We are not a license market player; we are an industrial company

Posted on Nov 12, 2012 in GPM in the media

We are not a license market player; we are an industrial company

9 November 2012


Why is the mining industry so conservative? What is special about this business in Armenia and globally? Why is it so important to cooperate and find a common language with environmental organizations? Will there be an end to the world financial crisis soon? Find answers to all these vital questions in ArmInfo’s interview with GeoProMining founder and shareholder Siman Povarenkin.

– Mr Povarenkin, you are the head of a major international private company with a diversified resource base of gold and other metals, with assets in the post-Soviet territory: in Russia and Armenia. You are considering projects in South-East Asia and Latin America. The world is facing challenges because of the crisis. What impact does the crisis have on the mining industry?

– Crisis aggravates issues of every industry, and mining business is not an exception. Companies including gold mining ones should always reckon a cyclic and conservative nature of the business in their development and production strategies. Return on investment for gold projects of industrial scale is at least 6-7 years. This is a result of significant capital investments in setting up and maintaining production. It is necessary to take into account production costs: salaries, energy, logistics, production process, taxes, tailing treatment and other expenses that are constantly growing along with inflation and raising cash costs.

Net cash cost of major gold producers is hardly less than USD750 per ounce, which is 2.5 times more than five years ago. After adding capital investments and interest payments for loans that companies take to invest in modernization and construction, the actual cash cost often exceeds USD1,100-USD1,200 per ounce. These are cash costs of leading companies. Those of smaller companies are even higher.

Another special feature of a mining company is the need for constant expansion of reserves and resources, which requires major efforts and expenses. Only one out of ten explored deposits usually reaches a production stage. To build a good mining and processing complex, a company needs make to invest heavily in drilling and research, conduct comprehensive metallurgical tests, select the right production technology, develop infrastructure, and work out a feasibility study. Then comes a stage of planning, additional financing and construction of the complex.

Deposits like those developed in the Soviet times, in 1930s-1960s, hardly exist any longer. Placer gold deposits were developed without any special machines or equipment. Gold deposits with the grade of less than 5 grams per ton were not even considered as companies saw no potential in them. Today, companies are ready to make large investments in gold deposits with 0.98-2 grams per ton of even oxide or sulphide ores. Deposits with 0.6-0.8 grams of gold per ton of ore can also be considered promising if the project can demonstrate good mining and recovery indicators.

– However, nowadays there are new technologies that allow boosting recovery rates…

– Of course. They are driving the progress. The number of new deposits in the world does not increase, while processing and environmental impact requirements have been significantly toughened. Since the beginning of the industrial revolution over 175 years ago, most of the promising “rich” deposits have been developed. The metal grade of remaining deposits is falling. There are some promising resources in remote areas with unfavourable weather conditions (extreme heat or cold) and absence of infrastructure. There are new technological solutions that allow processing “tough” ores. It was impossible to do this using the technologies of the last century. There are projects that are considered promising due to new technologies, but they are mainly in the regions that are not properly researched and require significant investments in the development. Additional expenses on construction of infrastructures increase risks.

– What are your guiding principles while selecting development projects?

– We are not a license market player, we are a major industrial company and it is very important for us to set up, launch and develop production. Therefore, we always focus on projects that are economically viable and present opportunities for industrial growth.

Looking back at the history of our company one can see that none of the assets were acquired in a good condition. Several years ago we bought two mines in Yakutia that were fully frozen. For two years we have been gathering a professional team, restoring and developing the mines. We faced serious technological challenges in the severe weather conditions of Yakutia. Today thanks to our comprehensive approach the project has become quite profitable (GPM’s assets in Yakutia are Zvezda which develops the Sentachan antimony deposit and the Sarylakh-Surma production complex, which includes the Sarylakh mine and recovery plant, located in the Yakutsk Region of the Russian Federation –ed.)

Over four years we have developed a new for us business from the scratch and now we control over 10% of the world antimony reserves. Today, we are the largest player outside China, which dominates the global antimony market. Its share in the total antimony production is 72%. At present, both the European and Asian markets totally depend on China. We are actively developing this business studying antimony projects in Latin America and South-East Asia, and considering the construction of an antimony trioxide production plant in Russia.

– What is the situation in Armenia?

– This year the Agarak Copper and Molybdenum Mine Complex demonstrated record production volumes since its establishment. We have recently completed modernization of the complex and increased ore processing volume to 3.5 million tons annually. We are grateful to our Armenian and Russian contractors who helped us modernize the complex without suspending existing production, which was a rather serious engineering and technical task. We implemented a successful drilling programme and increased the resource base of the complex prolonging its lifetime up to 35 years.

