Royal Dutch Shell Plc  .com Rotating Header Image Peter Hambro gold mining ops in Russian trouble (with Oleg Mitvol) – view from Moscow

John Helmer
05-DEC-06 08:00′

MOSCOW ( –A routine inspection by the Russian government’s environmental protection agency Rospriradnadzor has suddenly exposed Peter Hambro Mining’s (PHM) gold projects to fines and the possible loss of licences. It has also exposed Peter Hambro himself to the charge that he tried to mislead the market with a public statement about the problem that has been denied by the Russian regulator.

The trouble for PHM follows the Russian gold mining sector’s worst mine accident in more than a decade. A main shaft fire in September at the Darasun mine operated by Highland Gold, a London AIM-listed miner now under Barrick Gold control, burned for almost a week, initially trapping 61 miners, and killing 25.

Rescued miners gave interviews to the media, accusing Rusdragmet, Highland’s local management company, of ignoring fire safety requirements, and economizing on mine protection to cut costs of production. Oleg Mitvol, the deputy head of Rospriradnadzor, was publicly critical of Highland for the accident, telling Mineweb: “I do not understand why a foreign company, which is interested exclusively in increasing its capitalization on the London Stock Exchange, does not put enough resources into the modernization of its mines on the territory of Russia, and in increasing measures of fire and mine safety.” His agency then announced it would conduct an unscheduled inspection of other mines and prospects belonging to Highland.and other gold mine operators

On November 29, Rospriradnadzor issued a public report of inspections it had conducted at PHM sites. Of fifty licences identified as having been issued to PHM in Russia, the agency said that inspectors had checked five; these, the agency said, involve deposits of gold, titanium and magnesium, chrome, and other minerals. Not included in the check was PHM’s principal source of cash, the Pokrovskiy goldmine in the fareastern Amur region. Pokrovskiy accounts for 88% of PHM’s gold output and cashflow.

The inspections concluded with the finding that PHM was in multiple violation of its licence obligations. In its statement of last week, the agency said “according to Rosprirodnadzor, Peter Hambro Mining does not satisfy the condition of license agreements for carrying out of prospecting works; or carries them out with a significant backlog in relation to the terms and the volumes established in the [project] design documentation.”

The statement goes on: “In particular, under the license for extraction of gold for one their largest deposits Novogodnee-Monto (the Yamalo-Nenets autonomous region) 21 items in the [licence] agreement have not been executed by the company. The resource user [PHM] has not developed, and has not given by the target dates, the base documentation on the particular licence site: the project of development of the deposit, the project of mining works, [and] documents confirming implementation of starting payments.” The inspection reports suggest withholding of information requested from PHM affiliates, as well as violation of provisions of the water protection law securing mining from the surrounding water table, rivers and lakes.

Rispriradnadzor’s statement claims that a fine of R10,000 ($382) has been imposed for the violations at Novogodnee-Monto, and a recommendation for more serious sanctions — which could include licence revocation — sent to the Ministry of Natural Resources. These affect two other prospecting areas — Toupugol-Khanmeishorlskiy, a gold project; and Kongol-chrome.

Inspections of PHM’s other exploration and production licences, including those enabling the Pokrovsky mine to operate, have now been scheduled. These are aimed at enforcing the use-or-lose principle for exploration licence awards, and the capital spending required to meet volumes of ore to be mined, and gold extracted, at the operating minesites. “To post [gold] reserves on the balance-sheet of the company and not to conduct [exploration or mining] works is incorrect,” Mitvol told a Russian newspaper.

When the market expected the international gold price to soar effortlessly out of the $600s, and no-one believed the Russian government capable of cracking down on unsafe mines, the high cost of extraction at some Russian mines, and the future high cost of bringing to the surface gold reserves, valued on the balance-sheet but left undeveloped and unmined, hardly dinted the enthusiasm of the market for Russia’s gold mine prospects, and their share valuations. Also ignored in this royal flush has been the vulnerability of those Russian gold miners whose cash flow is dependent, for the time being, on single mine operations – Olympiada for Polyus (75%), Mnogovershinnoye for Highland (87%), and Pokrovskiy for Peter Hambro Mining (88%).

According to Moscow brokers promoting their book by advising sharebuyers of the unmined gold and the share value upside to shares like PHM’s, licence inspections, performance and spending audits, and mine safety reviews represent a cost threat they have yet to calculate. For Rob Edwards of Renaissance Capital, Rospriradnadzor is exhibiting “a randomness that makes people very uncomfortable.” Alfa Bank analyst Vladimir Zhukov attacked Mitvol for creating “instability and risks in the [gold] industry throughout Russia.”

The Moscow Times, a newspaper owned by Finnish, English and US investors who are notorious for their hostility towards the Putin administration’s resource policies, cited Hambro as claiming he had no advance warning of the Rospriradnadzor report, and blaming the publicity on the media frenzy that has developed out of the death in London of former KGB agent, Alexander Litvinenko.

“One of the problems with life is that agencies such as this don’t realize the knock-on effects of what they’re doing,” Hambro is quoted by the Moscow Times. “When they say something like this, thinking it will make the Moscow evening news … they don’t realize it will knock half a billion dollars off the value of the company.” The Moscow Times reported Hambro as saying he had learned of the accusations from the press and has received no word from Mitvol’s agency.

