By John Helmer, Moscow
Magic is a type of confidence trickery, but not all confidence tricksters are magicians. The difference is whether, when the magician pulls, the hat has got a real rabbit in it.
Minerals under the ground have something in common with rabbits; that’s to say, sometimes they are there – sometimes there’s only the illusion they are. Junior mining companies have this much in common with magicians – if they point a wand and recite a spell, they expect you to believe they can deliver at the minehead what you can’t otherwise see underground. The other difference is that on the stock exchanges, mining company promoters can collect bigger fortunes than magicians with this sort of hocus pocus.
Is Intergeo’s attempt to sell shares on the Toronto Stock Exchange (TSX), which commenced last week with the release of what is called a “preliminary base rep prospectus” a case of hocus pocus? Here’s the document  as released by the Canadian stock market data repository, Sedar.
The promoters are Morgan Stanley and BMO Nesbitt Burns. But at its Toronto office, Intergeo’s senior vice president in charge of the present (investor relations) and the future (strategic development), Corey Copeland , refuses to answer telephone and email enquiries. In Moscow, Mikhail Prokhorov’s (image left) Onexim holding, which is selling Intergeo shares if the listing attempt proceeds in Canada, refused to answer questions, and passed them to Intergeo’s Moscow office, where Maxim Finsky (image right) is in overall charge as executive chairman, and Grigory Potapov is chief executive of Intergeo Russia.
If there’s to be a big rabbit to be pulled, Intergeo is hardly a top hat. For the past three years it has operated with relatively small sums of money — $10,422,000 in 2009, $27,870,000 in 2010, and $105,942,000 last year. This cash has been loaned by Prokhorov. Borrowings as of the start of this year amount to just over $200 million, most of which is classified as the company’s capital and shareholder equity. The shareholders identified in the prospectus are Prokhorov through an entity called Daselina and Finsky through an entity called Kirkland. The difference between their stakes is that Daselina owned all of Intergeo’s 100 million shares until March 21.
At that date, the two Russians agreed between themselves that Finsky would hold 1.1 million shares (1.1%), with an option to acquire a further 17.9 million shares until February 2015. At most then, almost three years from now, he might own 19% of the shares. Right now, Prokhorov and Finsky are the controlling shareholders and promoters of the share sale. John Lill, a Canadian mining veteran, is reported on the Intergeo website as president and chief executive of the British Virgin Islands-registered parent now proposing to sell its shares. Lill is being paid $996,691 in compensation for 2012, and has been promised a share option allocation of 0.5%. Copeland, a public relations expert for Alcan before and after it was taken over by Rio Tinto, is being paid $522,189 this year.
The principal mineable deposits and licences are reported as Ak-Sug, Kingash, and East-Sayan; their mineable minerals are reported to be mostly copper and nickel, with traces of gold, platinum and cobalt.
Intergeo’s version of its history, according to the preliminary document, is that Intergeo Russia was established in February 2007 and acquired the licence rights “from an arm’s length Russian individual”. In March 2008 it is claimed: “Onexim Holdings Limited, part of the ONEXIM Group, together with three private companies, acquires a 100% interest in Intergeo Russia.” That leaves out one of the most bitter fights in recent Russian corporate history, when Vladimir Potanin, the control shareholder of Norilsk Nickel, fought Prokhorov, his one-time partner, for a division of their assets. In the process Potanin accused  Prokhorov of stealing the Intergeo assets from Norilsk Nickel.
A spokesman for Norilsk Nickel said this week: “Originally the licenses were owned by the [Norilsk Nickel]. At this moment there is no conflict between the Company and Intergeo on this issue.” That refers to the settlement of their differences between Potanin and Prokhorov in 2009 and 2010.
According to the Intergeo prospectus, “the Company has limited financial resources and expects to incur losses for the foreseeable future. As at April 30, 2012, the Company’s cash position was approximately $7 million. Management currently expects that the proceeds from the Offering will provide enough capital to fund the stated purposes under the heading ‘‘Use of Proceeds’’. Additional financing will be required in 2013 to fund each of the feasibility studies for Ak-Sug and Kingash, and the Company’s other planned activities. The Company’s continued operations will be dependent upon its ability to obtain additional financing and ultimately to generate operating revenues.”
