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MOSCOW (Mineweb.com) – Brian Gilbertson, the South African appointed a few months ago to head SUAL, a Russian mining and metals company, has run into a problem from a direction he couldn’t have anticipated — from the past. And unless he can quickly resolve the problem, the company he was hired to sell to foreign investors at a premium will have a gaping hole where one of its prize assets should be.

The challenge to SUAL, endorsed by a Russian court ruling two weeks ago, is also an embarrassment for Renova, the US-registered company controlled by SUAL’s chairman, Victor Vekselberg. Renova has been promoting itself in South Africa this year with promises of big investments to come in SA resource projects and black empowerment. Renova has also lobbied SA government officials to smooth the way ahead.

The reality of Renova’s position, however, is that, in Russia, it has allegations of shareholding and metals trading fraud to answer in the courts, while the tax authorities have begun pressing claims that Vekselberg, his company, and his partners should pay.

Once a major shareholder in the Volgograd Aluminium Plant, Shota Mikhelashvili told Mineweb that a recent Volgograd court ruling, invalidating a share emission for the plant that had favoured its takeover by Siberian Ural Aluminum (SUAL), is just the beginning of his campaign to recover a stake he values at a minimum of $20 million.

Mikhelashvili is chairman of the board of the Ralco company, which has held a 17-percent shareholding in the Volgograd smelter since 1993. He and lawyer Timofei Kryuchkov won a ruling this month from the Volgograd region arbitration court over opposition from SUAL, which has been planning to consolidate full control and ownership of Volgograd. The court move has blocked that.

SUAL is controlled by Vekselberg, and Len Blavatnik; Vekselberg’s personal holding company is Renova, while Blavatnik directs Access Industries, both US companies. Bill Spears, their spokesman, told Mineweb he anticipates a successful appeal. “Once the court has studied the faces, we believe it will support the legality of our partners’ position,” he said. Asked what SUAL says in response to Ralco’s claims in the court suit, Speaks said: “concerning Volgograd Aluminium, we are sure our partners are in the right. Beyond this, we do not wish to add anything further.”

The court ruling against SUAL comes at an awkward time for Vekselberg and Blavatnik, two of the three former controlling shareholders of Tyumen Oil Company (TNK), who in 2003 sold their stake in the top-5 oil producer to British Petroleum for cash and BP shares worth a total of $6.75 billion. The third shareholder to sell was Mikhail Fridman of the Alfa group.

Last week, the Russian tax authorities filed a back-tax claim against TNK’s successor, TNK-BP, for the year 2001 totaling $89 million. BP is holding an indemnity, agreed to by Vekselberg, Blavatnik, and Fridman, that makes them liable for any tax claims against TNK, prior to BP’s takeover.

Peter Charow, BP’s Moscow representative, told Mineweb that the indemnity from Vekselberg, Blavatnik and Fridman is in place, but it is “too early to tell” if BP will be obliged to enforce it. “Until we know more about the potential tax claim at issue, it will not be possible to say whether the indemnity will apply to all or part of the potential liability,” Charow said.

The Ralco challenge could prove to be equally costly. According to Mikhelashvili, “we want to fight for a share of SUAL), comparable to our legitimate stake in Volgograd. Our first target is to keep it, not to sell it.”

Two years ago, SUAL announced that it would acquire the assets of Volkhovsky Aluminium Plant, Volgograd Aluminium Plant and Pikalevo Alumina Plant from the Sevzapprom holding company; Sevzapprom is a Russian acronym meaning “Northwestern Industry”. In August of this year, SUAL’s shareholders approved the terms of consolidation with Sevzapprom’s Volgograd Aluminium Plant. At the time of the SUAL takeover, the controlling shareholder in Volgograd was Alexander Bronstein. Since 2003 he has been one of the 7 members of the SUAL board. Gilbertson is a fellow board member.

According to Mikhelashvili, Bronstein was responsible for the manipulation of the Volgograd smelter’s shareholding, before he and Vekselberg made their merger deal. After that, Mikhelashvili claims Vekselberg knew, or had a duty to know, what had become of the Volgograd’s minority shareholders. The statement from Spears confirms that Vekselberg is endorsing Bronstein.

Just before Gilbertson’s takeover, in a document circulated to SUAL shareholders in mid-2004, the SUAL management estimated the value of the Volgograd plant at between $105 million and $135 million, with a midpoint estimate of $120 million. That figure, Mikhelashvili told Mineweb in Moscow this week, “is a value below which it is not polite to go.” He added that if the plant is valued at the market cost of its current annual output, the valuation should be at least twice the SUAL estimate. Mikhelashvili’s 17-percent stake would then jump in value to around $41 million. If a higher valuation for SUAL’s assets is drawn from Gilbertson’s presentations to international investors, Ralco’s claim would grow accordingly.

In a website release, dated September 14, SUAL announced that at shareholder meetings, held on August 31, “an absolute majority of the participants, 99.99 per cent of the total of OAO SUAL shareholders and 93.02 per cent of OAO Volgograd Aluminium shareholders voted in favour of the incorporation of Volgograd Aluminium into OAO SUAL. The next step required to complete the merger will be a joint general meeting of the shareholders of both companies. Volgograd Aluminium and the OAO Metallurg subsidiaries, Volkhov Aluminium and Pikalevo Alumina, were incorporated into the SUAL Group production chain in 2002, after the SUAL Group and the SevZapProm Management Company had made arrangements to merge their aluminium assets.”

The 6.98 percent of shareholders who voted against Volgograd’s incorporation into SUAL comprise the Ralco stake. Mikhelashvili told Mineweb that his original stake of 17 percent was diluted to this by a share emission in 2000. “This emission was not legal,” Mikhelashvili said. This is the claim which the regional arbitration court upheld on November 5, and which SUAL is now appealing.

The Volgograd smelter began operating in 1959, and it has been producing at 150,000 metric tons per annum, said Mikhelashvili, who was a board director at the plant in 1996 and 1997. This is above initial design capacity of 141,000 tons per annum. The output figure is confirmed by a SUAL press release of September 2004. SUAL’s release of quarterly production results does not identify individual smelters, but Volgograd appears to account for about 17 percent of the SUAL aggregate of about 890,000 tons.

Mikhelashvili told Mineweb that Volgograd exports its aluminium through tolling contracts that deprive the plant of between $150 and $200 per ton. “There is an underestimate of annual revenue of $25 to $30 million,” Miikhelashvili alleges.

Alfa-Bank metals analyst Maxim Matveyev reports that Ralco’s court action “could delay the incorporation process, which would be negative for SUAL

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