Kinross Expands in Russia’s Far East

Since the collapse of the Soviet Union in 1991, Canadian companies have been playing a leading role in developing mining projects in Russia and other former Soviet republics. Although Russia’s large, relatively unexploited gold resources have come under scrutiny recently by media as investors have encountered difficulties with the government, a handful of firms such as Kinross Gold Corp. have taken the plunge–and come out on top. The company’s success in the Far East region of Magadan is due in large part to the wide-ranging support of the European Bank for Reconstruction and Development (EBRD) and the Canadian Trade Commissioner Service.

On a remote site one degree south of the Arctic Circle, reachable in winter by a 300-km ice road and in summer only by air, lies Canada’s single largest investment in Russia. The US$260-million Kubaka gold mine in Magadan, developed by Kinross Gold, is a model for how foreign investment and expertise can boost production in the region.

Established in 1993, Kinross is the world’s seventh-largest gold producer. The company moved into Magadan in 1997 with US$175 million in funding from the EBRD, the Overseas Private Investment Corp. (OPIC) and ABN Amro Bank, and built a plant with the capacity to mill 2,100 tons of gold ore per day, using state-of-the-art refining equipment made in Canada. Production rapidly soared, turning Magadan into Russia’s largest gold-producing region.

The Kubaka site is a far cry from the Gulag gold mines of the Stalinist era, when prisoners were shipped to Magadan’s port and sent north along the Road of Bones to dig for gold and die. Today, the mine’s 230 workers live in modern housing with recreational facilities, and are protected by strict safety measures on the job.

Perceptions difficult to change

There has been little direct foreign investment in Russia’s mining sector, due in large part to investors’ perceptions about the country. “In spite of what you hear about bureaucracy and conflicting laws and regulations, our experience has been that we have actually been able to get the attention of senior officials and obtain permits, licences and similar things needed to accommodate operational changes more quickly than we could in a North American context,” says John Ivany, executive vice-president of Kinross Gold. “The ruble devaluation, although crippling to most of Russia, has allowed us to maintain a very low cost structure at Kubaka. We have also avoided many of the well-known negatives. We have never been extorted, nor been asked for a bribe.”

Steering clear of pitfalls has been facilitated by the leverage of EBRD and the excellent business network of the Canadian Embassy in Moscow. “Having a strong partner, such as the EBRD or one of the other multilateral agencies that have independent influence in Moscow, can mitigate the risks of operating in Russia,” says Ivany. As the largest foreign investor in the region’s private sector, EBRD’s experience, knowledge and standing has helped Kinross to determine the trustworthiness and capabilities of local firms. “EBRD’s role as a debt and equity partner has also provided the equivalent of political risk insurance,” adds Ivany.

Kubaka’s open pit has been closed since 2002, but Kinross is still processing low-grade ore from its stockpiles and three small underground mines. In partnership with EBRD, the company has embarked on other projects in the Russian Far East. These include the development of the Birkachan satellite deposit, located 30 km north of Kubaka, and assessments of the mineral-rich but largely unexplored Kamchatka and Chukotka peninsulas. To support these and future endeavours, Kinross recently appointed Colin Belshaw as its general manager for its Far East operations.

Gloria Monson is a consultant to the federal government ministry International Trade Canada (www.itcan-cican.gc.ca).