Gold glitters in the eyes of Russia's billionaires

By Andy Hoffman
The Globe and Mail, Toronto
Wednesday, December 12, 2007

http://www.theglobeandmail.com/servlet/story/LAC.20071212.RGOLD12/TPStor...

For a growing list of Russian oligarchs, gold is the new oil.

Russia's wealthiest are piling into the bullion sector and eight of the country's 10 richest men are investing in gold.

This week, OAO Severstal, the Russian steel maker owned and run by billionaire Alexei Mordashov, said most of London's Celtic Resources Holdings PLC shareholders, which has gold projects in Kazakhstan, had tendered to a $328-million (U.S.) takeover bid.

Last week, Russia's richest man, Roman Abramovich, and his partners agreed to pay $400-million for a 40-per-cent stake in Highland Gold Mining Ltd., Russia's fourth-largest bullion producer. The sudden focus of Russia's billionaires on gold comes as the metal hit a 28-year-high last month and hovers near $800 an ounce.

"Clearly these people have the financial wherewithal to invest wherever they want, so it speaks positively about gold," said Don Whalen, the executive chairman of Toronto's High River Gold Mines Ltd., which operates in Russia.

Yet bullish prospects for the metal may not be the only driver. With the Kremlin controlling the bulk of Russia's oil and gas assets, gold is one of the few domestic resources left where the Russian oligarchs, who made their fortunes during the former Soviet Union's chaotic transition from communism to capitalism, can park their funds.

As well, the Russian parliament has drafted new legislation aiming to keep its largest gold deposits in Russian hands. If it passes, major gold mining operations will have to be majority Russian owned.

"It's a resource issue. Russia is very attractive in that it has resources that far exceed most places in the world. There hasn't been much exploration that has been done historically, so while the low-hanging fruit has been picked, there is probably a heck of a lot more fruit around. The Russian money is aware of that and wants to get in on the ground floor," Mr. Whalen said.

Russia has the second-largest gold reserves in the world, behind South Africa, but is only the sixth-largest producer, and its output has fallen in the past three years.

Other oligarchs with gold assets include Vladimir Potanin and Mikhail Prokhorov, who control Russia's largest producer OAO Polyus Gold; Suleiman Kerimov, who owns OAO Polymetal, Russia's third-largest producer; and Mikhail Fridman, an oil and banking magnate who set up a gold mining arm this year.

Oleg Deripaska, whose Basic Element has invested in everything from aluminum to auto parts (through a stake in Magna International Inc.), owns gold companies in Mongolia. In a recent interview with The Globe and Mail, he hinted he would like to invest in more gold projects, perhaps with the help of a Canadian company.

Tye Burt, the head of Kinross Gold Corp., which has operated in Russia for 12 years and is developing the Kupol project, thinks the oligarchs are emerging as viable -- and crucial -- local partners for foreign investors in Russia's fledgling gold industry. "I think there is going to be more and more foreign investment in Russian gold and I think the local guys are seeing that as an interesting way to partner up or stake out their ground in the gold sector," said the Kinross chief executive officer.

Mr. Burt dismissed suggestions the oligarchs are moving into gold in anticipation of Russia nationalizing gold assets, as it did with oil and gas. Gold, used mainly for jewellery doesn't have the political resonance with Russians the way other resources do, he said.

"Nobody uses gold as a strategic lever or a geopolitical tool to move public opinion. You can fly out a month's production in an airplane. It's not like natural gas, which affects people's lives in terms of heating and energy," he said.

Russia hasn't always been welcoming. The world's largest producer, Barrick Gold Corp., dismantled its Russian operations last year, saying the government favoured local players.

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