The Coming Gold Breakout

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I read headlines all day and focus extensively, if not exclusively, on gold. If gold is the best form of money (it is), and if gold had unique properties as money (it does; it’s the only form of money that is not also debt), then gold is well worth the focus.

With that said, it’s hard to surprise me on the subject. After a while, you think you’ve seen it all. Yet, there are exceptions. This headline stopped me in my tracks: “Bank of Russia may consider gold-backed cryptocurrency.”

The idea itself is not exactly new. I first suggested that Russia might be acquiring gold with a view to a new gold-backed currency at a financial war game hosted by the Pentagon at a top-secret laboratory in 2009.

Jim Rickards

Your correspondent at the Homestake Mine in Lead, South Dakota. Homestake was one of the largest and most productive gold mines in U.S. history, and was the foundation of the Hearst family fortune. Global gold output has flatlined in recent years while demand for gold remains strong.

In my upcoming book, Aftermath, I describe a more sophisticated monetary arrangement among Russia, China, Iran and other nations to use a gold-backed cryptocurrency for international settlements.

Still, theory is one thing, reality is another. Here was a real central bank taking real steps toward a gold-backed cryptocurrency. Of course, the announcement came with lots of caveats about the need to stick to hard currencies. This gold initiative involves review of a report, not a live plan at this stage.

Still, it was a significant moment in the move away from the hegemony of the U.S. dollar as the dominant global reserve currency toward another system that included gold.

By itself, this announcement is not a reason to load up on gold. In fact, the spot price of gold barely budged on the news. Gold prices are far more likely to be affected by strength or weakness of the U.S. dollar, real interest rates, inflation prospects and geopolitical stress.

But, the announcement is highly significant in another way. It signals that the demand for physical gold by major central banks is here to stay. Whether a new gold-backed cryptocurrency emerges next year or five years from now does not alter the fact that you need gold to have a gold-backed currency.

Neither Russia nor China has all the gold it needs for that purpose yet. Therefore, demand for physical gold will remain strong even as supply has flatlined.

This creates an asymmetric trading pattern where gold has good potential to rise, but only limited prospects of a material fall. Those are the best kinds of markets for trading and investment. Taking into account both these fundamental and technical factors, what is the outlook for the dollar price of gold and gold mining stocks in the near term?

Right now, the evidence is telling us that the dollar price of gold is poised to breakout to the upside after a prolonged period of range-bound trading.

Chart 1 below illustrates recent price action in gold and shows why the prospects are good for near-term price appreciation.

After a rally from $1,215 per ounce in late November 2018 to $1,293 per ounce in early January 2019, gold remained in a tight trading range.

Over the past five months, gold has traded between about $1,270 and $1,345 per ounce (as of yesterday after gold’s big run over the past week).

That’s a range of about 2.8% above and below a mid-point of $1,305 per ounce. A 2.8% range is not unusual when governments try to peg two currencies to each other. In effect, gold has been pegged to the dollar at $1,305 per ounce.

Chart 1

Chart 1

However, this trading range exhibits another pattern called “lower highs.” Each spike at the high end of the range is slightly lower than the one before. Conversely, the bottom in each gyration has been more tightly bunched forming a kind of floor under gold prices.

The combination of a strong floor and declining highs results in a compression of the trading range. What this pattern presages is a breakout. Of course, the question is whether gold will breakout to the downside or the upside. This week we saw gold break higher, to $1,345.

The evidence is strong that gold is poised for a sustained upside breakout. The reason for the floor around $1,270 per ounce has to do with fundamental supply and demand. Russia and China continue to buy gold at a prodigious rate.

Russia has been buying between 15 and 25 metric tonnes per month, sometimes more, for over ten years. Russia’s gold reserves now stand at 2,183 metric tonnes, over 25% of the U.S. total with a far smaller economy. China is less transparent in its gold buying but also has over 2,000 metric tonnes, perhaps much more.

Neither Russia nor China have their targeted amount of gold yet, which would be 4,000 metric tonnes for Russia and 8,000 metric tonnes for China to achieve strategic gold parity with the U.S.

Iran and Turkey have also embarked on major gold accumulation efforts.

