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By John Helmer in Moscow

Polyus Gold waits for the green light – or is it red?

Glenn Gould, the world’s greatest pianist, and a notorious automobile driver, once admitted: “It’s true that I’ve driven through a number of red lights on occasion. But on the other hand, I’ve stopped at a lot of green ones but never gotten the credit for it.”

Mikhail Prokhorov, the Russian oligarch who controls Polyus Gold, Russia’s most valuable gold miner (ticker PLZL:RU), may not be getting all the credit he deserves. It is understandable, therefore, that through spokesmen at his Moscow holding, Onexim, and indirectly through the media, he has been publicising a number of cash demonstrations in a marketplace stripped of most of its liquidity.

There is, for example, the $500 million he paid in September, plus another $500 million or so in pledged capital, for Renaissance Capital, a Moscow investment house that strenuously denies it holds toxic obligations, or operating losses it cannot cover.

There is also €496 million for the most expensive house ever sold in France. According to sources in the Nice area and Onexim, as well as French press reports, during the summer Prokhorov sent his representatives to inspect the villa at Villefranche-sur-Mer; negotiated the price; and paid a non-refundable €50 million deposit. No trace of such a payment has been reported in France, nor notarial evidence of the deal. Onexim said Prokhorov had not bought the house in France – as of mid-August.

Onexim spokesman, Igor Petrov, also told Mineweb: “we are not commenting on personal information regarding Mikhail Prokhorov.” Regarding his freedom to travel to France, elsewhere in Europe, or the US, Petrov added: “I don’t know what exactly is stamped in his passport.” To indicate Prokhorov’s room for manoeuvre, he invited Mineweb readers to follow this offshore display by Prokhorov in what Petrov called “one of the European countries”, posted on Prokhorov’s personal blog: http://md-prokhorov.livejournal.com/.

Sergei Chernitsyn, deputy CEO of Onexim, told Mineweb that Prokhorov’s intentions hinge on achieving vindication for the arrest and imprisonment he suffered — he believes wrongfully — in the French Alps in January of 2007: “I don’t know about the [property] deposit,” Chernitsyn said. “The situation is extremely simple. This is a very, very important moment. Neither Prokhorov, nor Onexim, would do any business in France before Prokhorov will receive apologies from the French authorities regarding the Courchevel incident. This is an issue of principle.”

Onexim sources explain they are negotiating for “elite” real estate in various parts of the world, because they believe it offers a liquidity which banks and other business assets lack in the present global credit crisis. According to Chernitsyn, “I have to note that the stage of these negotiations is preliminary. Nothing is decided yet; valuations are pending.”

Prokhorov’s display of agility has also been recorded in a series of recent transactions with Polyus Gold. The first took place on September 14, when Prokhorov signed with his estranged partner Vladimir Potanin, co-controlling shareholder of Polyus, an agreement to buy Potanin out of the gold mining company. Interros, Potanin’s holding, confirms the signing.

The terms vary from source to source. The consensus is that Potanin would give Prokhorov his full stake in Polyus – 30% according to Interros, 35% according to Onexim – in exchange for cash, plus a 2% stake Prokhorov continues to hold in Norilsk Nickel, and which he kept outside the deal Prokhorov made to sell 25% to Oleg Deripaska’s Rusal in April.

A source close to the negotiations told Mineweb: “This was not a formal agreement. It was a protocol, in simple written form, not an agreement according to Russian legislation, though it may be so according to other countries.” Another source claims the cash price was $1 billion.

But the cash element isn’t certain. Kommersant, the leading business newspaper of Moscow, reported that Prokhorov also agreed to exchange his stakes in Rusia Petroleum and Agros, an agri-business holding, as part payment in lieu of cash.

The market interpreted the deal, whatever its details, as a signal to buy Polyus, whose share price jumped to $20 per share, up 25% on the day. “In our view”, commented Uralsib Bank, “Prokhorov’s intention to buy out Potanin’s stake in Polyus might result in a buyout offer to minorities from the buyer, who apparently has enough cash to finance the offer to all minorities, at this stage. The price of the offer cannot fall below the six-month weighted average share price. The current six-month average Polyus share price is $47/share, which implies around a 130% premium to the current share price. However, Mikhail Prokhorov may prefer to wait until the six-month trailing average price drops following the recent sell-off on the Russian market.”

Uralsib analysts were still cautious, however, noting “it is still questionable for the market as to whether the two shareholders will reach any agreement.”

If there had been a green light in mid-September, Prokhorov appears to have stopped. For sources familiar with the ongoing negotiations claim that Prokhorov has changed his mind, telling Potanin he wants to link the Polyus sale to a deal on dividing up the two men’s stakes in real estate company, Open Investments, plus other conditions.

