Lou Naumovski, KINROSS Vice-President & General Director, Moscow Representative Office, CERBA National Board Director, Russia talks about Kinross successful developements in Russia, which has invested since 2007 more than $2 bln in Russia, challenges appearing on its way, how to communicate and work to take advantage of this really beneficial emerging market.
How would you evaluate your company many years of experience of operation in Russia?
Well Kinross has been active in Russia since 1995. In fact before Kinross was created as a separate company, some junior companies had been active in Russia and they merged in the first couple of years in the early 90s. Our first mine was in the Magadan Oblast, it is called Kubaka – a very successful mine, which was sold in 2007 but over the life of that mine, Kinross produced close to 90 tonnes of gold in Russia. There were some challenges then, it was before any of the regulations regarding foreign ownership in mining were codified but the company overcome those challenges.
About the time that Kubaka mine was being completed or mined out rather, the management of Kinross changed. Under new management headed by our then presidency Mr Tye Burt the company was looking to get back into Russia, and as a consequence in 2007 acquired Bema Gold which had been a junior and then intermediate mining company with some success in Magadan with the Julietta Mine and the very promising new Mine called Kupol in Chukotka autonomous district. In February 2007 that deal was closed a total value of our acquisition of Bema assets was well over 3 billion dollars. The Kupol mine itself, the total capital cost was in the neighbourhood of 750 million dollars. So it is quite a significant investment for our company but also for Russia which was the largest foreign investment in Russian mining period. Since 2007 we have gone from strength to strength. Kupol has produced well over 3 million gold equivalent ounces of metal in that time. We now at Kupol employ over 1,500 people which includes offices, a major office centre in Magadan, offices in Bilibino, Pevek, Anadir, all parts of Chukotka. It is a very significant logistical investment as well because we are virtually at the Arctic Circle.
There is very limited ocean shipping roughly from June until September. We have to build an ice road 420 plus kilometres from the port of Pevek to the mine and as a consequence having to order consumables and durables virtually 18 months before they are needed and warehoused and stored and it is quite a challenge. Of course that is something that the Canadians are good at having mined in the north of Canada as well. So our total investment since 2007 is roughly over 2 billion dollars.
The rest of that investment comes from our new mine, Dvoinoye mine which we purchased several years ago and we are now completing the construction of the mine including housing and all the necessary shops and we hope to launch the mine before the end of this year. We will be adding another 400 employees in total, so our total employment will be well over 1800 people. This mine will be, the ore is mined at Dvoinoye will be shipped to the Kupol Mill and it will be processed at Kupol. Basically, what this does is it allows us to extend the life of the Kupol mine well beyond the original mine plan. Our activities are concentrated in Chukotka. We recently won an auction for a couple of additional licences in the Chukotka region – a completely different part of Chukotka. Most Canadians will not know that Chukotka is the furthest North East that you can get in Russia. It is roughly the size of France and has about 50,000 inhabitants of which 15 or 18,000 are indigenous people. It is a very remote part of the country, a phenomenally beautiful part of the country but it has sort of defined the way that we do business, because we are quite self-sufficient we generate our own electrical energy, and we virtually have to import everything that we need to run the mine. It has been a very positive experience for us.
We often tire of saying that we are the only investor in the Russian hard rock mining industry, the only foreign investor. It is a fact it’s disappointing I think for Russia because of the absence of additional capital, the absence of more value generation and I think in terms of why other companies haven’t come, there is quite a very strong negative bias often you will read in the press where companies say well Russia is very well-endowed in mineral resources but we are just not ready to go there yet because the regulatory environment isn’t quite settled. We think it is challenging obviously but in some respects it is no worse than any other jurisdictions and we have had a very positive experience in Russia and we look forward to continue mining here for many years to come.
What do you think prevents some foreign investors from investing in Russia? How is it possible to overcome the existing negative opinion regarding the Russian market?
There is a lot of scepticism in the west let’s face it about investing in Russia and you will see that in headlines where a lot of editors are really keen to emphasise the negative, and a lot of people who are not well versed in the country will unfortunately come to their own conclusions based on these negative reports. We know that internally that Russia and its leadership is trying really hard to improve that impression that people make and there is a very active programme to raise Russia’s investment rating, the World Bank Rating from somewhere around 115th that they are currently to in the top 20 and there are a lot of programmes going on in parallel. It is a very daunting prospect.
There are some successes, there are some areas that continue to prove difficult. I think one thing that the press in the west must understand, if there is a sincere commitment on the part of the leadership in the country, and there is a very strong cadre of officials, very talented young officials in the bureaucracy and in politics that are doing everything they can to make this come true. But this a very large and very old society and there is no consensus I would say in terms of which direction the country should go in. So when you read about negative things perhaps in the political realm in the West, there is a tendency by companies, potential investors, to reach conclusions of an economic nature. In my experience, when you are vested here, when you have had experience you see a completely different dimension to the country and you understand the challenges they face. Will Russia manage to rise to the 20s in this World Bank Rating? I don’t know. I think it will probably be later than people would hope and that is just a realistic assessment of the challenges that they face. But can it happen? Absolutely, they have extremely talented people, dedicated public servants that they do have here. The problems that everybody knows that are well represented in the West, well reported. The accusations of corruption and bureaucracy, they are all true. But the experience of our company and many others here has been very positive. You can learn to deal with these issues and it is very important to maintain the values with which your company operates in your home country and that your executives both expatriates and local executives and local people that you recruit are pulling together.
It is a question of corporate culture, it is a question of corporate governance, how you run your business, and I think it is definitely possible to work well as an investor and to contribute to this initiative to improve the country’s investment rating.
Looking at your company experience we would like to find out are there any practical recommendations on how to become successful in Russia?
There is a community of successful foreign investors in Russia that is quite confident in the collective experience that these firms have had. You can find success in fast moving consumer goods, you can find success in high technology. You can find a lot of successes. Unfortunately, these are pockets of success which don’t easily translate in the eyes of companies that haven’t either tried or have tried and failed here. I think the ingredients for success are quite common, no matter what sector the company works in. Preparation is really key. By preparation I mean full analysis of the market. I mean a review of why other people have failed, things that have impeded success and the answers are quite common. For example, if we are talking about preparation, a lot of companies that I am aware of over the years who have come here, have decided to mobilise very quickly, spend a lot of money very quickly bringing large numbers of people trying to replicate what they have done in other countries. When in fact I think a more appropriate recipe would be to take ones time, to set up a representative office, to meet as many people as possible, to evaluate in the sector that your company operates to evaluate what is the best method of coming in to the market? Is it a joint venture is it an acquisition, is it sales to begin with? Not all companies do a very good job I have to say in preparation. When they are ready, one of the key mistakes that I have observed in the 30 years that I have been involved here is that they cut corners. For example, if they have someone in their company already who may or may not be familiar with Russia, they will put that person in charge.
Or another example is when someone has been successful inside the company in another market, they are hoping that that person will be successful in Russia whereas that person may not have any specific experience here. It has been my approach over the years that you can really teach what someone should be doing in a particular company to any intelligent person. But what you can’t really teach is the essence of how to work in Russia. The cultural, linguistic and other requirements, so it is very important that management who comes here on behalf of a foreign investor is well versed in those things. The other thing that I find quite curious I suppose, is that a lot of companies don’t fully evaluate the local work force. It is my experience that the real strength in Russia lies in its young people and we have had over the years in the different jobs that I have held here, the real success comes from finding the right people, training and motivating them, and they will deliver.