IRKUTSK REGION – IRKUTSK REGION –

NEW LEADER NEW LEADER

IN THE RUSSIAN GOLD MINING IN THE RUSSIAN GOLD MINING

INDUSTRYINDUSTRYIrkutsk - October 2003

Table of contentTable of content::Introduction

Section 1. World gold market and prospects for RussiaWorld gold production 1Gold producers – countries and companies 2Global gold market in 1990s 3Rehabilitation of gold as a valuable asset; major gold producers 4Current events on the world market 5Demand and supply on the world market 6Gold as a revenue stabilization tool 7

Section 2. Current gold production in Russia 8Major gold fields and miners 10

Section 3. Irkutsk Region – a leader in gold mining 11

Developing «Lenzoloto» and «Sukhoy Log» as one consolidated company 13

Key strategy directions 14Creation of a world class company in Irkutsk Region 16Benefits to the region 17

Conclusion 18

U.S.A.6.3%S.A.R.

37.9%

Australia6.3%

China4.5%

Canada3.7%

Indonesia2.9%

Russia21.6%

Others16.7%

World Gold MiningWorld Gold Mining

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After ratification of Jamaica Agreement in 1978 gold lost its importance as a world currency. However, being now just an ordinary commodity, it still keeps its position as an international payment tool, featuring the highest liquidity in the periods of political instability and global economical shake-ups.

Gold reserves in state and private funds, together with industrial, technical and other gold products, are estimated at the level of 145,2 thousand tons. U.S. gold reserve is about 8500 tons, in Germany - 3423 tons, France – 3025 tons, Italy – 2452 tons, Switzerland – 2198 tons. The Central Bank of Russia holds 387 tons, or 9% the country total gold reserve (as of November, 2002).

In the end of 1990s an energetic process of consolidation started in the gold mining industry. Today about 50% of the global gold extraction is concentrated in hands of 15 leading companies.

S.A.R.38.0%

U.S.A.11.2%

Australia10.0%

China2.0%

Canada3.0%

Indonesia3.6%

Russia6.0%

Others26.2%

Proved reserves - totally 50 thous. tons

Reserve base - totally 95 thous. tons

Sourse: USGS

Gold Producers – Countries and CompaniesGold Producers – Countries and Companies

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Country 1970 1980 2001 2002 2003 П

South Africa 995 674 402 395 395

U.S.A. 52 31 335 299 297

Australia 18 16 285 264 260

China <10 50 185 202 202

USSR-Russia 202 258 152 181 185

Canada 74 50 160 160 150

Indonesia <10 30 130 170 175

Peru <10 <10 138 140 134

In tons Source: corporate information and US Geological Survey data.

Anglogold7.2%

Barrick Gold6.9%

Др. фирмы65.7%

Newmont8.4% Gold Fields

5.7%

Rio Tinto4.3%

Норильский никель*

1.6%

Total 2 587 tons

* Including ZAO PolusSource: GFMS

• 5 biggest companies (>100 t/y) mine over 30% of gold

• After acquiring ZAO Polus, OAO Lenzoloto and OAO Matrossov Mine, MMC Norilsk Nickel took the 10th place in the world gold mining.

First opinions revising the role of gold in the global monetary and financial system appeared In 1990s. That was a period of aggressive gold demonetization, characterized by diminishing the role of this metal in the structure of gold and monetary reserves of Central Banks, low interest on investors side, transformation of gold into commodity with such typical specifications as cost and consumer value. This situation was caused by following factors:

• new generation of central bankers advocating for the decrease of the gold proportion in the total volume of gold currency reserves;

• broad integration of European economies and introduction of a new all-Europe currency;

• explosive growth of share prices, in particular, of high-tech companies;

• decline of gold price and gold deposit yield.

In 1996 the fall of gold prices restarted, and by the beginning of the 21st century the price came close to the level of extraction cost in major mining countries, resulting in shut-down of gold mines and suspension of new projects.

