By John Helmer in Moscow
The share price of Archangel Diamond Corporation (ADC) collapsed yesterday as a company statement acknowledged that its fund-raising of $174.4 million to restart the Grib pipe mining project, in northwest Russia, will be returned to shareholders.
ADC issued its statement after PolishedPrices.com had reported that delays in issuing project approvals by the Russian government had violated last Friday’s October 17 deadline for implementation of the funding commitment.
The text, issued from ADC’s Toronto office, said: “With respect to the US$172.4 million private placement of Subscription Receipts described in the Corporation’s news release dated June 24, 2008, Archangel announces that the Escrow Release Conditions as defined in the Subscription Receipt Agreement dated June 24, 2008 between the Corporation and Computershare Trust Company of Canada (“Computershare”) were not satisfied by 4.00 pm Toronto time on October 17, 2008. The Corporation was unsuccessful in obtaining an extension, consequently each Subscription Receiptholder’s escrowed funds, plus any accrued interest earned thereon, will be repaid pro rata to each such holder by Computershare in accordance with the terms and conditions of the Subscription Receipt Agreement.”
The reason the shareholders did not agree to extend the deadline is revealed in the stock market movement of ADC’s shares. According to the Bloomberg charts, in April the share price hit a peak for this year of C$2.00, shortly after the agreement was announced, resolving the long-running dispute between DeBeers, ADC, and the Russian stakeholders in the Grib project, LUKoil and Arkhangelskgeoldobycha(AGD). In June, when the placement was arranged with the leading shareholders — including DeBeers and Firebird of New York — the share was between C$1.30 and C$1.40. It then collapsed to a low of 21 cents on October 10. That was the day the state Control Commission for Foreign Investment ruled in Moscow to give conditional approval to the DeBeers-LUkoil joint venture agreement of April.
Uncertainty has prevailed in the market since then. Svetlana Levchenko, the staff member in charge of Control Commission reviews at the Federal Antimonopoly Service (FAS), told PolishedPrices.com that the commission had approved the application from DeBeers and LUKoil on October 10; but that Prime Minister Vladimir Putin, who chairs the commission, has not yet signed the protocol, making the approval official. Levchenko said she is waiting for the signature. ADC’s statement yesterday claimed it is “imminent”.
Levchenko also refused to say what the conditions are for the approval. She confirmed, however, that the joint-venture companies would have 20 days from the date of receipt of the protocol to accept the conditions, or reject them.
ADC now says it has received a letter from FAS, dated October 15, containing “a positive decision to grant conditional consent to the Transaction”. In its latest press release, ADC also reports that “the consent will be subject to a condition relating to local diamond processing…. Archangel has been further advised that the condition will have to be formalized in an ancillary agreement to be entered into between the Corporation and FAS within 20 days of the Decision. Archangel will study the condition and proposed ancillary agreement on receipt of the Decision, in order to understand its impact, if any, on the Transaction.”
There is speculation in Moscow that domestic competition for the new diamond mine may have attached costly diamond-cutting conditions to the DeBeers deal approval, in order to deter it from going ahead. A source at the Russian Association for Diamond Manufacturers said he did not know what the beneficiation condition for the Grib mine would be.
Once the shareholder funds have been returned, DeBeers has guaranteed to fund the first-tranche payment to LUKoil of $100 million so that the joint venture may resume work at the Grib site. The guarantee is for $115 million. In addition, ADC says it “will consider alternative financing options together with its financial advisors.”
Speculation that the new costs of cutting and polishing locally, plus increased interest costs for the start-up funding, may be deterring for DeBeers, led the ADC share to drop 45% in Europe, and 40% in Canada. It ended Monday trading at 16 cents Euro and 30 Canadian cents, respectively.