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By John Helmer, Moscow

Evraz, the steelmaking group owned by Roman Abramovich and Alexander Abramov, has revealed that it cannot complete the sale of its South African steel subsidiary, Highveld Steel & Vanadium, on time, and that the South Africans are the reason for the fresh delay.

At the same time, Russian Foreign Minister Sergei Lavrov told his South African counterpart, Maite Nkoana-Mashabane, in Moscow on Monday that the Kremlin wants to see less delay, more commitment from President Jacob Zuma on buying nuclear power reactors from Rosatom. Zuma, who has now arrived in St. Petersburg for the G-20 summit meeting, has met President Vladimir Putin twice already this year – in Durban in March, and in Sochi in May – and on each occasion the official communiques have pledged the same thing. Lavrov repeated this on Monday when at a press conference with Nkoana-Mashabane, he said Russia’s priority in its bilateral relationship with South Africa is the billion-dollar sale and purchase of reactors. “Russia is ready to assist in the creation in the Republic of South Africa of nuclear power,” Lavrov said. This, Lavrov emphasized, is the priority in “the complex of bilateral ties…further steps for implementation of these major arrangements…[and] the activization of investment cooperation.”

Nothing comparable, nothing responsive, and nothing concrete has been released by the South African Foreign Ministry or Zuma’s office. Nkoana-Mashabane even told her press secretary to omit reference to the nuclear reactor issue in the ministry communique on her Moscow visit. Zuma’s calling-card in St. Petersburg was just as blank. Why then are the South Africans stalling, and what are the Russians doing about it?

According to Evraz, its deadline for the sale of its 85% stake in Highveld Steel, the second largest steelmaker in South Africa, has been postponed to the end of this year. Speaking at an August 29 briefing for analysts on the company’s latest financial results, Pavel Tatyanin, senior vice president for international business at Evraz, said “it is reasonable” to expect the deal to close “by the end of the year”. He explained the reason for the delay was a bank borrowing problem for the South African buyer, a black empowerment group called Nemascore. Created in February with links to President Zuma, Nemascore “was taking a little longer time to put together a financing package [because] it is a large transaction in the South African context”, Tatyanin said, adding “there is progress in our negotiations there”.

Tatyanin’s remarks were recorded in this conference call with steel analysts. The reference to the Nemascore problem is at minute 25-26 of the tape.

Since March 27 Evraz claims to be selling, and Nemascore buying Highveld Steel for $320 million. Prior to the deal announcement, however, the Evraz stake had been valued in the market between $106 million and $135 million. Since March the market value of the stake has failed to reach 50% of the transaction price; it is currently just $136 million. The full story can be followed here.

Reporting in Johannesburg has suggested a link, at least in the scheming of the Nemascore group, between Russian state bank financing for the $320 million transaction and Zuma’s readiness to approve the first reactor purchase from Rosatom. VTB, the bank reportedly involved, declines to confirm or deny its involvement in the steel deal, or in the much bigger financing required for the reactor purchase. Again according to media investigation in South Africa, large new credits may also start to flow for Russian projects in South Africa once the BRICS Bank, the multilateral state bank being created by Brazil, Russia, India, China and South Africa is ready to open its $50 billion loan window. But that can’t be for another year, so if Highveld is to be disposed of, and $320 million loaned to Zuma’s friends and paid by them to Evraz, a bridge loan is urgently required – with a secure repayment guarantee. This is what officials of the two governments have been discussing since March. Only they can’t agree.

Strangely, Tatyanin’s explanation for the Highveld sale delay was contradicted by the company within days. On September 3, a cautionary notice was issued by Highveld to the Johannesburg Stock Exchange. This repeated the deal deadline “towards the end of 2013”, adding for purported reason that “the high-level due diligence process is progressing.” To explain the unprecedented silence of Nemascore’s executives, the notice claims this is required by “a Non-disclosure Agreement… concluded between the Company and Nemascore”.

South African sources reveal the government’s Industrial Development Corporation (IDC) is refusing to guarantee the financing for Nemascore to make its takeover of Highveld. IDC has already participated in one South African steel asset acquisition originally intended in 2012 to involve Evraz. That was the purchase from Anglo American of Scaw Metals. IDC bought a 74% stake in Scaw for Rand3.4 billion ($340 million) after Evraz withdrew from the bidding. Last month Abel Malinga, IDC’s executive in charge of mining and manufacturing industries, said in a press statement that IDC has never had a relationship with Evraz, and is not involved in the Nemascore deal.

On August 23, Highveld issued an insolvency warning, which has added to the difficulty of securing the $320 million loan. In a statement issued that day with its 2nd quarter financial report, Highveld said “there are matters that may cast significant doubt about the ability of the Company to continue as a going concern. Labour stability, health of the market and production stability continue to pose a threat to the operations of the Company. The Company continues to utilise credit lines that are not committed and payable on demand.”

The public postponement of the Highveld sale a few days later appeared in an Evraz announcement of intention relating to another Highveld transaction which was first disclosed in a Johannesburg newspaper on July 8. Evraz has subsequently confirmed that its Highveld subsidiary and “Arkein International have signed an agreement to establish a joint venture, Nyanza Light Metals (PTY) Limited. The joint venture has been set up to perform feasibility studies around the possible extraction of titanium from the waste steel slag produced by EVRAZ Highveld and its beneficiation to produce the titanium dioxide pigment. EVRAZ Highveld will initially own a 20% share in the joint venture.”

