RUSSIAN FAR EAST: MINING IN KHABAROVSK KRAI MARCH 2000

AUTHOR: ANDREI VASENYOV, BISNIS, KHABAROVSK. APPROVING OFFICER: RICHARD STEFFENS, PRINCIPAL COMMERCIAL OFFICER, US COMMERCIAL SERVICE, US CONSULATE VLADIVOSTOK.

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2000. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.

SUMMARY

Though the Khabarovsk Krai’s mineral resources are enormous, the mining industry remains underdeveloped and undiversified. Most existing mines operate with out-of-date technology and equipment. The Khabarovsk economy is currently experiencing structural transformation and reorientation of its raw-material sector toward the markets of the Pacific Rim countries. Although reserves of gold, tin and coal have attracted limited foreign investment, foreign firms, concerned about high business risks, have not been actively involved in the development of the regional mineral deposits. The report provides general information on the major resource base and mining operations in the Krai, and briefs on the local investment climate and some investment projects. End summary.

ABOUT KHABAROVSK KRAI

Khabarovsk Krai, occupying 4.6 percent of Russia's territory (304,500 sq. miles, larger than Texas), has a strategic location in the central part of the Russian Far East. The territory has traditionally ranked second in the Far East falling slightly behind Primorskiy Krai in the volume of foreign trade and export. The Krai has been the most industrialized territory of the Russian Far East. As of January 2000, the major sectors of economy are:

- power production (34.2 percent of Krai‘s industrial output),
- fuel production (18.9 percent),
- machine building and metal working (12.9 percent),
- mining (6.7 percent),
- timber, wood processing (6.5 percent), and
- nonferrous metallurgy (4.6 percent).

In 1999, production grew in the machine-building, mining, timber, apparel and food production industries.

The Krai has two major railway systems, water transportation for up to half the year, and a modest highway network. One of the largest regional ports, Vanino, can handle up to 12 million tons a year of cargo of all types. It is currently equipped to load bulk ores and coal. The Krai has a good airport at Khabarovsk. Labor costs are low for both workers and technical support staff.

MARKET OVERVIEW

The markedly weakened ruble has made the Krai’s resource-based industries newly competitive in the world market, and it has created opportunities for American equipment exporters as local managers retool aging facilities. The Krai is rich in mineral resources. Four minerals--gold, platinum, tin, and coal--offer short/medium term opportunity for development and exploration. The territory is one of the largest regional suppliers for nonferrous metals, including 7 tin ore bearing localities. Survey and development of precious metal placers, deposits of tin, copper, coal, rare-earth metals, as well as exploration of oil and gas fields in the continental shelf are major priorities of the Krai Administration. Foreign businesses are regularly invited to participate in tenders on development of raw material deposits and timber stands. Machine shops and metal fabrication shops in the major cities supply components and mining equipment.

BEST PROSPECTS FOR U.S. BUSINESS

· Participation in international tenders on deposit development;
· Participation in construction of processing/enriching facilities;
· Marketing of minerals produced in Khabarovsk to Pacific Rim countries;
· Sales of entry driving machinery and equipment;
· Sales of chemical ingredients;

INVESTMENT CLIMATE

Today, the countries with investment in Khabarovsk mining are the United States, Switzerland, and Japan. The capital required to develop a mineral deposit is considerable (reaching hundreds of million dollars) and the time before returns can be long. The Krai administration has no active “game plan” to attract investors. Procedures for establishing private business operations in Khabarovsk are complex, time consuming, and costly. The Krai’s promotion and marketing program is in the process of development.

Following the recommendations of CARANA Corporation, which was operating in Khabarovsk through the US AID-funded Regional Investment Initiative, the Krai has recently taken several positive steps to create a better environment for investments. The Krai Duma is considering a Law on Investment Activity in the Khabarovsk Krai, to improve the investment climate in the region and provide guaranties from the Krai administration, including the creation of Mortgage and Guarantee funds.

