[Kinross Gold] Good times in the gulag – by Paul Christopher Webster (Globe and Mail – Report on Business Magazine – April, 2011)

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Vladimir Putin, Tye Burt and Kinross’s Gold Rush in Siberia

Looking like a luxury liner that took a wrong turn somewhere in the Pacific, the living quarters at the Kupol mine stand in surreal contrast to the surrounding moonscape of snow, ice and searing wind. Built largely in Alberta and trucked here to northeastern Russia from a port on the Arctic Ocean, the facility, which is operated by Toronto-based Kinross Gold Corp., boasts a huge gym, exercise rooms, high-speed Internet, extensive entertainment facilities and two spacious restaurants serving nearly 30 tonnes a month of remarkably palatable food.

Workers, who are flown in for four- to six-week stints from the city of Magadan, 1,200 kilometres to the south, peg their shift schedules to Sunday shashlik dinners. “I’ve never seen anything like this anywhere,” says Anatoly Orlinsky, a veteran of Russian resource development who runs Kupol’s power plant. “If this is the future for mining in my country,” he says with conviction, “it gives me hope.”

Here on Russia’s remote northeastern frontier, Kinross has secured its own private El Dorado just as gold prices head for the stratosphere. After 15 years of battling investor doubts about Russia, startling logistical improbabilities and sinister patches of resistance in a region first developed by prisoners of the Soviet gulags, Kinross has captured a prized part of Canada’s Cold War peace dividend. At Kupol—a quarter of which is owned by the government of Chukotka province—huge quantities of stunningly high-grade gold ore are being mined by the descendants of gulag prisoners and guards, now working side by side under Canadian managers at Russia’s second-largest gold mine.

The site produces around 2,000 gold-equivalent ounces a day—worth $2.8 million (all currency in U.S. dollars) at current prices, almost $2 million of which is pure profit. After just 29 months of production, Kupol has produced two million ounces, a yield described as “stunning” by Kinross CEO Tye Burt. And its success in Russia has confirmed the company’s ability to identify and develop deposits in remote areas. “The cash flow from the Kupol mine has also been a tremendous contributor,” says Burt. “We’ve been emboldened.”

Galvanized in part by Kinross’s motherlode in the Motherland, last year Burt twice gambled on expansion strategies that have now placed Kinross within the firmament of the top six global gold companies. First, he secured another highly promising deposit in Chukotka—called Dvoinoye—with a $365-million down payment. Then, in a deal that forced substantial further dilution of an already-discounted stock, and yielded considerable investor skepticism, Burt bootstrapped Kinross into a controversial $7.1-billion all-stock deal to merge with Vancouver-based Red Back Mining Inc. The company owned large mines in West Africa that Burt was betting were undervalued in much the same way Kupol was when Kinross bought it in 2007. Kinross’s future largely hangs on this bet.

On the gold industry’s ultracompetitive chessboard, says Burt, Kinross’s Russian base provides a major advantage. Unrolling a map of the world’s known gold reserves at Kinross’s Toronto headquarters, he points out that Russia is home to the planet’s second-largest known gold reserves. In Burt’s logic, stock market discounts for Russian holdings—due to expropriation apprehensions that Burt flatly rejects—deny a basic truism: “If you are a major gold producer,” Burt contends, “it’s not a question of if you go to Russia. The question is when, and how do we get there? And we got there early.”

The Russian government has returned Burt’s compliments. Delighted with a total remit to workers, local suppliers and governments estimated at $1 billion to date, Russia’s economic grand master, Prime Minister Vladimir Putin, has singled out Kinross for praise. More to the point, the Kremlin has invited Burt to join its Foreign Investment Advisory Committee, giving him access to Russia’s inner sanctum of power. Given the country’s vast gold reserves and the Kremlin’s control of virtually every major business development in the country, this is no small coup: “You gotta earn your way in,” Burt explains. “And it doesn’t just happen overnight.”

For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/report-on-business/rob-magazine/good-times-in-the-gulag/article1954058/singlepage/

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