ERIC REGULY

Monday, January 26, 2009

MOSCOW — — Kinross Gold Corp. has nudged Russia to the forefront of its growth strategy with an agreement that could lead to the development of one of the world's largest gold deposits.

Kinross and Polyus Gold, Russia's top gold company, agreed Monday to co-operate on a "prefeasibility" study of Polyus's Nezhdaninskoye deposit in Yakutia, a republic in the northwest of Russia that is well endowed with natural resources but not infrastructure. Polyus thinks the deposit could contain 15 million ounces of gold, potentially making it the country's third-largest gold deposit.

"This is all about creating options," Kinross chief executive officer Tye Burt said at a news conference with Polyus and the President of Yakutia. "We see this as an opportunity to develop one of Russia's biggest gold deposits."

Kinross has one Russian mine, called Kupol, which opened last year after an investment of about $750-million (U.S.). The mine, 75 per cent owned by the Canadian company, is in Russia's extreme northeastern corner and has proved and probable reserves of 3.3 million ounces. Only 7 per cent of Kinross's reserves are located in Russia; the rest are in Chile, Brazil and the U.S.

Polyus and Kinross seem keen to work together over the long term. Polyus values Kinross's technical expertise, development skills and relatively easy access to the capital markets, which are all but shut to Russian firms as the financial crisis sweeps through the country. Toronto-listed Kinross raised $360.5-million last week through the sale of 20.9 million shares at $17.25.

Kinross, for its part, knows it cannot develop massive Russian projects on its own, for financial and political reasons. In Russia, large gold deposits can be declared "strategic" by the state, meaning they could not be controlled by foreign companies.

Polyus, which occupies the bottom fringes of the world's top 10 gold companies, wants to break into the top five within a few years and thinks it can get there faster with a little help from its Canadian friend.

In an interview last week, Evgeni Ivanov, Polyus's 42-year-old CEO, said he would welcome Kinross as a partner in the Nezhdaninskoye deposit, whose development costs could be $1-billion or more. "Kinross has a very positive record in Russia," he said

. "They have been successful in managing Russian risk and we have a good relationship with Tye."

In the prefeasibility study, Kinross and Polyus would examine existing technical data for six months, then decide whether to launch a full development plan, an effort that would take 18 months. At that point, they would have to commit to the project or walk away. If they go ahead, the first gold would come out of the ground in 2013. The mine would be owned 51 per cent by Polyus, 49 per cent by Kinross.

Mr. Ivanov seemed confident Polyus and Kinross will reach a development agreement.

"We're pulling in our friend and fresh blood to break the bad history of this deposit."

Russian gold companies have known about Nezhdaninskoye's potential for about 25 years. Various efforts to develop the site have failed for political, financial and technical reasons. Opening the mine would be impossible without massive investments in roads, rail and electricity supplies.

Barrick Gold Corp., the world's leading gold producer, considered becoming a Nezhdaninskoye development partner five years ago, but passed.

If Kinross does join forces with Polyus, it would be forming a partnership with a company with vast undeveloped reserves, a voracious appetite for development capital, and a difficult ownership structure.

Polyus was born three years ago, when the gold assets of MMC Norilsk Nickel, the world's biggest nickel producer, were spun off. The shares trade on the Russia's RTS and Micex markets and its American depositary receipts (ADRs) trade on the London Stock Exchange. The company's shares have underperformed other big gold companies. At yesterday's price of $13.75, Polyus had a market value of about $4.7-billion compared with Kinross's $12-billion.

One of the reasons investors have given the company a pass is its shareholder structure.

Polyus is owned about 30 per cent by Mikhail Prokhorov, who is also chairman, and 30 per cent by Vladimir Potanin. The two oligarchs recently had a falling out.

Mr. Ivanov said their differences have had no day-to-day effect on the company, but have the potential to make life difficult at the board level. "If we do an acquisition, for example, we need the approval of the board and we may have a situation with different views," he said.

© The Globe and Mail

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