To attract foreign investment, the government is offering various privileges. For instance, the Krai Duma (legislature) has adopted a two-year exemption from the regional profit tax for new enterprises engaged in production if they are wholly- owned foreign companies or joint ventures with more than 30 percent foreign ownership. In addition, new enterprises with foreign investments of more than USD 5 million enjoy a three- year exemption from the profit tax. Considerable geological information is available. Today the Department of Foreign Economic Relations possesses a Road Map on the Minerals Sector of the Khabarovsk Krai prepared by an expert of CARANA Corporation.

ADMINISTRATION OF THE KRAI’S MINING SECTOR

The Krai administration administers natural resources in the territory by issuing licenses. In accordance with the Russian Federal Law “On Minerals”, the licenses for the right to use minerals are jointly prepared by the Khabarovsk Krai administration, and Ministry of Natural Resources of Russia or by its regional branch – Committee on Natural Resources of the Khabarovsk Krai.

MINING IN KHABAROVSK-CHARACTERISTICS

The mining industry in the Khabarovsk Krai, has the following basic characteristics:
- Mineral and raw material resources are widely scattered across the Krai.
- Reserves for mining plants vary. The mining and enrichment industry makes concentrates, not finished products. Most output must be sent to other regions of Russia for processing.
- Losses during extraction and processing are extremely large. Waste often exceeds 20 percent; processing waste averages 50 percent. The usage of ores from nonferrous and other metals barely reaches 20 percent.
- Geological exploration in the territory has lagged: predicted, not known, resources dominate analysis.
- Virtually all forms of mining have a good raw-material base for future extraction. The raw material base can satisfy the Russian demand for tin, tungsten, and precious metals.

The region is richly endowed with precious metals, base metals, gems and energy and fuel resources. Much is known about the geology, the characteristics of deposits, and appropriate mineral recovery techniques. The Institute of Tectonics and Geophysics, the Far Eastern Research Institute, and the Institute of Mining and Engineering have been collecting and analyzing data pertaining to minerals and energy for over thirty years. The information is not always easy to find; some of the most useful has not been published due to lack of funding.

GOLD

For decades, gold and platinum extracted in the Krai constituted 6-8 percent of Krai’s GVP. 14 percent of the gold reserves of the RFE are located in the Khabarovsk Krai. In 1999 the extraction of gold and platinum yielded 97 percent of mining industrial output. 6.6 tons of gold was produced, 13 percent more than in 1998.

Placers primarily extract gold where vein reserves are considerable. The raw material base for gold extraction includes lodes (approximately 70 percent) and alluvial placer deposits with gold nuggets The gold content is 4.5 to 55 grams per ton in lodes and 0.7 to 10 grams per cubic meter in placer deposits. Predicted deposits of gold substantially exceed known reserves.

Significant changes occurred in the territorial organization of the gold mining industry in the course of economic reforms. As a result of privatization, state gold-mining enterprises have been reorganized into joint-stock companies and individual mining enterprises (artels). In 1999 approximately 6.6 tons of gold was produced, 13 percent more than the output of 1998.

The Amur Company produces about 50 percent of the total value of the precious metals in the region. In 2000, Amur plans to develop the Ryabinovyi deposit(Ayano-Mayskiy district),which is extremely rich in gold. This will allow the company to double its annual gold production.

The Vostok Gold Mining company is the second-largest artel in the Krai: the company mines about 1.6 tons of gold in Ayano- Mayskiy and Tuguro-Chumikanskiy districts. Both Amur and Vostok are prospecting for other placer gold and platinum deposits that could be developed profitably.

During the Soviet era, the Primorzoloto Gold Mining Association functioned in Primorskiy and Khabarovsk Krais, and Sakhalin Oblast. In Khabarovsk, it included six gold fields: Kerbin, Sofiia, Tumnin, Kerpuchin, and Kolchan, as well as the Nizhneamur mining-enrichment combine (based on the Mnogovershinnoye gold deposit in Nikolaevski district of the Krai) which started operations in 1991. By 1996, the Primorzoloto retained only three gold fields: Sofiia, Kerbin, and Tumnin. The Kerpuchin gold field and Nizhneamurskii GOK became independent enterprises; the latter won an international tender for the development of the Khakandzin and Yuriev deposits.