If you think that sounds like a disclaimer from the magician, pinning responsibility for the success of his trick on the rabbit, the explanation follows. In mining terms, this a very early-stage project in which Prokhorov and Finsky keep all their money, and new investors carry all the risk of not finding anything profitable enough to bring to the surface and sell. “As the Company is in the exploration and development phase, it has received no revenue to date from the activities on its properties and has not generated any positive cash flow. Consequently, the proceeds of the Offering will be used to fund the proposed expenditures set out above as well as for general working capital with the expectation that revenues and positive cash flows will not commence until such time as project construction is complete and mineral production begins.”
Last week, it was reported  that Finsky’s record on the Canadian market with his goldminer White Tiger Gold (WTG) had produced colossal value destruction. At this point, according to its auditor, WTG may be insolvent. According to the Intergeo prospectus, Finsky and his associates have never been involved in a bankruptcy. Here is their carefully worded disclaimer: “to the knowledge of the Company, no existing or proposed director or executive officer of the Company (nor any personal holding company of any of such persons), or shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company: (a) is, as of the date of this prospectus, or has been within the ten years before the date of this prospectus, a director or executive officer of any company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets…”
Finsky was asked to clarify the WTG record and explain to the market how to interpret it for the proposed Intergeo share sale. On the day before the Intergeo prospectus was released in Toronto, Finsky was asked: “does the WTG story mean the end of the plan to arrange an IPO for Intergeo on a Canadian stock exchange? If WTG is delisted because it is on the verge of bankruptcy, is [he] admitting failure?” He didn’t respond.
If the magician is in trouble, what chance does his trick have of producing the rabbit? The short answer to this question depends on what is to be made of the claim that Intergeo has a fortune in mineable nickel and copper underground. That claim depends in turn on a scheme recently tried by another Russian resource listing – RusPetro. It began selling its shares on the London Stock Exchange in January . The share price is up 21% since the initial listing, but down 30% since it peaked in April.
The reserves scheme involves offering investors the appearance of international reserves and valuation – without disclosure of a corresponding registration with the State Reserves Committee. The international consultants engaged in such schemes acknowledge that their calculations may depend on incomplete data or estimates provided by the mining company. The results may thus be characterized as projections, guesses.
Russia’s mine licensing regulators have been clear that if Russian mining companies want to claim publicly that their prospected territory contains valuable reserves or resources of oil, gas, or hard-rock minerals, they should prove it to the state; apply to have their claims assessed by the State Reserves Committee; and report publicly to shareholders, or potential investors, lenders and the like, if the count has been ratified and registered for their reserves and resources.
Notwithstanding this apparent rigour, there is a loophole in the Russian process – it isn’t transparent or publicly accountable. According to the State Reserves Committee in Moscow, they have no press office or spokesman, and do not have the duty to answer questions. The Ministry of Natural Resources, which supervises the mining sector, says all questions about mine licences and reserves, should be directed to the mine licensing agency, Rosnedra. According to Rosnedra spokesman, Sergei Zhikharev, under Russian law his agency has no right to provide individuals with copies of reserves information for identifiable deposits or their licencees, or even confirmation that such reserves have been officially registered.
Oleg Mitvol was the most active regulator of this process when he was deputy head of Rosprirodnadzor at the Ministry of Natural Resources between 2004 and 2009. He was ousted  after a lengthy battle with Rosnedra and the Minister, Yury Trutnev, over his keen (too keen) enforcement of the regulations. Mitvol says now he does not remember the reserve estimates for the deposits now being promoted by Intergeo, but he recognizes the scheme of projecting their value to stock markets. This week Mitvol said the following:
“This [data from the reports of consulting companies] cannot be considered objectively, because we have different laws. Texas methodology itself, by which [some of the international consultants] work, is quite objective, because in the U.S. they have criminal liability for not providing correct information. In Russia, the geological data are in limited circulation and part of the information is a [state] secret. Therefore, in Russia, as I said in 2007, there is a process of ‘taking from the ceiling and sending it to the sky”. That is, any numbers can be written down. For example, when we met with one of the consulting companies, they said that[their report data] were based solely on written information provided by the companies and they could not even check it.”