After the Rospriradnadzor announcement had started a wave of share-selling that cut PHM’s share price by 24%, the company posted a statement on its website claiming it is “not aware of any material or environmental or health and safety regulation infractions.” The statement went on: “The company did not receive any prior notification whatsoever on this matter and its representatives are in discussion with the Ministry…seeking clarification on these comments.”

While Hambro may not have personally learned of Rospriradnadzor’s inspection results, Mitvol and his agency flatly deny that PHM was not informed of the inspection at Novogodnee-Monto, or its outcome. Mitvol told Mineweb, through a spokesman, that the standard procedure is for the inspector or inspection team to come to the prospecting area or mine, and carry out their check. ” After this the check report is signed by the head engineer [of the operating company at the site]. Rosprirodnadzor is not supposed to inform the parent organization, but is acting only with the companies which perform as the [registered] owners of the current licenses. It is another issue if the top-managers at the sites should inform the [parent] company about the check they had undergone.”

The spokesman added that it is standard practice for Priradnadzor not to send prior notifications ahead of routine checks. He emphasized that the check of PHM was not connected to the special inspections that began after the Darasun fire. However, following the results uncovered, special checks have now been ordered by Mitvol of PHM’s other licences.

Asked what sanctions PHM is facing for the violations reported to date, Mitvol’s spokesman told Mineweb that it has sent a recommendation to the Ministry of Nastural Resources recommending revocation of the licence. But the ministry “can make some concession, or set up some time for fixing the violations,” he added.

In 2005 PHM produced 249,000 troy ounces of gold, and before last week’s disclosures, the company’s market capitalization was almost $2 billion.

Hambro himself, backed by Moscow brokers, believes the share price and market capitalization will recover, and that serious investors, as distinct from gold speculators, will not be deterred. At the same time, Mitvol and his agency have issued a clear warning to the market that it has failed to take into account the cost to junior miners like PHM of developing and mining gold assets, on which their share price is valued.

In a report on PHM prepared a few weeks ago by Alfa Bank’s metals analyst Vladimir Zhukov, it is revealed that following the bonanza year of 2005, when gold production rose 19% year on year, the picture this year has worsened. The H1 result was 108,000 oz, with the company’s best estimate for the year at 247,000 oz. In Zhukov’s base scenario, he forecasts PHM’s output rising to 1.2 million oz in 2009 and then falling almost as swiftly to about the present 250,000-oz level in 2014. The management, however, is forecasting sustained growth of production to 1.7 million oz after 2012. Since Pokrovskiy is PHM’s workhorse and cash cow, but is incapable of adding to production growth, the long-term strategy depends on three new mines – Pokrovskiy Flanks, Pioneer, and Malomir, all neighbours – generating more than 1.5 million fresh ounces that are only a gleam in Peter Hambro’s eye right now.

Generating the big growth spurt from the three new mines will cost about $350 million in investment, mostly into Pokrovskiy Flanks. If all management estimates of reserves (Russian classification C1), resources (C2), and mineral potential (P1,P2, and P3) for these three projects are accumulated, then PHM also has on its hands another Sukhoi Log-sized Eldorado – 39 million oz. But Zhukov points out, however, that “the management case depends largely on the successful conversion of P1 and P2 mineral potential into mineable resources or reserves.” Zhukov estimates the probability of successful conversion of P1 at 15%.

Sources inside the company are not less guarded in their calculations. They do not rate Pioneer’s future as reliable on current indications. Regarding the work done on Pokrovskiy Flanks, they claim there is too much guesswork and extrapolation to make a conversion from mineral potential to reserves calculated according to international standards. One source told Mineweb the reserve figure for Pokrovskiy Flanks is “somewhere between wishful thinking and a wild guess.” Malomir is still too deep in feasibility study to justify marketing right now, he claims.

What Rospriradnadzor has done with its initial findings is to warn PHM that if it wants to enjoy a high share price, based on value projections from gold still firmly buried in the ground, it must honour the legal and financial obligations it undertook when acquiring the licences. Mitvol has made the warning explicit — if PHM cannot afford to meet its obligations, it should lose the benefit it has been advertising to the market through its reserve figures.

Financially, PHM’s credit in the market has depended to date on ignorance of what its licensing obligations would cost, if fully discharged. In 2005 PHM’s revenues were $114 million, and after-tax income, $13 million. The latter figure had slipped from $15 million in 2004. For this year and next, Zhukov is predicting revenues will grow to between $150 and $180 million, while net income will jump to $41-$47 million. Long-term liabilities stand at $326 million. Project financing to develop its assets, and meet its licensing obligations, is possible, but not until much more bench and fieldwork is done.

The lesson of this affair should not be drawn from public statements about what PHM knew about Rospriradnadzor’s licence violation report, and when. Nor should the gold markets allow themselves to believe that it is arbitrary, illegal or random for Russian regulators to enforce the law and licensing contracts long thought to be flexible statements of intention that could be ignored. Rather, what is happening in the Russian mining sector is improving enforcement of policy and regulations believed to be standard in most either mining jurisdictions. The use-or-lose policy isn’t Russian roulette; ignoring it may be.

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