A joint venture was started in May 1994 between Delplast and the American investment firm, Pioneer Corp. Delplast is originated from the now defunct Stermark company, an organization established to create investment by foreign companies in the RFE. Delplast was granted a license to explore and develop a small, but rich gold deposit in the northern part of Khabarovsk Krai. Pioneer is a large investment company investing in and developing natural resources. The investment was estimated to be 27 million dollars. American equipment and technology were selected as the most cost-effective way of proceeding. The plant will produce about 2 tons of gold per year.

PLATINUM

The Konder deposit is the second largest platinum reserve in Russia. These reserves, confirmed in 1989, are being developed by a cooperative. Of particular value are the reserves in the upper part of the site, which has a high proportion of concentrated platinum as well as platinum nuggets. Prospectors from the Gold Mining artel “Amur” have found nuggets weighing 3.519 kg- the third largest ever found.

The Amur Company (Artel) is the largest gold and platinum mining operation in the Krai. The company mines approximately three tons of platinum per year. The company deals with consumer goods (furniture, home appliances, etc.) and operates a network of stores throughout the Krai and other northern regions in the Russian Far East. The trading department obtains about half of Amur’s revenue.

COAL

The commercial reserves of black and brown coal in Khabarovsk are 1 billion tons, and estimated resources of coke coal are 4 billion tons. The Adnikanskaya deposit of carbonaceous raw materials was exposed within Verkhnebureinskaya depression. While oil and gas reserves of the Krai are estimated to be 500 million tons, coal is the primary energy source of the Krai. The annual output of local coal mining enterprises of 1.5 million tons is not sufficient to satisfy annual local demand of approximately 9 million tons. About 84 percent of Krai coal is supplied from Neryungri (Southern Yakutia) and Kemerovo.

“Urgalugol” joint stock company is the largest coal mine in Khabarovsk. It develops the Urgal deposit in Verkhne-Bureinskiy district. During the last three years, the company has been producing approximately 1.2 million tons of black coal annually.

Coal mining enterprises also operate in Lazo district producing 15,000 tons of brown coal for local power plants. The Okhotskoye and Marikanskoye coal mining companies produce 100,000 tons annually each.

In 1997, an American company Quaker Ltd. (Kentucky) invested USD 2.2 million to develop Khurmulinskiy deposit of brown coal located in the neighborhood of Khurmuli settlement (Solnechny district, 30 miles west of Komsomolsk). Soon it became apparent that the high humidity and low calorific value of the coal did not meet the requirements of power plants. Presently, this mine is operating at a very low level (100,000 tons as of December 1999 instead of 500,000 tons planned).

TIN

Tin ore mining and dressing is predominantly performed in Solnechny district. Tin ore is extracted in a combination with industrial concentrations of copper, silver, tungsten, bismuth, and indium. The share of tin extracted from ore fluctuates between 20 and 90 percent; the complex utilization of basic and associated rare metals in these ores is low (20 to 40 percent).

The Solnechny Tin Mining and Dressing Enterprise, a joint-stock company, is Russia’s major tin concentrate-producing combine. Recently Duran Impex (a Russian company registered on Cyprus) took control over the company’s stock. The company possesses three mines, two concentrating factories, a lime stone plant, a geological survey division and some smaller facilities. With an annual capacity of 14 tons of tin concentrate, the company is currently producing 65 percent of its potential output. Tin ores contain bismuth, copper lead, sulfur, arsenic, niobium, silver, zinc, scandium, indium and dioxide. For further processing, it is shipped to Novosibirsk by railroad. Solnechny has overseas trade partners from the USA, China, the Republic of Korea, Japan, Austria, Switzerland, Great Britain, Poland, and Finland.

In May 1999, Duran Impex won a tender to develop the Pravourmiyskiy tin deposit located in the Verkhne-Bureinskiy district of the Krai. The multimillion dollar project envisions annual production of 1,800 tons of tin concentrate and 600 tons of copper concentrate.

