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By John Helmer in Moscow

Confidence in Roman Abramovich’s staying power supports Highland Gold’s value

Top-secret documents have recently been discovered, proving that sex between consenting adults cannot be managed in space. That’s because zero gravity makes the normal positions impossible. US and Russian experiments are also reported to have been carried out to determine what positions make it possible. The secrecy is so tight, mining newspapers can’t discover what these are.

The fareastern Russian province of Chukotka is not exactly outer space. It may be zero-value – the equivalent of weightlessness in some asset sectors — but it’s not zero-gravity. Still, it remains an official secret how precisely the governor of Chukotka, Roman Abramovich, one of Russia’s (and England’s) richest individuals, has managed twice to couple with the region’s most valuable gold deposit, Mayskoye, coming away each time with a pleasurable profit.

The first was when Abramovich sold the deposit in September 2003 through a company called Deerfield Universal, earning himself $35 million. The buyer from Abramovich, Highland Gold, told Mineweb through its spokesman at the time, Christine Coignard, that Abramovich was the beneficial owner of Deerfield; and that ahead of the sale, his Chukotka government had funded infrastructure for the Mayskoye site from the regional budget, enhancing its value.

The second coupling was when Abramovich bought Mayskoye back again this week, agreeing to pay $400 million out of the coffers of the Millhouse holding, to take shareholding control of Highland Gold.

Mayskoye, Highland acknowledges, is the most valuable piece of property the AIM-listed, Jersey-registered company owns. First discovered in 1972, it was partially explored, drilled and sampled through the 1970s and 1980s. The most recent reserves report from Micon in 2005 reported measured and indicated gold of 2.6 million ounces; inferred gold, 4.8 million oz. A fresh report and feasibility study is under way by SRK and Aker Kvaerner, and may be ready soon.

The principal inspector of Russian mining licences, Oleg Mitvol, has told Mineweb that the licence for Mayskoye, which gives Highland its real market value, should be revoked for non-performance of the licensing requirements. Mitvol also recommended in October that Mayskoye should be put up for public sale at a minimum price of Rb4 billion ($160 million).

Following this week’s announcement from Highland that it has agreed to issue $400 million worth of new shares to Millhouse, establishing Abramovich and his associates, as a 40% stakeholder in the company, Mitvol explained that, inside the Ministry of Natural Resources in Moscow, the report documents recommending the revocation of the Mayskoye licence had been lost. “They were found again,” Mitvol said, “only after the prolongation of the licence was granted.”

Mineweb reported the details in July:

http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=23003&sn=Detail

and again in October:

http://mineweb.com/mineweb/view/mineweb/en/page34?oid=38290&sn=Detail

Mitvol has now added to his tale. He charges Abramovich and his deputies in the regional government with influencing the decision taken by Rosnedra, the licensing agency within the Ministry, to give Highland the reprieve for Mayskoye which, this week, proved to be Millhouse’s opportunity. “All the time when Rosnedra was reviewing the licence,” Mitvol told Mineweb, “Efim Malkin was here negotiating with them about something.” Malkin is one of the two senators representing Chukotka in the upper house of the Russian parliament.

The head of Rosnedra, Anatoliy Ledovskikh, has been unavailable to answer any questions about his decision to endorse a subordinate’s prolongation of the Mayskoye licence, in the face of Mitvol’s recommendation to do the opposite. This week Mineweb asked Ledovskikh whether he had communicated with the governor of Chukotka, or other Chukotka representatives, before he made his decision. Natalia Ivanova, press- secretary of Rosnedra, responded: “You have to ask Ledovskikh personally whether he spoke with Abramovich on Mayskoye or not. He will be back from his business trip on December 17. It will be good if you will send a written request to me on the official letterhead of your bureau, addressed to Ledovskikh, so he could review the question.”

Highland’s spokesman, Dmitry Yakushkin has confirmed that the terms of the deal provide for a significant dilution of the current controlling shareholder in Highland, Barrick Gold. Its current stake of 33.9% will, if the two-stage share issue and fund subscription are executed as agreed, diminish to 20%. Ivan Kulakov, one-time protégé of Abramovich and board director, will be cut from 11% to 6%, Yakushkin said. He wasn’t sure what will remain of Roddie Fleming’s stake in the company, noting only that “everybody will be diluted”.

Several positions in the deal that has been announced are unusual. The voluntary dilution is one, but then the trend of Highland’s share price this year was destroying what remained of the company’s value, under pressure from the Mayskoye challenge; poor mining performance at Mnogovershinnoye; and the forced disposal of the Darasun mine after last year’s disastrous shaft fire.

Then there is the odd couple, which Barrick and Abramovich now form in the company. Barrick will have the right to appoint two members of the board, losing a third; Millhouse will be able to appoint three. Millhouse will also have the right to appoint a chief executive who will not serve on the board. But Abramovich has no experience of operating gold mine companies; Kulakov has not distinguished himself; and the two of them together have a dubious record of investing in Russian resource projects. For Mayskoye there will have to be substantial borrowing, and the bankability of the project is likely to depend on how Abramovich and Barrick chairman Peter Munk will continue enjoying each other’s company.

In September 2003, Barrick sources claimed that it had been Abramovich, who personally convinced Munk to buy into Highland by promising his protection. When Barrick executives learned what Munk had done, they initiated due diligence, delaying the promised take-up of Highland’s shares, and cutting their financial payout. Subsequently, Barrick has taken over operational control of the company, but reduced the visibility of Highland’s faltering performance in Barrick’s reports to its shareholders.

Millhouse and Barrick make an odd couple in the circumstances. The former needs the latter’s operational presence in Highland. More importantly, for projects like Mayskoye to raise the development finance required, Highland and its remaining shareholders depend on Abramovich to remain governor of Chukotka; lest a successor take Mitvol’s view of how the licence requirements have been complied with. Abramovich has already tried once to leave his post at the start of this year. He was told to stay put until the presidential election of next March. What happens to Abramovich after that is the new president’s guess. Highland shareholders may be enjoying the pick-up in their share’s price, but they cannot wager on Abramovich remaining in Chukotka for long.

Then there is the protection for shareholders in the regulations of the UK takeover code. A company that is registered in the UK would be required to make an offer to minority shareholders, if its stake reached 30%. Abramovich has avoided this by relying on Highland’s Jersey registration, which removes it from the jurisdiction of the takeover code. What protections remain? Mineweb has been reporting for months on the forces that have been pressing down on Highland’s share price until Levoskikh put his signature to the Mayskoye extension in October. The price stabilized then for several weeks, until the middle of November, when the charts suggest that some buyers in the market might have had more reason to bet on a price rise than others.

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