Russia’s mining companies have been badly affected by the economic downturn, with many posting losses for H109 while working to refinance existing debts and seeking further capital from lenders. UC RUSAL – the world’s largest aluminium company – was forced to undergo significant restructuring with respect to its debts, and in July 2009 it was reported that the sale of UC RUSAL’s 25% stake in Norilsk Nickel would be triggered automatically should the market price rise high enough to allow RUSAL to repay its debts to state banks.

In further bad news for the sector, in August 2009 a dam burst in Russia’s largest hydroelectric power plant, killing 12, with 64 still missing and presumed dead at the time of going to press. A turbine flooded at the Sayano-Shushenskaya power station and it is it is not expected to operate at full capacity for another two to three years. Antiquated infrastructure was blamed for the accident, although some terrorist groups claimed responsibility for the attacks – claims roundly ignored by the government. The accident threatens to reduce RUSAL’s aluminium production by 500,000 tonnes, equating to approximately 11% of the previous year’s production. RUSAL, together with state-owned RusHydro is now discussing the launch of a new hydroelectric power plant at Boguchanskaya as a way to bridge the shortage in required power. Tenders for the construction and installation are expected to be held later in September 2009.

On a more positive note, in August 2009, Russia’s largest diamond miner ALROSA finally saw demand return for diamonds and posted sales of US$66mn, putting the company in a position to begin repaying its debts, which include US$88.7mn to private lender Alfa Bank. The US$66mn deal was the first sale of the year to a buyer other than the government-controlled State Precious Metals and Gems Repository (Gokhran). The continued sales to Gokhran by ALROSA – rather than the seemingly more obvious strategy of cutting production – had sparked rumours that Russia, with a 90% interest in the company, was stockpiling diamonds in the downturn as a means to control international market prices. However, the criticism and eventual removal of the chief executive, Sergei Vybomov, who was the architect of ALROSA’s policy, suggests that this may not be the case. However, ALROSA is expecting to sell another US$3bn of diamonds to Gokhran over 2009-2010 to further alleviate the company’s debt, which stood at US$3.6bn at the start of the year. Prime Minister Vladimir Putin pledged US$1.1bn in state assistance to help the company weather the difficult climate.

Meanwhile, in July 2009 it was reported by the Wall Street Journal that the Russian government had threatened to revoke two mining licences from Arcelor Mittal for its Siberian coal operations, fearing that the company would close the mines and leave many unemployed. The company was instructed to boost production and stabilise operations at the mines or to transfer the licenses, without compensation, to the regional administration. By August 2009, the company had agreed to continue mining at the deposits without making any staff cuts. After talks between the company and the regional government, it was agreed that investment would be made to modernise facilities and continue operations, with coal sales being guaranteed by the local government.

Global Overview On page 9 of this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector, and what this will mean for the industry in the future.

Industry Forecast In the short term, Russia’s mining sector is facing severe difficulties caused by falling commodities prices. In 2008, BMI estimated the mining sector declined by 5.0% in real terms, while we forecast a marginal contraction in 2009. By the end of the forecast period, however, the market should have returned to strength as commodity prices recover and new reserves are developed. In 2013, we forecast the mining sector will be worth US$175.8bn.