Kinross Gold operations in Kupol, RussiaJames Hill/Handout
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."
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Alone in the freezing dark 300 metres beneath the Arctic snowscape, Nikolai Rasstalnoy feels his morning has gone reasonably well. Struggling at the console of a diesel-powered bolting rig that resembles a netherworld combine harvester, he has reinforced the ceiling of a lengthy section of a recently blasted tunnel with two-metre steel bolts drilled into the rock. Rasstalnoy is on pace for the next scheduled ore blast, and now he's ready for a cigarette break.
Perhaps because getting that nicotine fix meant leaving the rig's heated cab for outside-where, at minus 30, hell does seem to be freezing over-Rasstalnoy is not talkative. Curtly, he acknowledges that Canadians are changing the way things are done in Russian mines: "Better technology. Better management," he says, biting off his words in rapid Russian. "Everything has changed." Now 44, Rasstalnoy started as a miner at the tail end of the Soviet period. And frankly, he explains, he still misses the glory days of the worker state, with all the insulations it offered from the erratic and often brutal shocks of the market economy that began erasing socialism 20 years ago: "When I worked for Russians, the relationships were warm and we solved all our problems. We had a stable ruble and life was good," he recalls. But working at Kupol, he suggests, opened new perspectives on the Soviet past: "The quality of life in this place is far, far higher than anything I ever imagined was possible," he concedes. And with this midmorning sortie into international diplomacy completed, he climbs back into his bolter, slams the door and fires up the engine.
Three hundred metres above, Claude Schimper, Kupol's general manager, loads his empty plate onto a tray and heads for the restaurant's dishwashing station. Schimper, who trained as a miner, supervisor and mining engineer in South Africa before immigrating to Timmins, Ontario, in the early 1990s, has just finished explaining that one of his first acts as boss was to publicly toss the mine's book of Russian disciplinary codes into a trash can. "The whole book was about punishing people, with no mention in it of coaching them," he explains. "I wanted to make clear that we don't shout at people. We don't do denunciations."
At Kupol, Schimper faces an increasingly complicated future that will dictate the fate of Kinross's Russian gambit, and possibly the fate of the company as a whole. In the first two years of operation, Kinross focused on excavating and milling the mine's best holding, a large, rich deposit of easily excavated ore that produced significant income at a time when gold prices spiked toward historic highs. With production costs under $300 per ounce in the first couple of years, when gold hit $1,400 an ounce, profit was large. But wringing further wealth from the mine has become more difficult with each passing month. Although Kupol is estimated to contain enough ore to justify another six years of production, the quantity of gold in the ore is expected to continually decline. To offset this trend, Schimper needs to spur greater productivity, and he needs to find new supplies of high-yield ore. Both tasks, he believes, require feats of engineering-social engineering, that is.
"I gotta show you this," Schimper suddenly says as we pass through the dry room where miners store their heavy clothing. Ducking into the men's bathroom, he points to a row of placards placed above each urinal: "Under the old culture in this country," Schimper chuckles, "they even told you how to take a leak." The point, Schimper explained as we swerved down a seemingly endless corridor built with used cargo containers toward a suite of geological exploration offices, is that Russia remains a vastly over-regulated society where employees continually expect to be told what to do-no matter how banal the task. "We used to have people standing around just waiting to pounce on people who made mistakes," he says. In this setting, promoting a culture of self-reliance-and continuous efficiency improvements of the sort needed to keep the mine ultraprofitable-requires subtle nourishing. The occasional display of naked hierarchy-bashing can also help.
The productivity gains required to keep Kupol humming, Schimper explains, can only come from basic changes in the way people think. This is a notion he honed while working in repressive apartheid-era South African mines. "A lot of people think it was Nelson Mandela alone who brought down apartheid," he suggests. "But believe me, it was bigger than that."
Schimper's analogy seems far-fetched. But in both South Africa and Siberia, workforces were scarred by state brutality in some strikingly similar ways. Russia's Pacific northeast is a region still haunted by the deaths of hundreds of thousands of people-the majority of them political enemies of Russia's Kremlin masters through four decades starting in the 1920s. Secretly sent to forced labour camps, or gulags, the prisoners (and the many children that accompanied them) starved or froze to death here as a result of the Soviet government's sadistic approach to "opening" the region. Later, Moscow attempted a softer approach aimed at incentivizing mining in a region known to hold vast potential, says Valery Braiko, president of the Russian Gold Producers Union. But apart from a scattering of small mines, Russia extracted little reward. As with apartheid, the biggest social dividend has proven to be a deeply rooted culture of secrecy, fear and distrust. "It's a thought process," Schimper explains about the new mentality required to make the mine hum, "where responsibility comes naturally, not from managers shouting 'thou shalt not.' It requires a huge break with the Russian cultural systems, which, despite 70 years of communism, are strictly hierarchical."
