Gold Wars: Putin’s Mining Buddies Are Stepping Up The Plate

Russian Ruble

We have been giving the Russian and Asian demand for gold quite some attention lately, but now it looks like there are several more pieces of the puzzle falling into place. More than a year ago, a representative of Shandong Gold told us that when the Federal Reserve would stop its Quantitative easing program (check) and gold would fall to $1150/oz (check), the company would become more active on the M&A front and actively hunt for potential acquisitions.

In another column, we discussed the way China and Russia are growing closer and closer to each other, after Russia got ‘rejected’ by the Western countries. Both countries have signed very important energy deals, and it started to look like Russia is following the Chinese example and has started to accumulate more and more gold in the reserves of Central Bank. There are two things you can be sure of. First of all, Russia isn’t doing just for fun, there must be a central strategy or plan behind this move. Secondly, you can be very sure Russia’s gold is being stored in the vaults in Moscow and not being lent out in dubious gold lease deals.

And in the past few weeks it looks like Russia is stepping up its efforts to secure a continuous increase in its gold holdings. Two of the world’s largest gold mining companies are actually Russian, of which Polyus Gold is the largest one with an expected gold production of 1.7 million ounces of gold for this year, further increasing in the near future as it plans to bring another Russian mine into production. What was drawing our attention was the recent announcement by Polyus that it would be ‘hedging more of its gold production’. As this is a Russian company with Russian mines financed by Russian banks, we would dare to put a lot of money on a bet that the hedge deal involves a Russian bank. That Russian bank will very likely be Sberbank as it is Polyus’ main financier which has recently re-confirmed its confidence in the company through providing a $1B credit facility. And guess who’s the majority owner of Sberbank? INDEED, The Russian Central Bank. So it’s starting to look like Polyus’ hedge program with physical delivery will result in its gold bars being sold to the Russian Central Bank through Sberbank’s hedging program.

Polyus Gold Operations

Source

On top of that, Polyus was sitting on $1.8B in cash as of at the end of September, and its cash pile is growing at a rate of $2M per day (yes, even at the current gold price). The question is what will it do with the cash and it’s very likely more gold projects will be added to the portfolio and we wouldn’t be surprised if the company was pushed by the Central Bank and Sberbank to do so.

We wouldn’t be surprised to see Polyus Gold follow the ‘international’ approach of Nord Gold, which used to be Severstal’s gold business. Steel tycoon Mordashev still owns the absolute majority of Nord Gold’s shares, and as he’s a self-proclaimed ‘friend of Putin’, there’s little doubt who’s the ultimate buyer of Nord Gold’s output. And Nord Gold has been stepping up its game lately as it entered into two joint venture agreements (in Canada and French Guiana) and it acquired another advanced stage project in Burkina Faso where the company is already operating. But wait, that’s not all, earlier this week, Nord Gold made an offer to acquire a small Canadian exploration company for a total of less than $25M. This might sound low but that specific Canadian company has roughly 5 million ounces of gold in the ground which could be mined at an all-in cost of $644/oz. Throw in the acquisition cost and capital expenditures, and one ounce of gold would cost Nord Gold just $750. Now it’s easier to understand why it offered to acquire Carlisle Goldfields at a whopping 140% premium.

There’s little doubt this is just the starting phase and we expect both major Russian companies to buy more projects and companies to get their hands on as much gold as possible. All the signs are pointing in the direction of an end game as Russia’s major producers have very strong ties to the Putin regime and the Russian central bank, which is ultimately where the gold will end up. The end game has started. Did you take your precautions?

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