By John Helmer in Moscow
De Beers, NM Rothschild hold secret talks which could result in the release of Russian diamond asset
How long must the clock tick before disclosure delayed turns into news concealed, and insider trading?
Speculators on the share value of Toronto-listed Archangel Diamond Corporation (ADC) — ticker AAD — thought they knew enough to start buying shares of the company after it reached a year-low of 35 cents (Canadian) on October 31. As the Bloomberg chart shows, on or about November 1, someone started buying, and the share price rocketed upward by 43%: Bloomberg ticker.
Trading in ADC has been so rare, and the share so illiquid, that the Bloomberg charts show the speculative jump has occurred on just four transactions, totaling just 29,200 shares. The biggest of the trades, dwarfing all others for the past six months, was 19,000. Unlike the earlier big trades on record, this one was a purchase, not a sale. The amount of money involved was paltry, but the motive serious.
The next day, November 9, the Toronto exchange announced that it has halted trading in ADC stock. The language used indicated that the call was “pending a review of Company affairs by the Exchange.” “Pending news” was the phrase published by Market Regulation Services.
More than a week has elapsed, and ADC has said nothing.
ADC has 83.1 million shares on issue, according to this year’s financial statements. The majority of these shares, 59.4%, are owned by De Beers, following their acquisition from an Oppenheimer family holding. Cencan SA is the De Beers vehicle used to hold the shares, and lend ADC money; De Beers Canada provides management services.
ADC’s president and chief executive, Jonathan Dickman, is senior counsel in the legal department of De Beers in London; a South African, he moved to De Beers from the UK law firm, Norton Rose. The chairman of ADC is Bruce Cleaver, who moved from the South African firm of Webber Wentzel Bowens to become De Beers’s director for commercial and legal affairs in 2005. Two ADC directors not employed by De Beers, who appear to be shareholders, are Lamont Gordon and Clive Hartz.
There is no open report of the non-Beers shareholders in ADC. But the largest besides De Beers appears to be Firebird of New York, whose Global Master Fund appears to hold at least 18%. The free float of about 22% almost certainly includes a sizeable stake held by Gordon. Hartz, who is an Australian and chairman of gold miner IGC Resources, and is probably also a stakeholder.
The last statement or news release issued by ADC to the market was this annual report .
Although the CEO’s message is dated April 24, the report itself was not released until May 25. The annual general shareholders meeting followed on May 31. News agencies, but not ADC itself, then reported that “NM Rothschild had been retained as financial advisors to provide advice and assistance on options and possibilities in relation to the Verkhotina property.”
The market was not convinced by the genius of the move, and unimpressed by Rothschild’s chances. ADC’s share continued its dive after the bank’s retainer, until it hit its nadir on October 31. Then everything appeared to change, at least for someone.
Had ADC’s long-time Russian adversary Alisher Usmanov kicked an own-goal, giving De Beers the means to score a commercially successful deal with the diamond asset which Usmanov, and his partner Vagit Alekperov, have sworn never to allow De Beers to develop?
Did De Beers board director Sir Chips Keswick find the way to deal Usmanov in or out, because of their common business interest in the recent fight over control of the Arsenal Football Club?
Did Rothschilds come up with a buyer for a diamond asset which, despite its enormous mineable value, no major — not Lev Leviev, nor BHP Billiton, nor Rio Tinto — has wanted to risk real money to approach?
ADC’s last statement to shareholders, dated April 27, told them the company was up for a deal. According to his message at the front of the Annual Report for 2006: “We recognize the potential delay, cost and inherent uncertainties associated with any legal proceedings and remain open to a negotiated commercial resolution of the current dispute over the Verkhotina property. Whatever the process, it remains our aim to secure Archangel’s interest in the Verkhotina area by all reasonable means with a view to unlocking the potential value of the Verkhotina property and Grib pipe for the benefit of Archangel and, ultimately, our shareholders.”
The subsequent engagement of Rothschilds meant that, for a time, a group of international bankers was on the hunt for the success fee big enough to satisfy De Beers, and themselves.
Who can Rothschild have been thinking of selling to? The bank has had a dismal record of resource deal making in Russia. Its last recorded effort to sell an asset in the Russian diamond sector was in 2006, when it attempted to arrange Alrosa’s acquisition of the Faberge trademark and licensing rights from Unilever. Rothschild put a lot of effort into cultivating Alrosa. It got nowhere; and Faberge was ultimately taken by Brian Gilbertson’s Pallinghurst Resources, after a wrestling match with Victor Vekselberg. Vekselberg is still complaining of the sting of that defeat.
When it did its mine valuation, Rothschilds must have reviewed ADC’s exploration and De Beers’ assay results for the Grib pipe, first discovered in the Verkhotina licence area in 1996. In total, 68 boreholes totaling 19,557 metres have been completed by ADC on the pipe. The resource esimate prepared in 2000 by ADC was 98 million tonnes of kimberlite to a depth of 500 metres, containing an estimated 67 million recoverable carats. The grade has been estimated by De Beers from 69 to 82 carats per 100 tonnes. Depending on valuations which have moved upward with rising prices for rough, the asset value of the diamonds to be mined is between $5 billion and $7 billion.
In litigation against the Russian companies which have blocked ADC’s mining agreement — companies controlled by Usmanov and Alekperov — ADC is claiming more than $1 billion in penalties, costs and damages. Exploration costs listed to date are about $17 million, while total project costs are over $30 million.
