Is Rio Tinto about to commit a massive error? Or make a huge pile? And is there any real difference

Is Rio Tinto about to commit a massive error? Or make a huge pile? And is there any real difference between the two?

by London Calling

6th February 2006

London Calling Special: a cautionary tale of the bull and the bears

Almost unnoticed by financial journalists, Rio Tinto has formed a partnership with Norilsk Nickel - currently the world's biggest nickel producer (until Inco finalises its intended merger with Falconbridge).

In a single stroke, according to Mineweb's superlative Russian correspondent, John Helmer: "Rio Tinto has bought itself an admission ticket to the owner's enclosure for the running of one of the biggest and richest stakes race in modern mining history. And, unlike...Gold Fields...[Leigh] Clifford [Rio Tinto's CEO] hasn't paid, or risked a penny, for his place at this betting window."

The reference to Goldfields relates to the deal made two years ago, by which Norilsk ended up with 20% of Goldfields - a company notorious for its deadly dangerous operations in Ghana and elsewhere.

Although exact terms of the Norilsk joint venture aren't known, Rio Tinto has surely landed a Very Big Fish indeed. If we had any doubts about the company's legendary ability to trounce its rivals in the race for resources, this may put them finally to rest. It could make Rio's audacious 2000 seizure of Australia's North Ltd, from under the eyes of Anglo American, seem like grabbing oranges beneath a market stall.

On paper, the new joint venture doesn't give Rio Tinto direct control of any mine or deposit in Russia; nor is the UK-Australian megalith yet intending to purchase equity in Norilsk. This is hardly surprising, given the ongoing battle between president Vladimir Putin and the so-called "oligarchs" - a bitter contest which Putin intends to win by the time he steps down (should he actually do so) in 2008. If Putin does triumph, Norilsk may end up in state hands, and Rio Tinto find its 49% share in the joint venture bought out. Not having paid upfront for the stake - though it will have to fork out millions on exploration and proving-up deposits - it's a gamble Rio Tinto is both used to and obviously happy to make.

Only a couple of years back, Robert Friedland's Ivanhoe made a successful play for the huge Oyu Tolgoi copper-gold lode in Mongolia. The government late last year threatened to re-nationalise some mineral assets, but Ivanhoe claims it had already secured itself from any takeover. That won't be half so easy for Rio, as it trips across the taiga, but Putin himself may be looking to the Big Brit as an ally, rather than adversary.

Currently Vlad the impaler is locking horns with Vyacheslav Shtirov, the regional president of Sakha, which is home to Alrosa, the world's second biggest diamond producer. Putin wants Alrosa to diversify into other minerals and metals and possibly force a merger with Norilsk. Rio Tinto would then be more than happy to offer its expertise and attract foreign investment, in return for unprecedented access to new stamping grounds.

(London Calling remembers, back in 1994, standing with a Finish indigenous leader on the border between Saamiland and Russia, an area coveted by the UK company until international pressures forced it to withdraw. We could almost glimpse those Far Eastern Alrosa diamonds glinting in Rio's eyes).

It's not hard to see what benefits the world's second biggest mining company will get out of the joint venture if all goes according to plan: access to nickel of course, but also gold, copper and diamonds.

Until recently Rio Tinto and other multinationals in the extractive sector (a notable exception is BP) have left hands-on foreign involvement in Russia mainly to the juniors. But Rio's in no doubt of the potential value which can be "unlocked". In theory success in Russia could propel the company to world number one in output of a wide range of non-ferrous and precious metals. Its nearest and dearest rivals at BHPBilliton, Anglo American, Barrick, Newmont - possibly Inco, too - must be gnashing their teeth in disappointment and frustration.

The risks they run

But if Rio isn't running many fiscal risks - and stands to gain vast rewards - it may be a very different story for those currently being poisoned by Norilsk (almost certainly the worst single toxic polluter in Russia - and that's saying something!); and those in areas where expanded exploration may lead to new mines. Norilsk has stated that the joint venture will aim at digging up "gigantic" deposits - a prospect Rio Tinto must view with glee. After all, its fortunes were enormously boosted in 1995 when it secured a minority stake in Freeport McMoran, thus gifting it 40% of all copper and gold from what swiftly became the world's biggest single mine.