Along with deterioration of economy in emerging countries, the fall of gold prices also threatened the value of gold reserves in developed countries.

Furthermore, a threat of gradual exhaustion of existing deposits appeared.

Global Gold Market in 1990sGlobal Gold Market in 1990s

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With purpose to restore the role of gold in the global economy and stabilize its price, in September of 1999 fifteen Central Banks of the Western Europe, including European Central Bank, entered into Agreement on the limitation of gold sale on the market (with annual quotas not exceeding 400 tons), and on the allocation of gold deposits until 2004. The Agreement was supported by the U.S. Federal Reserve System, Central Bank of Japan and International Monetary Fund.These measures, accompanied by global economic decline, especially visible on stock markets, made the investors to change their feelings towards gold.

Rehabilitation of Gold as a Valuable Asset

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Gold has kept its stabilizing role in world crises.

What do we see today:• the global investors community regards gold as a mechanism of protection against U.S. dollar and stock market devaluation, and gold becomes an attractive asset from the viewpoint of risk diversification; • to miners and metal producers gold is of paramount importance as it guarantees a stable in-flow of revenues in the periods of sharp fluctuations of prices for other metals.

World leaders in gold production

Companies Output In tons

Cost of production in USD/ounce

Proven reserves in

tons

Forecasted resources in

tons

Newmont 214.6 234 1 900 4 354 Anglogold 184.5 213 2 100 5 566 Barrick 177.3 247 2 565 3 980 Gold Fields 146 208 2 500 5 100 Rio Tinto 110 – 1 244 1 455 Placer Dome 86 234 1 514 2 851 Freeport McMoran 82 53 332 1 744 Harmony 71 233 1 500 8 617 Ashanti 52 271 656 1 125 Norilsk Nickel* 40 180 1 450 3 000 Durban Deep 32 220 348 802 Buenaventura 32 156 475 1 010 Kinross 29 285 354 933 WMC 26 – - - Newcrest 22 262 886 1 666

* adjusted for acquisition of ZAO Polus, OAO Lenzoloto and OAO Matrossov Mine

Source: HSBC

1. Gold price has increased by 35,3% from January 2002 till October 2003.

2. Major price-increasing factors.A. Grown demand from the investors’ side caused by stock market volatility, low yield from other tools, and need to diversify assets. B. Since 2000 many large gold companies have been reducing their hedging portfolios, which results in buyback of gold futures realized in the past period.C. Consequences of the Middle East war: geopolitical instability, high energy cost.D. Bankruptcy of several large corporations; weakening of American economy.

Steep growth of investors’ demand is caused by the following factors:

а) search for a “shelter” in the troubled environment after September 11, 2001;b) capital spillover from falling stock market to a reliable and capacious market, where price

growth is better compared to the majority of other commodities and financial assets;c) slump in USD exchange rate vs. EUR and Yen; global economic slowdown in 2003;d) persistent low rates on money markets;e) replenishment of investment portfolios with longer gold futures (from 3 months to 5

years). Note: the major part of capital responsible for the price growth is owned not by long-term investors who are more loyal to the market, but by institutional investors who saw a quick way to earn money on the price boost.

3. The greatest influence on the general supply/demand picture is currently exerted not by gold production dynamics, but by gold recycling, operations of central banks and producers’ hedging policy.In 2002 gold extraction fell for the first time since 1995. Production decline was about 2% (60 tons). Future production hedging was decreased by 352 tons. Central Banks’ sales grew by 44% within the last 5 years and reached 549 tons.

