Email This Post - Print This Post Print This Post

By John Helmer in Moscow

Never mind Walt Disney or Johnny Depp — the last certified Caribbean pirate was Edward Teach, aka Blackbeard. He died on November 21, 1718. His professional practice came to an end with five bullet holes, and 21 stab-wounds. His head was then cut off, and stuck on the bowsprit of a British naval vessel, HMS Ranger, before being taken ashore for the bounty claim. Daniel Defoe was the first to write up the tale in 1724.

The British are engaged once more; and this time the charge is piracy of an altogether modern sort. The locale is still the Caribbean. This time, the Financial Services Authority (FSA), the UK markets regulator, is to investigate whether Polyus Gold – listed on the main board of the London Stock Exchange since 2006 (PLZL:LI) — is the target of an asset-stripping scheme perpetrated by a British Virgin Islands-registered company called Polyus Exploration Ltd. This looks to be the same as the company called Polyus Geologorazvedka, established last May and registered in Moscow. The English appears to be a translation of the Russian in the company title. But they are far from the same company – and that’s the rub, or shall we say in pirate lingo, rub-out.

Polyus Exploration Ltd. was registered just two months ago at Tortola, BVI, on December 18, 2007. It was created by Mikhail Prokhorov and Yevgeny Ivanov; the latter was acting on Prokhorov’s orders as chief executive of ZAO Polyus Zoloto (Closed Joint Stock Company Polyus Gold). This is a wholly owned subsidiary of OAO Polyus Zoloto (Open Joint Stock Company Polyus Gold), which is the publicly listed vehicle.

There is a big difference, however, between the open (OAO) and closed (ZAO) corporate structures, which requires a forensic accountant, and not a simple a translator from Russian to English, to unravel. For starters, in addition to its registration in BVI, Polyus Exploration Ltd. has an office in Switzerland. It is wholly owned by Jennington International Plc, which turns out to be registered in BVI also. Jennington was the vehicle used to hold the 20% stake in Gold Fields, which Prokhorov and his then advisers, Leonid Rozhetskin and Dmitry Razumov, acquired in March 2004, beginning what they thought would be a takeover of Gold Fields’s offshore assets, and a reverse listing for Norilsk Nickel. That scheme aborted when the Kremlin vetoed the deal.

Forensically, Jennington is 100% owned by closed joint stock company (ZAO) Polyus, and not by the open and listed parent. But Jennington holds a 9% shareholding in the parent.

ZAO Polyus Zoloto is thus the parent, and indirectly the 100% shareholder of Polyus Exploration Ltd (BVI). In theory, that makes the BVI unit a wholly owned subsidiary of the publicly listed parent, OAO Polyus Zoloto. But in practice, according to the current charter and corporate governance rules of Polyus Gold, Ivanov can make asset purchases and disposals through ZAO Polyus without permission, vote, consultation, or even knowledge, of the board of directors of the parent company. That means Ivanov can sell assets without telling the shareholders of the company – except for Prokhorov.

On February 8, 2008, that is exactly what he did. A Russian language filing, signed and stamped by the general director and chief accountant of OAO Rudnik imeni Matrosova (the Matrosov Ore Company), reveals that the Matrosov company had transferred 100% of the shares in its wholly owned subsidiary, Magadanskoye GRP (Magadan Geological-Prospecting Enterprise) to Polyus Exploration Ltd., in exchange for 5.7 million shares issued by Polyus Exploration. Magadanskoye GRP was one of the vehicles the Matrosov company used to hold goldmining and prospecting licences.

Official documents indicate that Magadanskoye GRP controls prospecting licences for four areas – the Doroninskoye ore field, the Degdekan deposit, the Chai-Yrya deposit, and Vostochny (Tokichansky), a pure exploration area. The nominal value assigned to the transaction in the filing was $35 million. The real value has yet to be estimated. The transfer record – filed to Federal Service for Financial Markets in Moscow — indicates that Ivanov and Prokhorov have removed 22% of the capital value to Polyus shareholders of the Matrosov affiliate – and buried it in the Caribbean.

