Following the Trail of Magadan Gold
By Catherine Belton Staff Writer Friday, Feb. 21, 2003.A worker pouring gold at the Kubaka mill, which is owned by Magadan's biggest gold venture, Omolon. Each bar is worth $60,000.KUBAKA GOLD MINE, Magadan -- Just two days before Magadan Governor Valentin Tsvetkov was gunned down in broad daylight on Novy Arbat last fall, Kinross Gold Corp., the Canadian majority shareholder in the region's biggest gold venture, announced it had reached an agreement with Tsvetkov to buy out its aggressive new partners. The deal was meant to put an end to more than a year of corporate takeover attacks from the partners, who have been linked to powerful St. Petersburg precious metals group Polymetal, the same raider that pushed another Canadian company out of a Magadan silver mine in 2000.
It was also to ensure the long-delayed repayment of a $45 million gold loan issued by the regional administration to the gold venture, Omolon.But then the buyout's key broker was killed. "For a moment, we wondered whether this was the start of a major attack. We wondered whether we should be evacuating," said Scott Anderson, Kinross' site manager at Omolon's mine. "For a moment, we wondered whether the killing had anything to do with us."Kinross stayed. But its buyout deal has been in limbo for months. Refusing to deal directly with the new shareholders, Kinross needed the regional governor to get the deal through.It may never be clear whether indeed there was a link between the Kinross deal and the killing of Tsvetkov on Oct. 18. The deputy head of the Interior Ministry's economic crime unit in Moscow, Colonel Alexei Novoseltsev, has told reporters that Tsvetkov's efforts to ensure payment of the gold loan is just one of the main lines of investigation into the murder. The Kinross deal was to be the chief mechanism for that payment. But what is clear is that Kinross' experience in Magadan, where the governor had the power to crush any business and where fortunes could be made on political ties alone, is a telling example of why, in a region once teeming with Canadians prospecting for gold, foreign investors are now few and far between. With a new governor elected Sunday in Magadan, Kinross' future will be watched closely by investors wondering if they should dip their toes back in as the gold market heats up. Prices have soared almost 40 percent since 2001. "Russia would be No. 1 in the world for gold miners. But because of politics and the lack of clear laws, people have been staying away," said Jim Sullivan, the Magadan head of Bema Gold, another Canadian firm that owns a much smaller mine, Julietta, in the region.After months of waiting to see whether there was a future for their $175 million investment, Kinross is finally seeing its buyout move forward. However, problems still loom. It is not clear whether Kinross is to get the go-ahead for a 100 percent stake in the company as planned under the original deal, said Vyacheslav Moskvichov, who took over from Nikolai Dudov as acting governor when Dudov ran for the post and who had been Tsvetkov's closest aide since he came to power in 1996. Dudov won the election last Sunday.
What's more, Kinross' license for Omolon's chief asset, the Birkachan gold field, which could contain up to 100 tons of gold, has been under attack. Polymetal, the company Kinross says was connected to the legal attack on Omolon, is now competing for the field, Moskvichov said.
Polymetal denies it has made any moves on the field and denies it had any connection to the legal onslaught against Kinross.Magadan law enforcers refused requests for interviews. The Moscow investigator Novoseltsev, interviewed by telephone, would only say that repayment of the gold loan was one of the versions being investigated.Moskvichov, who was with Tsvetkov in Moscow the night before his death, said he did not want to talk about whether the Kinross deal could have had anything to do with the murder.In a region rich in gold, silver, fish and oil, and where Tsvetkov tried to control most major businesses, possible motives for his killing are plentiful. "Wherever there is gold, there is always crime," Moskvichov said.Law enforcers have said they are also looking into Tsvetkov's activities distributing lucrative fishing quotas. Federal prosecutors on Thursday arrested the head of Magadan's state fishing research institute, Alexander Rogatnykh, and accused him of siphoning off millions of dollars in state funds, in a case opened as a result of the investigation into Tsvetkov's murder.
Prosecutors also have been looking into Tsvetkov's attempts to crack down on a local gold smuggling ring. Kemal Musoyan, reportedly a major player on Russia's illegal gold market, was found shot dead in Moscow just 12 hours after the governor. According to some reports, Musoyan controlled illegal gold produced in the far northeast, including Magadan and Chukotka. Experts estimate that up to 30 percent of Russia's gold production is sold illegally.