The current market cap of ADC is almost $43 million. In its annual accounts, ADC is running at an annual loss of between $1 and $2 million. Its biggest costs are interest on loans, and legal fees. The latter amounted to $1.4 million in 2006, which turned out to be a winning year in the courts of Sweden and the US.
Notwithstanding, ADC’s annual report warns that court rulings don’t always mean recovery of shareholder funds, let alone profit. “Legal proceedings seeking to enforce contractual rights or damages are inherently subject to uncertainty and risk and no assurance can be given that the Corporation will prevail in either or both of the current legal proceeding in Colorado or the Stockholm arbitration. Should the Corporation ultimately prevail in either case, given the current uncertainty regarding enforcement of contractual rights and of arbitration awards in Russia, there is no assurance that the Verkhotina Licence will be transferred or that damages, if awarded, can be recovered.”
The phrase “current uncertainty regarding enforcement” is a euphemism for the way men like Usmanov and Alekperov can control Russian court rulings. And since ADC’s strategy has been to inflict the maximum pain that can be lawfully inflicted on the Russians’ interests abroad, the litigation in the state of Colorado has been the spearhead of ADC’s effort. For it is in Colorado that Alekperov’s oil company, LUKoil, operates a lucrative chain of petrol stations.
Rothschilds has been told by De Beers and ADC that years of negotiating with Usmanov and Alekperov have come to nought. Some time ago, Usmanov claimed he had retreated into the background, after transferring his stake, or voice, to Alekperov. Alekperov also delegated a LUKoil deputy Leonid Fedun to carry on talking with De Beers.
But these weren’t negotiations. Alekperov privately made it known that he regarded the diamond property as his personal affair; that he would decide who to sell it to when the time was ripe; and that he would never sell to De Beers. That was two years ago.
What has happened more recently is that a timetable of document filings and testimony has been fixed for the re-hearing of ADC’s contract arbitration claims in Stockholm, Sweden. This will conclude in June 2008.
Meanwhile, appellate court rulings in Colorado have been prodding the case, along with Usmanov and Alekperov personally, towards an evidentiary hearing. Both Usmanov and Alekperov are named in court listings of people ADC’s lawyers want to examine for their sworn testimony. That is a threshold such Russian businessmen are convinced they cannot cross for fear of tripping themselves up in international legal violations, enforceable in the courts of countries where they wish to travel. A prosecution for perjury, or worse, would be potentially more damaging in loan agreements or share issues that are subject to US government regulation. Accordingly, they have pursued dismissal of ADC’s case on the ground that the US courts lack jurisdiction.
It is a rule of thumb in the pursuit of Russian malefactors that, if they lose on jurisdiction, and face deposition and trial on the merits, they always pay to settle out of court. On November 1, did someone start buying ADC shares in the belief that Rothschilds has negotiated such a deal with Usmanov and Alekperov?
Alekperov has never agreed to answer Mineweb’s questions on this case, and Usmanov claims he exited from involvement a long time ago. His involvement came back to haunt him, however, when the detailed recital available in the Colorado court documents recently exposed Usmanov in a way shareholders of the Arsenal Football Club claimed might make him an unsuitable player in their gentleman’s game.
Mineweb reported in October on how the clash between Usmanov and Arsenal shareholders happened to involve De Beers indirectly, through Keswick’s position on both boards: http://www.mineweb.com/mineweb/view/mineweb/en/page37?oid=38610&sn=Detail
Usmanov’s claim, in a press counterattack he arranged with Times reporter Mark Franchetti, was that he had been unjustly accused; that he was not a defendant in the litigation in Colorado, nor in the Stockholm arbitration; and that in the Russian courts ADC and its claims had been dfismissed. Artfully worded for sports fans, the meaning of the litigation record has not escaped the understanding of credit, risk, and reputation committees of the international banks, on which Usmanov depends to finance his business.
The ADC problem remains a costly thorn in Usmanov’s, and in Alekperov’s side. If there is “pending news” that would warrant a sharp climb in ADC’s share value, then it may be that Rothschilds has gotten them to agree to release the stranglehold they have over the mining project.
But what kind of deal can they have agreed to, along with De Beers? For both the Russians, and De Beers appear to be sellers — someone else must be found to buy, and then mine the Grib pipe. The obvious candidate for that role is Alrosa, which has been developing another mine and mill close by, at the Lomonosov diamond field, also in Arkhangelsk region. For that project, Alrosa works through affiliate Severalmaz, once owned by De Beers and then sold to Alrosa for $20 million. ADC may have lost $30 million on the Grib project, with little to show. Alrosa has borrowed and then sunk more than $110 million in Lomonosov.
A new deal structure can be imagined, in which Alrosa might agree to pay one price for the Usmanov-Alekperov claim, and another price for the De Beers claim, thus establishing its proprietorship of the entire project. Thus, it could not be said that the Russians have conceded the truth of any of the court charges against them. But what would be the price, and who would pay?
The cautionaries in the ADC literature suggest that De Beers might be willing to accept a discounted exit — say $50 million to $100 million. A tough oil driller, Alekperov is likely to fix his asking price at twice the latter amount; three times, if he and Usmanov have an agreement to share the spoils.
Persuading them to take less would require more of what Russians call “administrative resource” than Alrosa chief executive Sergei Vybornov can marshal, at least compared to Alekperov. But Vybornov is an expert in creating transaction chains and tax-optimizing intermediation that might make possible a double-barreled deal with Usmanov and Alekperov on the one hand, De Beers on the other.
If that’s what’s in the works, it’s no surprise that someone might have guessed on November 1; and that it would take three weeks for ADC’s management to figure out how to explain what they are doing to the market. At this point, they still haven’t.