There was a similar situation with the Ararat complex. When we acquired the asset in late 2007, it was idle. By that time the company had processed all reserves of oxide ore and tailings. The company had huge debts to employees and creditors. We have not only resolved all the accumulated problems, but also re-launched production at the height of the global crisis. We made serious capital investments and resolved operational issues. At present, we are introducing a unique Albion technology developed by Xstrata Technology, Australia, at the Ararat gold recovery plant. The first plant using Albion Process has been recently launched in the Dominican Republic. The Albion Process technology enables to effectively process all type of ore including sulphide-bearing ones. The Zod deposit contains mostly sulphide-bearing ore. It is a very important project for our group. Its capital costs exceed USD150 million. It also requires high professional qualification of specialists.

HR issue is among key topics we are actively discussing with the Armenian government. Serious and high-tech equipment is being imported into the country and it requires substantial training of technical staff. We have launched a scholarship project to train students at the mining universities in Armenia and Russia. The first five students joined the programme this year. The company also needs heavy truck drivers, electric welders, etc. Such specialists are in high demand but most of them are of pension age. A new generation of them should be trained in the country. And we are ready to assist in re-training and education of new staff.

– So you think that the mining sector should remain a driver of the economy in Armenia …

– The mining sector of Armenia has a huge potential and I see plenty of opportunities for growth for us and our colleagues. Other sectors will also contribute to the economic development in Armenia, e.g. agricultural, financial and service businesses. I think that the country has a bright future in the IT-sector. This sector is quite promising and there are neither geographical nor geopolitical obstacles to its development. The tourism industry also has a big potential.

– What prospects do you see for GeoProMining in general and in Armenia, in particular?

– GPM is a global company and we study such development projects that let us grow more rapidly and more effectively. Our company has huge plans for our Russian and Armenian assets. We are also considering businesses outside the CIS. We began investing in South-East Asia and Latin America.

We have many plans for organic growth of the company in Armenia. For instance, we have completed exploration drilling at the Hankavan copper and molybdenum deposit and we will start a feasibility study, which will take us a year to prepare.

It is noteworthy that small and medium-size companies have been emerging in the mining sector in Armenia recently. It is a very positive and important factor for the market development. In this respect Canada’s example is very interesting: the country has created a favourable environment for the development of mining companies and put in place an efficient state system of encouraging investments in the mining sector. Newly established companies enjoy certain tax privileges. If a big company acquires such project or merges with it, it may enjoy these tax privileges to some extent, too. The second important factor: as a rule exploration license evolves into production license, which is an important incentive. In Canada and other countries with the developed mining sector, mining royalty rates are applied depending on the ore grade. The fact that small and medium size companies have been emerging in Armenia contributes to formation of an adequate business practice in the sector, which will attract more foreign and strategic investors from all over the world and increase the number of professionals in the mining sector.

– What do you think of the business environment in Armenia, especially after the troubles your Armenian companies had to overcome?

– Companies in any country face problems. At the stage of investment it is less visible. At the stage of the first profit it is observed nearly everywhere. I think that any experience is useful, even the negative one. It is important to overcome difficulties and reach the goals. It is important to understand that despite these problems the company, the staff and the entire business environment go ahead. Armenia is making very serious steps to attract foreign investments and we are actively involved in this process.

– The Group’s enterprises in Armenia very often face criticism of environmental organizations. Unfortunately, big reserves of ore are located not in the saline lands, but in the areas of rich nature: forests and lakes. What do you think of environmental protection as a person of global vision, not as a businessman pursuing profits?

– Environmental issue is of high importance for us. We strive to be as technologically and environmentally progressive as possible. We are committed to observing environmental requirements – and it is a matter of principle for us. There are always environmental issues in any business. The only way to resolve them is a constructive dialogue. If you are a priori guilty of choosing this business, there can be no dialogue and concerns are obviously inflated.

Mining industry is active worldwide, including Western Europe and North America where the toughest environmental protection requirements are applied. People negotiate and find mutually acceptable solutions. We are also ready to negotiate with environmental organizations, study all the documents, and share environment impact assessment resolutions. We will be happy to introduce innovative environmental solutions. For me it is an open question. Our Group applies the toughest environment protection standards and requirements to all its projects. It is our internal law.

– How long will the crisis continue?

– We are experiencing a period of uncertainty when people do not know what will happen in the market in 3-4 years. The old model of economy with its predictability has faded away. Unfortunately, no one can predict borrowing rates in the market. Nobody knows what monetary policy the biggest economies in the world will prefer tomorrow. Today we live in a different economic reality. Therefore, it is very important to do business at your best, making an economic contribution to the global process.

Investors and banks today prefer companies generating profits, professionally managing the cost value and having industrial experience. Many avoid long-term projects because of high expenses and risks. Such approach reduces the stability level and hinders the economic growth.

We must be ready for on-going changes as now we live facing permanent crisis and challenges.

by Emmanuil Mkrtchyan