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Russia is expected to sell discounted rights to one of the world’s largest untapped gold deposits this week to a joint venture of miner Polyus and a state conglomerate, industry sources and analysts said, after sanctions and restrictions discouraged other bidders.

The starting price at Thursday’s auction of the Sukhoi Log deposit is $144 million, valuing gold there at $2 per ounce, around 10 times cheaper than deposits of a similar size elsewhere in the world, according to one analyst.

The Russian government, after 20 years of promises to sell the deposit, hopes the start of production will generate much-needed tax revenues and jobs.

Moscow has also come under pressure from a two-year lobbying campaign by shareholders in the joint venture of Polyus and state-run Rostec, according to an industry source, who spoke on condition of anonymity.

Rostec is headed by Sergei Chemezov, a close associate of Russian President Vladimir Putin.

As part of a policy of keeping strategic resources in Russian hands, the government limited access of foreign investors to the auction, ordering that 25 percent of any bidder should be owned by state-controlled firms.

Western sanctions over Russia’s involvement in the conflict in Ukraine has also made it harder for Russian companies to get access to foreign debt markets, thinning out potential bidders.
Only two bids, from SL Zoloto — the joint venture between Polyus and Rostec — and Zoloto Bodaibo — a joint venture between Polyus creditor VTB Bank and businessman Ibragim Palankoyev — were submitted to the auction.

Polyus is owned by the family of Russian billionaire Suleiman Kerimov.

“Polyus is the front-runner because it is able to cope with the project in terms of financial resources,” said Oleg Petropavlovskiy at BCS Investment Bank. “Having a state partner allows it to split risks and to reckon on state support with infrastructure building.”

Palankoyev’s relatives have done business with Kerimov in previous years, Vedomosti newspaper reported in December. He has no known background in mining and has never held significant mining assets. The auction would be declared void if there was only one bidder.

The sale of Sukhoi Log is unlikely to affect gold markets because the start of production is still years away.

Adding Sukhoi Log to Polyus’s portfolio could make it more attractive for deals long under consideration. These include a secondary public offering in Moscow and talks with Chinese investors, which, sources have said, are considering an acquisition of a stake in Polyus.

“It (Sukhoi Log) brings a saleable story,” another senior industry source said. Polyus declined to comment.

The auction will start at a price of 8.6 billion roubles ($144 million) for the deposit, which, according to Soviet-era research, contains 1,943 tons (62.5 million troy ounces) of gold in its reserves.

Deposits of a similar size elsewhere in the world are 10 times more expensive, said Nikolay Sosnovskiy at Prosperity Capital Management said.

However, the real value of the deposit is hard to estimate because its reserves, based on Soviet research done in the 1960s when it was discovered, require further exploration.

Sukhoi Log will require up to $5 billion in investments, according to industry estimates based on a 10-year-old state feasibility study.

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