What all of these gold buying strategies have in common is a desire to escape from dollar hegemony and the imposition of dollar-based sanctions by the U.S. The practical implication for gold investors is a firm floor under gold prices since Russia and China can be relied upon to buy any dips.

The primary factor that has been keeping a lid on gold prices is the strong dollar. The dollar itself has been propped up by the Fed’s policy of raising interest rates and reducing money supply, so-called “quantitative tightening” or QT. These tight money policies have amplified disinflationary trends and pushed the Fed further away from its 2% inflation goal.

However, the Fed reversed course on rate hikes last December and has announced it will end QT next September. These actions will make gold more attractive to dollar investors and lead to a dollar devaluation when measured in gold.

The price of gold in euros, yen and yuan could go even higher since the ECB, Bank of Japan and People’s Bank of China will still be trying to devalue against the dollar as part of the ongoing currency wars. The only way all major currencies can devalue at the same time is against gold, since they cannot simultaneously devalue against each other.

A situation in which there is a solid floor on the dollar price of gold and a need to devalue the dollar means only one thing – higher dollar prices for gold. A breakout to the upside is the next move for gold.

Regards,

Jim Rickards
for The Daily Reckoning

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If Gold Was Just a Barbarous Relic…

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There’s nothing new about the Russian accumulation of gold bullion in their reserve position. It began in a material way in 2009 when Russia had about 600 metric tonnes of gold.

Today, Russia has 2,183 metric tonnes, a stunning 264% increase in less than 10 years. Russia is the sixth-largest gold power in the world after the U.S., Germany, IMF, Italy and France.

Russia’s gold hoard is over 25% of the U.S. hoard, but Russia’s economy is only 8% the size of the U.S. economy. This gives Russia a gold-to-GDP ratio over three times that of the U.S.

While these developments are well-known, the question of why Russia is accumulating so much gold has never been answered.

One reason is as a dollar hedge. Russia is the second-largest energy producer in the world. Most of that energy is sold for dollars. Russia can hedge potential dollar inflation by buying gold.

Another reason has to do with the avoidance of U.S. sanctions. Gold is nondigital and does not move through electronic payments systems, so it is impossible for the U.S. to freeze on interdict.

Yet a deeper reason is that Russia has a long-term plan to subvert the dollar’s role as the leading global reserve currency. The Russian ruble is not positioned to be a reserve currency, but a new cryptocurrency backed by gold would be a good candidate.

The Central Bank of Russia will consider a new study that suggests just such a gold-backed cryptocurrency to settle balance of payments among willing participants. This plan is in its preliminary stages and is a long way from reality at this point.

Still, the Russian endgame has now been revealed. The dollar’s days as the leading reserve currency are numbered.

Of course, Russia is not the only nation accumulating gold as a means to move away from the dollar. You can certainly add China to that list, and many others.

The latest move comes from Malaysian Prime Minister Mahathir Mohamad. He promoted the idea of a common trading currency for East Asia that would be pegged to gold. “The currency that we propose should be based on gold because gold is much more stable,” he said.

I’ve actually advised Mahathir Mohamad in the past and he’s very familiar with my writings on gold. So I’m not surprised he’s issuing this call.

The global monetary regime has collapsed three times over the past 100 years, in 1914, 1939, and 1971. They seem to happen about every 30 to 40 years on average. It’s now been over 40 years since the last collapse, so we’re due.

Got gold?

Below, I show you why gold is heading for a powerful breakout. And yes, it involves the world’s central banks. Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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Mapped: Who owns the world’s gold reserves

Central banks around the globe have been on a gold buying spree this year, with Russia and China leading the pack.

In the first three months of 2019, gold purchases by the country’s top banks hit the highest level in six years, as nations diversify their assets away from the US dollar.

Global gold reserves, in fact, rose 145.5 tonnes in the first quarter, a 68% increase from a year earlier, based on figures released by the World Gold Council earlier this month.

To better visualize where most of the world’s gold is sitting these days, the experts at How Much.net came up with this map, which shows exactly that:

Mapped: Who owns the world’s gold reserves

Read more about it here.