OTHER RESOURCES

Forecast reserves of complex ores in the Krai are approximately 100-130 billion tons and include the following:
- Beryllium (Bureiski and Ingiliysky massifs).
· Zirconium—large deposits have been discovered in Ayano-Maiski district. · Phosphorites-- Significant reserves are located in the Udsko-Shantarski ore area.
· Apatite ores are concentrated in the Dzhugdzhurski and Baladedski massifs, where titanium, vanadium, iron and feldspar can be extracted as auxiliary products.
· Iron ores are concentrated in two districts: Dzugurski (6.6 billion tons) and Udsko-Selemdzinski area (1.6 million tons).
· Manganese ores are common in Udsko-Shantarski area (30 million tons).
· Chromite ores are found in the rocks of Konderskoye platinum deposit.
· Peat and sapropel-- Significant reserves are found in swamps and lakes, and a number of thermal and mineral springs are being utilized.
· Alunite ores, used to produce alumina, potassic fertilizers, sulfuric acid, coagulants for water purification— Practically unlimited reserves were found in the lower Amur basin.

MAJOR PROJECTS

The Natural Resources Department of the Krai administration is compiling a package of the more attractive projects. Following is a brief description of some projects that will be included on the list.

1. Zirconium--Development of Algaminsky zirconium deposit (Ayano-Mayskiy district) and construction of a processing plant.

The Georos Mining company seeks partners to participate in the construction of the plant for the extraction and processing of zirconium ore and production of zirconium dioxide. The final products will be zirconium dioxides (up to 20 tons a year), containing 99.5-99.9 percent of ZrO2+HfO2 and zirconium oxycarbonate, 300-400 tons. In the central part of the deposit, experimental extraction of ore has been conducted. The potential markets for final products are Russia, Japan, the Republic of Korea, Germany, Spain and others. The investment required for the development of the enterprise is approximately USD 11.3 million.

2. Water--Geological and industrial development of Chipali sites of Sovgavanskiy underground pure water deposit.

The purpose of the investment is to develop a slit, construct a sanitation protection zone, conduct trial extraction of water, purchase equipment and construct a shop and warehouses. The final products of the project will be super-pure water and drinks: 20 million 1.5-liter bottles marketed to Pacific Rim countries, especially Singapore. The investment needed is USD 800,000 including USD 500,000 on purchase of bottling equipment.

3. Copper and Tailings--Metallurgical plant for scrap processing in Solnechny.

The raw material resources of the enterprise are 40,000 tons of copper concentrate and 30 million tons of tailings. The final products of this metallurgical plant will be copper, zinc, and lead. The non-ferrous metals market of the Russian Far East and Pacific Rim countries is steady and continues to expand as the demand for non-ferrous metals is rather high. Cost of the project is USD 7 million, including USD 2 million for purchase of equipment and USD 3 million for construction.

KEY CONTACTS

KHABAROVSK OFFICIALS

Khabarovsk Krai Administration:
56 Muravyov-Amurski street
Khabarovsk 680000, Russia
Viktor Ishayev, Governor
Secretary:
Tel: (7-4212) 325-540
Fax: (7-4212) 328-756

Gennady Apanasenko,
First Deputy-Governor
Tel: (7-4212) 325-471
Fax: (7-4212) 328-756

Gennady Pocherevin,
Head of the Natural Resources Department
Tel: (7-4212) 323-782
Fax: (7-4212) 328-756

Sergei Lopatin,
Head of International Economic Relations Department
72 Frunze street
Khabarovsk 680000, Russia
Tel: (7-4212) 235-823
Fax: (7-4212) 324-121
E-mail: vnesh@adm.khv.ru

Alexander Levintal,
Head of the Economic Committee
Tel: (7-4212) 325-544
Fax: (7-4212) 328-397

Galina Gromova
Head of the State Property Committee
76 Zaparina street
Khabarovsk 680000, Russia
Tel: (7-4212) 323-622
Fax: (7-4212) 321-311

Institute of Economic Research,
Far Eastern Branch of the Russian Academy of Sciences
Pavel Minakir, Director
153 Tikhookeanskaya street
Khabarovsk 680042, Russia
Tel: (7-4212) 358-137
Fax: (7-4212) 358-110
e-mail: pavmin@ecrin.khabarovsk.su

Department of Commercial Mineral Usage and the Krai Mortgage Fund Activity
Nikolay Michailovich Frolov, Head of the Department
76 Zaparina street
Khabarovsk 680000, Russia
Tel: (7-4212) 38-82-86
Fax: (7-4212) 324-711

