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Refinery Discrepancy

17 july 2017

Gold weighted bullion bars are a traditional symbol of welfare and one of the most popular investment tools. Many lines of profession – starting from a geologist to a smelter furnace-operator - are engaged in making a bullion bar, and its manufacture crowns a long production process and logistics. While many gold mining companies prefer to show 999-gold bullion bars in their presentations, more often their end-products are Dore bars. As a rule, it is a gold-silver alloy containing 70% to 85% of gold and up to 5% of byproduct non-precious metals. Dore bars are unsmooth, dark, each weighing about 23 kg, so they do not at all look like the gold the majority of people dream about. These are sent to the refineries where they undergo melting-down, are decontaminated and finally become traditional bank fine gold bars. It is the refinery hallmark that is an integral part of a marking used for a 999 gold bar.   
And there are reasons for that. First, Dore bars are supplied to the refineries by many gold miners and the metal melts in a ‘common pot’, to put it literally. Second, often this is not about tolling refining but about buying and selling of the gold-containing raw material, in other words, the refineries hold full rights for their end-products. This peculiar feature of the interaction between producers and refineries serves a purpose of collection of indirect taxes to the budget and is an obstacle for the increase in the refineries’ production, whose capacities are far from optimum utilization under the conditions of stagnating gold mining.

Russia that ranks third in the gold mining output after China and Australia accounts for 4% of the global gold refinery market. Four Swiss refineries that do not mine a single ounce of this precious metal process up to 80% of the world gold volume (about 1 000 tonnes, both mined and secondary gold). These are Valcambi, Metalor Technologies, Argor-Heraeus, and Pamp. Their capacities are utilized over 85%. Taking into account two more Swiss refineries, the Swiss companies account for 90% of the turnover of the companies that are in the list of suppliers of gold bullion bars made to the most established Good Delivery standard that was approved by the London Bullion Market Association, LBMA. The remaining 20% of the world gold are distributed among other 125 refineries. The Swiss refineries attract the gold miners thanks to their low prices, flawless banking services, safety and logistics; more importantly, taxes are low for the business in this country. The gold producers of almost all the gold mining countries use the services of the Swiss refineries, except Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan that mainly refine the precious metals on their own.

The Russia’s gold production in 2016 was 298 tonnes. Practically all the Russian gold is refined in the country, except 8 tonnes last year that were sold by subsoil users (first of all, Polymetal and Polyus) to China and South Korea in the form of the float concentrate made using the refractory ores. Some Russian gold producers like Nordgold and Polymetal, also mine the metal abroad: Nordgold mines in Burkina Faso, Guinea and Kazakhstan, and Polymetal mines in Kazakhstan, but they bring the Dore bars to Switzerland to be refined. Or – in case with Kazakhstan – the metal is refined locally. According to the industry participants, the refining cost in Switzerland is much lower than in Russia. What is the reason?

Five enterprises in Russia are engaged in gold refining, and the largest among them are Kraszvetmet and the Prioksky Nonferrous Metals Plant, their average process utilization is about 28%. Kraszvetmet, a former refinery of the Norilsky Nikel that was handed over to the administration of the Krasnoyarsk Territiry in late 1990’s within the framework of restructuring the debts of the mining-metallurgical company, now controls 62% of the Russian gold refining. The Prioksky Nonferrous Metals Plant located in Kasimov, the Ryazan Region, accounts for 22%, but only this refinery alone has enough capacity (260 000 tonnes per year) to refine practically all the Russian gold production. It is the most up-to-date refinery in Russia, its construction started in the mid-1970’s, when the decision was taken to move the main production site from the Novosibirsk plant that was located within the city. Novosibirsk plant that before 1990’s was the only one to do gold and silver refining in the USSR is still operating. Now, it accounts for 7% of the Russian refining. One more enterprise, the Kolymsky Refinery, turned bankrupt in 2015, officially due to the cash shortage caused by the Director General. After the Kolymsky Refinery shutdown, the only private refinery operating is the Ekaterinburg Nonferrous Metals Plant (accounting for about 7% of Russian gold refining) belonging to Viktor Vekselberg’s Renova.

Low profitability of the business is one of the explanations of this lack of demand. The margin in the metal refining and trading is under 1%, says Sergey Belov, Deputy Director General of Kraszvetmet on refining.  However, the import of the gold-containing raw material until recently was liable to 6% - 20% import duty.  “In this situation, we cannot speak of the economic effect of the raw material import,” said S. Belov. This year, the duty for mineral raw materials was slashed to zero till December 31, 2017, and the duty for secondary raw materials – till December 31, 2019. The Industry Association of Refineries is making documents for the extension of the preferential taxation period for the imported raw materials, says S. Belov.

