29 May '09
Oleg Kouzbit, Online News Managing Editor
Russia’s Polymetal and South Africa’s AngloGold Ashanti have announced ending their JV and may even disband their gold-producing project in Siberia. The JV was set up less than a year ago and has apparently cost its founders more than $8m in “unrecoverable costs.” Polymetal is hoping prospective license sales for its JV fields will bring it at least $100m. Despite gold prices hovering near $1,000/oz., AngloGold Ashanti is facing a tough time given the collapse in the gold-mining sector back home. Polymetal’s future looks brighter—it intends to boost gold production, settle its debt and even purchase new assets.
Earlier this week Polymetal, one of Russia’s leading gold producers, and its South African partner, AngloGold Ashanti, surprised the market by announcing discontinuance of investment in all five gold fields run by the companies’ JV Taiga Gold in Siberia.
RB.Ru Russian Business cites AngloGold’s report as saying the JV itself will fade very soon. The South African company says preparation for sales of JV-owned exploration and production licenses is under way. Nevertheless, the parties reportedly hope to remain good partners and possibly team up again for other projects in Russia or the CIS.
How it all began
AngloGold Ashanti is the world’s third largest gold-mining company operating on four continents. It was established in 2004 through an AngloGold and Ashanti Goldfields Corporation merger.
Polymetal and its subsidiaries produce gold in five Russian regions, including Magadan, Sverdlovsk, Transbaikal, Krasnoyarsk and Khabarovsk. It extracted 285,000 ounces last year, generating $502.7m in sales.
The two struck a strategic deal in September 2006. To corroborate its commitment AngloGold Ashanti went as far as breaking up with other partners, including the U. K.’s Eurasia Mining, with which it teamed up in 2005 to do projects in Russia’s Transbaikal and Buryatia regions.
JV Taiga Gold was set up in 2008. The founders brought into it gold fields in Krasnoyarsk and Transbaikal regions, including Annenskoye, Bogunai, Veduga, Sovremenny and Aprelkovo-Peshkovsky. The JV later won a license for a piece of the Penchenga field in Krasnoyarsk Region.
No bed of roses
According to Polymetal, Taiga Gold is being liquidated because “the costs of its field development are unrecoverable.” It looks like the JV was plagued from its conception, and Polymetal could only report the partners’ loss of $8m for 2008.
As woes were deepening, Polymetal owner Suleiman Karimov officially announced in May 2008 he was in talks over a sale of his company. Investfunds named Polymetal’s JV partner, AngloGold Ashanti, and Canada’s Barrick Gold among most likely buyers. But no deal panned out.
Prior to the current crisis the partners were discussing options for construction of a $500m integrated gold production hub in Krasnoyarsk Region, RB.Ru reports. With the economic meltdown eroding plans, Polymetal now opts to focus on its profit-making assets rather than infuse cash into unexplored ones. Experts believe it’s a smart move in the current environment.
FG BKS’ Oleg Petropavlovsky feels that “…the dumping of licenses will help the company beef up liquidity and re-channel cash into its ongoing projects with no need for credit.”
What’s it worth?
According to Polymetal’s Executive Vice-President for Strategy Pavel Danilin, the JV partners have agreed on license sales and are hoping to fetch at least $50m per license.
Unicredit Securities’ Marat Gabitov and Tim McCutcheon, managing partner of DBM Capital, however, do not think Polymetal will be able to find many buyers willing to pay $50m each for its licenses.
Vedomosti thinks Polymetal should get $60-80m for its Veduga in Krasnoyarsk Region alone as it has a solid JORC-registered reserve of 2.7 million ounces. But analysts are not so sure about others, because their exploration has just begun.
They cite the fact that one of the JV licenses, Krasnoyarsk’s Bogunai, already dumped in April to Canada’s Kola Mining for just $700,000, cost AngloGold more than $26m in 2005.
An undue marriage or an infidel spouse?
Polymetal has recently reported plans to double gold production by 2012 to 630,000 oz/year. This year’s projection is 280-300,000 ounces.
Despite a $300m debt as of the end of 2008 the company is in successful talks with creditors and even intends to acquire two new gold-mining assets this year, CEO Vitaly Nesis announced. The search and due diligence reportedly continue.
Analysts believe the firm might also be interested in Trans Siberian Gold (TSG), a British gold miner operating in the Russian precious metal sector.
With all these irons in the fire, Polymetal is ending its Taiga Gold with optimism. Its JV partner, on the other hand, is hoping to hang on to its Russian connection.
In its mid-May report RBC daily said gold production in South Africa had fallen by an annualized 7.6% by April, causing a sector nose-dive unseen since 1922. AngloGold Ashanti shed 2% of its value within a month. Experts predict a further downfall as the crisis shows no clear sign of subsiding.
The cost of gold production in South Africa is very high as extraction is done at two-mile depths and more. It was $445/oz as of April 1, according to AngloGold Ashanti’s official website. Given current gold prices at global exchanges (for instance, May 28 NYMEX close was $959/oz) production profitability in South Africa is lower than in Russia where the cost of one ounce is an average $350 or less.
When it was first announced, the JV made sense. But given the current reality, it’s probable that Polymetal initiated the divorce because its JV dream no longer fits the Russian company’s independent – and fairly wide-ranging – designs and aspirations.