Russian government may be taking over gold mining

By Oleg Mityayev
RIA Novosti, Moscow
(Russian News and Information Agency)
Tuesday, August 21, 2007

http://en.rian.ru/analysis/20070821/73010774.html

MOSCOW -- The Russian government is preparing to take control of gold mining, another "strategic sector" of the national economy where profits are expected to soar.

As a first move toward that goal, billionaire Mikhail Prokhorov will sell his 22-percent stake in Polyus Gold, the country's largest gold producer, to diamond monopoly Alrosa.

According to sources involved in the deal, Alrosa has offered Prokhorov much more for his stake than did his former partner, Vladimir Potanin, the co-owner of Interros, the managing company for Norilsk Nickel.

The two former partners, who own $15 billion each and share fourth and fifth places in the Forbes ranking of the 100 richest Russians, decided to part ways in early 2007. Prokhorov was to sell Potanin his shares in Polyus Gold and Norilsk Nickel in what was dubbed a "civilized divorce."

But they failed to agree on a price, and since their decision to part, prices of nickel and gold have risen substantially, leaving Potanin unable to pay Prokhorov a market price for his stakes.

In early August the state-owned corporation Alrosa, which mines 97 percent of Russian diamonds and is second only to De Beers in diamond production, offered Prokhorov $2.2-$2.5 billion for his stake in Polyus, 20-30 percent above its market value.

There was some speculation as to whether Alrosa could actually afford it, but on August 14 VTB President Andrei Kostin said that his state-controlled bank would issue Alrosa a loan for the acquisition.

At first glance this looks like a mutually beneficial transaction. Prokhorov will sell his stake in Polyus at a profit, while Arosa will soon repay the loan thanks to a growing demand for gold. But a closer look shows that this is just the first move in a government campaign to strengthen its control over the highly profitable gold mining sector.

Russia is the sixth largest gold producer in the world, yet holds the world's second largest gold reserves (after South Africa), and production costs in Russia are substantially lower. It is therefore safe to assume that Russia's "golden age" is only just beginning.

It makes sense that the Russian government has begun its offensive with the largest player on the national gold market, Polyus Gold. After Prokhorov sells his stake to Alrosa, the government may offer a similar deal to Potanin, a law-abiding (or at least Kremlin-obliging) oligarch who has never yet rejected a government offer. As a result, the government will hold a 44 percent stake in the gold mining company.

If it then purchased the 7 percent stake held jointly by Prokhorov and Potanin together, the government could increase its share in the company to a 51 percent controlling stake. According to another version of events, Potanin has already agreed to sell his stake in Polyus to the state, and the three parties to the deal are deciding when to make their decision public.

Norilsk Nickel, the world's second largest nickel producer, could follow in the footsteps of Polyus Gold. Prokhorov initially planned to sell his stake in the metals giant to Potanin but then decided to resume control of the company and insisted that an extraordinary meeting of its shareholders be held in October.

Could this be a disgruntled ex-spouse reneging on the terms of the "civilized divorce," or just a smokescreen ahead of the transfer of control of Norilsk Nickel to the state?

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Oleg Mityayev is economic commentator for RIA Novosti and the views expressed here are not necessarily the news agency's.

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