By John Helmer in Moscow
LUKoil ends raid against Archangel Diamond’s Russian project, opening up new mine possibility.
Grib is Russian for mushroom, and this isn’t the season for harvesting them. Grib is also the name of a diamond pipe, first discovered in northwestern Russia in 1996 — and the target of a Russian raid ever since.Until yesterday, that is.
According to an overnight announcement from De Beers in London, Nicky Oppenheimer has signed an agreement with Vagit Alekperov, chief executive and controlling shareholder of LUKoil, to end a decade of dispute and litigation over the fate of the Grib pipe, at the Verkhotina prospect, in Arkhangelsk region, in Russia’s northwest.
The signing was blessed at a brief meeting which Oppenheimer and Alekperov had with President Vladimir Putin on Tuesday in Moscow. LUKoil confirmed the meeting with Putin, but the Kremlin is saying nothing. How little or how much Putin meant, by way of endorsement of the proposed new diamond mine remains to be seen.
Oppenheimer told Alekperov at yesterday’s ceremonies that De Beers has bought assets in Russia in the past, but has no experience of developing and operating a mine in Russia. He and Alekperov appear to agree that, for the time being, neither has decided how the Grib pipe will be mined, and with whom.
For the time being also, De Beers and ADC have committed to paying a substantial amount of new money for the opportunity. Oppenheimer and Alekperov have agreed that they will work together to complete a feasibility study of Grib, and a mining plan. Until this preparatory stage is completed, De Beers and LUKoil have agreed to lock in their positions, and not to sell their stakes to anyone else.
The deal terms have yet to be fully disclosed to the Toronto Stock Exchange, where De Beers’s subsidiary, Archangel Diamond Corporation (ADC), the discoverer and stakeholder in the mine, is listed. Trading in ADC shares has been suspended since last October, while the two sides attempted to settle their claims ahead of looming court action that has been pressing Alekperov in the US, and also in Sweden.
ADC issued a brief statement confirming the out of court settlement, and promising further details and disclosures. In the meantime, ADC share trading remains suspended.
The signing session in Moscow, which also included two representatives from the ADC board, describes the deal as “the acquisition by Archangel of an interest in OAO Arkhangelskoye Geoldobychnoe Predpriyatie (AGD), a Russian open joint stock company currently wholly owned by LUKoil group and the holder of the licence to explore and mine the Verkhotina licence area.”
The AGD interest in the project licence, which DeBeers and ADC will receive, “will not exceed 49.99%. LUKoil will continue to own the remaining interest in AGD.” Once executed, the announcement says, “the litigation and arbitration proceedings relating to the ownership of the Verkhotina licence will be terminated.”
Cautiously worded, the agreement marks a triumph in the decade-long attack strategy of De Beers’ former chief executive Gary Ralfe, former Moscow director Raymond Clark, and former ADC chief executives, Timothy Haddon and Franco Boule. They believed that the first-ever discovery of a diamond pipe on Russian territory by a foreign diamond miner could be defended successfully from a domestic raider.
Their strategy, as initially conceived, was to offer a combination of sticks and carrots. Both have left their mark in the settlement deal. Alekperov has shifted the political and financial risk of a new diamond mine to De Beers, which is paying for the chance to see how far Putin’s endorsement will go.
In detailed court papers publicly available, ADC had charged Alekperov and his partner Alisher Usmanov with masterminding a series of contract violations that blocked ADC from exercising its operating, investment, and stakeholding rights in the Grib discovery.
The bill for damages in the US court case came to $30 million in ADC development costs; $400 million in profits it should have earned from its 40% stake in the mine project partnership with AGD; $800 million in lost profits from other diamond deposits believed to be located in the Verkhotina area; and $3.6 billion in punitive damages.
Over the years, as Mineweb has reported, Alekperov bought out Usmanov’s interest in AGD, and was then confronted by the court case in Denver, Colorado, accusing LUKoil and AGD, the named defendants, with a string of unlawful and embarrassing violations. Colorado was chosen, because ADC operated an office there, and LUKoil, petrol stations.
In parallel, ADC had pursued an arbitration proceeding in Stockholm against AGD. This had been returned from an appellate Swedish court to compel the Russians to face a new evidential proceeding. The Colorado case had also returned from the higher-level appellate courts, and was approaching a key test for Alekperov and Usmanov — their testimony on oath.
It had been De Beers’s strategy that, if the US courts accepted jurisdiction to try the claim, Alekperov and Usmanov would settle, rather than allow themselves to be cross-examined on the evidence.
The limited disclosure to date reveals that De Beers has improved on its stake in the project, lifting ADC’s stake from 40% to 49.99%; this suggests that ADC and De Beers have acquired a 10% stakeholder, Michael Krel, who had been aligned with ADC.
Russian law prohibits foreign-owned mining companies from holding a majority stake in a domestic diamond mine. In the 1990s, De Beers had owned another Arkhangelsk diamond license, for the Lomonosov field, but sold it to Alrosa; it operates as the Alrosa subsidiary, Severalmaz (“Northern Diamond”).
ADC’s battle had suspended all work on the Grib pipe, but Alekperov and LUKoil had protected the licence from being revoked by the regulatory authorities on the ground that the licenceholder had failed to comply with the investment and operating requirements of the licence.
Usmanov had been publicly hostile towards De Beers, which bought into ADC after an Oppenheimer family company sold its stake. De Beers remains the majority shareholder, with an 18% stake in the hands of the New York-based Firebird group.
After he took over the AGD claim to develop Grib alone, without De Beers, Alekperov had said publicly he would not sell LUKoil’s position to De Beers. But the question remains now whether De Beers will be permitted to act as the de facto mine operator, with LUKoil’s consent. Oppenheimer and Alekperov appear to have deferred answering that question until the feasibility stage is completed.
An Alrosa source told Mineweb it learned of the settlement over night, and has yet to form a view about the future for the project. In Arkhangelsk region, the news of the De Beers deal was welcomed in the belief that this will now unlock investment on the Verkhotina prspect, and give impetus to fresh investment at nearby Lomonosov. AGD, the LUKoil subsidiary, declined to comment. But a source close to Severalmaz, the Alrosa subsidiary, said he would welcome De Beers’s investment, and a pooling of resources to develop both mines in parallel.
The De Beers announcement noted that the transaction is “subject to the receipt of the consent of the Federal Anti-Monopoly Service of the Russian Federation and other conditions precedent.” That’s legalese for a major policy decision still to be addressed in Moscow: what will the Kremlin decide to be the role of Alrosa in the new project, if any? It was good, traditional Oppenheimer politics to go to the chief. But then predicting what interest the Kremlin may ultimately take in the Grib pipe, and what scope that will leave to Oppenheimer and Alekperov is anyone’s guess right now.
Ararat Evoyan, head of the Russian Diamond Manufacturers Association, told Mineweb that there is still much to do before Grib becomes a producing diamond mine. Notwithstanding, he said the deal is “good in several respects: De Beers is back in Russia, and they may really invest, as I see no others who can invest there [in Arkhangelsk].” As to who will be the mine operator, and what role Alrosa may yet play, Evoyan declined to comment.