London, U.K. — The inhabitants of Chukotka’s frozen tundra must think they’re the luckiest people in the world. Billionaire Roman Abramovich — the oil mogul best known in the U.K. for lavishing millions of dollars on his Chelsea Football Club — looks set to take Russian President Vladimir Putin’s unsubtle hints that he should stay on for a second term as governor of Russia’s most north-easterly region.
Western investors who can take advantage of the favourable economic climate in Chukotka may also improve their fortunes, and Canada’s
The population of Chukotka is just 51,000 and no roads lead from the capital, Anadyr, to the Russian “mainland,” as locals call it, or even to the region’s numerous villages.
Many of the ethnic Russians who came to Chukotka in pursuit of highly paid government jobs have left since the breakup of the Soviet Union, and significant numbers of those who remain belong to various indigenous groups such as Chukchi or Siberian Yupik Eskimos. They still practice their traditional subsistence activities — reindeer herding and hunting marine mammals.
In the past five years, Abramovich has spent what some estimate to be half a billion dollars of his own money building houses, schools, hospitals and hotels in Chukotka, although he rarely visits the region.
The biggest challenge for the celebrity governor is finding ways to help Chukotka become self-sufficient. Abramovich’s oil company, Sibneft — which he sold recently to Russian government-controlled Gazprom for US$13 billion — discovered a small oil field in Chukotka, but Bema Gold’s Kupol mine, currently under construction, is the largest and most promising economic project in the region.
Kupol contains an indicated 3.1 million oz. gold and 39.7 million oz. silver, plus an inferred 1.2 million oz. gold and 16.9 million oz. silver. It is located 940 km northeast of Bema’s Julietta mine in the neighbouring Magadan region and 200 km east of the city of Bilibino in Chukotka.
Bema’s management believe that their experience building and operating the Julietta mine enabled them to develop Kupol.
“We financed that project (Julietta) when gold was US$260 and put it in production in 2000 as a low-cost underground mine at 400 tonnes a day, two months ahead of schedule and on budget,” Bema CEO Clive Johnson said at the Denver Gold Forum in September. “This was a great success for us. It established our ability to build one of these mines and run it, it established our presence in Russia, and it was the credibility of Julietta that led directly to the successful acquisition of the Kupol property in a deal with the government of Chukotka. They chose us based on our success at Julietta and our entrepreneurial approach to the business.”
Bema’s deal in Chukotka was unique for a Western company, according to the company’s investor relations manager, Ian MacLean, because instead of the usual Russian auction for the licence to develop a mineral deposit, the government of Chukotka chose to sell 75% of its interest in the property to Bema, while retaining 25% and thus partnering with Bema.
“It became quite a competitive process, but we won out over a couple of big majors,” MacLean said. Johnson negotiated initially with Abramovich, and Bema now deals primarily with Chukotka’s first deputy governor, Andrei Gorodilov, a former vice-president of Sibneft.
In the controversial 2004 Forbes list of the 100 richest Russians — compiled by U.S. journalist Paul Klebnikov who was murdered in Moscow shortly afterwards — Gorodilov occupied 33rd place with personal wealth estimated at US$1.1 billion. That’s quite some distance below his boss, Roman Abramovich, whose wealth at the time was an estimated US$12.5 billion. Abramovich was second on the list after Yukos oil company founder Mikhail Khodorkovsky, who is now also said to be in Siberia . . . in a labour camp.
Gorodilov is 34 years old, while Abramovich has survived the booby traps of Russian politics and business to reach the ripe old age of 39.
“They are pretty dynamic guys, they’re very easy to deal with in a business sense,” MacLean said of the Chukotka government. “There is a notion of the nasty oligarch, but Anadyr gets missed by the media a lot. Part of Abramovich’s thought was to try to give something back to the region; and the other part of it was to promote foreign investment.”
The capital cost to Bema of building the Kupol mine is US$364 million, plus another US$100 million in banking and financing charges. In addition, Bema has paid US$45 million to the Chukotka government for its 75% interest in the property and has invested US$51 million in exploration and feasibility work.
Both the Chukotka government and Western banks have been so willing to co-operate on the Kupol project that it has moved forward much faster than most mining projects, especially projects in Russia, where the level of bureaucracy can be an obstacle. German bank HVB provided a bridge loan to Bema of US$150 million, most of which has already been spent to achieve the planned startup date of 2008.
“I don’t know in my career when I’ve seen a situation where a bank has put up money first before equity, and has put US$150 million on the table in the fashion that HVB did,” Johnson told investors during a September conference call.
“Our approach was the right one, which was to fast-track this project as soon as we drilled in 2003. We all felt very confident that we had something unusual and extraordinary in terms of the economics of the project, so we decided to fast-track the project and try and bring it into construction, basically simultaneously with things like detailed drilling and feasibility, which, if not unique, is at least unusual,” Johnson added.
As an example of the ease with which Bema has been working with the Chukotka government, MacLean mentioned that in Magadan the local administration was very insistent that the company should use Russian equipment, although the Russian drill rigs weren’t as fast and didn’t drill as deep as Canadian rigs. The Chukotka government, by contrast, encouraged Bema to use Canadian rigs because of their efficiency.
— The author is a freelance writer based in Anchorage, Alaska.
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