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By John Helmer in Moscow

Gold Fields’ sale of its Venezuelan gold assets to Rusoro is a profitable relief

There is a traditional Russian toast that can be roughly translated: “May we have more pies and doughnuts, fewer black eyes and bruises!”

After selling its loss-making Venezuelan gold assets at a profit to Rusoro Mining last week, Gold Fields has publicly raised its glass to toast the new buyers luck — not least of all, because Rusoro is making a great deal in public of its Russian connexions for solving the black eyes and bruises Gold Fields desired to be rid of in Venezuela.

Rusoro’s Chief Executive Officer, and a principal shareholder, Andrei Agapov, has claimed this year in the mining media that Rusoro enjoys an advantage over other goldminers in Venezuela, because it is majority owned by a Russian company. According to Agapov, Rusoro is somehow the beneficiary of the relationship between Venezuelan President Hugo Chavez and Russian President Vladimir Putin in minerals and energy, and also in military equipment. Agapov is quoted [by Resource Investor] as saying that Russia sees Venezuela as a mirror image of itself in the early 1990s and has entered a series of trade agreements to help the country’s development.

The new President of Rusoro, George Salamis, a Canadian appointed on September 4, has repeated the claim that Rusoro’s Russian connexions will enable it to have the advantage over South African Gold Fields in getting government permits for water resources, and in solving local labour discontent and union problems. “Because of the experience we have in Venezuela, we feel we can resolve some of these issues, ” Salamis is quoted as saying [to Resource Investor] last week.

Gold Fields has read the press claims about Rusoro’s Russian connexions, but cannot vouch for what it has read. The only Russian connexions Gold Fields knows for certain are the nationalities of Andrei Agapov and his father Vladimir, who control the company from London and Caracas; and a handful of others on the board of directors or the advisory board.

What is odd about these claims is that Gold Fields has its own direct connexions in Moscow; most directly with Norilsk Nickel, and its co-owners Vladimir Potanin and Mikhail Prokhorov. Artem Grigoryan, a Russian with Russian political, intelligence and business connexions, and an office in Moscow, sits on the Gold Fields board of directors; he was first appointed when Norilsk Nickel bought a 20% stake in the company from Anglo American in 2005. After Potanin and Prokhorov sold out, Gold Fields decided to retain him as a non-executive director because, as one executive explained at the time to Mineweb, he was a highly valued asset.

If officials of the Venezuelan government were susceptible to be impressed, or influenced, by Russian connexions, it appears Gold Fields deployed significantly more powerful ones than Rusoro.

Mineweb investigated the Russian claims of Rusoro last December, a month after Rusoro first listed on the TSX Venture board in Vancouver on November 9 (RML-TSXV). From a pre-listing share price of less than one Canadian dollar, it jumped to a high of $4.50 on November 27. It then commenced a steady decline which neither Russian, nor Venezuelan, nor even Vancouver promoters have been able to halt. The low since listing was $1.58 on August 16.

In the weeks that followed the listing, three assessments of the company were published by market analysts — one by James Winston on November 16; one by Richard Reinhard on November 17, and one by Laurence Roulston on November 22. All of them emphasized the importance of Russian finance, political power, and mining experience. Reinhard entitled his presentation “From Russia with Love”.

Winston led off with the claim that Rusoro’s board chairman, Vladimir Agapov, is a “very well connected Russian — to both President Putin in Moscow and President Chavez in Venezuela.” Vladimir and his son Andrei are reported by Winston to own “well over half the company.” Noting the political risk for American investors of pursuing Venezuelan gold “so long as firebrand leftist and anti-American Hugo Chavez is the President”, Winston noted “what if this mining company is owned by Russian?”

No evidence of Agapov senior’s influence with the Kremlin, or political reputation, has been found in Moscow. A spokesman for the Venezuelan Embassy in Moscow said economic officials there know nothing of Rusoro or the Agapov group.

Experienced Russian mining sources told Mineweb that the Agapovs are unknown in Russian gold mining. A source who knows Andrei Agapov told Mineweb that there had been social connexions between him and Prokhorov of Norilsk Nickel, but nothing more — and nothing current.

In December, Andrei Agapov told Mineweb “our family is the first Russian investor in Venezuela.” He noted that he does not have “much mining experience myself”, while father Vladimir “was into oil exploration.” He acknowledged that “Prokhorov knows us well on a social basis.” But Rusoro “is not big enough” for Prokhorov to be interested to fund, he conceded. He estimated that his group had invested in Venezuela “$70 million — maybe a little bit more.” Rusoro was purchased as a private company, he added, in 2002, when there had been “no exploration, an old mill, and gold was at $300.”

If the Russians backing Rusoro’s public flotation in North America were the insurers of its impressive reputation and political risk cover in Caracas, where did the Russian money come from? Agapov junior explained that he had been the founding owner of MFC Securities, a modest Moscow brokerage identified in the Russian press archive as having a small annual revenue — too small to generate the size of the Venezuelan investment that has been reported. Agapov told Mineweb that MFC “is not involved in trading, with very few institutional [clients]. It services high net-worth individuals”. MFC and Andrei Agapov appear to be represented on the Rusoro board of directors through Peter Hediger, managing director of MFC Merchant Bank S.A. of Switzerland.