Already, the Chitka and Irkutsk regions of Central Siberia have been named as key targets for the joint venture. What does this mean for the "small indigenous peoples" (so-called) of the North? Over decades the Evenks in particular have experienced enormous attrition, both under state capitalism (Soviet communism) and, more recently from oil and gas exploration under the oligarchs. They suffer from pollution, alcoholism and general ill-health, underpinned by denial of basic land rights, let alone any semblance of fully informed prior consent to what is done with their land and resources (mainly reindeer herds).

One can hear Rio Tinto protesting that, precisely because these scattered communities are in such desperate shape, they need the programmes for income generation and social renewal which it can provide: "Look at what we did in Canada's North West Territories - where we carefully protected the caribou and their migration pathways from the impacts of the Diavik mine."

Which, of course is not the point - or at best only a marginal one. (If the company hadn't gone there in the first place, no threat would have existed). The Cree around Diavik at least had a right to pre-empt company proposals (the Evenks don't), and negotiate benefits packages (which the Evenks almost certainly wouldn't).

Whatever major deficiencies may be found in Canada's style of government, they don't come within a continental shift of the corruption, venality and brutality demonstrated by Putin's regime. Even by Russian standards, Norilsk has been notorious for its lack of transparency.

By offering a mighty hand to the Russian glove, Rio Tinto could reverse any recent (if often illusory) gains made in promoting its brand of corporate social responsibility.

The price it paid for its 1995 stake in the Grasberg mine wasn't to be measured simply in monetary terms. After climbing into the mountain with Freeport, it rained down detritus, not only on the people and rivers of West Papua, but ultimately on its own reputation.

Is it going to repeat the same morally disastrous mistake?

The following background report on Norilsk by Nostromo Research was published in the Winter 2003-2004 issue of Taiga News, Taiga Rescue Network, Sweden.

Norilsk’s Nickel Nightmare

The Norilsk complex is Russia’s worst ambient air polluter and the biggest single source of sulphur dioxide (SO2) poisoning anywhere in the world. Surely the time is ripe for a campaign to clean up its act?

‘When foreign companies consume Norilsk Nickel products for environmentally friendly products like catalytic converters, they clean the air in the USA, Europe and Japan thanks to the existence of this horrible source of pollution in Russia.’ Thus declared the Russian Socio-Ecological Union in 1994.

Nearly a decade later the situation has hardly changed. Every day, according to local authorities, Norilsk plants send 5000 tonnes of SO2 and heavy metals into the sky; some falling as far as Norway and Canada. Near Norilsk’s operations in the Kola Peninsula, the sulphur has turned the snow yellow for 30 miles around; copper makes it black.

More than 8000 km2 of larch forest and lichen, essential sustenance for reindeer herds maintained by Nenets and Sámi, have been wiped out by acid rain since 1980 alone. Hundreds of km2 of tundra have been rendered sterile.

Official statistics say that Norilsk is responsible for ‘only’ one-seventh of the total factory pollution in Russia: 2 million tonnes of waste gas, and 85 million m3 of dirty water every year. But such figures must be regarded with scepticism. Throughout the post-communist period, data on toxic emissions have been at best unreliable and at worst fabricated. In 1991, management at Norilsk’s Severonickel smelter said it was responsible for 200,000 tonnes of SO2 a year, but the Finnish government claimed it was actually three times that amount.

Norilsk is Russia’s largest mining conglomerate. Nickel mining and smelting are concentrated on the Kola Peninsula, while platinum group metals (PGM) are hewn and processed in Krasnoyarskii Krai. Norilsk supplies most of Russia’s copper and cobalt, is the world’s biggest vendor of nickel and palladium, and second among global platinum producers. It is also now aggressively venturing into gold mining in Magadan and Irkutsk. But that is not all: earlier this year Norilsk bought up Stillwater, the only producer of PGM in the USA. This was a stunning coup for a company whose lack of transparency is legendary. Russian law continues to protect Norilsk from independent scrutiny, and production figures for PGM are a state secret.

