Date: Fri Sep 10 1999 15:57
Goldteck (Russia's Biggest Gold Mine Says Taxes Killing Profit The Kubaka mine is one of Kinross' most efficie) ID#431200:
Copyright ¸ 1999 Goldteck/Kitco Inc. All rights reserved
Russia's Biggest Gold Mine Says Taxes Killing Profit Bloomberg NewsSeptember 10, 1999, 3:12 a.m. Magadan, Russia, Sept. 8 ( Bloomberg ) -
When Russia's biggest gold producer, the Omolon Gold Mining Company, started in 1994,gold was $385 an ounce and the country's bureaucracy and
tax
system seemed conquerable.Then the price of gold plunged more than 30 percent, the government slapped new taxes on production and the company
spent years trying to win permission to export. Now Omolon, 53 percent owned by the Toronto-based Kinross Gold Corp., North America's
fifth-largest gold producer, is barely breaking even.With its headquarters in a former administration building
for the area's Soviet-era labor camp system, Omolon is the first Russian joint venture gold mining company since 1917. The mine,known as Kubaka, is
the country's biggest producer; last year it extracted 15 tons of the country's 105 tons of gold. High taxes,however, are keeping it from turning a profit
and could kill other investment in the area's more than 100 gold deposits.``Back about five or six years ago, there were a lot of international mining
companies looking to form partnerships,'
said Bill Fotheringham, Omolon's general director. ``Kubaka is running -- find me another one. There isn't one.'More than 2,600 tons of gold have
been mined in the Magadan region since production began in 1931, mainly by the 780,000
prisoners Josef Stalin sent to the region in those early years.The biggest drop in production occurred in 1956, the year of the Communist Party's 20th
congress after Stalin's death, when many of the prisoners were released.The region produces more gold than any of Russia's other 88
regions, mining 30 tons last year, more than double the 14 tons produced by the Krasnoyarsk region, the second-biggest producer.Cost-Cutting
The company slashed costs this year by about $1 million per month in the first six months versus the same period last year.Even so, the mine is just
breaking even as taxes eat up profits.`We'll pay the banks back for the financing but that's
about it,' said Fotheringham. ``The mine is not profitable under today's price and the current mine life,' which expires in 2004 if no further deposits are
found.Kinross, which merged last year with the Amax Gold Mining Company, a subsidiary of Colorado-based Cyprus Amax Minerals Co.,has mines in
Zimbabwe, Chile and the U.S. It lost $24.7 million in the first six months of this year.In its Russian venture, revenue-based taxes eat up about 25
percent of Kubaka's income while the price of gold has fallen by more than $100 an ounce, or 27 percent, since the mine began
construction in 1994. Omolon based its finances on a gold price between $375 and $400 per ounce. In London trading this morning,gold fell to
$256.20 per ounce, from $256.80 per ounce yesterday.`System Ridiculous'The mine spends about $100 to produce one ounce of gold,
then must pay another $45 per ounce in revenue-based taxes. On top of that, the government introduced a 5 % export duty on gold earlier this year,
and the mine must pay income tax, which
adds another $10 per ounce to the production cost. According to Russian law, the company must pay tax even though it isn't making a profit.
``There's no place in the world where you pay anything like this,' Fotheringham said. ``The tax system here is ridiculous --there is no sense of reality or
of a reasonable return on an
investment.'Russian President Boris Yeltsin signed a decree in 1995 giving Omolon the right to export gold through commercial banks.
The company, however, was unable to persuade government agencies to honor the decree and the company didn't actually win the right to export until
last September. The timing, as it turned out, was terrible.In August, 1998, the government had defaulted on its Treasury debt, leaving it, and most
commercial banks with insufficient money to buy gold.Obstacles It finally was able to begin exporting in late September,Fotheringham said.``We had a
signed decree before the mine was even built, but when we went to do it, there were obstacles to doing what we had a legal right to do,' said
Fotheringham. ``How are you supposed
to run a business that way?'The mine sold almost all of the gold it's produced this yearto the state, after exporting through Rosbank, formerly Unexim
Bank, from October through December of last year. Omolon prefers selling to the state, which gives the best rate -- approximately
the rate on the London Metals Exchange -- and half in foreign currency. Though the mine doesn't have the right to export on its own, it can export
through a local commercial bank or simply sell to the local bank for rubles.The state hasn't bought Omolon's gold over the past few
weeks and the mine is now working out the best way to sell. It will probably keep working with Rosbank and Lantabank, said Fotheringham. This year,
Omolon expects to produce about 450,000
ounces, above the budgeted target. Production next year should be about the same.Foreign-Currency Needs ``Without the tariff it was more
cost-effective to export,'he said. ``Now it will be cheaper to sell domestically.'Omolon needs foreign currency to pay interest on its loans.
The company paid for the construction and start-up of the $300 million mine with loans from the European Bank for Reconstruction and Development,
and the Offshore Private Investment Corporation,
as well as with equity. Only $40 million was financed in Russia.Kubaka employs about 350 people, operates 24 hours a day and cost about $250
million to build and needed between $40 and $50 million in working capital to start. Its taxes comprise about 33 percent of all tax revenue to the
regional budget. Since 1993,
foreign companies have invested about $232 million directly in the Magadan region - most from Omolon.Several other joint-venture projects in the area
have begun construction at mine sites, including the Julietta gold mine,majority owned by Canada's Bema Gold Corp., and the Dukat silver deposit,
majority owned by Canada's Pan American Silver Corp.Neither have begun production yet.The regional government says its looking for $550 million to
develop several rich sites in the region, including the Natalkinsky deposit, with as much as 400 tons of gold.
Fotheringham warned investing in a Russian mine may not be as profitable as it first seems.
``It isn't easy starting up here - nothing happens
quickly,' said Fotheringham. ``If one person wants to slow you down, and I mean even at the seargent level, he can stop you dead in your
tracks.'Ice-Breaking Costs Based in a remote corner of the Magadan region, 900
kilometers from the capital city, Omolon ships most supplies to the site from December to mid-March when rivers are frozen and easier to navigate.
This year, the regional government said it will pay for maintaining the port only in summer, which leaves Omolon to foot the bill for ice-breaking in the
wintertime when Magadan's port freezes.This is just another tax, said Fotheringham.``There are these hidden taxes,' he said. ``These tax policies are so
short-sighted as far as encouraging foreign investment.'
`Borrowing' Fuel Last year the regional government confiscated some of Omolon's shipment of fuel, then later paid for it by canceling a
portion of the company's tax payment. The problem is that the taxes were owed in rubles and the fuel had to be paid for in dollars. The company uses a
new local gold refinery to process its gold, though sometimes it must ship the gold to a refinery in Western Russia to complete the job, which is more
expensive.``Anywhere else in the world you'd have the $100 per ounce cash costs and even at these gold prices it would be a pretty
good operation, but when you pull 20 percent of your gross revenue . . . it's just crazy,' he said. The Kubaka mine is one of Kinross' most efficient. The
15 tons of gold a year produced by the mine's approximately 400 employees far exceeds the 1.4 tons produced last year by the 2,000 employees of
the region's third largest mine, OAO Berelyokh. The two biggest mines in the region after Kubaka produced about 3.2 tons of gold last year.``It's a
really well-run operation,' said Fotheringham. ``I know it's the best mine by far in Russia.'
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