The other Russian who appears to be at least as important in Rusoro’s financial history is Dmitry Ushakov, who is currently listed as a board director.

According to Rusoro’s spokesman last December “Mr. Ushakov was the chief executive officer of Norilsk Nickel from 1999 to 2002. He is currently on the board of directors of Interros, a company which in turn owns Norilsk Nickel and Polyus Gold.” Rusoro’s website currently says that Ushakov is “is a director of Interros.”

This isn’t correct. According to Norilsk Nickel, Ushakov was never an executive of Norilsk Nickel. According to a Russian mining source, who knows him, Ushakov was a friend of Prokhorov’s from their time together at university. Like a good many others in that friendship circle, when Prokhorov and Potanin took over Norilsk Nickel and vested shareholding control in the Interros group, Ushakov was engaged. He was assigned the agribusiness interests to manage, but this proved to be troublesome, according to a Moscow source who knows what happened. Ushakov grew personally wealthy, but he was viewed by Potanin as Prokhorov’s man. When he was on the Interros board, he was there as Prokhorov’s representative.

Since January, however, Prokhorov and Potanin have had a serious falling-out, and Potanin has cleared the Interros holding and Norilsk Nickel boards of as many Prokhorov placemen as possible. The current Interros board does not list Ushakov.

Ushakov has told Mineweb through his Moscow assistant that “had never been an executive of Norilsk Nickel, but he was member of the board. In the Rusoro project,” Ushakov says he “plays a role of Vladimir Agapov’s consultant.”

The two Agapovs and Ushakov are the only Russians on the Rusoro board, or in the senior management, with an apparent equity stake in the company. Four more Russians have been named to an advisory board

On September 11, Rusoro announced that “the Company has granted incentive stock options to directors, officers, employees and consultants to purchase up to an aggregate of 6,495,000 common shares exercisable for 10 years at a price of $2.12 per share.” Among the option holders disclosed last December, one was the Canadian PR company and corporate spokesman engaged to promote Rusoro’s stock, Vanguard Shareholder Solutions of Vancouver. Rusoro and Vanguard disclosures indicate that Vanguard was engaged by Rusoro for a combination of a monthly cash retainer and stock options.

At some time after listing — no dated announcement of the news can be found on Rusoro’s website — the company added an advisory board comprising three Russian geologists, and one employee of the Ministry of Foreign Affairs in Moscow; the last of these, Yury Maltsev, may have intelligence connexions.

From the latest financial statements posted on the Rusoro website, as of June 30, 2007, just over 8 million stock options were outstanding, with a weighted average exercise price of $2.86, making total value in hand of $22.9 million. There is no telling whether the advisory board members are compensated as consultants to the company with share options. As of June 30, Rusoro reports that it has $55.4 million in cash; it has accumulated a $64.4 million development deficit; and it ran a $3.4 million loss for the first half of this year. At the same time a year ago, Rusoro’s reported loss was $9.9 million.

Reinhard of Growth Stocks Weekly, one of the initial promoters of the idea that Rusoro’s Russian connexions would add value to the stock, has now issued a new encomium: “This transaction [with Gold Fields] quickly positions Rusoro as an intermediate gold producer. With a proven ability to operate effectively in Venezuela, Rusoro should be able to unlock further value from these Venezuelan assets. This transaction also puts them well ahead of other potential operators as THE regional consolidator, with one of the world’s premier gold companies as its largest single shareholder and $50 million in cash to advance their quest. Gold Fields obviously believes Rusoro will succeed where they found frustration.”

Gold Fields doesn’t go so far, neither in public nor in private. Ian Cockerill, Chief Executive Officer of Gold Fields said in a corporate announcement of the sale to Rusoro: “Additional capital investment is required to realise the full potential of the Choco 10 gold mine. However, after careful consideration we have concluded that, given the current environment, this investment is better made by others, with Gold Fields retaining exposure to the upside inherent in the assets.”

The last Gold Fields operational report indicates that the problems at the Choco mine, which is among the assets sold to Rusoro, include inadequate water supply — which depends on government permits that have not been issued — rising costs, falling grades, changing ore types, and miner strikes. In the past year, output was 54,000 oz; cost was $523/oz, 39% higher than than any other Gold Fields operation, where the average cost was $377/oz. Choco was also a lossmaker to the tune of almost $5 million: report.

Salamis of Rusoro told Resource Investor last week that Rusoro had the clout — read Russian connexions again — to overcome these problems. Gold Fields ran into problems in the country when it could not obtain permits to access nearby water resources, Salamis told the North American publication — an issue he sees Rusoro resolving quickly. “That was Gold Fields’ single biggest impediment,” he said.

Gold Fields is much too happy with the sale to look the gift horse in the mouth. Gold Fields is “delighted with the transaction,” a Johannesburg source told Mineweb. “If they can do better in Venezuela, good luck to them.” Don’t miss that conditional.

