The Armenian government ordered prosecutors last week to put a stop to an attempt by the Vedanta group in London to auction off its rights to the Zod gold mine to the highest bidder.
Two weeks ago, following six months of investigation, the Armenian prosecutor’s office in Yerevan went to court on behalf of the Ministry of Natural Resources, to seek a ruling to revoke the Zod licence, which has been held since 1998 by Vedanta’s Canadian-listed subsidiary, Sterlite Gold (ticker SGD). The judge deferred his ruling on the procedural ground that the due diligence, which had been undertaken by the prosecutor’s office since January, lacked the appropriate order from the government. The Armenian prime ministry then arranged for the ministerial resolution to be drafted and issued, and an accelerated investigation has already begun.
“The government wants to end the tender process being conducted in London by Anil Agarwal [controlling shareholder and chairman of Vedanta]”, according to a source close to the litigation in Armenia. “The Indians are trying to get a high price for the asset, and the Armenian government sees no reason why they should pocket that profit, and walk away, when they are in violation of their licence obligations. That is why the licence revocation process is being accelerated now, publicly, so that bidders for the assets should understand what is at stake”.
Vedanta and Sterlite Gold have repeatedly refused to answer questions about the informal tender. This has been conducted by Ernst & Young; the latter has drafted and circulated a marketing document on the Armenian assets, and a score of bidders have responded. The assets include two mines, Zod and Meghradzor, and an ore-processing plant at Ararat. The official proceedings and investigations have already called a halt to mining at Zod, and a criminal investigation has been opened into charges that Sterlite and Vedanta have been engaged in a variety of allegedly unlawful gold operations.
The Armenians say they don’t yet have a full list of those to whom Vedanta has been trying to sell the assets. But they suspect Vedanta has not disclosed to potential buyers the full extent of the sanctions already imposed on Sterlite. These include a freeze on the bank accounts of the mine operating company, Ararat Gold Recovery Company (ARGC), and a refusal to re-register and confirm the licences, on which mining operations depend. For practical purposes, ARGC, Sterlite and Vedanta can no longer operate in Armenia.
Armenian officials believe the leading bidder at present is the Russian conglomerate Industrial Investors, which is headquartered in Moscow, and controlled by two partners, Sergei Generalov and Siman Povarenkin. Generalov, a former Russian energy minister, and former member of the State Duma, is financially the stronger of the duo. Generalov’s primary business is in maritime fleet, port, and land transportation. In the past two years, he has moved swiftly to create a multi-modal transportation group, with Far Eastern Shipping Company (Fesco); Trans-Garant, a freight railroad; National Container Company, Russia’s largest box transporter; a Baltic cargo feeder line operating from Rotterdam; and with a big new container terminal in planning for Riga, Latvia. Acquiring these assets has cost Generalov almost $850 million in debt — a heavy burden that is uncomfortable for him to bear. This week in Moscow, he offered investors a new share issue to try to raise $200 million in fresh cash.
Part of this is for reducing his debts; part may be intended for the Zod buy-out. But at an estimated $100 million to $120 million, which is Vedanta’s price-tag, the sum may be too large for Generalov to accept. He has signed a memorandum of understanding with Sterlite and Vedanta, in order to cover his due diligence, and allow him time to find the money. The Armenian government appears unwilling to allow the transaction to go through at all. Sources close to official thinking have told Mineweb the government wants “to get it all back”, and then determine who should win a licence competition, to be conducted on the government’s terms.
Mining sources familiar with Zod, and with the territorial claims neighbouring Azerbaijan is making on Armenian land and gold deposits, believe $50 million is the maximum price that can be paid for the assets.
Generalov is a newcomer to the mining sector, and in Yerevan it is suspected that Zod is Povarenkin’s baby. However, Povarenkin has even less cash or credit than Generalov to make the purchase. According to sources in Tbilisi, Georgia, Industrial Investors is behind Joint Stock Company Madneuli, which in May was the only bidder at a government auction for mineral licences in the Ambrolauri region of western Georgia. The equivalent of $135,000 was paid for the rights.