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And then there is the matter-as important to Schimper as he cruises Kupol's corrugated steel corridors as it is to Burt in his ultramodern corporate aerie in Toronto-of finding more gold. Kupol, Schimper notes, sits on a geological trend roughly similar in size to the famous gold corridor alongside the Andes in South America. The difference is that the Russian deposits-which run down the Pacific coast between the Arctic Ocean and Russia's border with China-have been only loosely prospected because of their remoteness. "The geologists are the artists," Schimper says about a team of Russian and international scientists now coalescing at Kupol. Here again, his bet is that ripping out traditional hierarchies will unleash talent and generate the alchemical reactions required in the game of geological divination known as gold prospecting.
To find more gold in Chukotka, Kinross can also count on connections with local geologists dating back to 1998, when the company purchased the first of two pre-Kupol properties. At a time when gold prices were one-fifth current levels, the mines made modest amounts of money while establishing vitally important relationships with local, Soviet-trained geologists who knew better than anyone where gold could be found. When the Russian economy imploded in the late 1990s, and Kinross faced intimidating pressure from bankrupted local partners who threatened to use political connections to have Moscow revoke the company's licence over a dubious $45-million claim, many observers expected the Canadians to sell out and leave. The company faced serious legal jeopardy, since, as one Kinross official put it at the time, Russian courts were known for their "hometown decisions." But instead of bailing out, Kinross settled the issues out of court without having its reputation tarred, stuck with its mining plans, and continued to cement key relationships in Moscow, Magadan and, most importantly, gold-rich, secretive Chukotka.
Nikolai Grigoriev, Kinross's Magadan-based deputy general director, proved to be a particularly important friend to the Canadian prospectors who started investigating Russia after the collapse of the Soviet Union. Starting in 1973, Grigoriev had been part of a team that identified a series of major deposits north of Magadan, a forbiddingly wintry city of decrepit apartment towers and administrative buildings built in the 1930s as a staging-post for the gulags. In a strange twist of fate, the collapse of the Soviet Union in 1991 left him in personal possession of some of the former superpower's most valuable economic secrets. The downside was that his employers in Moscow had in effect gone bankrupt. He quickly established a private company with the closest members of his team. "We started at once to look for investors," he recalls in his office at Kinross's Magadan headquarters, "and the Canadians were among the first people who came." In 1998, Vancouver-based Bema Gold bought the Julietta deposit, which Grigoriev had discovered in 1989. "I wasn't able to personally grab the deposit," he says a trifle wistfully about a mine that he estimates yielded 25 tonnes of gold. "But we saved our team."
In 2002, his new-found Canadian friends also bought the Kupol deposit, which had been discovered in 1996. "They were slow and they underestimated the capabilities of the deposit," Grigoriev recalls. But with a team of Canadians, Grigoriev led an aggressive exploration drive at Kupol that soon revealed a massive body of spectacularly high-grade gold-silver ore. In 2006, the news from Kupol helped galvanize the $3.1-billion (U.S.) stock-swap offer with which Kinross swallowed Bema by paying its owners a 34% premium on the company's valuation. At a time when Bema had yet to commence production at Kupol, and gold prices had yet to spike, Kinross gambled that the mine was undervalued. By then, Kinross had been operating mines for over a decade, explains Burt, who became CEO in 2005. "Magadan," he says about a city that would likely win the competition for the oddest Canadian company town of all, "was our jumping-off point."
Once Kupol had proven its merits, Grigoriev's Canadian friends were introduced to another substantial deposit of high-grade ore-the Chukotka deposit, known as Dvoinoye-that is located close enough to Kupol to allow Kinross to use the same mill. In a transaction last summer involving the transfer of $165 million and 10.5 million newly issued Kinross shares, Kinross purchased this deposit (which comes online in 2013) from a company associated with Roman Abramovich, the Russian oil oligarch who until recently served as governor of Chukotka. Unlike every other foreign resource investment made in Russia to date, Moscow gave Dvoinoye to Kinross without requiring a Russian partner. As the largest employer in Magadan, the largest taxpayer in Chukotka and the largest gold producer in Russia, Kinross is putting billions in workers' pockets, Russian government coffers and the private accounts of highly influential parties. The Kremlin likes what it sees. And now it wants more.
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The bidding on Vladislav Tretiak's special-edition ring ignited at the $10,000 mark. The ring-a blocky signet sporting a cameo of Tretiak, the Soviet goalie who became a star after the famous 1972 Canada-Russia hockey series-seemed more trinket than treasure. But Tretiak, who is now a member of the Russian parliament, is a figure of considerable nostalgic interest. From the stage in the high-Soviet baroque ballroom in Moscow's Sovietskaya Hotel, Tretiak was spiritedly prodding the bidders. Fuelled by his booming encouragements, and plenty of cheap champagne, many among the middle-aged business crowd seemed to be trying to relive that last-minute goal that gave the series to Canada.
