Email This Post - Print This Post Print This Post

By John Helmer in Moscow

Endeavour Financial Corporation, a Cayman Island goldmine investment fund, announced on Monday that it has found buried treasure in a surprising place — in Alexei Mordashov’s pocket.

The fund, which is listed in Canada and controlled by Frank Giustra, has announced that it had sold out its 43% shareholding in Crew Gold — a junior goldminer with a sole producing mine in the west African republic of Guinea — for a cash payment of $215 million. Since Endeavour Financial had paid just $134.5 million when it started buying its stake in January, and then fought Mordashov for shareholding control in the company, Mordashov’s purchase has given Endeavour Financial a profit of $81.5 million in just eight months – a 124% rate of return on an annual basis.

Endeavour started the year by calling its stake in Crew Gold a “strategic investment”. On September 8, Endeavour explained what the strategy was: “Endeavour is implementing a strategy to create value by investing in junior gold producers at attractive entry points and by becoming actively involved with the companies. The ultimate creation of an intermediate-sized gold producer is anticipated to drive higher valuation multiples.”

Five days later, Endeavour Financial explained that it couldn’t resist the treasure Mordashov had agreed to pay for Crew Gold. It also renamed the company Endeavour Mining.

The reason for selling to Mordashov, the company explains in a market release, is simply that the Russian was offering so much cash: ““Endeavour has accepted the opportunity to exit its investment in Crew Gold at a significant profit which is a superior alternative to remaining in a minority shareholder position.”

Burdened with more than $6 billion in debts accumulated for over-priced steel assets Mordashov bought for his Severstal steel group in the US in 2007 and 2008, Mordashov has had trouble to meet bank covenants to find fresh cash. He has also been personally reluctant to allow premiums to be paid to buy fresh gold assets in the marketplace. For most of last year, for example, Mordashov tried pressuring Canadian minorities holding shares in High River Gold (HRG) into selling at prices which were well below market and analyst valuations. He failed. The chart shows that HRG’s price remained below the 50-cent (Canadian) level for most of 2009. It has topped C$1 this month – but it remains well below the C$3 level at which it was trading in the first half of 2008:

To take over Crew Gold, it is estimated that Severstal has already spent at least $450 million; another $30 million or so will be required to buy out the remaining Crew Gold minorities. The attributable valuation of the entire company, and cost to Mordashov, are thus about $500 million. That is close to the $520 million which is the current value of Mordashov’s 69% shareholding in HRG.

The point for Mordashov of these gold investments is to make a profit when (if) he can persuade the market to buy his initial public offering of shares in Severstal Gold, the vehicle he’s designed to hold these two goldminers, plus some Russian gold assets (Arlan, Celtic Resources, Prognoz) for which Mordashov overpaid several years ago. Until recently, expert valuations from investment houses in Moscow had put a cap of between $2 billion and $4 billion on the imaginable worth of Severstal Gold at IPO.

Supposing then that about 20% of Severstal Gold is to be offered, the best Mordashov could recover would be $800 million. After the money he’s just given to Endeavour for Crew Gold, he must be looking for more value for Severstal Gold, and more cash back from the IPO.

Just how much more depends in part on Crew — and that depends on the Government of Guinea in Conakry. This is because Crew Gold is facing a series of fiscal claims from the government, and also an equity claim for the return of the 15% stake in Crew Gold’s local company, Societe Miniere de Dinguiraye (SMD), for which the former Norwegian owners of Crew Gold had been obligated to pay, but which they had avoided doing.

The story of Crew Gold’s negotiations in Guinea has already been told in February. At that time, Crew’s senior management, led by UK-based William LeClair, was in negotiation with the Guinean Mining Minister, Mahmoud Thiam, but was unwilling to say anything in public. More than six months have elapsed, and there were fresh negotiations with Thiam in Paris in July. Nothing of this has been disclosed by Crew Gold in its releases to the market or reports to shareholders.

Meanwhile, production has been going up and down, the company has reported:

Despite a newly reported net profit of $21.6 million, there remains a danger of cash haemorrhaging from the company, and thus from Mordashov’s pocket — short-term liabilities are currently at $62 million; long-term debt at $104 million; cash on hand, $28.9 million

The most recent reference to “government issues” is in the Crew Gold management’s discussion of its first-half financial reports, released on August 16. At page 7, there is acknowledgement that the company is discussing with the Guinean government its environmental liabilities; customs duties; and a claim for return of value-added tax paid of $21.1 million.

The report adds: “Since the change in the Government in December 2008, a new level of political uncertainty has existed in Guinea. However, in early 2010, a new interim government which incorporated members of opposition parties was sworn in and brought about an increased level of political stability. The first democratic vote in Guinea since the country gained independence was held on June 27th. The election did not produce a majority winner; the second round has been scheduled for September 2010. There have been not been any significant disruptions in the country during the election process.”

With the takeover by Mordashov, it is near-certain that the Russian practice of replacing senior management with Moscow men will be implemented swiftly. When they reach LeClair’s desk, they will find the records of the Thiam negotiations and a draft settlement, proposed by Crew Gold’s lawyers. This calls for the return of the 15% stake in SMD without charge to the Guinean government, plus a cash bonus Crew Gold will pay to the government in Conakry.

In exchange, the government is requested to extend the gold concessions on which Crew Gold’s fortunes depend in Guinea for another 20 years, together with the addition of extra prospecting territories. Sources in Conakry believe these extras are the key to the extra value which Mordashov may have thought he was paying for in this week’s takeover transaction.

The problem, according to the Guineans, is that the new concession areas Crew Gold has asked for have already been awarded to others. Fresh negotiations on this and the other terms, including the value of the cash payment Crew Gold will be up for, will restart very soon.

Severstal’s announcements of the Crew Gold acquisition don’t mention any problems in Guinea – nor debts and other liabilities Mordashov may have accepted as an additional price of his takeover. The latest Severstal presentation of its gold assets – issued on September 14 – implies that as it readies Severstal Gold for IPO, it plans to unveil significantly higher proven gold and silver reserves, and rising gold resources as well.

Just before the Russian takeover, Crew Gold was also reporting rising value in the ground: “In January 2010, the Company announced updated mineral resources and reserves at LEFA, effective as at August 31, 2009. Total resources at August 31, 2009 stood at 5.22 million oz, comprising Measured and Indicated resources of 4.63 million oz and Inferred resources of 0.59 million oz. Total Proven and Probable reserves were 3.0 million oz as at August 31, 2009.”

According to the latest this week from Severstal, Mordashov has already started counting Guinean gold resources into the Severstal Gold total, and hence into the valuation he’s aiming at for the IPO. “As of 1 July 2010,” says the Severstal statement, “the Company had 9 Moz of Proven and Probable gold reserves according to the JORC Code, while its Measured, Indicated and Inferred resources according to the JORC code amounted to 22 Moz of gold (on a 100% basis including Crew Gold) and 103 Moz of silver (includes 50% of Prognoz Silver).”

As reported already, Mordashov’s grip on the big Russian silver deposit Prognoz is anything but settled, or its value in the bag.

Severstal Gold management makes a point of saying it won’t answer questions from this correspondent. The same message has been delivered to Alfa Bank’s metals team. They report today: “Severstal and High River Gold management would not discuss details on the projects with us, although we had heard that such discussions were being held with investors.”

Leave a Reply