London Calling - February 2 2003

London Calling! February 2 2003

Penetrating Russia steppe by steppe: Part One

Russia's "oligarchs" - those ruthless entrepreneurs who came to control unprecedented stakes in the country's natural resources industries over the past decade - claim to be reforming. Gone, they say, are the criminal-mafia elements which created bloody battlefields over oil and mineral assets, following Yeltsin's corrupt give-aways ("loans for shares") in the mid-nineties. Now these men are purportedly driving responsible deals with respectable off-shore businessmen. Putin's administration is "squeaky clean". Squeaky it may be - but clean?

Over our next three despatches, London Calling examines what is really going on in Russia and elsewhere in the former USSR, especially in the aluminium, gold and diamonds sectors. In this posting, we start with a relatively modest Canadian company whose debut in London is helping pave the way.

Rising in the East

Bema Gold Corporation (Toronto SE and American SE) has a glint in its eyes. It's reflected off a gold plum on South Africa's Witwatersrand. The Golden Reefs mines hold a putative one and a half million ounces of reserves and more than three million of resources. A recent independent audit costed production at US$185 an ounce - promising a lucrative clean-up at present prices.

Not all market observers think Bema is beaming down on a nugget of a deal. One Canadian brokerage says the company would be paying three times what London-based Thistle Mining paid for the historic President Steyn mines last year. But Jerry Korpan, Bema's London-based non-executive director, is more sanguine. There's not only the metal's newfound buoyancy to consider but the fact that - unusually for South Africa - 40% of Reef's current output derives from open-pits. Says Korpan: "We can make inexpensive changes to improve productivity and cut costs." Another bout of layoffs in the offing?

There are several points of importance about this corporate play. First, the trojan horse on which Bema would piggyback is EAGC Ventures. This had first bid on the Golden Reefs, but was struggling to raise the entry fee, despite being underwritten by London's Standard Bank. EAGC Ventures is the new Canadian face of the older old East Asia Gold Corp. When based in Spokane, Washington, EAGC was one of the few mining companies to flout moral strictures against investing with the Burmese military regime. (Though it doesn't seem to have done much in that tortured country since 2001). During the same period, EAGC also ran two mineral concessions in Katanga province in the Democratic Republic of Congo.

Second, before its engagement with EAGC, Bema was planning to register on London's AIM - where (valued at two hundred million pounds) it would be second in the mining sector only to Highland Gold (Of which more, next time around) Now, however, it's envisaging applying to list on the London Stock Exchange itself. Not so much to raise capital for the South African venture, but to grease further exploits in Russia, where it already controls (with 79% equity) the Julietta gold and silver mine in Magadan. Cash costs for Julietta supposedly some in at under US$100 an ounce, putting it among the world's lowest. No doubt this is partly due to Bema's policy of employing as many job-hungry Russians as possible - a surprising 65% of whom (so Bema claims) with a university education.

Accusations

But Julietta's reputation is sullied. So is that of the World Bank, whose MIGA (Multilateral Insurance Guarantee Agency) issued US$27.2 million of essential political risk insurance cover for the mine in August 2000, without allowing any public scrutiny beforehand.

This, despite demands from more than 70 Russian and international NGOs that the Bank desist from underwriting environmentally threatening projects in the country, after Vladimir Putin did away with Russia's main national environmental agency. Accusations have been made that construction of Julietta's tailings dam meant the stripping of a large area of insulating and moisture-absorbing soil, tundra and organic material, right down to the permafrost. The dam itself allegedly sits on an unstable sandy gravel base and is less than 50 yards from a stream and two kilometres from a major river. But Bema isn't stopping just at Magadan.

A different planet (but firmly London-based)

Recently the company acquired the Kupol gold and silver project, also located in Russia's Indigenous Far East. Comments Ken Gooding, the doyen of British mining journalists: "Bema is being radically transformed by the South African and Russian deals. In Korpan's words, 'They put us on a different planet.' That's why the company is now mulling over the possibility of a full London listing, rather than one on the secondary market (AIM)."

For Gooding (and he should know): "London is fast becoming the main mining finance centre for eastern European projects and Bema is one of the few western companies to have found a way of working successfully with Russian partners to bring a mine into production successfully." Not to mention the World Bank.

This may be true for the moment. But the City, along with some of those Russian oligarchs, are plotting much bigger deals in the months ahead... (More next time).

[Sources: MiningWeb 22/1/03; Roger Moody "Grave Diggers: A report on Mining in Burma", Nostromo Research, CAPRN et al, 2001; World Bank/MIGA: Letter to Pacific Environment and Resources Center, 18/8/2000; Schwartz E. "World Bank Backs Russian Gold Venture Over Soem Objections" Bloomberg News Service, 10/8/2000. Pers. comm from technical expert in mining, February and March 2001]

[“London Calling” is published by Nostromo Research, London. The opinions expressed do not necessarily reflect those of any other individual, organisation or editors of the MAC web site. Reproduction is encouraged with full acknowledgment