Weekly Report on Russia's Mining Sector: Production Decline Amid Rising Investment and Stricter Regulation

Bottom Line

Despite a sharp drop in metallurgical production in Q1 2026 (more than 10% year-on-year), the mining sector is showing significant growth in capital investment in exploration (424 billion RUB in 2026) and capacity expansion (Polyus, Mechel, OKTO Gold). Investors should focus on companies with sustainable cash flow capable of absorbing regulatory risks (ban on license pledges) and operational costs from the fuel crisis, while diversifying positions across iron ore, gold, and coal.

Key Developments

1. Subsoil Use Reform: Ban on License Pledges and Mandatory Electronic Auctions — Amendments came into force on July 3, 2026, completely prohibiting the transfer of subsoil use licenses as collateral and requiring electronic auctions. Portfolio implication: Restricting the collateral capacity of licenses will complicate financing for M&A and exploration for small and medium-sized companies, increasing the attractiveness of large players with their own resources.

2. Decline in Metallurgical Production in Q1 2026 — Steel and Rolled Product Output at a Low Since 2009 — Russian metallurgy reduced output by more than 10% compared to Q1 2025; the decline affected both ferrous and non-ferrous metallurgy. Portfolio implication: Reduced domestic demand for iron ore raw materials and coal may temporarily limit production growth, despite favorable global conditions for iron ore; expectations for volumes should be reassessed for companies focused on the domestic market.

3. Fuel Crisis: Use of Strategic Reserves and High Alert Mode in Irkutsk Region and Transbaikalia — Due to a fuel shortage caused by strikes on refineries, the government began to tap into reserves; Lukoil temporarily limited supplies. Portfolio implication: Direct operational risk for mining companies, especially in remote regions (Yakutia, Eastern Siberia), where transportation costs and dependence on diesel fuel are high; it is recommended to assess hedging of fuel costs.

4. Iron Ore Prices Rose to a High Since February 2026 — The rise in global prices is driven by increased demand and limited supply. Portfolio implication: Positive for Russian producers (EVRAZ, others), partially offsetting the decline in volumes; increases revenue and cash flows, improving the ability to finance capital expenditures.

5. Surge in Capital Investment: 424 Billion RUB on Exploration, Polyus (28 Billion RUB), Mechel (Multiple Increase in Coal by 2027), OKTO Gold (Processing Plant for 300 Thousand Tons/Year) — Russian companies announced large-scale investment plans, including the construction of processing plants and capacity modernization. Portfolio implication: A long-term signal of an expanding resource base and production potential, however, project implementation may face delays due to regulatory constraints and the fuel crisis; investors should track progress against key milestones.

Sector Pulse

Risk Watch

• Fuel Crisis — Shortages of diesel and gasoline, especially in Eastern Siberia and Transbaikalia, could disrupt the operation of open-pit mines and processing plants, increasing operating costs. Probability: High. Impact: High.

• Regulatory Restrictions on Licenses — The ban on license pledges and mandatory electronic auctions limit access to credit for medium and small subsoil users, which could slow the launch of new projects. Probability: High. Impact: Medium.

• Shortage of Exploration Results — Despite rising investment, a lack of research and infrastructure barriers limit discoveries of new deposits, threatening the long-term replacement of the resource base. Probability: Medium. Impact: High.

Outlook

Key events and indicators to monitor next week:

• Development of the fuel crisis: dynamics of wholesale diesel prices, possible introduction of a rationing system or quotas.
• First operational results of Russian mining and metallurgical companies for June 2026 (Rosstat publications, issuer reports).
• Market reaction to the subsoil use reform: clarifications from the Ministry of Natural Resources, first auctions under the new rules, company statements on revising financing strategies.

Positioning Recommendation: Amid the production decline and rising operational risks, maintain a defensive stance — focus on companies with low debt levels, their own energy resources (integrated producers with gas-fired generation), and a high share of export revenue in hard currency (gold miners, iron ore producers).