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Historic Siberian mine to become automated

The Siberian Coal Energy Company or SUEK has partnered with Zyfra Group’s subsidiary VIST Group, to develop an unmanned drilling technology at the Tugnuysky coal mine, located on the border between the Buryatia and Chita regions in south-central Siberia.

Officially created in 1989, the open-pit operation has an annual output of approximately 12.5 million tonnes of low-nitrogen hard coal, which is mainly exported to China and Japan.

SUEK, however, has said it has plans to increase the total capacity of Tugnuysky and the neighbouring Nikolsky mine to reach about 13.6 million tonnes a year with the idea of raising deliveries to Asian markets by 50% by 2021.

The system incorporates an on-board computer with independent control software which contains the basic logic of the drill control, I / O controllers for controlling analogue and discrete signals, and a set of environmental scanning sensors.

In the miner’s view, these growth plans require modernizing the way work is done. Thus, management engaged VIST to develop a custom, unmanned drilling technology that only requires direct human interaction once, when the drill operator moves the equipment to the required stack in manual mode. Once this is done, another employee remotely sets a drilling plan for the drill rig and starts the independent operation mode.

According to VIST, the system’s built-in safety algorithms will be responsive to equipment and employees performing auxiliary work in its surroundings, which means that the drill’s movements will vary depending on whether there are nearby elements or not.

If necessary, a remote operator can take control of the equipment during any process operation. “Specialists will be able to remotely control the engines, compressors and controllers, moving, turning, mast raising and lowering mechanisms, assembly of the drilling unit, the braking system, drilling itself, etc. In addition, the dispatcher will deal with security issues such as the admission of equipment and people to the automated site,” the tech firm explained in a media release.

VIST also said that the automated system includes satellite navigation and special drill control programmes that are activated when directly approaching a specific location and that are able to provide pointing accuracy of up to 10 centimetres. Routes for the drill’s movement between the wells can also be developed.

To create such a solution, the Moscow-based company will equip a conventional Epiroc Pit Viper 27 drill with sensors to ensure accuracy and reliability. Then, it will record the entire data set on its operation, and the initial and changing conditions will be compared with the drilling parameters and the driver’s commands. The resulting information will be the input used to configure and optimise the drilling algorithm.

“The newly developed solution will become a part of the Intelligent Mine system, making it possible in the future to centralise control over several drills simultaneously, including simultaneous operation of these rigs in the same stack,” VIST’s press release reads.

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To the Brink

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The cannons are readied, bayonets are fixed… the bugle is ready to blow.

Diplomacy has failed.

The trade war will resume this Friday — should 11th-hour negotiations fail.

The 10% tariff on $200 billion worth of Chinese wares becomes 25%.

And President Trump threatens to order 25% imposts on an additional $325 billion “soon.”

Existing tariffs are “partially responsible for our great economic results,” he justifies.

Meantime, Chinese negotiators have dallied, dithered and dawdled.

The president, Sunday:

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars… of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

So Mr. Trump drops the carrot… and seizes the stick.

He undoubtedly hopes to pummel China into last-minute concessions.

Then he can thump his chest about a “wonderful” trade deal… wrested only in the nick of time.

Export-driven China needs the United States more than the United States needs China, he believes.

Following Sunday broadside, China threatened to back away from scheduled talks this week.

But it has since come around… and discussions will evidently proceed on the timetable agreed.

Goldman Sachs believes the feuding parties will come to terms before Friday. Sixty percent odds, they give, for a peaceful resolution.

But a dangerous game is underweigh…

China takes its honor very heavily. Will it be publicly shoved around?

Trump’s country hardball, explains Rabobank analyst Michael Every:

Puts [China’s]chief negotiator Liu He in a very awkward position. While it may be Trump’s style to be impulsive in the final stages of a deal, the Chinese government will lose face if they cave in to his demands following a public threat on Twitter. It could be perceived as a breach of trust and the Chinese may conclude that the U.S. has been negotiating in bad faith after all. 

What if China walks away from the negotiating table? Does Trump go chasing after it, sobbing for peace?

Or does he let them slip away — knowing retaliation ensues?