Western Europe is the main buyer of Norilsk products; investors in the company include Britain’s Mercury Asset Management, the Dutch ABN Amro bank, and Swiss-based Glencore, the world’s most profitable metals trader. Britain’s Barclays Capital was central to Norilsk’s purchase of Stillwater in early 2003.

If the Nenets and Sámi have unforgivably suffered (and without recompense) from forced resettlement and the blighting of their pastures within the Norilsk domains, workers’ lives have, over several decades, also been remorselessly put upon the sacrificial block. Soon after glasnost, Russians for the first time openly challenged the Stalinist assumption that domestic mineral resources were limitless, to be exploited at almost any human and environmental cost. It was Norilsk’s operations that, for many, represented the worst case example of the Soviet state’s inhumanity to its citizens.

Following the collapse of Soviet communism, there has been only cosmetic change. Numerous serious accidents, fires and explosions have been recorded over the past 15 years, while domestic heating for the mining settlements often fails. Residents’ life expectancy is 10 years below the Russian average (which, as has recently been pointed out, is itself now lower than it was under Soviet rule). Alcoholism is rife and there is a massive incidence of respiratory disease and skin complaints.

Largely because of this continuing attrition, the Norilsk workers have finally broken with the tradition of filing into polling booths, to vote company nominees into local and regional administrative posts. In 2002, former Norilsk director general Alexander Khloponin was elected governor of Krasnoyarsk, but dismally failed to keep his promises on income and health. This May, the unions put up one of their own as an ecological candidate for mayor of Norilsk. Viktor Melnikov accused the company of chalking up huge profits while continuing to operate an unsafe plant, depress wages and withhold crucial internal financial data. In a surprise victory in October 2003, Melnikov walked away with a huge majority and, as the new Mayor of Norilsk, has vowed to force Norilsk Nickel to spend a larger percentage of its revenues on the social welfare of its workers.

Norilsk is underpinned by a shady Russian industrial conglomerate called Interros, although its board includes, among others, an ex-senior official of the European Bank for Reconstruction and Development (EBRD); its auditors are Deloitte and Touche and a key adviser is the Robert Fleming Investment Bank, both London-based.

Central to the enterprise is Vladimir Potanin, the fifth wealthiest man in Russia with a personal fortune of around US$1.8 billion. A former Soviet international trade official, Potanin set up Oneximbank in the early 1990s. This soon became the country’s largest private bank and the vehicle by which Potanin acquired 51% control of Norilsk Nickel in 1996, under the infamous ‘loans for shares’ auctions, engineered by Boris Yeltsin and Boris Berezovsky. For this largesse, Potanin bankrolled Yeltsin’s 1996 presidential re-election campaign. (In return, Potanin was rewarded with the Russian vice presidency.) Although Oneximbank crashed in 1998, Potanin had by then transferred his interests out of the bank, while holding onto the reins of Norilsk. Despite his seedy history, Potanin has so far escaped indictment in Vladimir Putin’s scourge of allegedly corrupt oligarchs. The most likely reason for this is the importance of Norilsk as a honey-pot of vital foreign exchange.

Clearly murkiness is not just confined to the air around Norilsk. The crucial process of unearthing the truth, about what one worker dubs ‘the quasi-police state’ of Norilsk, has not even begun.

Sources: The Norilsk-Rio Tinto deal: "Rio Tinto Breaks the mould", by John Helmer on Mineweb, 20/1/26; Alrosa and Rio Tinto: Dryblower on miningweb.com 30/1/]06; Putin spars with Shtirov: Helmer on Mineweb, 30/1/2006; Evenks confronted with oil in Sakhalin: Sahkalin Times, 30/1/05; general situation of Evenks: Taiga Rescue News 3/6/02; RFE/RL, 7/3/02; Diavik defence: Diavik Diamonds corporate website, June 2003