CurrentCurrent E Events on the World Marketvents on the World Market

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Supply and Demand on the World Market (in tons)Supply and Demand on the World Market (in tons)

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Supply 2001 2002 2003 F 2004 F 2005 F

Extraction 2 604 2 543 2 500 2 550 2 535

Sales by Central Banks 504 400 400 400 400

Recycling, scrap 706 727 749 750 750

Hedging - 147 - 120 - 100 0 0

TOTAL SUPPLY: 3 667 3 557 3 549 3 700 3 685

Demand

J ewellery 3 006 3 055 3 116 3 178 3 242

Electronics 203 205 207 209 211

Official coins 56 56 56 56 56

Dentistry 65 65 65 65 65

Other industrial applications 102 102 102 102 102

Medals 55 35 35 35 35

Miscellaneous 222 202 202 202 202

Other industrial 584 463 465 467 469

Total industrial consumption 3 590 3 518 3 581 3 645 3 711

Bullion coin 232 300 200 150 150

TOTAL DEMAND 3 822 3 818 3 781 3 795 3 861

BALANCE - 155 - 261 - 232 - 95 - 176

GOLD PRICE USD/OZ 272 312 362 376 368

Every year the world market faces an invariable gold deficit of approx. 100-250 tons being compensated by sales of some Central Banks reserves.

0

250

500

750

1000

1250

1992 1994 1996 1998 2000 2002

0

1000

2000

3000

4000

5000

Gold price

Pd price

Price inUSD/oz.

Demandin tons

Gold demand

7

Gold prices change in counter-phase to key indices of economic activity and prices for industrial-purpose metals, thus allowing the gold producers to obtain revenues in the periods of industrial cycle downward movement.

250

275

300

325

350

375

400

425

1992 1994 1996 1998 2000 2002

375

400

425

450

475

500

525

550

Gold

S&P 500

S&P 500

indexGold

USD/oz.

Gold as a Revenue Stabilization ToolGold as a Revenue Stabilization Tool

Russia possesses over 20% of the world’s inferred gold reserves, however, proven reserves are below 7%. Poor exploration level may be explained by lack of investments within the last decade.

Processes of reformation and fast privatization in the Russian gold-mining industry resulted in its decomposition. Over 600 small companies exist now, but they are mostly small and low-effective, operate out-of-date technology and mine some tens or hundreds tons per year. Labor productivity in these companies is 1-1.5 kg/worker, compared to the world’s 8-8.5 kg/worker. Low capitalization of Russian mine assets attracts international portfolio investors and speculators who prefer quick profits and are not interested in long-term investments in the industry development. All this leads to the following:

• Deposits are “moth-balled”, not under operation;• Underground reserves are exclusive State property, but traded by companies;• Resource base of professional mining organization being eroded;• Industry disunity and poor control diminish tax payments to federal budget.

Current Gold Production in RussiaCurrent Gold Production in Russia

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Entering a new stage of industry development, it is crucial for Russia to make an accurate assessment and exploit properly the existing ADVANTAGERS

1. Abundance of long-term gold reserves.

While the biggest world deposits are close to exhaustion, Russian resources are plentiful: Sukhoy Log, Natalka, Kuranakh Group, etc. Volume of measured but still not operated reserves amounts to 2 500 2. Countries – competitors are facing serious problems.

А. Largest gold reserves are located in South Africa. Internal political instability in the country not only prevents the gold mining companies from investing into new projects but also threatens further operation of several largest companies.

В. Gradual degradation of ores in world largest deposits. World spendings in the exploration of new deposits, according to Raw Materials Group, declined from USD 3,6 bln in 1997 to USD 1,4 bln in 2000. If mining companies maintain the existing mining rates, they will see the depletion of measured reserves in 12-15 years.

С. Extensive use of cyanides and danger of resulting technogenous catastrophes cause extremely negative reaction from non-government environmental organizations and society, primarily in North America and Europe.

3. Improvement of investment climate in Russia.

4. Human resources and advanced technologies in gold mining and processing. Due to specific historical role of mining industry, this sector of our domestic economy is well staffed with highly qualified and experienced personnel. High qualification of Russian geologists and mining engineers is recognized all over the world.

Although new modern processes are available today (such as bio-leaching), only a few companies may afford them, as huge investments are needed for their implementation.