Arkein is headed by a group of South African executives led by Donovan Chimhandamba; the same group also runs a health care company called Razorite, and shares the same Johannesburg offices. Chimhandamba says that he and his associates are not connected to Nemascore, and have no involvement in the takeover bid for Highveld Steel. Whether that deal goes through or not, he said, the Evraz “interest is in providing the tailings” for reprocessing into titanium dioxide. According to Chimhandamba, “Arkein is involved in developing a titanium pigment production plant which will use Evraz Highveld Steel’s waste slag in eMalahleni [Mpumalanga province, east of Pretoria]. Evraz is contributing the waste slag and we are funding the feasibility studies.” Local press reports suggest that the cost of the project studies is being covered by the government through IDC.

ChimhandambaChimhandamba (right) adds that Evraz has taken up its stake in Nyanza without paying cash. He also claims: “we are not aware of who Nemascore is.”

The Nyanza project appears to have started with a February 2010 announcement from Rare Metals Industries (RMI), then a vehicle for Chimhandamba to raise an estimated $1.2 billion for titanium and other metals processing. In the initial releases Chimhandamba referred to “Russian investors”, hinting that he was already in talks with Evraz. The titanium for refining in the purported project was originally planned to be extracted from 200,000 tonnes of waste slag from the Highveld mining operation – 200,000 tonnes of slag to be turned into 50,000 tonne of titanium dioxide (paint pigment). The RMI project vehicle later turned into Arkein and from Arkein into Nyanza.

But Evraz headquarters had already decided that Chimhandamba was their man for another assignment. Chimhandamba says that in July of 2012 Arkein became “involved in contract mining at Mapochs, Highveld’s mine, “through a JV with Advanced Group which owns Lonfin Mining Services. We took over the contract from Quarry Cats. The Management of the mine still rests with Evraz. We are only contracted to do the mining on their behalf under their management.”

Evraz hardly lacks home-grown expertise in mining. Its Kachkanarsky complex is one of the five largest mines in Russia; it specializes too in extracting vanadium, an alloy for hardening steel, and also for combining with titanium in several applications. Evraz is also one of the two largest coalminers in Russia. So what special expertise did Evraz or its Highveld executives need to manage their open-pit iron-ore mine at Mapochs, and why were Chimhandamba and his associates chosen for the mission?

TatyaninIn 2010, when Tatyanin (right) was in Johannesburg for negotiations on the future of Highveld, he hinted that Evraz was looking for a black empowerment group to take over the Mapochs mine on terms which would protect the supply of iron-ore to Highveld’s steel smelters, and avoid trouble with the government in Pretoria or disruption by the unions. Chimhandamba, RMI, Arkein and now Nyanza appear to fit that bill.

But Evraz also wants to stop the haemorrhaging of cash out of Highveld, and reduce its $7 billion global debt. In its recent financial reports and briefings the company has explicitly targeted the sale of Highveld, and also its Vitkovice steelmill in the Czech Republic, in order to reduce its debt by about $900 million or so, and cut its debt service bill. So, if the proposed black empowerment partners were looking for big new Russian investments, they have been barking up the wrong tree. According to Evraz, the Nyanza project “is at an early stage and does not require significant capital investment. It would be premature at present to estimate the potential size of likely capital expenditure. EVRAZ Highveld’s future level of participation and actual share in the project will depend on the results of the feasibility studies and the decisions by EVRAZ Highveld’s future owner.”

Chimhandamba has already trimmed his public estimate of the titanium project cost from more than $1 billion to less than $450 million. “Evraz is contributing no cash or capital”, he now says. “Their interest is in providing the tailings only. When they took up the shares [in Nyanza], they had to make an announcement [to the Stock Exchange]. [They are paying] no cash.”

Arkein tried to raise cash for itself through a merger with Sherbourne Capital, which is run by two controversial South African entrepreneurs, Connie van Nieuwkerk and Sagie Van Niekerk. Van Nieuwkerk was a defendant in an April 2013 bankruptcy ruling by a regional South African court. The two of them are reportedly under investigation by the South African police. Chimhandamba says now: “We tried a reverse listing into Sherbourne. But the cash shell had no cash. They could not meet their obligations, so we decided not to proceed.”

Two mining outfits have been identified by Chimhandamba’s associates in the Arkein group in their career resumes – Tamuka Mining and Sephaku Holdings. Tamuka is a small closed corporation and is exempted from having to issue public accounts. For a time it was in process of deregistration, but not now, according to Chimhandamba. “It was specifically incorporated to do contract mining at Tuli Coal Mine in Zimbabwe, which was halted by the Zimbabwean Government a few years ago due to shareholder issues. But now [Tamuka is] in the process of being resuscitated and the members of Tamuka Mining in their individual capacities have been engaged to provide technical consulting services.”

MahlatiSephaku is principally a cement producer, and is on its current statement loss-making. The board chairman at Arkein, Gilimamba Mahlati, was a non-executive director at Sephaku Holdings until he resigned in July 2012. Mahlati claims to be a specialist in liver transplant surgery. But he also claims that published biographic listings for him are in error.

At Evraz’s office in Moscow, Tatyanin was asked to clarify the relationship between Evraz and the Chimhandamba group, especially the mining expertise provided in the Mapochs management contract, and the results of Evraz’s due diligence on the Nyanza project group. He refused to respond.

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