But only when they decide to walk away and announce their retaliation will we truly know Trump’s intentions. Is he really willing to cancel trade talks and to put the recent rally of his beloved stock market at risk? And this with just 18 months left before the U.S. elections? Or will he somehow regain control over his emotional intelligence and still find a way around this strong May 10 deadline?

These are the questions that rise before us. For the moment, no answers are issuing.

But Jasper Lawler — who heads research at London Capital Group — fears the Great Negotiator may be overplaying the cards in his hand:

“We know from experience that this could be one of Trump’s infamous negotiating tactics, but there is a good chance that this time it will backfire.”

We shall see… soon.

But what about the all-important stock market? How did markets take yesterday’s news?

Dow futures plunged 500 points Sunday evening. And the major indexes opened the day deeply in red.

But by mysterious coincidence, eager buyers soon fell upon Wall Street in throngs.

Stocks clawed their way back… and the Dow Jones regained some 300 points by midmorning.

Who came rushing in at the fatal moment?

We have no specific answer at this time.

But the wags at Zero Hedge pointed a jeering finger at the Plunge Protection Team.

By the closing bell the Dow Jones closed to within 66 points of even.

But should diplomacy fail, Friday’s tariffs will represent the largest increase since hostilities commenced last year — some $30 billion.

And the American consumer would bear the blast this time…

Previous tariffs centered largely on capital or intermediate economic goods. But perhaps 25% of Friday’s tariffs target consumer goods.

Can the consumer absorb the blow?

Renegade economist John Williams of ShadowStats believes the economy is already sunk in recession — damn the official statistics.

We have a recession in place. It’s just a matter of playing out in some of these other funny numbers… The economy is tanking, and I’ll contend it already has, although we have not seen it in the GDP reporting. 

And the sting in the tail:

“The underlying weakness is with the consumer.”

That is, the very consumer likely to absorb the worst of the tariffs… should they proceed Friday.

The clock ticks.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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RANKED: Top 10 lowest cost gold mines on the globe

In 2018, global gold mining companies' average all-in sustaining costs (AISC) fell 6% across the board as miners reacted to a gold price in steady decline for most of the year.

The AISC metric serve as a benchmark of a mine’s operating efficiency. They provide a more comprehensive look at mine economics than the traditional "cash costs" approach that many companies may interpret arbitrarily – and it includes important expenses such as overhead outlays and capital used in ongoing exploration, mine development and production.

Mining Intelligence, a MINING.com sister company, looked at costs at primary gold mines and ranked them based on AISC. Primary gold operations are defined by Mining Intelligence as “mines where gold contributed to 80% or more of revenues from operating activities generated last year.”

The data used by Mining Intelligence represents companies reporting quarterly production and listed on the following stock exchanges: TSX (+TSX-V), ASX, LSE (+LSE-AIM), NYSE, and JSE. The ranking excludes privately-owned mines, tailings, re-processing operations, mines where the precious metal is produced as a by-product, and operations where companies report gold-equivalent output.


Falling out of the top ten list compiled by Mining Intelligence in 2018 are two Barrick mines that were on the Mining Intelligence list compiled in 2018: Lagunas Norte in Peru, where costs have gone up from $483 to $636/oz, and Pueblo Viejo, in the Dominican Republic, where costs rose from $525 to $623/oz. The Barrick mines made way for two recently commissioned mines: B2Gold's Fekola mine in Mali, and Atlantic Gold's Moose River mine in Nova Scotia.

1 Svetloye – $425/oz

Svetloye mine. Image from Polymetals.

Polymetal’s Svetloye mine is an open-pit gold operation that located in the far east region of Russia. Despite the remote location and lack of infrastructure, high-grade ores and heap-leaching technology help this mine to produce gold at the lowest costs possible.

2 Fosterville – $442/oz

Fosterville mine. Image from Kirkland Gold.

Fosterville is the largest gold producer in the state of Victoria, Australia. The underground mine is owned by Toronto-based Kirkland Lake Gold. Production in 2018 totalled 356,230 ounces. Recently the company raised the production guidance to 550,000-610,000 ounces for 2019-2020, up from the previous guidance of 390,000–430,000 ounces.

