Russia May Amend Law Deterring Foreign Mine Investors (Update1)
By Ilya Khrennikov

Dec. 10 (Bloomberg) -- Russia is considering an easing of mining laws designed
to protect domestic producers because they're deterring foreign investors and
curbing development, Deputy Minister of Natural Resources Sergei Donskoy said.

The government may streamline the approval process for foreign investors, give
them tax breaks and increase compensation should the state decide to take back
assets.

"We have proposed the government amend the legislation," Donskoy said in an
interview. "We realize that the new laws are hampering exploration."

Exxon Mobil Corp., the largest U.S. oil company, and Canada's Barrick Gold
Corp., the world's biggest miner of the metal, have said the so-called strategic
deposit legislation risks damaging Russia's economy to protect local companies
as they compete for the country's mineral wealth.

"The thing with strategic deposit laws is that they are scaring off other
investors who were considering coming to Russia," said Sergei Lobov, manager of
Barrick's Fedorova Tundra project in the country's northwest, which has been
delayed by the legislation.

The laws, which came into force in May 2008, cover deposits deemed to be
"strategic." They include resources of more than 50 metric tons of gold, 70
million tons of oil and 500,000 tons of copper. Developers need permission from
authorities including the Federal Security Service, formerly known as the KGB,
and Prime Minister Vladimir Putin.

Shell, BP

Russia adopted the rules to clarify procedures after the state forcibly gained
control of Royal Dutch Shell Plc's Sakhalin venture in 2006 and threatened to
revoke licenses to TNK-BP's Kovykta gas field in 2007.

"It was timely in 2007 and early 2008 when prices for deposits peaked," said
Mikhail Leskov, a partner at NBLgold, a Moscow-based consultant advising mining
companies including Petropavlovsk Plc. "Now, as the market plunged, it looks
like this legislation limits exploration and drags Russia's mining industry
behind international competitors."

The state can take back a deposit from developers and pay their costs plus a
premium of 30 to 50 percent. Critics say that deters investors because it
ignores the value exploration companies can add to a deposit by proving
reserves.

"Companies may fail to prove large reserves at a field, or they may succeed,"
said Lou Naumovski, a vice president at Toronto-based Kinross Gold Corp.
"Limiting the amount of return for high-risk exploration ventures makes little
sense, as companies are more likely not to bother exploring if they see a
limitation on the potential returns for their efforts."

`Halfway Measures'

The Ministry of Natural Resources is proposing to gauge the market value of
deposits where licenses have been withdrawn and pay investors half that amount,
Donskoy said in a Nov. 10 interview in his office in Moscow.

"No government body is acting independently in Russia" said Konstantin Simonov,
the head of Moscow-based National Energy Security Fund, an independent
consultant. "The ministry obviously reacts to signals sent by Vladimir Putin,
who said earlier this year the bureaucratic procedures should be streamlined for
foreign investments."

The ministry's proposed changes are "all halfway measures," said Valery Braiko,
the former head of the Soviet Union's largest gold-producing unit who now heads
the Russian Gold Producers' Union. The group is lobbying for the ministry to
raise the threshold for strategic gold deposits to 200 tons.

Gold Mines

The current 50-ton threshold "means investors need to get this multi-stage
approval at as high a level as Putin to develop a pretty small deposit," Braiko
said. "It's ridiculous."

Some foreign companies have succeeded in bringing projects into production.
London-based Petropavlovsk mines gold in eastern Russia and said last month an
expansion was ahead of schedule at its Pioneer pit. Kinross started output at
the Kupol mine last year, becoming the largest gold producer in Russia after
Moscow-based OAO Polyus Gold.

Barrick has made less progress and is still renegotiating the right to build its
Fedorova mine, having previously been granted an exploration and development
license. Robin Young, the chief executive officer of Amur Minerals Corp., a
London-based miner, said his company faces the same situation with its own
Russian project.

Other companies quit Russia altogether. Zoloto Resources Ltd., a Canadian gold
explorer, stopped investing in the country last year after the laws were passed,
company spokeswoman Yana Bobrovskaya said.

De Beers

De Beers, the world's largest diamond company, withdrew from a mining joint
venture in January after talks with the Federal Anti-Monopoly Service about the
processing of gems in Russia, said Tom Beardmore-Gray, a spokesman for De Beers'
former joint Venture partner Archangel Diamond Corp. Lynette Gould, a
spokeswoman for De Beers, declined to comment.

Russia has the world's largest reserves of gold deposits, after South Africa and
the U.S. Russia's production gained 15 percent to 151 tons in the first nine
months of 2009, according to the producers' union, driven by output from Kinross
and Petropavlovsk. Supply will decline in the "medium term" after smaller
foreign miners fled Russia, Vitaly Nesis, the CEO of Russian precious metals
producer OAO Polymetal, said in October.

"Russia obviously has a right to protect its national interests and give some
preference to domestic miners," Naumovski said. "Looking from another angle
though, Russia is competing with other countries for investments in its resource
sector and may lose this competition unless it considers amending the strategic
law."

Gold was little changed at $1,127.88 an ounce at 8:53 a.m. in London. Barrick
shares rose 38 cents, or 1.4 percent, to 27.90 euros in Frankfurt trading.

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