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Major Gold Fields and MinesMajor Gold Fields and MinesProduction volume (kg) Company Region Main

Deposits 2000 2001 2002

Norilsk Nickel (including Polyus,

Lenzoloto, Matrossov mine)

Krasnoyarsk Irkutsk Magadan

Olimpiadinskoye, Taymir, Kola peninsula, alluvial deposits in Irkutsk region, Natalka

25 200

27 673

39 800

Omolonskaya MC Magadan Kubaka 13 900 13 502 12 500

Susumanzoloto Magadan Ore deposits, alluvial deposits 4 000 4 526 5 400

Mnogovershinnoye Khabarovsk Mnogovershinnoye 3 200 4 799 5 700

Buryatzoloto Buryatiya Zun-Kholba, Irokinda 3 954 4 578 4 700

Polymetal Ural Vorontsovskoye, Dukat 917 2 584 4 200

Amur Khabarovsk Ryabinovoye, Tas-Yuryakh 800 2 966 4 000

Pokrovsky mine Amur Pokrovskoye 1 600 2 814 2 300

Mines extraction by region 2002

Region Extraction volume, kg Change

Magadan region 33 121 +8,3%

Krasnoyarsk region 29 305 +54%

Yakutiya 17 525 +5,7%

Irkutsk region 16 064 +1,1%

Khabarovsk region 15 252 +13%

Amur region 12 182

Irkutsk Region – A Leader in Gold MiningIrkutsk Region – A Leader in Gold Mining

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Most important gold fields

Large and unique gold deposits

Darasun 50 t

Deposit names and gold reserves (tons)

Gold extraction in Irkutsk region 1991–2003 (kg)

1991 1995 1998 1999 2000 2001 2002 2003 plan

Irkutsk region, total 11 040 11 137 10 938 12 334 16 005 15 792 16 064 16 500

«Lenzoloto» 11 000 3 000 4 816 5 894 8 134 8 290 9 200 9 500Source: Russian Union of Gold Producers, “Gold of Russia”

Norilsk

Irkutsk region

China

Olimpiada 450 t

Sukhoy Log 1029 t

Kuranakh 230 t

Moscow

Krasnoyarsk

MongoliaKazakhstan

Blagoveshensk

Vladivostok

Khabarovsk

Pokrovskoye 100 t

Mnogovershinnoye 120 t

Nezhdaninskoye 450 t

Natalka243 t

Kuchus 157 t

Baley 109 t

Darasun 50 t

Zun-Kholba 60 t

Magadan

Irkutsk Chita

Udokan

Kubaka80 t

Ametistovoye 90 t

Mayskoye 138 t

Ekaterinburg

Vorontsovskoye 100 t

Berezovskoye 50 t

Kochkarskoye 46 t

Pechenga

Ulan-Ude

Yakutsk

Penskiy region

Chertovo Koryto

80 t

The town of Bodaibo celebrated its centenary in the summer of 2003. This is the center of unique gold-bearing region that played a significant role in the modern history of Russia. Over 95% of Irkutsk gold is being mined in Bodaibo region. 1/3 of gold in pre-revolutionary Russia was mined in this region, and approximately 1100 tons of accounted metal was extracted here in the last 150 years.

Gold mining has stimulated the infrastructure development in Lenskiy gold-bearing region:

• In 1896 the first Russian electric railroad was constructed on river Nygri (powered by thermoelectric station);

• In 1896 mining engineer L.F.Graufman, Chief executive of Lenzoloto, constructed the first Russian 300 kW hydropower station on Lena River;

• In 1895, together with the Great Siberian Railway, the construction of Bodaibo railroad (BRR)was started, going along the bank of Bodaibo River and coming close to the “Bodaibo Residence” (not a town yet at that time).

320 placers and 6 ore deposits have been measured in this region (Sukhoy Log, Golets Vysochaishiy, Verninskoye, Pervenets; indicated: Dogaldinskoye, Centralnoye, Yubileynoye, Nevskoye, Caucasus, Yergozhu, Gurbey; about 40 promising ore manifestations). Gold reserves of the region are number one in the country, thus making it the most attractive for investing in gold mining.