A week after the purported agreement, Prokhorov allowed it to be known in the Russian press that Suleiman Kerimov had made an offer to buy Potanin out for between $1 and $2 billion in cash. Interros has told Mineweb that no offer from Kerimov to Potanin has been received. Kerimov has not confirmed the offer, and Onexim, speaking for Prokhorov, who ostensibly has the first option to buy, according to the September 14 paper, said through spokesman Petrov: “I saw no offer. I am not the author of the offer, and not the addressee. I can’t tell you whether it exists or not.”

On September 30, during a session of the Polyus board of directors, Prokhorov told the Russian press that Kerimov might buy a stake in the company, and that Prokhorov considered him a “comfortable partner”. It is mystifying to the market why Prokhorov would be touting an offer that has not been made to the only one in a position to respond to it by selling — Potanin himself.

Between the rumour of the Kerimov offer, and Prokhorov’s confirmation, two other signals have been flashed in the market place.

On September 24, President Dmitry Medvedev, on a tour of eastern Siberia, rebuked Polyus’s chief executive, Evgeny Ivanov, after the latter complained to the president’s face that the federal government has been too slow to spend its cash on infrastructure required for the big new Polyus mine, Natalka, in the Magadan region. “I understand that it’s difficult for businesses to work, that we have an unwieldy bureaucracy, but don’t whine,” Medvedev warned. “If gold mining profits are too marginal for you, give up this work; we’ll find someone else. If you want, we can take the license back.”

No Kremlin official has ever spoken so directly to Polyus on the issue the company’s critics have been focusing on for years – the lack of credible investment spending for the company’s long-term future. The Moscow stock market slashed the gains the Polyus share price had been making earlier in the day on the news of Potanin’s sale to Prokhorov. Economic Development Minister Elvira Nabiullina tried to soften Medvedev’s remark, claiming the government has no intention of revoking the license, and that the president’s words should be regarded as more of a call for “better alignment of business interests with the interests of the state.” Nabiullina has no authority over mine licensing, which is under Natural Resources Minister Yury Trutnev, and Deputy Prime Minister Igor Sechin.

No-one in the Prokhorov and Potanin camps claims to know what, or more precisely who, prompted Medvedev’s attack. The yellow light was obvious, however, if not red. According to Uralsib analyst, Michael Kavanagh, Natalka represents 56% of Polyus proven and probable reserves. “[It] is Polyus Gold’s largest project, with projected production of 1.7 mln oz per year (compared to Polyus current production of 1.2 mln oz per year). The project is currently scheduled to start up in 2013, although the start date has been a moving target. The other moving target is the required capex, last estimated at around $2.4 bln. From Medvedev’s comments, it appears as if Polyus is not going to get any state help to develop this one….The development of Natalka is critical to Polyus’s growth prospects.”

One theory circulating in the market is that Medvedev might be preparing the ground for obliging Prokhorov to cede control of Polyus to a state-owned company. Responding to this speculation, Alrosa, the diamond-miner, has denied it is interested.

Prokhorov reacted on September 29 by releasing public news that Polyus is offering cash and shares for a controlling 50.1% stake in KazakhGold, a Kazakhstan miner controlled by the Assaubayev family. The deal is a mixture of cash and equity. Polyus is to pay $7.95 in cash for each KazakhGold share, totaling $420 million; plus 0.298 of its own shares. Using the September 26 closing price of $26.00 per share, this indicates an $800 million valuation for 100% of KazakhGold, or $16 per share. That is a premium of 30% over the September 26 market price.

The shares Polyus proposes to swap come from the 6.6% or 12.5 million of treasury shares held in the offshore subsidiary Jenington International. Of these, 7.5 million, or 4.4%, will be transferred to the KazakhGold shareholders.

The effect of the KazakhGold transaction is to reinforce Prokhorov’s position, in case the Kremlin decides to go further than Medvedev’s warning. The Polyus treasury, with an estimated $1.3 billion, will be emptied of a third of its cash, while treasury shares under Russian control will be placed in foreign hands.

The deal also enables Polyus to increase its output more swiftly than its Russian mine assets allow. KazakhGold is a low-cost producer, with reported cash costs of $262 per ounce in 2007, which is substantially lower than Polyus’s 2007 cash costs of $348/oz. KazakhGold says it will increase production from 232,000 oz to 1 million oz a year by 2011, with an estimated capital expenditure of about $500 million; this is a fraction of the Natalka obligation, and comes at least two years before production of gold can commence at Natalka.

The reaction of the market was relief that Polyus may stave off a costly continuation of the Prokhorov-Potanin battle, or a low-ball Kremlin buyout. The Polyus share price leapt 22% to $32.55 in Monday’s trading. On Tuesday, it slipped slightly. Today, it has lost all optimism and confidence in Prokhorov’s deal-making.

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