A nimble miner that beat the rush into Russia

published 31 October 2005

In some respects, the ex-Soviet Union provides a harsh working environment for foreign firms, says The Fleet Street Letter, but for mining firms it offers massive benefits too. Labour is cheap and access to high-quality geological survey work carried out by the old Soviet government is easily gained. No wonder then that, when in 2000 deregulation and "mining-friendly" legislative initiatives meant that Western mining firms were "pushing at an open door" into resources-rich areas, they rushed in. Since then the relaxation of export controls and abolition of a 5% sales tax on gold ingots have combined to make Russia an even more "attractive" mining location.

One small London company that made the most of this is Celtic Resources.An aggressive acquisition strategy means it now controls "some major mining assets", two in Kazakhstan and one in the Russian republic of Sakha. This gives it a huge resource base - encompassing over 31.25 million gold ounces - that is "second to none". At its Kazakh Suzdal mine it is well on course for a 100,000 oz production this year, at an average cost of US$169 per ounce. At the "giant" Nezhdaninskoye mine in Sakha, production could average 160,000 oz a year just for phase one of development. And with the gold price north of US$400, Celtic's extraction costs of around US$140 per ounce look pretty low, and the business as a whole highly profitable. If Celtic reaches its goals for 2007, it will have sales in excess of US$200m, generating around US$50m in annual profits. It is alsowell positioned to attract interest from larger blue-chip mining companies that have "so far been slow off the mark in Russia".

Meanwhile, little stands in the way of Celtic's "drill bit" in 2004. Production growth looks strong, demand likewise, and international recognition of the lower-risk profile of Kazakhstan means that the rating of the country's sovereign debt is likely to be raised to investment grade over this year. Yet Celtic's current market capitalisation is still very cheap in relation to its resource base, valuing each reserve ounce at US$5.40. Now that trading of the stock is on the rise, the shares are less illiquid. Recent interest has pushed them up to 508p, but the stock is well worth buying with a 12-month target of 700p.