Asked whether the State Reserves Committee data provide a correction when there is this uncertainty, Mitvol cautions: “Auditors do not require these data, nor banks either. There is a rigorous, clear system of responsibility, a technique used in the U.S., and we [government] have no responsibility for providing information to auditors. And there is a problem. Companies have registered in the State reserves Committee information, which the Committee p[SRC] could open. SRC has different geological prospecting data produced in the Soviet period and in subsequent study periods. For the SRC, those fields, which in Soviet times did not give anything or gave a negative result, may be currently assigned with a huge hope.”
What hope does Intergeo have, and what is the level of reserves registered with the State Reserves Committee? Chief executive Potapov responds: “I think that in the context of our application on the Toronto Stock Exchange it would be reasonable to operate with the data given in the technical reports under Canadian Standard 43-101, as these data will be opened to investors, or, strictly speaking, investors will focus on them. These data can be taken from the prospectus.”
But the prospectus says there’s no rabbit. “The Company has not defined or delineated any proven or probable reserves on any of its properties for the purposes of NI 43-101. Mineral exploration and development involves a high degree of risk and few properties that are explored are ultimately developed into producing mines. There can be no assurance that the Company’s mineral exploration programs at either the Ak-Sug Project or the Kingash Project, or at any other mineral property, will establish the presence of any proven or probable mineral reserves for the purposes of NI 43-101. The failure to establish proven or probable reserves at any mineral property would severely restrict the Company’s ability to implement its strategies for long-term growth. In addition, the costs, timing and complexities of upgrading the mineralized material at the Ak-Sug Project and Kingash Project to proven or probable reserves, and ultimately to develop those reserves, may be greater than the Company anticipates.”
So Potapov was asked what data have been submitted to the State Reserves Committee. He replied that the reserves of two of Intergeo’s mineable deposits — Kingash and Ak-Sug – have been registered with the State Reserves Committee.” This isn’t reported in the Toronto document, nor on the Intergeo website . Potapov in Moscow and Copeland in Toronto will not say what the Russian government numbers are, or when they were calculated and registered.
Instead, in the Toronto for-sale advertisement there are estimates and projections. Ak-Sug, for example, is reported to hold 1.6 million tonnes of copper of indicated resources, 1.8 million tonnes of inferred resources. The footnote to the table tells the full story: “The Ak-Sug PEA is preliminary in nature, it includes inferred mineral resources that are considered too speculative geologically to have economic considerations applied to them and cannot be categorized as mineral reserves, and there is no certainty that the Ak-Sug PEA will be realized.” At Kingash, it is claimed that there might be 2.1 million tonnes of measured and indicated nickel; 984,000 tonnes of copper; 80,000 tonnes of cobalt; .4 million ounces of gold; 3.7 million ounces of platinum; and 3.7 million ounces of palladium. The additional, inferred numbers are much smaller. The footnote says: “The Kingash Technical Report has not estimated any mineral reserves for the Kingash Project. The Kingash PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that the Kingash PEA will be realized.” According to the company document, if there are investors willing to buy shares, their money will be spent on at least two years of prospecting, drilling and proving, before a feasibility study is released in 2014. At best, there will be no mine until “2016/17 & beyond”.
There is another, telling catch. According to the Intergeo document, “pursuant to the Subsoil Law, certain subsoil plots are considered to be Strategic Plots. Among these are subsoil plots or deposits containing, among other things, any amount of nickel, cobalt, or platinum group metals, or hard-rock gold reserves or copper reserves (in accordance with Russian standards) in excess of certain quantities. The Ak-Sug Project, the Kingash Project and the East Sayan property are on the list of Strategic Plots, and the Greater Ak-Sug property and Arbinsk property may be considered Strategic Plots. Pursuant to the Strategic Investment Law, licencees or operators of Strategic Plots are considered Strategic Entities and are subject to various restrictions.”
This is tacit acknowledgement that there have been State Reserves Committee estimates of the volume of reserves of nickel, copper, cobalt, gold, platinum, molybdenum at Ak-Sug and Kingash, in order to fix whether they go under or over the thresholds defined. If they go over the thresholds, they become strategic and are subject to strict Kremlin control, especially if they turn out to be controlled by foreign investors.
That’s a very good reason why Prokhorov, Finsky and their associates don’t want to discuss the underground numbers, before they sell off the hope to Canadians that they are on to big ones. This too makes clear who’s to play the rabbit in this show.