By John Helmer in Moscow
Crew Gold, the Toronto and Oslo-listed junior miner whose gold reserves and mining operations are mostly in the West African republic of Guinea, is facing a legal challenge from Guinea’s mining minister, Mahmoud Thiam.
The bad news from Guinea has landed immediately after Crew Gold’s controlling shareholder, Norwegian Jens Ulltveit-Moe (right image), agreed to share his loss-making mining company with Alexei Mordashov (left image), the Russian oligarch who runs steelmills in Russia, Italy, and the US; and whose Severstal Resources owns Canadian-listed High River Gold, as well as an iron-ore mine in Liberia.
After a rights issue in November 2008, Ulltveit-Moe lifted his shareholding from 23% to 39%.
An announcement by Severstal on February 12 said it had “acquired, through its subsidiary Bluecone Limited, 335,961,241 common shares in Crew Gold Corporation (“Crew Gold”) at a price of NOK 0.90 (CDN$0.16) per share. The securities acquired represent ownership and control of approximately 15.71% of Crew Gold’s issued and outstanding common shares. Following this transaction, Severstal will have ownership and control over 423,201,241 Crew Gold common shares, representing approximately 19.79% of the issued and outstanding Crew Gold common shares.” News of the deal lifted Crew’s share price from 14.5 Canadian cents to 21.5 cents, before it settled back to 19.5 cents.
There had been no disclosure of the Russian shareholding in Crew Gold (ticker CRU:CN) before. Bluecone, a Cyprus-registered affiliate of Severstal, had been used in 2007 to hold shares of another goldmining junior, Celtic Resources, whose assets have been absorbed by Severstal Resources. Severstal has been considering various options to consolidate its Russian, Kazakh, and African gold mines and prospects into High River Gold, or into a new gold company, to be spun off in an Initial Public Offering sometime this year or next.
Sources in Moscow say they believe the Crew Gold deal stands apart from the High River Gold and IPO planning. It was a personal one, they believe, between Ulltveit-Moe and Mordashov, at a C$54 million price that came in below the transaction limit allowed to debt-strapped Severstal by its international banks. Severstal and High River Gold sources claim they were blindsided by the deal. Sergei Loktionov, spokesman for Severstal Resources, declined to answer questions about it.
High River Gold’s share price (HRG:CN) has been unaffected. It has been falling steadily since it hit a peak of 90 Canadian cents in January; its current price is 63 Canadian cents. There may be a link between Mordashov’s interest in the two goldminers. According to one Russian source, Mordashov looks for over-leveraged, struggling gold producers to acquire, consolidate, and profit from restructuring. HRG and Celtic Resources were two cases, the sources suggest. Crew Gold may be a third.
Crew Gold’s website has yet to post news of the Severstal buy-in. When the company issued a prospectus for a new share issue on December 29, its list of shareholdings failed to identify the bloc of 87.2 million shares Mordashov now admits he already owned at the time.
The vulnerable state of Crew’s position at the time was indicated by the reported net debt of $364 million as of September 30, 2009; a $30.9 million operating loss for the nine months to the same date; on top of the $203.5 million loss posted for 2008.
The biggest risks to Crew Gold as a going concern, the prospectus acknowledged, were in Guinea. “The completion, development or rectification of LEFA may require additional external financing or further restructuring or both. Failure to refinance could result in the delay or indefinite postponement of exploration, development or production on the LEFA project. There can be no assurance that additional capital or other types of financing will be available.”
LEFA operations are also vulnerable, the prospectus conceded. “Significant capital expenditures are required to refurbish the LEFA mining fleet as it reaches its mid life and to improve plant reliability and efficiencies. The Corporation intends to acquire insurance spares and additional mobile equipment for LEFA, however, there can be no assurance that such spares and equipment will be available for near term delivery or available on favourable financial terms. There is a risk that both SAG mills at LEFA will not be continuously operational going forward, and that production will not meet management forecasts. The Corporation has also experienced challenges in obtaining consitent deliveries of fuel at the LEFA mine, and there can be no assurance that such challenges will not exist going forward. Operational difficulties at LEFA would negatively impact the Corporation’s performance and financial position.ble or, if available, that the terms of such financing will be favourable.”
