The owner of Severstal started buying gold assets last summer and has now announced his intention to be the third or fourth largest gold producer in Russia. However, skyrocketing prices on gold deposits may prevent him from doing so.
The price of gold in the world market is a little below $800 per ounce; this figure is unprecedented since January 1980 when it reached the record $850 per ounce. This is taking place because of the growing demand for all raw materials, the weakening of the dollar and instability in Western credit markets. Under these circumstances, the majority of investors prefer to put their money in gold, which has eternal value. Leading world bankers predict that in 2008 the price of gold will reach $900 per ounce and will continue growing until at least the end of this decade.
Russia has the world's second largest gold reserves after South Africa, but the cost of gold mining here is much lower. It is only natural that the steel tycoon has shown such an interest in gold. In the summer, Severstal made its first gold acquisition by purchasing a 22% percent stake in the Irish-registered Celtic Resources, which is in charge of gold deposits in Kazakhstan. Now Severstal is close to fully absorbing the company, but to achieve this, Mordashov had to raise his initial offer to the tough Irish company by 30% and will now have to pay them $330million-$340 million. While bargaining with the shareholders of the company, he has purchased a number of smaller deposits in Eastern Siberia.
Mordashov's confidence in the precious metal is so great that he has decided to become Russia's third or fourth largest gold producer, which he said at an investment conference organized by the Swiss UBS bank in Moscow on November 16. In five years, he is planning to integrate his gold businesses into one company in order to conduct IPO or find a strategic investor.
He hopes to enter the gold market without excessive expenses, but gold mining assets are growing in price along with gold. At the same conference, Mordashov mentioned the British Highland Gold Company (which owns gold deposits in Russia) that could allegedly be purchased at a low price. Although the Severstal press service resolutely denied the fact of the talks on the purchase of Highland Gold, its price tag went up by 16% in one day to reach $540 million.
Analysts believe that the future Russian gold king does not have much choice. If he wants to become a third- or fourth-largest player in this industry, he will have to acquire new assets and Highland Gold is a likely target. By buying it and merging it with Celtic and smaller gold mining assets, Mordashov can become one of the four largest gold producers in Russia. As with Celtic, he is likely to buy Highland Gold with a 30 percent markup - for about $700 million.
Mordashov is not likely to go for any of Russia's three biggest gold producers, Polyus Zoloto, Peter Hambro or Polymetal. The latter is Russia's third largest gold producer but its main product is silver, and is therefore of no interest to Mordashov. Peter Hambro shares are listed on the London market and are very expensive. Moreover, its shareholders are not planning to sell any stock.
Russia's biggest gold producer, Polyus Zoloto, also costs too much. It will be very difficult to buy or sell it because due to growing gold prices its capitalization has already reached $8.5 million. The company is co-owned by Vladimir Potanin and Mikhail Prokhorov (each has about 25%). This year, Prokhorov tried, without any success, to buy stock from Potanin. Then he decided to sell his own equity to the Russian state-controlled diamond-producing monopoly Alrosa. However, in November, Russian Finance Minister Alexei Kudrin, who heads Alrosa's supervisory board, announced that the sides failed to agree on the price and suspended the talks.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
