By John Helmer, Moscow
LUKoil, the second largest of Russia’s oil producers and exporters, is thinking of disposing of its northwestern Russian diamond mine known as Grib, selling the subsidiary Arkhangelskgeoldobycha (AGD) which has held the controversial mining licence through fifteen years of litigation and arbitration with Archangel Diamond Corporation (ADC), a De Beers-owned company until its bankruptcy in 2010.
This isn’t the first time LUKoil has advertised such a sale. Because of the unresolved litigation and the mountain of evidence it has produced, the asset may be unsellable, at least to a foreign buyer. But if timing and tattle are telling against the sale, then is LUKoil doing no more than asking the state, through Alrosa, to take the diamond-mine off its hands at a conveniently high price?
Leonid Fedun (image right), a senior executive of LUKoil as well as a 9% shareholder, told a Moscow investment bank conference a few days ago that he has been receiving buyout offers for the Grib diamond mine from Asia and the US, and would consider a deal to sell if the price is right. He did not indicate a value. He added that LUKoil is not under pressure to accept an offer as the company is “not worried about not being able to sell the diamonds.”
LUKoil spokesman, Dmitry Dolgov, told Polished Prices.com that Fedun “didn’t state exactly that Arkhangelskgeoldobycha will be sold, but he made a suggestion. First we’d like to capitalize the deposit, to start mining, and then we’ll decide whether to keep or to sell it. There is no final decision yet.”
The Grib pipe at Verkhotina in Arkhangelsk region was assayed by De Beers five years ago. On those data Grib is the one of the world’s largest undeveloped diamond deposits. First discovered in 1996, a total of 68 boreholes totaling 19,557 meters were completed by ADC, before an alleged asset raid by AGD halted work, and led ADC to initiate court claims. A resource estimate prepared in 2000 by ADC counted 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 with oscillating prices for rough, the asset value of the diamonds to be mined is between $5 billion and $10 billion. But environmental and technical mining problems and costs led De Beers to calculate that the mine had a net present value in 2008 of no more than $400 million.
Fedun’s advertisement is not the first from LUKoil. Vagit Alekprov, the chief executive and controlling shareholder of the oil company, said in September of 2009 that AGD is “being prepared for possible sale”. Asked to clarify what he meant, Alekperov’s spokesman explained: “According to the conditions envisioned by the license, LUKoil will finish building infrastructure there — roads, electricity, concentration plant, etc. — and in addition, the company will drill extraction wells of large diametre. The company will also conduct additional explorations at the deposit. The plan is to set up [diamond] extraction; but just in case, the project will be prepared for possible selling.”
“The asset costs a considerable sum. But our company never said this asset is strategic,” Alekperov said at the time.
Currrent Russian law on diamond mining would make virtually impossible the sale of the entire mining project to a foreign company. A joint venture to mine Grib between LUKoil and De Beers, in which the latter would have operated the mine but held a minority stake of 49.99%, was attempted between April 2008 and January 2009. LUKoil says De Beers then backed out without explaining why. De Beers claims that the Russians had a change of mind after the project had been approved by the Kremlin and put stumbling blocks in the way to kill the deal.
Due diligence by De Beers of the mine project had identified a number of mine and licence boundary problems, as well as lack of legal authority for a foreign mining company to export the output of the mine, at least as rough diamonds. Alrosa, the Russian diamond monopoly, owns the nearby Lomonosov diamond mine project, and has been thought to want either to buy LUKoil out or to ensure that no rival miner would be able to mine Grib. A deal between Alrosa and Rio Tinto for the latter to take over the Lomonosov mine collapsed a year ago.
The other major international diamond-miner, BHP Billiton, is in the process of exiting the diamond business altogether, if it can find a buyer for its costly Ekati mine in Canada.
Interfax, the Russian wire service, reports in addition to Fedun’s remarks that LUKoil has loaned $349.3 million to AGD to build the Grib mine by 2013. The Russian mine plan reportedly calls for excavation of 4.5 million tonnes of ore in the first year of operation; 58 million carats over the first sixteen years; and a total mine life of up to 35 years, depending on sub-surface conditions and costs.
The legality of AGD’s licence is not currently being challenged in the US litigation which is being pursued against LUKoil by the trust acting for ADC’s shareholders. LUKoil is charged by the trust with operating an illegal scheme to deprive ADC of the value of its investment and shareholding return in the mine project. If the ADC trust succeeds in court, it is not seeking the return of the mining licence to the joint venture from which it was ousted by AGD. Still, the US court case evidence may undermine confidence on the part of a potential foreign buyer of the asset; if not deterring the sale, it may force a deep discount in the price.
A federal court hearing on whether to take jurisdiction over ADC’s renewed claim for damages will be held shortly in Colorado.