Russia may not be doing very well in its overall economy, but if there is one sector that benefits from the crisis, it is the gold mining sector. Along with a seven percent increase in the price of gold this year, the crashing ruble treated gold producers with cheaper labor costs and other expenses.
According to BCS Financial Group, a Moscow-based investment company, Russian mining companies have the lowest costs in the world, with the potential to decline by as much as 25 percent this year. At present, the cost to extract gold in Russia is around 15 percent lower than the global average at an estimated $736 per ounce.
Furthermore, Russia's central bank is buying up gold from domestic companies to increase its foreign currency reserves after trying to curb the economic crisis. Historically speaking, this could be the best year for Russian gold producers in terms of margins, despite double digit inflation rates.
The impact of the Russian ruble slide-losing as much as 46 percent to the dollar last year-can be seen in the ruble gold prices. In January 2014, gold had an average price of 42,000 rubles per ounce. A year later, the price almost doubled to 80,500 rubles per ounce. Gold has also advanced in the London Metals Exchange.
Russia's gold output is also rising along with strong demand. Production rose to about eight percent in 2014 to 275 to 280 tons, worth as much as $12.5 billion at current prices. This made Russia the second largest supplier of gold in the world, pushing past Australia but falling short of China. Output is further expected to increase by as much as three percent this year to about 300 tons.
Other mining companies are also benefiting from the low ruble, such as nickel miner Amur Minerals Corporation (OTC: AMMCF). Because most of its funding comes from the United Kingdom, it means that pounds are converted to a higher ruble amount, thus decreasing operational costs and increasing savings. Amur Minerals also remains to be debt-free-an advantage especially in times of economic crisis.
Still, inflation could undermine the benefits of the weak ruble as import costs climb and workers demand higher salaries to compensate. As of December 2014, inflation in Russia reached 11.4 percent. It is expected to peak at 15 to 17 percent by March or April, according to Deputy Economy Minister Alexey Vedev.
In addition, once the central bank's gold reserves become adequate, its purchases may not climb in the same pace as in 2014. After all, the boost in gold purchases was simply the reaction of the central bank to Western economic sanctions, as forecasts indicate that Russian banks might lose one trillion rubles in 2015.