russia must go further in changing its claim-staking rules. At present, explorers that make new discoveries in previously mined areas have no guarantee they will retain rights to the deposit, since, under Russian procurement laws, rights to deposits must be publicly auctioned.

The government must also further subsidize infrastructure developments in the Russian Far East and other remote regions. The lack of transport, port and energy support in these areas is significantly constraining investment, Yatsenko said.

Rules on foreign ownership of major mining projects must also be relaxed, he said. At present, foreigners are restricted from owning more than 25% of a strategic deposit. Yatsenko suggested lifting this to 49%.