Financing projects & exploration in Russia

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2 Financing projects & exploration in Russia Scene setting: What is different about exploring for & developing projects in Russia? What is changing about the way of developing projects in Russia? What risks & opportunities exist? Tips for working in Russia 2 Unlocking Russia s mineral wealth

3 First, what is happening about exploration? Ra#o: Explora#on projects to feasibility studies Cr Cu Fe Au Pt Dia Mo Zn Pb U Sb Ti V Ni Nb Potash W Sn Co Global Russia is relying on historical Soviet exploration to sustain its mining industry Petropavlovsk, Polymetal, Kinross and others are lobbying government to change the Mining Tax Code 3 Unlocking Russia s mineral wealth (Source: MEG) (Ra$o of number of projects in the Explora$on and Target Outline Phases to projects in the Reserve Development and Feasibility Phases) Russia

4 Why are Companies not exploring in Russia? Conducting research to identify greenfield targets does not necessarily result in getting an exploration licence Applications for a licence are published leading to expressions of interest => auction Lack of co-ordination between departments resulting in contradictory decisions Departments focused on achieving departmental objectives not best result for Russian State e.g. focus on maximising value of auctions rather than developing projects Overlapping licences create confusion e.g. mineral licences; forestry and mining licence Concern about the risk of revoking licences Whilst actual examples are rare, the risk affects ability to get funds Need confidence that Discoveries will get mining licences Current approval step adds doubt Strategic limits discourages majors and caps opportunity for juniors Effort only justified for richer, larger deposits Elsewhere smaller projects can be developed more easily But perception of risk of losing licence increases doubt 4 Unlocking Russia s mineral wealth

5 Next, how are projects evaluated? Must comply with Russian systems & standards Currently based on polygonal methods, moving towards block modelling Best for lithologically controlled & simple 3D orebodies Geotechnical analysis quite simplistic and conservative Metallurgical analysis is generally good Economic analysis is generally poor Weak links are geological model and scheduling Productivity and development rates conservative Cost estimates based on cost estimation handbooks, factored by inflation Few options evaluated Projects often developed in parallel International & Russian approach 5 Unlocking Russia s mineral wealth

6 What is changing? Greater awareness of a need for exploration Creation of RosGeology and some review of legislation Discussing softening strategic limits ; Some flexibility regarding licencing rules Kinross invited by President Putin to advise on exploration & foreign investment Resource reporting NAEN Code developed a CRIRSCO family code Block modelling rules are being amended by GKZ to incorporate block modelling Services & Logistics Finance Several international laboratories Trans-Siberian Railway still constrained but capacity increases each year Most international equipment suppliers have dealers & parts network in-country Russian banks willing to finance studies as well as projects Perspective More internationally focused management pushing to use modern technology & economic justification Greater use of international consultants / engineering companies 6 Unlocking Russia s mineral wealth

7 There are opportunities as well as risks Risks Corporate governance Corruption Project development takes longer Weak link between technical & economic decision-making Moscow is not Russia Skill & labour shortages Tonnages quoted for Prognostic resources: P1, P2, P3 Due to lack of exploration, remaining projects often of poor quality Opportunities Existing operations have potential to improve efficiency Under-explored by modern methods Can be easier & cheaper to develop projects Starting from a low base 7 Unlocking Russia s mineral wealth

8 How foreign companies thrive in Russia? Understand you are welcome Be seen to give Communicate frequently Create multiple communication paths Develop relationships International specialists must be good Be consistent yet flexible Be aware of the history & culture Be aware of similarities & differences Be willing to push hard Have a thick skin & be willing to drink 8 Unlocking Russia s mineral wealth Moscow Times books

9 In summary Exploration rules need to evolve further Likely to take several years Consider partnering with RosGeology Be cautious of any prognostic resources (P1, P2, P3) Ensure international-style projects match Russian project documentation Consider the opportunities as well as the risks 9 Unlocking Russia s mineral wealth