Today we have a real chance to restore leadership of this region not only in Russian, but in the global gold-mining industry.

To maintain and strengthen the region’s leading position in Russia it is necessary to undertake the following measures:

• To overcome the disunity of gold producers and to consolidate gold companies (even the leading Lenzoloto is actually a holding company comprised of 9 subsidiaries with annual output of 200-1500 kg). 41 small companies have received quotes for 2003, and some 15 artels operate as subcontractors without individual quotes;

• To involve new long-term investors into industry development. Only large mining companies with deep knowledge of this industry and positive experience in comprehensive project implementation can be profitable for the region.

Irkutsk Region traditionally holds the 3rd or 4th place among Russian gold-mining areas (with 10% of total Russian output), the greater part of metal coming from alluvial deposits. Gold extraction In 2002 exceeded 16 tons, a record level for the whole period of gold mining. The industry employs approximately 9,5 thousand people and provides for 2,5% of the total industrial output in Irkutsk Region.

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Proposed strategy of project implementation:

• Project realization period — less than 5 years.

• Already in 2 years a large world-class gold-mining company will be established, enabling the region to increase its total gold extraction.

• When the deposits of the Bodaibo gold-bearing region, including:

Sukhoy Log (1 029 tons, average content 2,76 g/t), Zapadnoye (ОАО «Lenzoloto», 13 t, average content 2,7 g/t)

will be put into operation in framework of consolidated mining industrial complex, the following results will be achieved:

Total extraction in the region - approx. 58 tons a year (including consolidated output of Lenzoloto and Sukhoy Log of at least 50 tons);

Cost of extraction — approx. 150 $/oz.

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Developing Lenzoloto andDeveloping Lenzoloto and Sukhoy LogSukhoy Log as one as one consolidated companyconsolidated company will allow Irkutsk Region to will allow Irkutsk Region to

become a leader in the world’s gold-mining industrybecome a leader in the world’s gold-mining industry

ОАО “Lenzoloto” — development of placers and small ore deposits.

1. To increase extraction from placers and ore deposits up to 17 tons a year the following measures shall be taken:

• retrofitting of existing facilities within two year period;• development of efficient and transparent financial policy.

2. To optimize technological solutions and reduce environmental risks.

3. To reorganize the internal corporate structure of OAO “Lenzoloto”: to develop and introduce a transparent financial model of the company operation, to determine strategically important directions for further development (in areas of mining and auxiliary works). To improve legal status of principal company and subsidiaries.

“Sukhoy Log” — deposit development schedule:

1. Three years after the license state registration to commission the first plant line with a capacity of 8 mln tons of ore and annual gold production of 15 tons.

2. Five years after the license state registration to commission the second plant line with a capacity of 8 mln tons of ore and cumulative annual gold production of 30 tons.

3. Polyus and Irgiredmet are assessing the possibilities to increase ore extraction so that the plant annual production could reach 40 tons of gold.

KeyKey Strategy DirectionsStrategy Directions

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Geological exploration in Lensky gold-bearing region

1. We believe that Lensky gold-bearing region possesses a unique geological potential, and there is a high probability of finding new large gold deposits. Discovery of new gold manifestations and deposits will allow to compensate for the depletion of existing placers, thus resolving problems with exhausted recourses and population employment in Bodaibo region.

2. In 2004 – 2005 we plan to file a request with Irkutsk Regional Administration to obtain rights for geological exploration of underground reserves in promissing areas.

3. Geological exploration will be financed from the Company’s own budget. Annual spendings for prospecting and exploration are estimated at the level of USD 10 mln. Primarily Irkutsk geological organizations will be involved in this work.

Supporting small gold-mining companies

1. Our company does not intend to develop small alluvial deposits being the major resource base for small artels of gold-digger.

2. Investments in infrastructure development at Sukhoy Log will allow small gold-mining companies to increase their extraction volumes.

