Alaska miners visit Kamchatka Aginskoye mine

The Kamchatka peninsula in Russia's Far East was off-limits to mining in the Soviet era. Exploration took place, but no mines were built because Kamchatka - a short hop across the Bering Sea from Alaska - was home to numerous military bases. After the Soviet Union collapsed in 1991, a group of geologists and investors formed a company, KoryakGeoldobycha, KGD, hoping to take advantage of the region's vast mineral potential. But they had to fight to prevent some of it from being closed again: this time because of the creation of new parks and other conservation units.

In August the Alaska Miners Association organized a group visit to Kamchatka, hosted by KGD, to see how the company has been succeeding in overcoming years of opposition to its plans. Construction of the region's first hard rock gold mine, Aginskoye, is close to completion. AMA members visited the mine and had the opportunity to discuss all aspects of the project with KGD's management.

"The really exciting thing for me was to see that project going forward after the incredible level of attack it withstood," AMA Executive Director Steve Borell said of Aginskoye. "The dry stack tailings facility is as good as I've seen anywhere. There's a bypass under the dam, a really neat concept. I'd heard of that, but I hadn't seen one before. The camp facilities are as nice as you'd find anywhere, in any remote camp. The original exploration will cause them some additional challenges. They were driving on the ore zone, which is less competent than the wall rock."

Environmentalists opposed to Aginskoye

Kamchatka legislators created a 235,000 hectare protected area called the Ichinsky Zakaznik in 1994. That same year, KGD's subsidiary Kamgold won the license to mine the Aginskoye gold deposit. The Kamchatka administration subsequently withdrew 52,000 hectares, including the Aginskoye deposit, from the nature reserve. But in 1995 the then Kamchatka governor, Vladimir Biryukov, signed a decree creating three parks. One of the parks, the Bystrinsky Nature Park, included Aginskoye. The following year, Biryukov redrew the boundaries of Bystrinsky Park to exclude Aginskoye.

All this provided ammunition for environmentalists, who pressed for multilateral lending agencies not to finance or provide political risk insurance to the Aginskoye project. Then, in December 1996, KGD suffered another blow when UNESCO designated the "Volcanoes of Kamchatka" a World Heritage Site, including Bystrinsky Park and other protected areas. Kinross Gold, which had purchased a 25 percent interest in Aginskoye from Asarco for $4 million in 1995, eventually withdrew from the project. There are some 160 volcanoes in Kamchatka, 29 of which are still active.

Today the boundaries issue is resolved: Aginskoye is outside Bystrinsky Park, and KGD's subsidiary Bystrinsky Mining Co. is developing and financing the mine by itself, without a foreign partner.

The company is making use of the enormous amount of exploration work that was carried out in the 1970s and '80s by the Soviet Union's Ministry of Geology.

At the height of geological exploration, 1,200 people lived on site, and a total of 52 kilometers of exploratory tunnels were built - far more than were needed to establish gold reserves.

The wife of KGD's present general manager, Vasily Knoll, was one of the geologists who explored Aginskoye, during which period she was tragically killed in an underground accident there.

Intense Soviet-era evaluation

"During the Soviet era there were armies of professional people that systematically evaluated many USSR mineral deposits, like Aginskoye, with little concern about the cost of acquiring the exploration data," said Tom Bundtzen of Fairbanks-based Pacific Rim Geological Consulting, who led the AMA trip to Kamchatka.

"The Ministry of Geology put hundreds or thousands of diamond drill holes into deposits like Aginskoye, including underground tunneling.

...

It wouldn't be done quite that intensively in the West." Bundtzen is president of the AMA this year and has been regularly visiting the Russian Far East since 1989, originally as part of a scientific exchange and more recently as a consultant.

Licenses to develop deposits that were explored in the Soviet era are sold at auction by the Russian federal government. Companies are given a set amount of time to develop a mine, and if they fail to do so, the license can be withdrawn. In practice they are usually able to apply for an extension on the license, as long as they give a legitimate reason for the delay. The amount that the winning company bids in the auction is considered a start-up payment, and the government must receive it within 30 banking days after registration of the license, or the company automatically loses the license.

Environmental assessment, permits required

Construction of a mine in Russia also requires an environmental impact assessment and a host of permits.

The draft of a new federal law on the subsoil, likely to be passed by the Russian Duma by the end of this year, would make the penalties for failing to develop a mine within the time limits of the license agreement less severe.

Instead of losing the license, a company would have to pay financial penalties.

The new law would also allow a company to sell its mineral rights to another company.

Foreign companies may participate in Russian auctions, unless the mineral deposit is designated as strategic, such as the giant Sukhoi Log gold deposit in Irkutsk, in which case the company must be at least 51 percent Russian-owned.

One recent auction in Kamchatka was also closed to foreign companies because the deposit was located in a military district.

Last year London-based Peter Hambro Mining, which focuses on Russian properties, considered purchasing the license for the Ametistovoye gold deposit in Kamchatka from KGD. Ultimately the deal fell through. Earlier this year the Russian company Renova purchased an estimated $150 million stake in KGD. Renova is owned by one of Russia's richest men, Viktor Vekselberg, who is also an owner of aluminum giant SUAL and a major shareholder of Russian-British oil venture TNK-BP. Vekselberg attracted the attention of the world's media last year when he paid the Forbes family more than $90 million for a collection of Fabergé imperial Easter eggs, saying he wanted to bring them back to Russia.

Vekselberg for governor?

In August, while the AMA group was in Kamchatka, President Vladimir Putin's envoy to the Far East Federal District suggested that Vekselberg should be on the list of candidates for the next governor of Kamchatka. "Vekselberg is now actively developing gold and other metal deposits in Kamchatka ... and invests big sums in the territory," Konstantin Pulikovsky said. Pulikovsky is in charge of drawing up a preliminary list of candidates for Putin, who recently abolished elections for regional governors and replaced them with presidential appointments.

The Kremlin responded to Pulikovsky's comments by calling them "premature," according to Russian news agency Itar-Tass. The appointment of an oligarch as governor would be highly controversial. Russia's richest man, Roman Abramovich, is governor of the neighboring Far East region of Chukotka, and although he has invested hundreds of millions of dollars in the region, he has also been criticized for obtaining tax breaks for his oil company, Sibneft, by registering it in Chukotka.

Kamchatka and Koryakia regions to be merged

Putin also plans to merge Kamchatka and Koryakia, in the north of the peninsula, into one region. A referendum is due to be held in October. The world's largest placer platinum mines, also owned by KGD, are in Koryakia. KGD's former general manager, Vladimir Loginov, went on to become governor of Koryakia until March this year, when he became the first regional governor to be fired by Putin, reportedly for mismanaging the heat and electricity sector. Winter energy shortages required an emergency operation to deliver fuel to freezing villages.

Far East politician Oleg Kozhemyako was appointed by Putin to replace Loginov. The current governor of Kamchatka is Mikhail Mashkovtsev, a member of the Communist Party, who nevertheless has good relations with KGD. The company does not expect its operations to be affected much by Russian politics, officials told the AMA visitors, and in fact is about to step onto the international stage. KGD is having its reserves audited and put into the Western format with the intention of holding an IPO on London's Alternative Investment Market.