The sale terms are that Rusoro will pay Gold Fields $150 million in cash; accept $30 million in a convertible vendor loan; plus tend 140 million Rusoro shares (worth $308 million last Friday, after the deal announcement), in exchange for Choco and the rest of Gold Fields’ Venezuelan assets.

Financially, Gold Fields will not be writing down asset value. In its next report, when the terms of the purchase by Rusoro are accounted for, Gold Fields will report that it turned a profit on its total investment.

But if Gold Fields’ Russian connexions have proved unavailing in Venezuela, why should Rusoro’s prove any different? Or is the tale of Russian connexions intended more for sharebuyers outside Venezuela, not the Chavez government in Caracas?

In March, the purported Russian connexion surfaced in a different guise, and for a slightly different purpose, on the Canadian market, suggesting that Canadians believe in the tale — even if no-one else does. At that time, the rumour of big-pocketed Russian buying interest was floated around the Bank of Montreal (BMO) to boost Crystallex shares. The published claim was that Crystallex was the target of takeover by Polyus Gold, the leading Russian gold miner owned by — guess who? — Potanin and Prokhorov. Polyus immediately told Mineweb it had nothing whatever to do with Rusoro, and no interest in bidding for Crystallex. A Polyus source hinted that it believed the rumour had been planted in Canada to hype Crystallex’s share price.

The North American media publicity at the time also included the claim that Polyus had engaged a BMO unit — either BMO Nesbitt Burns or BMO Capital Markets — to advise on possible foreign gold asset acquisitions. This turned out to be something BMO refused to confirm. If Vanguard was involved, it refused to say if it had any link to Crystallex. Six months later, Polyus has acquired no foreign gold asset, and Crystallex is still without its mining permits.

The announcement of Rusoro’s acquisition from Gold Fields was assessed by the end of last Friday’s share trading when RML lost 8.33% on the day, one of the sharpest single-day falls in Rusoro’s history; by contrast, GFI gained 1.3% on the day. If Russian connexions don’t appear to be convincing in Vancouver, or Caracas, what of Rusoro’s Venezuelan connexions?

Until September 4, Mario Szotlender was President and CEO of the company, and its most prominent Venezuelan shareholder. Last December, he spoke optimistically to Mineweb about his plans for the company. In May, there was a promotional note about Szotlender in The Market Traders, a publication issuing from Tucker, Georgia, written by Malcolm Bucholtz. According to Bucholtz, Szotlender had managed the merger between Mena Resources, a small operating gold miner in Venezuela, which he controlled, with Rusoro, whose control he shared with the Agapovs.

Bucholtz was impressed by the new combination; he didn’t mention the Russian connexion at all. As for the fear that “leftist wing-nut dictator Hugo Chavez has thrown into the markets… this is where I see a very lucrative contrarian investing opportunity.” Bucholtz went on to assure his investor audience that “Rusoro’s share price is not reflecting reality because of the Hugo Chavez fear factor. I have done a lot of reading and research into Mr. Chavez and his background. And you know something – I am perfectly comfortable with him. All he wants is to improve the lot in life for the poorer folk in the rural areas of Venezuela.”

What Bucholtz didn’t know in May was that the only significant Venezuelan in Rusoro was about to do a bunk. On September 4, Rusoro issued the following announcement, confirming that Szotlender had been replaced by Salamis. “The Company,” reads the website posting, “would like to thank outgoing President Mario Szotlender for his diligence and service since the Company’s inception and wishes him the very best in his future endeavors.”

Archive searches indicate that Szotlender, who has told Mineweb he commutes between Venezuela and Canada, reveal that he has left Rusoro, but not Venezuela, where he lives; nor the Latin American gold sector. One of his listed directorships is Radius Gold, another Vancouver TSX listed junior. Radius describes exploration properties in Nicaragua, Guatemala, Ecuador, Mexico, and Peru, “with a steady stream of new discoveries in the pipeline”. Its share price trajectory has been in the opposite direction from Rusoro’s — up.

To return then to Rusoro — how does a company with almost no operating experience, having lost its Venezuelan founder and source of local significance, reverse a declining share price?

First, it hires a Spanish-speaking executive with experience in Venezuela, to substitute for Szotlender. On September 27, Rusoro announced that it was engaging Omar Salas, a Canadian, to the position of Chief Financial Officer “effective immediately. Mr. Salas brings many years of financial expertise in the mining industry to the Company’s executive management team. Mr. Salas has previously held several senior finance oriented positions in the industry, most recently as Director of Finance for Glencairn Gold Corporation. He also brings direct experience in Venezuela as he was formerly the Financial Controller for Placer Dome’s operations in the country. Mr. Salas, a fluent Spanish speaker, has over 30 years of experience directing financial operations on several major development projects in the resource industry, in addition to leading M&A due diligence mandates on various projects in Latin America and Africa.”

A fortnight later, Rusoro made its deal with Gold Fields.

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