The event was the Canada Eurasia-Russia Business Association's annual winter charity auction. The inaugural effort in 2002 raised $5,000 for Russian children's groups. Successive takes have compounded nicely. This year's kitty-including $32,000 for the Tretiak ring-was just over $200,000.
That progress is analogous, suggests Lou Naumovski, head of Kinross's Moscow office and director of the company's all-important Kremlin relations team, with the modest but steady gains Canadian businesses are making in Russia. Trade between the two nations roughly quadrupled between 2002 and 2009, at which point Canadian exports declined 40% as the Russian economy dramatically contracted. But Naumovski, who has tracked Canadian investment in Russia since he arrived here as a trade commissioner in the Canadian embassy in the '80s, takes a somewhat jaundiced view of Canadian efforts to engage with what geography suggests should be a natural trading partner. Kinross's success has proven that money can be made here, he argues. But Canadians have missed numerous opportunities. "The Canadians are so damn timid," he said with some exasperation a few days after the auction.
Naumovski, who grew up in Toronto, can list off numerous examples where Canadian companies-Bell Canada, Petrocan-initiated projects that sputtered. Bombardier has had limited success. Other companies have done better, including SNC-Lavalin, Cirque du Soleil and Uranium One. But for the most part, he thinks, Canadian business efforts in Russia have been inadequate, even, in some cases, "chickenshit." And although various government efforts have been staged-most notably two large "Team Canada" business delegations led by then-prime minister Jean Chrétien-Naumovski also faults Ottawa for an approach he describes as faint-hearted.
Canada was a substantial investor in the European Bank for Reconstruction and Development, established in 1991 to help co-ordinate Western investment and promote economic reform in Russia and the former Soviet bloc, recalls Naumovski, who worked with the EBRD. Although the EBRD substantially contributed to the reconstruction of the Russian oil industry, the biggest foreign investment opportunities EBRD projects yielded were seized by Europeans and Americans. EBRD invested in Kinross's first project in Russia, the Kubaka mine, in Magadan, in the mid-1990s. "We were the more favoured trading partner," says Naumovski.
The Russian economy has expanded rapidly over the last decade, and the opportunities are huge, Naumovski believes. Before joining Kinross, Naumovski headed Visa's Russia office. From that perch, he watched Russian consumer spending explode as the economy began stabilizing after 1999, when Russian President Vladimir Putin began checking the chaos of the 1990s. "I look back with some regret that Canadians didn't move on these opportunities," he says. Through the window at his back, a thicket of enormous office towers can be seen under construction in Moscow's new business district-a project once spearheaded by Canadians, before they let it drop. "But working with Kinross has given me a lot of hope."
At Kinross, which he joined in 2007, Naumovski's signal contribution has been winning Tye Burt his seat on the Kremlin's Foreign Investment Advisory Council, which is chaired by Prime Minister Putin. Through FIAC, Kinross not only gets direct access to the ultimate inner circle of Russian policymakers, but it also gets to help shape foreign investment policies alongside 40 other international investors. Winning a seat on FIAC "was a very pleasant surprise," acknowledges Burt, and a powerful endorsement of Kinross's investments in Russia. "Mr. Putin was good enough to say that on national TV," chuckles Burt, who says he was amazed by the numeracy of Russia's highly authoritarian political strongman (who completed a doctorate on mining law) when they met recently. Within FIAC, Kinross has agreed to produce a white paper for the Russian government on how Russia might fashion a Vancouver-style venture exchange for junior and senior mining companies. Like Naumovski, Burt thinks Canadians need to accelerate investment efforts in a rapidly modernizing Russia while they remain affordable and available, and before they are swept up by Russian and international competitors. "The relationship is growing," says Burt, "but I don't think it's growing fast enough."
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Kinross," says Sergey Efimovich Donskoy, Russian deputy minister of natural resources, "is the big story in Russian mining. What they've done on the moonscape of Chukotka is remarkable. It's the most positive development we've ever seen." Sitting in his central Moscow office, the deputy minister was anxious to emphasize that Kinross has proven that the risks of investment in Russia are greatly overstated. Yes, he acknowledged, there have been numerous crises for foreign investors in Russia. Numerous major companies, he could have added, have tested the waters and balked in the face of the notorious official corruption and the capriciousness of the Russian courts. Huge private companies like Yukos, at one point Russia's second-largest oil company, have been renationalized using blatantly politicized legal measures. Legislation identifying vast swaths of the economy-including gold mining-as being of "strategic" relevance to national security creates confusion, and fear, he acknowledged. "Not only foreign investors are worried about our legislative system," he shrugged. Even so, amid worldwide competition for investment, Russia has lots to offer, he stressed, while gesturing toward a huge map of his vast, resource-packed country. "But if they plan to invest big sums here," he advised, "they will have to face the local authorities and feel their way."