However, according to the representatives of the Russian refining business, so far we cannot speak of a full-fledge competition on the world market. They think that the Russian refineries cannot offer attractive cooperation terms and conditions for foreign producers until the VAT is slashed to zero when importing the gold-containing raw material to be refined, so called ‘insurance fee’. When importing the raw material from abroad to be refined, it is necessary to pay 18% of its value. After refining, this sum of money should be returned to the company within 3 months. Taking into account a high price for gold, these sums are big and ‘freezing’ of the working capital for this period is not a pleasant thing. Moreover, this sum is returned by the taxation authorities based on the results of a desk audit, that could show some discrepancies in making the documents, and it could result in the refuse to refund the VAT, says Vladimir Son’kin, Director General of the Prioksky Nonferrous Metals Plant.

“The main problem is to convince the customs authorities that this [VAT abolishment] will not harm the federal budget. The same revenues will come but due to processing. And the increase in the capacities will provide additional tax revenues,” he said. “There is no economic sense in this [actual ban on the export of the gold-containing raw material to the RF],” said Dmitry Zamyshlyaev, Deputy Head of the Chamber of Assay of the RF, adding that this issue is under discussion at the Expert Council under the Ministry of Finance for several years.

The security considerations act as a brake on taking the decision. The customs authorities insist that in case of import, the refinery should ensure the refining of the imported raw material exactly. And the bullion bars that will go back abroad should be made using exactly this raw material and not any other one. Technically, it is not feasible, explains V. Son’kin of the Prioksky Nonferrous Metals Plant, because all the raw materials melt in a ‘common pot’, to put it literally. “Opponents of [the liberalization of the gold-containing raw material import regime] are concerned that the refineries would import the raw material and then it would disappear. However, refineries are not fly-by-night companies. They are state-owned companies. The risk that they would disappear with the raw material is small,” says D. Zamyshlyaev of the Chamber of Assay of the RF.

“Nowadays, all the refineries are upgraded and [advanced] from the point of view of the competitiveness in the world market. It is necessary to open foreign markets as soon as possible so that we could attract [foreign producers],” says V. Son’kin. “The competition for market share will be very tough as today there are no uncommitted [gold-containing] resources. However, we are ready to work hard and within three years have 5%-7% of the global volume. Redistribution is possible from the Latin America and Africa, from small- and medium-scale subsoil users – all the large-scale ones have already been engaged,” says S. Belov of Kraszvetmet. According to him, in case of the liberalization of gold-containing imports from other countries, the Russian refineries could increase the use of their production capacities by 25 percent minimum. Kraszvetmet has already preliminary contracts with foreign contractors, but they are not under implementation due to existing obstacles.

Those supporting the liberalization of imports give as an example the change in the law on the precious metals issued in 2015 that made the refining of the scrapped precious metals obligatory. This measure brought the huge market out of the ‘gray zone’ and boost the operating rate of the company. For example, 13 tonnes were refined at the Prioksky Nonferrous Metals Plant last year, and before the changes in the law - about 150 kg were refined. A certain layer of organizations appeared that legally process the scrapped metal and sell it to the refineries as a semi-product. “It is a win-win situation. The volumes increased as well as the tax revenues, and plenty of gold came out of the shadow. Adopting these amendments required the colossal efforts made by, first of all, the Ministry of Finance, Chamber of Assay, Association of Refineries. There were strong doubts because things might get worse. Now when the law started working, everyone understood that it had brought positive results,” says V. Son’kin of the Prioksky Nonferrous Metals Plant.

Mainly jewelers opposed the adoption of this regulation. This measure was not to their benefit as it did not allow the jewelers to melt the jewellery scrap or buy the scrap of unknown origin at their own discretion, explains D. Zamyshlyaev of the Chamber of Assay. “Only the equipment of the refineries can ensure the compliance with the stringent requirements regarding the metal refining and bringing it to the required conditions – as the precious metal could also be radioactive. Otherwise, the metal could not be of required fineness,” he says. Finally, the jewellers were allowed to melt only the metal of their in-house products and the state monopoly ensured the transparent turnover and accounting of the precious metal volumes. The refineries cooperate with a limited number of suppliers who guarantee the non-criminal origin of the metal.

So far, the abolishment of the VAT for investment bullion bars (of 999 fineness that cannot be used for the manufacture of jewellery due to the ‘pure’ gold fragility) is under consideration at the State Duma. According to the Ministry of Finance, this move will contribute to the development of the financial market through the higher demand for the investment gold because the people can buy the gold from the banks without a VAT. 

The issue of the abolishment of the VAT for the exported gold-containing raw material is a ‘political’ one, says S. Belov of Kraszvetmet. The industry does not expect it to be abolished soon. The representatives of the law-enforcement authorities probably find the term ‘liberalization’ in the context of the operations with gold too frightening to expect such changes to be adopted in the near future.

There exist such a notion as ‘refinery discrepancy’. This is the discrepancy between a supplier and a refinery as for the quantity of the chemically pure precious metal in a raw material batch. Unfortunately, until the restraints we outlined here are not abolished in Russia, this term can be used to describe  the situation when a major mining country does not create a significant value addition in refining, and a country that does not mine is the global largest intermediate stopping place for gold thanks to both the historical reputational factors and the favourable tax regulations.

Igor Leikin for Rough&Polished


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