The Russian metals and mining space saw renewed interest from investors in 2017, with Russia's largest gold miner, PJSC Polyus, returning to the London Stock Exchange with an IPO worth US$879 million after a two-year absence. Russian steel and aluminum players such as PAO Severstal and United Co. Rusal Plc also saw an uptick in activity as the Chinese government moved to make massive capacity cuts in an effort to improve air quality in cities.
For the first nine months of 2017, gold production in Russia rose 6.4% to 227 tonnes, according to the country's Ministry of Finance, while leading steel producers PJSC Novolipetsk Steel and Evraz Plc showed improvement in their year-over-year output for 2017.
In terms of outlook for the year to come, steady economic recovery coupled with higher commodity prices will lay the foundations for more consolidation activity in the mining space in 2018, Alexey Tsoy, principal consultant at CSA Global, told S&P Global Market Intelligence.
Analysts have expressed optimism for the growth of the Russian economy. Goldman Sachs came in with the most optimistic forecast at the beginning of 2018, predicting a growth in GDP of 3.3%. Economic Development Minister Maxim Oreshkin responded to the outlook at the Gaidar Forum in Moscow on Jan. 17, saying that while the economy is expected to perform better, such a large figure is unjustified.

Tatiana Lysenko, EMEA senior economist at S&P Global Ratings, put Russia's real GDP growth in 2018 at an average 1.6%, based on the assumption that Brent oil price averages US$55 per barrel this year. She said Russia's recovery continues at a "modest pace."
"Still, in our view, higher oil prices are not likely to meaningfully boost economic growth at the current juncture," Lysenko told S&P Global Market Intelligence on Jan. 19.
Although the uptick in oil prices in 2017 helped to improve Russia's fiscal outcomes, it did little to lift growth in 2017, and this is something that will continue into 2018, Lysenko said.

"On the upside, this cautious approach to fiscal policy helps to keep inflation in check. This should in principle allow the Central Bank of Russia, CBR, to reduce the key rate at a faster pace, which would support growth," Lysenko said.
She added that although global financial conditions are set to tighten, the Russian economy is not particularly exposed, "due to its continuous current account surpluses and strong external balance sheets."
Some short-term volatility in currency and bond markets could be in the cards if the U.S. implements sanctions on Russian sovereign debt.
"Even if the ban extends to all current debt, and not just new issuances, we think the debt stock will be absorbed by domestic players. The Russian government still has assets, and also some flexibility in adjusting expenditures if needed, at least for the next few years," Lysenko said.
In light of a more positive outlook for Russian growth and generally higher commodity prices, Tsoy said an uptick in investor interest and an increase in deals are likely.
"We see a raising interest to the industry from both mining companies and financiers, and it will probably convert into some deals in coming years," he said Jan. 15.
Soviet heritage
However, he expects that the deterioration of grades and production at deposits discovered in the Soviet Union could be a source of volatility in coming years.
"The biggest ones are still exploiting (the) old Soviet resource base. And both grade and continuity will start to deteriorate sooner or later," said Tsoy, adding that, on the positive side, this should force Russian companies to adopt a "leaner approach to business."
One of the main issues holding back new exploration is the Russian government's lack of legislative action and the difficult environment for junior miners. Tsoy said junior miners tend to be the main driver of new discoveries, but in Russia, they are a relatively rare beast compared to other jurisdictions. He went on to say that as it stands, the situation is unsustainable, as current deposits are being depleted and very few new mines are being launched to replace them.
Andrey Lobazov, a metals and mining analyst from Aton, argued otherwise, saying Soviet heritage deposits still held a lot of promise for Russia and the CIS as a whole.
"The largest deposits in Russia were discovered during the Soviet Union. This situation this year will not change as there is still huge potential for development of these deposits — Natalka, Sukhoi Log and Kyzyl in Kazakhstan, to name a few."
In Lobazov's view, the developing vehicle batteries market will give a boost to nickel and copper producers such as PJSC Norilsk Nickel Co. and the Ural Mining & Metallurgical Co. However, he said the electric vehicle market is a long-term prospect, and it will likely take several years for an increased demand to have a significant effect on the mining sector.
Norilsk holds a similar opinion and believes that the outlook for the automotive and battery sectors is more nuanced. At the company's capital markets day in November 2017, head of strategic marketing Anton Berlin said that in the midterm, hybrid vehicles would be more significant as they also require platinum group metals to reduce emissions. By 2025, the company estimates that the number of hybrid vehicles in circulation will reach 10 million units.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