This much was public, and it is certain the Russians knew of the Guinea risks before the latest share purchase. But did Mordashov know that Guinean Mining Minister Thiam had warned Crew Gold that its purchase of the Guinean state stake in the LEFA project had not been completed, and was not lawful? Loktionov refuses to say.
At stake now for Crew Gold is its most valuable asset, the LEFA Corridor Gold Project, which includes the Dinguiraye mining concession (covering 10 named deposits), and six additional prospecting permits subject to short-term expiry dates. The gold-bearing area is roughly 700 km northeast of Conakry, the Guinean capital. According to Crew’s published data, LEFA holds 3.9 million ounces of reserves and resources, or about three-quarters of the company’s total portfolio; this also counts Crew’s gold properties in Greenland, Philippines, Canada, Ghana, and Norway. LEFA is producing almost 80% of Crew’s total output last year of 180,000 oz. That last aggregate represents a fall of 9% on the 2008 production by the mining company.
Thiam is a US-trained investment banker who returned to his homeland in January 2009 to clean up and reorganize Guinea’s resource sector. Over the past year, he has supervised individual company audits, and reviews of compliance with the use-or-lose provisions of privatization and concession agreements awarded during the 25-year rule of Lansana Conte, the Guinean military dictator who died in December of 2008. Other international mining companies which have come under Thiam’s scrutiny include Rio Tinto, Anglogold Ashanti, and United Company Rusal, the Russian state aluminium monopoly. A campaign by Rusal since December to have Thiam replaced in the new Guinean government lineup, failed on February 15, when his reappointment as minister of mining and geology was confirmed.
Thiam told Minesite this week that he understands t6hat Crew’s operating subsidiary in the country, Societe Miniere de Dinguiraye (SMD), has been struggling with technical problems in its mine and milling operations. But he noted that there were serious problems with the way Crew had acquired the Guinean state’s 15% shareholding in SMD in 2006. The valuation of that transaction was too low, Thiam said, and Crew has not implemented the share transfer that was part of the deal. “The Guinean government position is that there was under-pricing of the deal, and there is a substantial bloc of shares still owed.”
Crew Gold’s public announcement of the 15% SMD share deal was issued on July 3, 2006: http://www.crewgold.com/pdf/press_releases/pr_2006/q3_2006/CRU_NR030706_SMDAcquisition.pdf  Thiam confirms the understanding published at the time that Crew was obligated to pay a total of US$30 million in value, divided into two parts – $15 million in cash, and $15 million worth of Crew Gold shares. At the time of the announcement, Crew Gold’s shares were trading at about C$15. They climbed to a peak of around C$24 in 2006 and again in 2007. But they collapsed in the autumn of 2008, and today they are trading at just 20 cents. Thus, if the Guinean government had received its shares at the time of the SMD sale, they should have received 1 million shares. That bloc would be worth just $200,000 today. But the government and the company were unable to agree on a share price for the transfer, or on the number of shares to be paid to the government by Crew Gold.
According to a Crew Gold document, “the shares were placed in escrow pending agreed upon amendments to the Convention de Base being ratified by the Government of Guinea. The Corporation has extended the deadline for the GOG [Government of Guinea] to raftify the amended Convention de Base until September 30, 2008, after which time if the ratification has not occurred, the Shares may be cancelled and returned to treasury.”
This implies that Crew Gold has retained the shares, and unilaterally cancelled the second part of the deal. Thiam’s position is that the entire deal was faulty, and must be renegotiated.
It may be a combination of good and bad luck, according to Thiam, that Crew Gold did not transfer the shares to complete the SMD buy-out in 2006. How much Crew Gold now owes the government in Conakry depends, Thiam says, on what a fair valuation of the SMD stake should have been at the time, and what it may be today. When Crew Gold took over the LEFA project and bought an 85% stake of SMD in late 2005, it paid US$330 million. On that basis, the Guinean government stake should have been priced at $58 million. Thiam says his ministry has valued the LEFA reserves, and believes a fair valuation of the 15% stake should be $100 million.