Stanislav Sergeevich Voskresensky, deputy minister of economic development, was similarly unvarnished. "I won't be bullshitting," he bluntly promised across a teetering file of briefing notes and econometric reports in his Moscow office. In studiously casual English, Voskresensky, who is 34, mapped out the Russian government's strategy to attract foreign investments, with frequent digressions to discuss landmark deals such as a recent $3.8-billion investment by PepsiCo, and an even larger deal between BP and Rosneft, Russia's state-owned oil behemoth: "We don't need loans from the IMF and the World Bank. What we need is FDI," he said, using shorthand for foreign direct investment. At about $300 billion, he estimated, FDI in Russia "is not as much as China, of course, but still significant." But if there seemed to be an escalation in foreign investment recently, it was more a matter of the post-recessionary economic cycle than a shift in policy, he stressed. "Of course, it looks sexier when we say there is a big shift happening," he mused. "Maybe it looks like a shift because before all of this we were saying these things about supporting foreign investment. Now we have proof."
For proof that investments in Russia will find favour from government, and will pay, Voskresensky, like Donskoy, lost little time in drawing attention to Kinross. "This is the first company in the history of the country that was allowed to solely take over a gold mine, which is considered a strategic thing," he stressed about last year's Dvoinoye deal. "It's the first time anyone got that. And they said they were surprised how fast it happened. It was done almost immediately. That's how we work now."
The upbeat message from Voskresensky and Donskoy would be more persuasive without the contrapuntal noise emanating from a small group of tenacious media voices and public researchers. While Russia's main television channels and broadsheets are under government control, the country is the fourth most dangerous country on Earth for independent reporters, according to the New York-based Committee to Protect Journalists. In a $1.5-trillion economy, bribery is estimated to account for $300 billion in expenditures, with every sector of government and law enforcement compromised. Indeed, Russia is the world's most corrupt major economy, according to Transparency International's 2010 Corruption Perceptions Index.
Russian President Dmitry Medvedev, formerly a lawyer, has made fighting corruption his signature issue. The country is run by corrupt officials, he acknowledged in a recent speech. "Corruption has a systemic nature," he added, "deep historic roots. We should squeeze it out. The battle isn't easy, but it has to be fought. I don't think we can achieve tangible results in one year or two. If I am a realist, we could get good results in 15."
In large part, the Kremlin incubated the corruption it now says it wants to uproot. Through the better part of a decade in power following the Soviet collapse in 1991, former Russian president Boris Yeltsin established an utterly corrupt system of crony capitalism that his successor, Vladimir Putin, did not contain during a single-minded drive to maximize oil revenues. But in an autocratic regime dependent on fast economic growth for survival, the government now recognizes that oil revenues will not be sufficient to seed a new economy, and that Putin's decade-old policy of promoting Russian "national champions" must be internationalized.
Like Donskoy and Voskresensky, Roman Valentinovich Kopin, Chukotka's Kremlin-appointed governor, is too young to have ever had a job in the Soviet era. At 37, he's part of a new generation of Russian technocrats moulded in a more open, internationalized and money-obsessed country than their parents could have ever imagined. But he's also old enough to have spent his entire adult life navigating the epic, vicious struggle for the incredibly valuable trophies left dangling amid the massive economic despoliation that followed the collapse of the USSR in 1991. Kopin's predecessor in the governor's job, Roman Abramovich, is one of a handful of oligarchs who successfully gamed Russia's privatization sweepstakes in the mid-1990s, when the collective wealth of the world's largest country passed from public control into a tiny clutch of private hands.
On a recent visit to Moscow, Kopin described Kinross as a model corporate citizen that provides roughly 30% of his administration's revenues. As with Donskoy and Voskresensky, the message was that Kinross found favour in good part because it refuses to engage in corruption-in keeping with Tye Burt's insistence that Kinross has "a zero tolerance policy for corruption." Kinross's success also signals that the Kremlin wants Russian mines to be developed in a setting of rigorous business competition, Kopin stressed: "Kupol was developed very quickly and the results have been noted, not just by Western companies but by the Chinese, among others," the Kremlin's man in Chukotka explained. Russian companies should take note that Kinross has raised the bar: "We want to work with the best," Kopin said. In the race to open up one of the world's richest remaining gold frontiers, the governor emphasized, the time has come for Russia's long-sheltered national champions to compete with their international counterparts. And that, it seems, could portend more good news for Kinross. "We have spent a lot of time understanding their way of thinking," says Burt with considerable satisfaction. "And now they want to understand ours."