Environmental Committee
Vladimir Boltrushko Chairman
6-a Kadrovy lane,
Khabarovsk 680013, Russia
Tel: (7-4212) 32-52-70
Fax: (7-4212) 211-712

Committee of Natural Resources of Khabarovsk Krai
Valeriy Troyan, Chairman
8 L. Tolstogo street
Khabarovsk 680000, Russia
Tel: (7-4212) 325-179
Fax: (7-4212) 327-585

Priamursky Region of State City
Technical Inspection of RF
Grigorov Stanislav Pavlovich, Head of the Inspection
76 Zaparina street
Khabarovsk 680000, Russia
Tel: (7-4212) 325-546

The Far Eastern Mineral Research Institute
of the Federal Ministry of Natural Resources
Yuri Bakulin, Director
31 Gerasimov street
Khabarovsk 68021, Russia
Tel: (7-4212) 34-06-59
Fax: (7-4212) 342-843
E-mail: root@dvims.khabarovsk.su

Khabarovsk Mining Institute
Yuriy Manaev, Director
51 Turgeneva street,
Khabarovsk 680000, Russia
Tel/fax: (7-4212) 32-79-27

Association of Khabarovsk Gold Mining Companies
Nikolay Samarkin, Chairman
10-B Saratovskaya street
Khabarovsk 660031, Russia
Tel: (7-4212) 71-06-38
Fax: (7-4212) 71-05-65

MINING COMPANIES

Amur Joint-Stock Company
Viktor Lapatyuk, President
10 Vostochnoe Shosse
Khabarovsk 680014, Russia
Tel: (7-4212) 373-320
Fax: (7-4212) 221-887
Gold and platinum mining

Vostok Gold Mining Company
Malyshevski Genady Iosyfovich, General Director
69 Planernaya street
Khabarovsk 680031, Russia
Tel: (7-4212) 372-226 or 373-722
Fax: (7-4212) 371-488 or 372-228

Solnechny Tin Mining Joint Stock Company
Pyotr Korobkin Nikolaevich, Deputy Director
Settlement of Solnechny, Khabarovsk Krai 681901, Russia
Tel: (7-246) 912-32 or 912-93
Fax: (7-246) 225-03

Resurs Joint Stock Company
Andrei Kreines, Director
Settlement of Solnechny, Khabarovsk Krai 681901, Russia
Tel/fax: (7-246) 235-22

Tas-Uryh Gold Mining Company (Pioneer Group – USA).
Valentin Kravtsov, Executive Director
8 L. Tolstogo street, office #45
Khabarovsk 680000, Russia
Tel: (7-4212) 305-046

Quaker Coal Mining Company
Vladimir Pyanzin, Executive Director
Tel: (7-4212) 22-77-42

Geophysical Exploration Gold Mining Company,
Yuriy Plotnytsky, Director
15 Balashovskaya street
Khabarovsk 680041, Russia
Tel: (7-4212) 557-476
Fax: (7-4212) 557-762

Global Forestry Management Group
8 Industrial Lane,Igor Kochetkov,
Khabarovsk, 680008
Tel/fax: (7-4212) 34-97-14,793-421
Charls McCormick
Office in Sovgavan :
(42138) 40-627, 46-022 apartment
U.S.office: P.O. Box 10167
Jeffrey Fantazia, President
Portland, OR 97203
Tel: (503) 228-1950
Fax: (503) 228-2291
Port management and forestry activities

U.S. Commercial Service, Vladivostok
Principal Commercial Officer: Richard Steffens
32 Pushkin street, Vladivostok 690001, Russia
Tel: (7-4232) 300-093; Fax: (7-4232) 300-092
Email: csvlad@online.ru
http://www.vladivostok.com/fcs

Andrei Vasenyov, BISNIS Representative in Khabarovsk
69 Turgenev Street, 1st floor
Khabarovsk 680000, Russia
Tel: (74212) 321-767, 306-197, 306-067, 649-059, 649-041
Fax: 7(4212) 324-012
E-mail: bisnis@vasandr.khv.ru
BISNIS provides trade and business information to U.S. and Russian companies.

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