MOSCOW – A long-time ally of President Vladimir Putin has snapped up a chunk of Russia’s giant Sukhoi Log gold field in a barely contested government auction.

Bidding for the deposit was won by a venture between State-owned Rostec Corp. and Polyus PJSC, Russia’s biggest miner of the metal, after it made a minimum-required single bid above the starting price, according to a Statement from the Natural Resources Ministry on Thursday.

Rostec is run by Sergey Chemezov, 64, whose relationship with Putin dates to the 1980s. It was competing against a grouping of State bank VTB and businessman Ibrahim Palankoev that has little mining experience. The auction took 11 minutes, mostly taken up with officials reading out the tender rules, the Interfax news service reported from the Moscow venue.

The resource in the isolated Irkutsk region of Siberia is one of the world’s largest untapped gold fields, making up more than a quarter of Russian reserves. It has held an allure for miners since Soviet geologists surveyed it in the 1970s. Yet BCS Global Markets strategist Kirill Chuyko and Societe Generale SA analyst Sergey Donskoy said before the sale that the outcome wasn’t in doubt.

"Given the terms of the sale and the composition of bidders, Rostec and Polyus’s joint venture will most likely win," Chuyko said in Moscow ahead of the sale.

The Russian budget will get 9.41-billion rubles ($157 million) from the transaction, the resources ministry said Thursday. The starting price had been set at 8.6-billion rubles, with bids rising in increments of 855 million rubles.

The initial level represents a cost of $2 to $3 an ounce of reserves, compared with a more typical $30, according to Sergey Kashuba, head of the Union of Gold Producers of Russia. On the other hand, Sukhoi Log’s purported 97 million ounces in reserves and resources was calculated in Soviet times and may be inaccurate, while development costs could reach $4-billion to $5-billion, Kashuba said.

Russia expects Sukhoi Log to reach annual production of 80 to 90 tons of gold and 20 to 25 tons of silver, the ministry said without giving a time frame. Total capital expenditure on the field, covering about 28 percent of the nation’s gold reserves, is seen at about 90-billion to 100-billion rubles, it said.

INNER CIRCLE
Chemezov has known Putin since the future president’s days as a KGB officer when they lived in the same apartment complex in Dresden, Germany. A decade later, he worked under Putin in Boris Yeltsin’s administration.

After a stint running Russia’s main arms exporter, Chemezov persuaded the government to bring State-owned assets under a single conglomerate.

The result was Rostec, set up almost a decade ago, which owns businesses from producers of vaccines to the country’s largest passenger-car maker and had about $22-billion of revenue in 2016. Chemezov convinced the government to sell Sukhoi Log in July 2015, Kommersant newspaper reported.

The Rostec chief executive officer is also among an inner circle of Russian officials that the US has sanctioned in retaliation over the conflict in Ukraine.

Chemezov and Polyus declined to comment before the auction. Rostec said it had expertise to develop a project of such size, while VTB said Sukhoi Log was an interesting investment opportunity. "The winner will be determined upon review of the one-off bids they will make, with the size of the bid being a key parameter," Nikolai Gudkov, head of the press service at the resources ministry, said at the time.

VALUE OF COMPETITION
Past sales have drawn more bidders than the legal minimum of two who competed on Thursday. Russia’s last major gold offer was the Natalka site over a decade ago. Four groups bid up the deposit 13-fold from the starting price.

“Important in these types of bidding processes is that the government does sufficient marketing of the opportunity to the kind of companies that might be able to develop the project,” said Patrick Heller at the National Resource Governance Institute, an adviser to government and regulators in mineral-rich countries. Then it’s “benefiting from the value of competition.”

The New York-based NRGI hasn’t advised the Russian government.

Over the years, Barrick Gold Corp., Nordgold SE and Kinross Gold Corp. are among those that have shown interest in Sukhoi Log. Yet a combination of uncertainty over the amount of gold in the deposit, the cost of digging it out and local ownership rules have put up hurdles to would-be investors.

"There is almost no alternative in this auction," Societe Generale’s Donskoy said from Paris before the sale.