The financial reports of Crew for 2007 show SMD as 100% owned by the parent company. No acknowledgement can be found in Crew’s reports to shareholders of either a dispute relating to the $30 million valuation price for the SMD share bloc, nor to the three-year delay in implementing the second part of the transaction, and transferring the Crew shares. The prospectus issued by Crew Gold on September 10, 2008, in relation to a private share placement, ignores Guinean government claims, and implies that the transaction, including both the cash payment and the share transfer, were fully implemented:
http://www.crewgold.com/pdf/press_releases/pr_2008/q3_2008/CrewProspectus_100908.pdf  — page 22
More recent Crew Gold disclosures indicate a range of troubles for the company since the new Guinean government under Captain Moussa Dadis Camara came to power in January of 2009. Camara has been fully behind Thiam as he has opened the old dossiers on the international mining companies in the country.
According to Crew, the “LEFA operation in Guinea was suspended on April 20, 2009, for 48 hours while a review of the environmental reclamation plan was conducted. The review of all mining operations and concessions in Guinea is continuing and Crew is in continuous dialogue with the Government and supportive of the Government’s review. In various ways, recent changes in the Government of Guinea impacted the Corporation’s operations in 2009. This has taken the form of operational stoppages and delays in gold shipments as the Government established new controls over gold exports and environmental issues. Gold shipment procedures have been demonstrated in detail to Government officials and are completely transparent to the Government of Guinea. The issues related to the strategy for reclamation upon ultimate closure and its funding are being fully communicated to, and reviewed with, the Government. Discussions are also ongoing with respect to Import Duties, Value Added Tax and Royalty payments.”
Another company summary of its Guinean problems includes a $12 million debt Crew is claiming from the government. “LEFA has been subject to the following reviews by the Government: 1. Environmental closure liabilities – While the Convention de Base calls for the closure process to be funded by the company at the end of the mine’s life, the Government demanded a cash deposit to cover the expected liability. In LEFA’s case the deposit amount agreed to at that time was $5 million and this was deposited in equal instalments of $2.5 million in June and July, 2009; 2. Import duties – the Customs department stated that it is reviewing import duties with the potential to increase them in advance of the dates stated in the Convention de Base; 3. Value Added Tax / Royalty payments – the Government owes the Company $12 million of VAT. While the Convention de Base calls for all VAT to the mining companies be refundable, the Government is not up to date with the repayments. Royalty payments were previously offset against VAT, but are now required to be paid.”
William LeClair, Crew Gold’s UK-based chief executive, was asked by email and by telephone to comment on Thiam’s claims regarding the SMD acquisition, and to clarify Crew Gold’s potential liabilities in Conakry. He did not respond. Le Clair was reported by Reuters as saying on December 29: “We will continue to operate under the laws of the country and to support our people and the Convention de Base which we and the government of Guinea have operated under for the past 15 years.” He also said the Convention called for “cooperation to ensure the benefit of all parties” to the agreement. “We understand that this is a difficult time for the government and will continue to support the government in any way we can.”
In Moscow Severstal’s spokesman Loktionov also declined to comment on the latest Guinean government concerns.
Once before, Crew Gold had made a move into Russian goldmining, announcing in December of 2004 that it had formed a partnership with a state-owned Russian miner to pursue goldmining projects in the fareastern Russian republic of Sakha. The announcement by Crew failed to get the name of the region correct; misspelled one of the region’s best-known goldmines; refused to name its Russian partner; and could not say for sure whether the partner had a legal licence to explore or mine for gold in the target area.
Larisa Alexeeva, an official of the Sakha Ministry of Industry, responded at the time to the Crew announcement: “we are definitely sure that Crew Gold had no negotiations with the Sakha government. An MOU could be signed at a preliminary stage even before any contacts [are made at] the governmental level. But it is absolutely a must-thing for a state company to negotiate such a JV on the governmental level.”
Subsequently, no mining venture materialized.