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By John Helmer, Moscow

A court in The Netherlands has dismissed a fraud claim for more than $800 million by Andrei Melnichenko against Alexander Mashkevich and the two other Kazakh owners of International Mineral Resources for lack of evidence. The 11-page judgement was issued by the District Court of Amsterdam on June 25. Three judges, A.W.H. Vink, K.M. van Hassel, and R. Raat, signed the unanimous ruling.

International Mineral Resources (IMR) is registered in Amsterdam, and is owned by Mashkevich, Patokh Chodiev, and Alijan Ibragmiov, the controlling shareholders of Eurasian Natural Resources Corporation (ENRC). The trio also hold a 48% stake in Shaft Sinkers (ShS), a South Africa-based, London-listed mine engineering company which specializes in building mine shafts. The lawsuit was initiated on March 25, 2013, by Melnichenko’s Volgograd-region potash mining subsidiary, EuroChem Volga-Kaliy LLC. This escalated the conflict between Melnichenko and Mashkevich, after they had failed in direct and indirect meetings to agree on compensation for the failure of Shaft Sinkers technology for one of the mineshafts at Eurochem’s newest potash mine, Gremyachinskoye, in the Volgograd region.

The initial Eurochem claim was for direct losses from flooding at the mineshaft. These are still the subject of arbitrations in Zurich and Paris over the July 2008 contract between Eurochem and Shaft Sinkers. The latter has also cross-claimed for an unpaid contract invoice of $15 million.

gremyachinskoyeThe escalation to a claim for $800 million was reported by Eurochem in its financial report for 2012 as “compensation for the direct costs and substantial lost profits arising from the delay in commencing potash production. This was a result of the inability of Shaft Sinkers to fulfill its contractual obligations and complete the construction of the Gremyachinskoe cage shaft (right), primarily due to problems with the grouting technology.”

There has been speculation in the potash industry, and also in the London market, that Melnichenko raised his money claim out of personal animosity for Mashkevich, and with the aim of influencing Melnichenko’s bargaining position in Kazakhstan. There Eurochem is vulnerable to government claims that the Russian group has been failing to develop its promised $1 billion phosphate mine at Kazakhstan’s Zhambyl province. For that story, start here.

EuroChem Volga-Kaliy (ECVK) commenced the Dutch court claim with a 77-page submission, to which was attached 72 exhibits of supporting evidence. “The quantum of the damages,” lawyers for ECVK wrote, “has been preliminarily estimated by ECVK’s damages experts as approximately $800 million and will be substantiated in further proceedings.” The amount was then raised to €600 million ($816 million). According to the March 2013 claim, “this case arises out of blatant fraud, exacerbated by bribery, committed by or attributable to defendant IMR at plaintiff’s multi-billion dollar mining Project in Russia. The unlawful acts were carried out through IMR’s operating subsidiary ShS at the direction of IMR with the personal involvement of IMR’s executive and representative Alon Davidov.”

There are five chapters in the charge-sheet: “IMR’s pervasive and pernicious influence on subsidiaries”, “the long trail of corruption claims”, “the manner in which IMR exercises control over ShS”, “the Fraud”, and “the Bribery.” The fraud alleged by Eurochem is that Davidov, IMR and Shaft Sinkers knew before they started digging the abortive Gremyachinskoye shaft that the injection technology known as grouting would fail. The bribery is alleged to have passed from Davidov to a site construction engineer to conceal from Eurochem senior management what was really happening. “Ultimately,”, said ECVK, “grouting failed at the very first water bearing layer, the Shaft flooded repeatedly, and ECVK suspended ShS’ work on the Project in December 2011 (exhibit 7); the BCW Contract was subsequently terminated. ECVK was forced to remove all of the grouting infrastructure and materials and engage another contractor to use the alternative freezing technology to solidify the ground before shaft sinking. This cost ECVK in excess of $160 million and resulted in a two-year delay in completion of the Project.”

Melnichenko told the Amsterdam court there had been direct contact with Mashkevich in Florence, Italy, on September 10, 2012. At that time Davidov and Mashkevich (below left) met with Eurochem representatives to try to bridge the claims and settle the sunk costs and operational losses. It isn’t reported whether Melnichenko attended himself, or his stand-in, Eurochem chief executive, Dmitry Strezhnev (right).

mashkevich_strezhnev

Eurochem told the court that Mashkevich asked for the Florence meeting in order to explain IMR payments allegedly made. Eurochem also alleges that at the meeting Davidov made admissions. Eurochem doesn’t explain why Melnichenko refused to accept Mashkevich’s offer, or what the offer was.

“At the very least”, Eurochem testified, between 2009 and 2011 bribes of 13.5 million roubles – the equivalent then of almost $450,000 – were paid to conceal the mine shaft flooding and technology failure. At Eurochem’s Moscow headquarters it reportedly took two years before the mine project problems were understood. During that time, Eurochem alleged that “Davidov personally orchestrated and directed the entire [scheme of] bribery while he was employed by IMR.”

