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Russia's New Shield From U.S. Sanctions: A Siberian Gold Mine

The Wall Street Journal. logo The Wall Street Journal. 2/10/2019 Thomas Grove
© Thomas Grove/The Wall Street Journal

SUKHOI LOG, Russia—Beneath this plot of land in southeastern Siberia lie vast stores of gold, according to Russia’s biggest gold producer, Polyus PJSC, and tapping them could provide the Russian central bank with a huge and nearly sanction-proof backstop for its currency.

Tests commissioned by the company last year and undertaken by Australia-based AMC Consultants, along with a scoping study conducted in 2018, determined that there are 63 million ounces of gold at Sukhoi Log, Polyus has told investors. While independent mining analysts haven’t confirmed that estimate on their own, many of them refer to Sukhoi Log as one of the world’s largest untapped gold deposits.

“And that may just be the beginning,” said Polyus geologist Svetlana Deys. “The gold could extend far beyond the reach of the Sukhoi Log license.” Polyus says the prospective mine holds approximately a quarter of all Russia’s known gold underground.

The news is good for both Polyus and the Russian government. Unlike other producers that move their bullion on world markets, Polyus sells its gold exclusively to large Russian state banks, which then resell it to the country’s central bank. Once mining begins, the bank can use the mine’s gold to support its ruble currency or sell it for extra foreign currency in times of crisis.

Gold has become a major holding in Russia’s central bank reserves, with its share nearly double what it was in 2014, when the bank started dumping its U.S. Treasury and dollar holdings amid increased tensions between Russia and the U.S.

Last year, the central bank’s deputy head, Dmitry Tulin, told lawmakers that while gold prices may fluctuate, “it’s a 100% guarantee against legal and political risks.”

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Russia is hardly alone in making that observation. Globally central banks have markedly increased their purchases of gold over the last decade. Last year saw the biggest buying by central banks since 2015 as more developing countries worked to increase their reserves. 

Russia’s central bank likely bought around 270 tons of gold, more than a third of global purchases, making it by far the world’s biggest buyer of the metal, according to Junlu Liang, a senior analyst at Metals Focus, a London-based consulting firm. “Russia will likely remain a major gold buyer given mine production that helps it buy on the domestic market,” she said.

Polyus’s gold transactions, though expressed in dollars on the London bullion market, are conducted solely in rubles, making purchases cheaper and easier for Russian banks. Most central banks buy their bullion on global exchanges in dollars.

The central bank said last month that in the 12 months ending June 30, it had boosted its share of gold reserves 14% to $76.7 billion and bought up euros and yuan while it dumped around $100 billion in U.S. Treasuries and U.S. dollars.

Sukhoi Log, where open-pit gold production is expected to begin in the mid-2020s, assures a steady supply for the future.

“This is the Holy Grail of gold mining effectively, given the quality and given the scale,” said Polyus Chief Financial Officer Mikhail Stiskin, adding Polyus would sell gold from the Sukhoi Log mine to the Russian Central Bank as long as there was demand.

Polyus’s own history has tracked the ups and downs of Russia-U.S. relations. In 2015, the company delisted itself from the London Stock Exchange after ties with the West plummeted over the Ukraine crisis, which saw Russia’s annexation of the Crimean Peninsula in 2014. In 2017, in search of more capital, it relisted on the same bourse and made a second offering on the Moscow Stock Exchange.

The company hasn’t been hit by U.S. sanctions but investors have been wary about further U.S. measures that could target the company. When U.S. lawmakers last year aired the idea of sanctioning companies owned by relatives of blacklisted businessmen, Polyus remained silent but took note.

Sanctioned Russian tycoon Suleiman Kerimov, who first bought a stake in the company in 2009, put his shares in a blind trust for his family when he first became a lawmaker. In 2015 those shares were transferred to his son, Said, who now owns more than 82% of the company.

For now, Polyus geologists are poring over enormous cylinders of rock extracted from Sukhoi Log’s rock bed. Working in 12-hour shifts, the geologists examine the samples for changes in color, formation and texture and enter the information into a digital database. Polyus turns that information into a 3-D model of what lies underground, allowing it to understand how to dig.

The samples are cleaned and pulverized, and the powder is sent off in 200-milligram envelopes to an independent laboratory in Chita, more than 600 miles away. The laboratory and AMC Consultants have verified more gold reserves than previously believed and a grade of 2.1 grams per ton. According to the World Gold Council, that is about the average grade for open-pit ore, and above the median.

Sukhoi Log was first discovered in 1961 after a Soviet geologist estimated that the rock formations, similar to those in South Dakota’s gold-rush country, could hold great reserves of the metal. After decades of Soviet mismanagement that delayed exploitation, the Russian government made its first estimates of Sukhoi Log’s reserves in the late 1990s.

Polyus sees Sukhoi Log, together with Natalka mine, another big gold mine in eastern Siberia, as safeguards against what it sees as the increased likelihood of consolidation in the gold-mining industry as gold grades drop broadly through the industry.

Among some of the bigger mergers and acquisitions in recent years was the purchase of Mali-based Randgold by Canadian-based Barrick Gold, the world’s biggest gold-mining company.

When the license for exploration of Sukhoi Log went up for auction in 2017, Polyus joined Russian arms conglomerate Rostec in buying the rights. Polyus, which now owns a 58.4% stake in the plot, plans eventually to buy up all the rights.

Polyus says it is looking to invest a total of $2 billion to $2.5 billion in Sukhoi Log over a period of several years. For now, Mr. Stiskin said Polyus believes it can finance the project completely on its own, adding that other possibilities include bringing in a partner for the project or taking on loans from Russian banks.

According to Polyus, Sukhoi Log is likely to be producing more than 1.6 million ounces of gold every year for more than 35 years, one of the longest lifespans of any mine globally.

“It’s hard not to be excited,” Ms. Deys said.

Write to Thomas Grove at thomas.grove@wsj.com

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