Russia Mining Report Q2 2016 - New Market Research Report

Russia's g old and coal production growth will be the sector's relative bright spots , while P GM's and iron ore output growth will grind to a halt . Low metal prices , the country's inadequate infrastructure and Western sanctions will continue to limit the sector's production growth.

Latest Developments & Structural Trends

Although Russia's mining sector holds significant production growth potential - due to its rich mineral deposits, including coal, iron ore, gold and platinum - the country's bureaucratic hurdles, Western sanctions and weak mineral prices will limit new projects from coming online and weaken mining output growth over the coming quarters.

Coal: With 157bn tonnes (bnt) of coal deposits, Russia's holds the second-largest recoverable coal reserves in the world. We expect Russia's coal production to grow from 392mn tonnes (mnt) in 2015 to 427mnt in 2019, as production ramps up in country's Kuznets basin. This would represent an average annual production growth of 2.3% during 2016-2020, significantly lower than the average 6.4% during 2010-2014.

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Gold: Russia will remain the world's third largest gold producer, with significant potential to expand output and increase the country's share of global gold production. We expect Russia to account for 9.6% of global gold production in 2016. We forecast Russia's gold output to grow from 8.0 million ounces (moz) in 2016 to 8.4moz in 2020. This would represent an average annual growth of 1.5% during 2016-2020, significantly slower than 5.3% during 2011-2015.

Iron Ore: Russia's iron ore production growth will be supported by the country's vast iron ore reserves and Metalloinvest's strategy to increase output through innovation at the firm's existing mines. Russia holds more than 25bnt of iron ore reserves, making it the third largest holder of reserves, after Australia and Brazil, respectively. We forecast Russia's iron ore production to grow from 110mnt in 2016 to 123mnt in 2020, averaging annual growth of 2.7% during 2016-2020, showcasing consistent growth following 2.7% y-o-y during 2010-2014.

Due to our downbeat view on global iron ore prices, we expect mining investment to come under pressure in the coming years. We forecast iron ore prices to average USD41/tonne during 2016-2020, significantly lower than the average price of USD137/tonne during 2010-2014.

Nickel: We have revised down our forecast for Russia's nickel mine production due to Norilsk Nickel's (Norilsk) reduction of low-margin tolling operations at Kola MMC and the divestment of Tati Nickel in April 2015. We revised down our growth forecast from 1.6% to 0.5%, 1.5% to 1.0% and 1.4% to 1.0% for 2016, 2017 and 2018, respectively. We now forecast output to grow from 253 thousand tonnes (kt) in 2016 to 265kt in 2020. This would represent an average annual output growth of 1.0% during 2016-2020.

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