By John Helmer in Moscow
With a 17-line announcement the Toronto-listed Archangel Diamond Corporation (ADC), a De Beers-affiliated company, has cancelled its agreement to mine diamonds in the Arkhangelsk region of northwestern Russia. Almost twenty years of exploration and mining effort, including the first major diamond discovery in western Russia for a century, have been abandoned.
ADC shares (ticker AAD:CN) dropped 32% in Toronto trading on Monday, following the disclosure, and are now priced at 9 Canadian cents.
A press release from ADC claims the company has withdrawn from the Russian project, because the Russian government has failed to meet deal implementation deadlines, which expired during the holiday period.
The ADC announcement says that “in connection with its proposed acquisition of a 49.99% equity interest in OAO Arkhangelskoe Geologodobychnoe Predpriyatie (“AGD”) from OAO LUKOIL(“LUKOIL”) (the “Transaction”) described in the Corporation’s news release dated April 16, 2008, Archangel has exercised its rights to terminate and has terminated the Share Purchase Agreement (“SPA”) between LUKOIL, the Corporation and De Beers Societe Anonyme dated April 15 2008… because two conditions precedent to the SPA have not been fulfilled by the long stop date of December 31 2008…The Board of Archangel is now considering future options for the Corporation including financing options and a potential resumption of the litigation currently suspended.”
There has been no comment yet from LUKoil, one of Russia’s most powerful oil exporters, whom De Beers first charged in 1998 with contract violations and attempted fraud in the mining project. LUKoil’s chief executive and controlling shareholder, Vagit Alekperov, who signed the deal with Nicky Oppenheimer last April, had been claiming last month that he expected the deal approvals would be completed by December 31. Had that happened, LUKoil would have received a first payment from De Beers of $100 million.
Alekperov is one of two Russian businessmen, who have been named in US court papers filed by ADC. ADC has charged contract violations, attempted fraud, and racketeering by AGD, a LUKoil-owned company and mine licence-holder, and LUKoil. AGD is a defendant in the proceedings; Alekperov is one of the named principals. The court papers claim that he and other Russian associates blocked ADC from developing the Grib diamond pipe, which it had discovered with geologists from AGD in 1996. The other Russian named in the US court papers is Alekperov’s partner for a time, Alisher Usmanov, a well-known owner of iron-ore mines and steelmills in Russia, and part-owner of the English football club, Arsenal.
ADC suspended legal proceedings against LUKoil in the Colorado state court of the US and the Stockholm arbitration tribunal in Sweden, when Oppenheimer signed with Alekperov nine months ago. Colorado was chosen for litigation of ADC’s recovery and compensation claims because LUKoil operated a petrol station in the state; because ADC management had been based there at the time of the alleged offences; and because the state allowed jurisdiction for the claim. There were parallel proceedings in Stockholm, Sweden, in an arbitration tribunal stipulated by ADC’s contract with the Russians.
The Oppenheimers have been reluctant to continue the legal proceedings because of the multi-million dollar costs, and their belief that even if they win, they may be unable to enforce the awards in Russia. Rather than apply international legal pressure on LUKoil, De Beers opted last April to offer LUKoil $225 million for a minority stake in a revival of the project.
ADC’s stock jumped to C$2 on that news, but by October 17, when the Russian government missed a project approval deadline, ADC was obliged to refund US$172.4 million raised from shareholders.
The principal De Beers lawyer in the case, and chief executive of ADC, Jonathan Dickman, subsequently left De Beers. The Russian representative of De Beers, Nigel Kieser, has also resigned. There are now no experienced Russia hands left at De Beers.
The Oppenheimers also face a test of management confidence shortly, when the Anglo American Corporation board must decide whether to renew a contract for the Oppenheimers to continue managing the diamond mining businesses in which Anglo and the Oppenheimer family hold cross-shareholdings.
De Beers has made little secret of its frustration at the unreadiness of the Russian government agency reviewing the joint venture deal, the Federal Antimonopoly Service (FAS), to devise clear terms of a diamond cutting and polishing agreement, which the mining venture must accept in order to proceed. De Beers believed that without clarity on what such a beneficiation agreement would cost, and on whether LUKoil will share the cost proportionate to its equity stake, there was a serious financial risk in continuing.
Asked last month if LUKoil was considering cutting the financial outlays required from De Beers, the company spokesman said: “Formally, we have time until December 31. That is the date by which the decision on the deal should be made. It is premature to talk numbers. There is no FAS approval yet, so the number is not significant before the approval will be granted. If there will be no approval, there could be no deal.”
ADC and De Beers have not revealed whether the Oppenheimers attempted to negotiate with Alekperov, and requested his intervention with Prime Minister Vladimir Putin to meet the deal terms by deadline. Putin had personally endorsed the deal at the signing last April. At the time, it was the first Russian diamond mine project in which a foreign mining company was allowed.
Putin then chaired the State Commission on Foreign Investment which approved the deal, attaching the condition that an unspecified amount of the rough diamonds mined would be cut and polished in Russia. This was the first time De Beers had been warned that its April deal carried this additional and costly requirement. Putin signed the protocol of approval on October 27. De Beers then agreed to guarantee ADC’s first payment to LUKoil, if the deal were to close by December 31.
There is suspicion at De Beers’s London headquarters that the condition inserted in October, and the subsequent delays, were designed as deal-breakers.
Alrosa, the state-owned diamond miner, has not been directly involved in the ADC dispute over the Grib pipe. However, it is already mining at the Lomonosov diamond-field close by, in the same region. Alrosa also controls the local infrastructure of roads and power, on which the Grib project would depend, if it were restarted.
Alrosa has also terminated its diamond trading relationship with De Beers as of December 31, but like LUKoil, it lacks the financing in the current market conditions to take over the project by replacing De Beers for its 49.99% stake. Another option for Alrosa would be to seek to oust LUKoil entirely by having the federal government cancel AGD’s licence for non-performance.
If De Beers decides to abandon litigating its claims against the Russians, that would open the way to other international miners, with an interest in the Grib pipe, to make their bids for the project. Before diamond values crashed last year, De Beers had estimated the deposit to contain 74 million recoverable carats, worth about $8.2 billion.
The only other foreign-listed diamond miner working in northwestern Russia has also pulled out.
Everfor Diamonds, whose shares were first listed in London in 2004, announced it was abandoning a four-year exploration programme in June of last year. Everfor had earlier told investors and share-buyers that it was likely to find a new diamond deposit in the same area as ADC’s Grib pipe. After the shareholder money was exhausted, and its share price had fallen, Everfor claimed it had not found anything worthwhile. It then changed its name to Everfor Resources (ticker EVE:LN).