How to make a fortune from Russian gold

The former Soviet Union is no longer "off limits" to investors, says Emily Parkinson in Shares. Groups such as Canada's Barrick and AngloGold Ashanti have recently "bought large stakes in smaller Russian-based miners as a way of accessing Russia's vast untapped gold reserves". Moreover, because the Communists saw it as their duty to extract minerals from under the ground, regardless of cost, grade, profitability, and so on, it also boasts "some of the most rigorous geological data in the world".

Investors cottoned on to this last year, driving up the prices of UK-listed gold producers, among them Celtic Resources Holdings (CER), by anything from 56% to 145%. Even so, Celtic is still undervalued. Although its output was a "relatively modest" 37,000 oz in 2003, its Nezhdaninskoye prospect is a "world scale" resource, with around 17 million ounces (Moz) of reserves (in the Russian B, C1 and C2 categories) and approximately 28Moz of resources (including the speculative Russian P category). That makes it the 16th-largest resource in the world and the second largest yet to be developed. It also compares with Newmont and Barrick - two of the world's largest gold miners - which have total reserves and resources of 135Moz and 128Moz respectively. Yet these companies have market values of $20bn and $15bn, compared with just $276m for Celtic.

The key to Celtic's future is therefore the development of Nezhdaninskoye. It is currently only 50% owned by Celtic, the other 50% being owned by IG Alrosa, the business development arm of the Russian diamond behemoth, Alrosa. However, according to James Boxall in the Financial Times, the two companies have now "agreed terms on a share swap" that would see IG Alrosa exchange its 50% stake in the mine, along with two other producing assets, in return for a 23% stake in Celtic - thereby becoming its largest shareholder. The successful completion of this deal will then allow Celtic to begin its "ascendancy to the big league" as it starts converting its resources into reserves. Thereafter, it will spend between $100m and $120m (funded through a combination of debt and equity) over the next five years to develop a mine producing around half a million ounces a year. Ultimately, the company has ambitions to produce 1Moz per year. In the meantime, however, it is trading on a multiple of 16 times forecast 2004 earnings. That's not excessive, given the re-rating it should experience as it moves into "the league of heavy-hitting gold stocks", says Parkinson, even with the risks associated with operating in Russia. Both Shares and the Investors Chronicle

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