The court judgement dismisses these allegations, ruling that whatever had gone wrong technologically or financially at Gremyachinskoye, there was no proof that Davidov personally, or IMR corporately, or Mashekevich, Chodiev and Ibragimov as IMR stakeholders were either culpable, responsible, or liable.

“As far as Davidov is concerned, the District Court is of the opinion that it has not been established that during the period that he was a director of ShS he was also an employee or representative of IMR as well…it cannot be simply inferred from these entries that there was an employment [by IMR or ShS of Davidov] or power to instruct in fact. Nor does it follow from the content of the power of attorney defined sub 2.3, to which ECVK has pointed in this context, that Davidov was in the employment of IMR. Now that no further concrete facts or circumstances have been advanced from which it can be inferred that Davidov has carried out his duties as a director of ShS as an employee of IMR, there are no grounds for assuming IMR`s liability for the actions of an employee.

davidov“For the sole circumstance that Davidov (right) was appointed a director of ShS after having been nominated by IMR does not entail that he would subsequently carry out his duties as a director of ShS under the authority of and in order to carry out the operations of IMR. ECVK has not advanced sufficiently concrete facts or circumstances on the basis of which the assessment thereof should be different…As a non-executive director of ShS, Davidov cannot have committed the activities attributed to him in behalf of ShS, now that he had no executive powers within said company.”

The court also dismissed the allegations against IMR. “The District Court is of the opinion that it cannot result from what has been advanced by ECVK that IMR was actively involved in the policy and business of ShS and had a decisive influence on these in the period in which the alleged wrongful actions of ShS were committed. It has been established that IMR indirectly held 54% of the shares in ShS. That is insufficient in itself to assume that IMR was indeed actively involved in and influenced the business operations of ShS. Nor has ECVK advanced any concrete facts or circumstances against IMR`s contestation which show this direct involvement of IMR. EVCK has also stated that the participation in ShS was very important to IMR and that it is to be assumed for that reason that IMR was intensively involved in the business operations of ShS. ECVK has not made this specific in further detail. This would have been logical all the more now that it has to be assumed on the basis of the non-contested arguments of IMR that the equity interest of IMR in ShS Holdings was a relatively small participation (3.8% of IMR`s equity in 2010). IMR has further stated without being contested that it was permitted to nominate no more than half (three out of six) of the directors of Capstone and ShS for appointment on the basis of the shareholders agreement…

“To this extent there is no dominant influence of IMR on the policy of ShS, either. After the reasoned contestation of IMR to that end, ECVK has not substantiated in any way whatsoever its bare argument that the directors appointed at ShS at IMR`s nomination had reported on the fraudulent state of affairs alleged by ECVK, so that from this the stated active involvement and influence of IMR cannot follow, either.

“The conclusion is that ECVK has advanced insufficient concrete facts and circumstances with regard to the reasoned contestation by IMR, from which facts and circumstances it could arise that IMR is liable for any wrongful act committed by ShS or Davidov. Under these conditions it can be ignored whether there has actually been any wrongful act by ShS and/or Davidov towards ECVK, whereas the question whether or not all this has to be assessed under Russian law, which is argued by IMR and contested by ECVK, need no longer be answered. For the claim fails already because of the fact that there is an insufficient factual ground to attribute to IMR any such wrongful act by ShS and/or Davidov.”

For its failure to prevail on any of the grounds of the case, the court ordered Eurochem to pay all costs.

The Amsterdam judgement has encouraged a 21% lift in Shaft Sinkers’ share price:

SHARE PRICE TRAJECTORY FOR SHAFT SINKERS, ONE MONTH

shaftsinkers_1m
Source: http://www.bloomberg.com/

Its market cap is now £6.4 million. At its lowest point, it has been around £5 million. At its highest point, since its initial public offering in December 2010, the market cap was £85 million.

A spokesman for Eurochem has responded to the Dutch judgement by saying there will be further proceedings. The company had uncovered “a large amount of additional evidence of the fraud which the Dutch court did not yet have the opportunity to review…EuroChem believes that it has very strong evidence to support its case against IMR and will continue with the claim in the Dutch court.”

In its latest financial and operating report for the March quarter, Eurochem reported it was loss-making. It also described the replacement of the Shaft Sinkers shaft, skip shaft number 2, at Gremyachinskoye. “The first quarter ended with the cage shaft at -209 meters and as of early May, sinking was down to a depth of -253 meters. Good progress was also achieved at the skip shaft #1, where work is being performed below -676 meters. While sinking efforts on the site’s skip shaft #2 only started late in the first quarter, the shaft had already reached -82 meters as of early May.”

Last October, Eurochem issued an announcement that it had started “drilling and blasting operations at its phosphate rock development project in Kazakhstan. The large-scale development of the phosphate rock deposit is carried out by Kazakhstan-based EuroChem-Fertilizers LLP. The initial production capacity will amount to approximately 640,000 tonnes of phosphate ore per year with first production expected to come on stream in 2014. The initial phase of the project represents investments of approximately $120 million… EuroChem is deeply committed to the Jambyl region and has already contributed over $10 million dollars to help solve some of the most pressing social issues.”

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