3. Provided the interests of gold-digging artels are taken into account, and existing small mining companies stay in place, the region could achieve social stability.

Key Strategy DirectionsKey Strategy Directions

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MMC Norilsk Nickel is the only Russian company capable to develop large deposits in a short period of time. It possesses the following competitive advantages:

• Transparency, predictability, openness;• Availability of financial resources required for the development of big gold deposits,

possibilities to attract foreign investments;• Unique experience in construction and operation of large mining facilities;• Equipment and technology for gold ore extraction from open pits;• The Company was first in Russia to construct a plant for processing stubborn gold-bearing

sulphide ores (based on bio-leaching process);• The Company has its own team of geologists and may finance geological exploration;• The Company considers Irkutsk region as an area of strategic importance for its long-term

outlook.

Norilsk Nickel Group is ready to set up the largest Russian gold mining company of world class, based on OAO “Lenzoloto” company and “Sukhoy Log” deposit. If the Group obtains rights for the development of local underground resources, the following scenario will be possible:

1. Norilsk Nickel is ready to invest necessary assets in the deposit development and facilities retrofitting.

2. Elimination of “speculative games” around deposits and changes of assets owners.

3. The deposit will be developed by the largest company with highly qualified personnel and substantial financial and technical possibilities.

4. In the nearest future a new world-class mining enterprise will be constructed in Irkutsk region.

5. After commissioning Sukhoy Log and some other deposits, the share of mining industry in the total industrial production of Irkutsk region will reach 10%.

Creation of A World-class CompanyCreation of A World-class Company

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Implementation of this program will allow to create in Irkutsk region a gold-mining company of world class, producing 50 mln tons of gold annually. Lensky gold-bearing region will join five largest gold producers in the world: WITWATERSRAND (SOUTH AFRICA), NEVADA (USA), WESTERN AUSTRALIA, ONTARIO (CANADA), IRKUTSK REGION (RUSSIA).

Establishment of this new company will ensure the following benefits:• Significant increase of regional economic potential; 10-11% GRP (Gross regional product) growth;• Taxation base expansion. Additional payments to the region’s consolidated budget will amount to USD 70 mln. (mining tax – 16 mln, profit tax – about 49 mln). A large world-class company, operating in accordance with international standards, is more transparent, and this will ensure higher tax collection;• Reduction of the regional budget dependence on power generation and aluminium industries;• Socio-responsible partnership with regional authorities (1 500 – 2 000 new working places for local population);• Infrastructure development (construction of roads, bridge on Vitim River, power transmission lines, residential housing);• Preferential purchases of local products;• Higher level of environmental safety, meeting international standards;• Strengthening of the State’s regulative role in the development of gold-mining industry;• Investments in target R&D programs, opening a breakthrough to new technologies.

A large mining company will allow:• To avoid disputes and controversies connected with processes of authority and

responsibility distribution among numerous local gold-mining companies;• “To personify” the responsibility for gold extraction at key deposits.

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Benefits to the RegionBenefits to the Region

1. Gold still plays its role of “reserve” or “stabilizing”asset in the global economy.

2. Availing of existing competitive advantages, the Russian gold-mining

industry restores its almost lost positions and becomes one of the most

attractive and rapidly developing industries.

3. New stage of the industry development is marked with consolidation of

producers, realization of new big projects, and establishment of large

national gold-mining companies of international scale.

4. Irkutsk regional gold reserves comprised of numerous ore deposits and

placers, provide us with objective prerequisites for creating a large mining

company rated first in Russia and the fifth in the world.

5. Only large national mining corporations will allow Russia to solve new

important tasks: geological exploration of underground resources,

attraction of foreign investments, introduction of advanced technology,

development of scientific, technical and labor potential.

6. Only one Russian company – MMC Norilsk Nickel - has enough capacity to

attract significant long-term investments and to develop the largest and the

most complicated gold-bearing deposits.

ConclusionsConclusions

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