BHP decides to play Russian roulette

BHP decides to play Russian roulette

Andrew Trounson, The Australian

14th June 2006

As the global scramble for mineral resources hots up, BHP Billiton has finally put its wariness towards investing in Russia behind it, forming an exploration joint venture with the country's largest mining company, nickel and platinum giant MMC Norilsk.

BHP is following the footsteps of rival Rio Tinto, which formed a similar exploration alliance with Norilsk in January.

In the wake of Russia's descent into financial crisis in 1998, BHP quit the country, effectively abandoning its small portfolio. It only began having a new look when aggressive former chief executive Brian Gilberton took over from Paul Anderson in 2002.

But with commodity prices having boomed and new large-scale development projects thin on the ground, miners are having to venture into politically riskier geographies.

Russia is mineral rich, with significant oil, gas, nickel, coal, palladium, platinum, gold and iron-ore resources, as well as having a large aluminium industry.

It says much for MMC Norilsk's bargaining power that the world's largest mining company has been limited to an alliance giving it only 50 per cent, less one share, in any finds. It is similar to Norilsk's deal with Rio Tinto that gives it a 49 per cent stake in projects.

But at the same time the two global miners will probably feel comfortable ceding control to Norilsk, given the higher political risks in Russia.

Investor faith in Russia has been shaken in recent years by the state virtually taking control of oil giant Yukos.

The company's former chief executive Mikhail Khodorkovsky, a political critic of President Vladimir Putin, now languishes in a Siberian penal colony after being convicted of fraud and tax evasion.

But Russian companies are increasingly trying to adopt the corporate governance standards of the West. Mr Gilbertson is now president of Russian aluminium company Susal, while former WMC boss Andrew Michelmore is on the board of local rival Rusal.

"This is an important step for BHP Billiton and represents a diversification of our geographical base," chief executive Chip Goodyear said after a signing ceremony in Moscow. BHP and Norilsk will target a "a range of commodities" in northwest Russia and western Siberia.