3 Olimpiada – $468/oz

Olimpiada mine. Image from Polyus.

Located in one of Russia’s most prolific gold mining provinces, Olimpiada is Polyus’ largest operation.To treat Olimpiada’s sulphide ores, Polyus employs BIONORD, the company’s proprietary bio-oxidation technology. Successful exploration activities in the area indicate the potential for substantial extension of the life of this mine.

4 Voro – $477/oz

Voro mine. Image from Polymetal.

Voro is one of Polymetal's very first key gold assets, acquired in 1998. The mine and processing facility is located in the Sverdlovsk region of Russia. The open-pit and heap leach operation started in 2000 and has another nine years of life.

5 South Arturo – $478/oz

South Arturo mine. Image from Premier Gold Mines.

The South Arturo open-pit gold mine in Nevada is a high-grade oxide deposit amenable for highly efficient heap leaching mineral processing and extraction technology. This deposit is of the prominent Carlin-type widely known as being one of the most productive and cost efficient geological formations worldwide. Premier Gold Mines holds a 40% interest in the South Arturo property with Barrick owning the remaining 60%. Barrick processes South Arturo ore at its Goldstrike plant 5 km south of the mine.

6 Long Canyon – $505/oz

Long Canyon mine. Image from Newmont.

Newmont’s Long Canyon open-pit mine is of the same mineralization style as the South Arturo deposit, and the only significant discovery made in Nevada in the last decade. The nature of the deposit, application of a heap leach technology and tapping into existing infrastructure keep costs at Long Canyon at some of the lowest levels in the industry.

7 Fekola – $533/oz

Fekola mine. Image from B2Gold.

B2Gold first acquired the world-class Fekola gold project in Mali through a merger with Papillon Resources back in 2014. First gold pour at the Fekola mine took place three years later. The company recently decided, based on a positive PEA study, to invest $50 million into expanding the mine's capacity.

8 Cerro Negro – $535/oz

Goldcorp’s Cerro Negro mine.

Sitting 600 metres above sea level on the Patagonian plains in southern Argentina, Goldcorp’s Cerro Negro underground mine has 4.86 million ounces in proven and probable gold reserves. Commercial production began on January 1, 2015.

9 Blagodatnoye – $547/oz

Blagodatnoye mine. Image from Polyus.

Polyus commissioned Blagodatnoye in Krasnoyarsk, eastern Siberia in July 2010. Processing capacity at the open pit, located 25 km from the Moscow-based company's flagship Olimpiada mine, is 8.1 million tonnes of ore per year, which makes it one of the largest facilities of its kind in Russia.

10 Moose River – $564/oz

Atlantic Gold's Moose River mine.

Atlantic Gold’s Moose River open-pit mine is located in Nova Scotia that has a long history of gold mining. Commercial production was declared in March 2018, and in the first year production reached 90,500 ounces. Atlantic expects its phase two expansion plans will have gold production ramping up to more than 200,000 ounces per annum.

(Based on research compiled by Vladimir Basov of Mining Intelligence)

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Russia’s Nordgold injects another $70m into Guinea mine

Russian miner Nordgold (LON:NORD) invested $70 million last year in its Guinea-based gold mine, $22 million more than the total allocated in 2017, the company said on Monday.

Nordgold, which spun off of Russian steelmaker Severstal in 2012, said the funds allowed it to both, extend Lefa mine’s life and improve efficiencies at the operation.

The gold producer, which acquired the mine in 2010, said it since has invested almost $1 billion in the West Africa’s nation. Additionally, Nordgold has paid $180 million in corporate taxes and royalties from 2011 to 2018.

Nordgold acquired the Lefa mine in 2010 and has already invested roughly $1 billion in Guinea.

“We remain committed to Guinea and to driving performance at the Lefa mine,” the operation’s acting manager, Alejandro Rodriguez, said in the statement. “This intensive investment programme will put us in the best position to maximise the value of this major asset.”

This year, Nordgold estimates it would increase its investment in Lefa by 15% to about $80 million.