Other observers have pointed to the reported ambitions of Roman Abramovich, Sibneft's major shareholder and Chukotka's governor, to spread into neighboring Magadan. The Kremlin has long-term plans to merge Magadan back together with Chukotka. During his tenure as governor, Abramovich has been exploring for oil off the coast of Chukotka, but so far has come up dry. Magadan, however, has a shelf in the Sea of Okhotsk that could contain vast reserves of more than 1.2 billion tons of oil, said Alexander Polyakov, the head of the Magadan's natural resources department.There could be a link, too, to the Kinross deal. But as ever in Russian takeover stories, those links are murky. MDM Bank, which is often seen linked to Abramovich because its loan book is dominated by Sibneft and his metals giant Russian Aluminum, provided Polymetal with a $40 million credit line -- all its financing needs -- for its Dukat silver mine in Magadan. Polymetal now owns the silver mine, the biggest in Russia, after a vicious corporate battle with Canada's Pan American Silver.
Polymetal, in turn, is connected to the Moscow-based company Kaskol, which represented the Omolon shareholders trying to push out Kinross. Kaskol worked with Polymetal in the controversial 2000 takeover of Dukat, which sits above the world's third biggest silver deposit with a value of $2.5 billion.Local observers say Polymetal and Kaskol appeared to be trying the same tactics with Kinross, buying out Kinross' former Russian partners and then initiating a slew of lawsuits contesting the registration of the company's shares in a bid to push out Kinross. That is, until Tsvetkov, under pressure from the Finance Ministry, agreed to Kinross' buyout proposal. MDM, Kaskol and Polymetal, however, deny this.MDM denies any shareholder links to Abramovich or Polymetal. "There are no relations between shareholders. Polymetal is a completely different project; it does not belong to MDM,"said Anatoly Meshcheryakov, a spokesman for MDM Group.MDM denies any involvement in Kinross' troubles, as does Polymetal.
"We did not play any role in this at all. We advised Tsvetkov on some matters, that was all," said Alexander Nesis, president of IST Group, the holding company that owns Polymetal. He said Polymetal had good relations with Kaskol and MDM but no ownership links.Vladimir Butkeyev, Magadan's representative in the State Duma, said it makes the most sense for the interests of powerful Moscow groups to be mixed up in the killing. "It seems the contractor for this murder must have come from Moscow. To organize a killing in the center of Moscow on Novy Arbat, a thoroughfare with a heavy police presence, takes a lot of money. To commit a crime like that, a great deal of money has to be involved," Butkeyev said. "It's quite likely Tsvetkov stood in the way of a major Moscow group," he said.Four months after Tsvetkov's death, no suspects have been caught and the police haven't determined a motive. Or if they have, they are keeping it quiet.For Kinross, however, the killing capped a treacherous ride in Magadan's gold industry.
On a remote site 340 kilometers from the Arctic Circle reachable in winter by a 300-kilometer ice road and in summer only by air, Kinross hoped its investment in Omolon's Kubaka gold mine would become a model for how foreign investment and know-how could boost production in the region. With $175 million in funding from the EBRD, OPIC and ABN Amro Bank, the Canadians in 1997 brought in 19 Caterpillar heavy construction vehicles and built a plant with the capacity to mill 2,100 tons of gold ore per day, using state-of-the-art refining equipment from Canada. Omolon acting general director Hal Kirby said the company also invested $5.5 million in infrastructure to protect the environment. Soon production soared, reaching 13.5 tons in 2001 to make Omolon Russia's second-biggest gold producer and help boost Magadan as a whole to become Russia's largest gold-producing region. As other mining companies such as the Dukat silver mine stood still amid vicious takeover battles, and with the rest of the industry left virtually without investment and idle following the breakup of the Soviet Union, Omolon was providing half of the region's tax take. In comparison, Magadan's next biggest gold mine, Susuman Gold, produced just 4.5 tons in 2001. The Julietta mine owned by Canada's Bema Gold produced 3 tons last year. The rest of the region's gold output of about 14 tons is produced by some 300 small, largely unregulated "family" enterprises that extract a couple of hundred kilograms of alluvial gold each.The Kubaka site is a far cry from the gulag gold mines of the Stalinist era when prisoners were shipped to Magadan's port and sent north along the Road of Bones to dig for gold and die.
At Kubaka today, the mine's 230 workers live in modern housing with pool tables, video rooms, saunas and a gym. Safety is taken very seriously. The mine had just one accident last year. But Omolon got into trouble almost as soon as it went into full production in 1998. With gold prices way below the level set when the deal was drawn up, Kinross' original Russian partner, Geometal Plus, was unable to pay off a $45 million gold loan. It had received the loan in 1994 from the regional administration as part of a federal lending program to boost Magadan's gold sector, and used it to finance a 25 percent stake in the venture.Tsvetkov went on the warpath. He claimed Geometal Plus had received the gold loan because of its owners' ties to his predecessor as governor, Viktor Mikhailov, and fumed that Kinross was paying off its foreign loans while its Russian partners were not paying theirs to his administration. He filed a series of lawsuits to try to force Geometal Plus to pay the loan all at once.