Matrosov is the most valuable asset in the company which Polyus Gold shareholders believe they own. Last year’s report of the company’s international audit of proved and probable gold reserves, estimated according to the JORC code, showed that the Natalka deposit of the Matrosov company holds 40.8 million oz; that amounts to 79% of the company’s total gold portfolio. The next largest asset is Polyus’s operating goldmine Olympiada, which holds 13.1 million oz, or about 25% of total.

Extrapolating from the Natalka gold to Polyus’s current market capitalization of $10.9 billion – based on an LSE share price of $57 – Matrosov should account for more than three-quarters of asset value, or about $8.6 billion.

Natalka is an “old” deposit; though undeveloped, it was first found in 1944. One of the four licences transferred, Degdekan, is identified on the Polyus website as having been acquired in 2005, with indicated P1 and P2 resources totaling 6.1 million oz, at low grade. It is 70 km from Natalka. The Vostochny site is 75 km from Natalka, and is reported to hold P1 and P2 resources of almost 1 million oz, grading at 14grams/tonne. It is premature to estimate from these figures what value of the Polyus asset base Ivanov and Prokhorov transferred this month without shareholder approval.

Prokhorov’s current stake in the listed Polyus Gold is between 22% and 25%. Former partner Vladimir Potanin owns 22%; the two share 7.4% of the company’s stock in a locked holding called KM-Invest. The free float of the company is between 45% and 48%.

The scheme to remove the Matrosov asset, and follow with stakes in other mineable assets in the Polyus portfolio, has been alleged in a complaint prepared by Interros, Potanin’s holding Interros, for filing with the FSA. An action on other grounds relating to the lockup of shares in KM-Invest is being drafted by lawyers for filing in the UK High Court. According to Potanin, Prokhorov has decided to take the most valuable goldmining assets out of the company, leaving Potanin’s stake, along with other institutional and public shareholders, holding an empty sack.

When Mineweb last reported on this conflict, on February 4, details of the Matrosov transfer were not known: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=46097&sn=Detail
They became known with the filing of February 8.

Four days later, it was disclosed that a senior executive of the Polyus group, Vladimir Sovmen had left his post. Sovmen is the son of the former owner of the Olympiada mine, Hazret Sovmen. His sale to the Norilsk Nickel group in 2002 started the gold asset accumulation by Prokhorov and Potanin that was later spun off into the Polyus company. Sovmen junior is now reported to have returned to his post, but the rumbling indicates resistance inside Polyus to the Caribbean scheme.

Prokhorov’s strategist and head of his Onexim holding in Moscow is Dmitry Razumov. He was asked to respond to the charge of asset stripping by Polyus Exploration; he refuses to respond. But Ivanov was unusually talkative, telling Interfax that he aims to lift Polyus’s capital spending over the next decade to $5.1 billion – up $1.7 billion from the company’s last projection. He also raised the production target for the year 2015 from 3.9 million oz already announced to 4.6 million oz. Alfa Bank reported skepticism that Ivanov’s promise amounts to spending more real money, warning that he is having trouble containing a cost blow-out. “We think,” Alfa reported on Wednesday morning, “that 50% growth in CAPEX reflects not only an 18% increase to its production target, but also significant inflationary pressure for the company’s costs. We consider this news, along with an increase of 33% in the total cash cost for 2007, as a potentially worrying issue for the company.”

Sergei Batekhin, a Polyus board director representing the Interros (Potanin) stake, warned in an open letter to minority shareholders of Polyus this week that Ivanov and Prokhorov have more than poor performance indicators to deal with. “We believe”, according to the text provided by a shareholder to Mineweb, “the valuation discount on Polyus Gold is attributable to a fundamental lack of confidence in management’s commitment and ability to unlock value for all shareholders.”

Referring to the Caribbean privateering, Batekhin added: “these issues are driven by lack of independent board oversight, tiered corporate structure designed to allow management to make decisions on key transactions unilaterally, without Board approval, and insufficient disclosure to shareholders…”

Leave a Reply