Lefa is one of the largest gold mines in Guinea, employing almost 1,200 people directly, as well providing over 800 indirect jobs.

The operation has invested significantly to improve the provision of local health and education services, including support in the fight against Ebola, as well as the creation of new medical facilities and some 40 schools.

Nordgold, which acquired many of its major assets during the 2008-2009 financial crisis, also operates in Russia, Kazakhstan and Burkina Faso.

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Alrosa recovers large diamond from International pipe

Alrosa's (MCX:ALRS) International mine produced this month the largest gem-quality diamond seen in the past two years.

In a press release, the world's top diamond miner by output revealed that the stone weighs 118.91 carats, displays a light yellow overblown, has salient edges, one of them with cleavage, and has small inclusions in the central zone.

The International deposit was first discovered in 1969. By the time it was fully developed, reserves were estimated in more than 100 million carats.

"This crystal is unique as it has a large clean area despite the inclusions in the center – this makes it a gem-quality diamond," Evgeny Agureev, Director of the United Selling Organization at Alrosa, said in the media brief. "Well-known hallmarks of the diamonds from the 'International' kimberlite pipe are regular shapes and purity. That is exactly the pipe that most often brings Alrosa regular shape octahedrons with smooth edges."

Agureev said that a similar rock -a 109.61-carat diamond- was mined at the International pipe in the summer of 2017.

Given that the new gem was mined on April 16, 2019, the eve of the launching of Alrosa's Zarya deposit, it will carry the name of the mine.

The International mine, which reached full production rate of 500 kt/a in 2002, is located 16 kilometres south-west of the town of Mirny, in east-central Russia. Mineral resources in the measured category are 20,157 kct, while in the indicated category are 29,608 kct. Approved reserves are characterized by a high diamond content in ore, about 7-8 carats per tonne on average.

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One of world’s largest diamond mines gets 10-year life extension

Russia’s Alrosa, the world's top diamond producer by output, is extending the life of its Aikhal mine to 2044 by digging deeper into the ground, in a project estimated to cost about RUB 10 billion ($16m).

The 300 metres underground extension, the company said, will add almost 20 million carats to the raw material base of the Aikhal mining and processing division, allowing it to keep annual output at 500,000 tonnes of ore.

Underground extension of Aikhal is estimated to cost about $16 million.

"The project is also attractive because there's no need for major re-equipment or new infrastructure,” Evgeny Denisov, Director of Aikhal Mining and Processing Division said in a statement.

The Aikhal mine, located in the north-eastern part of Russia in the Sakha Republic, is one of the country’s and the world’s largest diamond mines.

The operation is part of the namesake division, which also includes two open-pit mines — Yubileyny and Komsomolsky. Last year, the unit mined almost 12 million carats worth more $1.2 billion.

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Alrosa launches new Zarya pipe in eastern Russia

The world's top diamond producer by output, Alrosa (MCX:ALRS), announced this week the launching of diamond production at its Zarya pipe in Yakutia, eastern Russia.

The new 300-meter deep deposit, operated by the Aikhal Mining and Processing Division and which started to be prepared for mining in 2016, is expected to have a mine life of over 10 years.

To prepare the Zarya pipe, 14 million cubic meters of overburden were removed and a roadway, hydraulic engineering structures and infrastructural facilities had to be built.

In a media statement, Alrosa said that it spent $187.8 million in the development of the Zarya primary diamond deposit, which makes it is one of the company’s major investment projects in recent years.

According to the miner, the decision to allocate funds to this project was driven by the fact that there is no need to build a new mining and processing division and a plant because Zarya is located in the operational zone of the Aikhal Mining and Processing Division.

Besides the operational advantages, Alrosa said Zarya’s production is also expected to make up for dwindling resources at other sites.

“The new deposit will allow compensating for the depleting stock of Komsomolsky open-pit mine and looking forward it will ensure stable mining for the division,” the media release reads. “In 2021, according to the development roadmap of Aikhal Mining and Processing Division, the enterprise is to reach the design capacity of 1.25 million tons of ore per year and process rough diamonds at the Plant No. 14. The plan is to mine the first 100 thousand tons of kimberlite ore in 2019."

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