Speaking for Generalov and Institutional Investors, Oleg Rumyantsev told Mineweb they refuse to comment, and decline to confirm that they are participating in the bidding.
A source in Tbilisi told Mineweb that Institutional Investors is the silent partner backing the Madneuli management in making the bid for Zod, and that it is the latter who are making the running. Madneuli’s current business is mining copper, and leaching gold from the tailings.
This disclosure is a problem for the Armenians, however. For they have already demonstrated their concern that Agarwal and Sterlite lacked the financial capacity and will to meet the investment requirements of ARGC’s licences, and would not brook the $100 million obligation for a new ore-processing plant. The conviction that Agarwal was holding Zod in order to flip it has led to this month’s moves to accelerate the revocation proceeding.
The Madneuli partnership with Institutional Investors compounds the problem of financial capacity, from the point of view of the Armenians. And more — from the perspective of Caucasian politics, the Armenian government is reluctant to cancel the ARGC licences, and oust the Indians, only to hand the assets over to a Georgian group, even if they claim to have Russian backing.
Sterlite’s disclosures to its shareholders have been limited. An operations summary on Sterlite’s website refers to the February 2002 implementation agreement, according to which Sterlite risks the forfeit of its Armenian licences, if gold production is halted. Sterlite’s report says: “The Implementation Agreement stipulates that should AGRC [Sterlite’s local company, Ararat Gold Recovery Company] terminate work either in Zod, Meghradzor or Ararat for a period exceeding three successive months other than for economic and business circumstances or for reasons beyond the control of Sterlite, then Sterlite either must relinquish its mining rights to the Government or pay the Government an amount of $50,000 for each month of stoppage beyond the initial three months.”
According to the last resource estimate issued by Sterlite, at the end of 2005 the company claimed the Zod deposit held measured resources of 215,495 ounces, and indicated resources of 1.9 million oz, at an estimated grade of 3.9 grams per tonne.
In May, Sterlite told shareholders that “the 2007 mining plan of its subsidiary, Ararat Gold Recovery Company LLC (“AGRC”), has not been approved by the Armenian government and as a result, AGRC’s mining operations have been temporarily suspended. AGRC is working with government authorities in an effort to secure approval for its mining plan so that operations can be resumed. AGRC has previously received approval for each of its annual mining plans during the term of its Implementation Agreement with the Armenian government.
Following various media reports in the last few days, the Company also advises that, in connection with the previously announced investigation by Armenian governmental authorities of AGRC’s mining operations, AGRC has received from the Armenian authorities a preliminary notice of penalties and fines in the amount of approximately US$46.5 million that the Armenian government intends to levy on AGRC. The notice is preliminary in nature and the Company understands that the notice is to undergo further analysis and expert review at the relevant Armenian governmental agencies in the coming weeks, before it is served in final form upon AGRC. As advised previously, Sterlite Gold and AGRC will vigorously contest any allegations or claims that may be made against them arising out of the investigation.”
On June 14, Sterlite posted this fresh cautionary: “Sterlite Gold Ltd. advises that, in connection with the previously announced investigation by Armenian governmental authorities of AGRC’s mining operations, AGRC has received from the Armenian state tax authority a notice of penalties and fines in the amount of approximately US$11.5 million. This tax authority notice is in addition to the previously announced preliminary notice of penalties and fines issued by the Armenian Ministry of Finance. The investigation by Armenian governmental authorities is continuing. As advised previously, Sterlite Gold and AGRC will vigorously contest any and all allegations and claims that may be made against them arising out of the investigation.”
No notice to shareholders of the attempted sale of the Armenian assets has been posted to date. Agarwal did not reply to Mineweb‘s request to explain why he is selling Sterlite’s principal asset.