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By John Helmer in Moscow

Gold raiders may be pushing gold mining asset holders on to the defensive in Russian Fareast

When Winston Churchill tried to express his ignorance of how Russians conduct their affairs, he famously referred to bulldogs fighting under a rug. These days, in the Russian gold mining sector, the bulldogs are hard at it again, but the rug has slipped off –well, let’s say half-off.

There are asset raids under way, driving share prices down, for Ovoca in Magadan region; and Highland Gold in Chukotka. Ovoca and Highland are both listed on the London Alternative Investment Market (AIM); Ovoca is also listed in Ireland.

The conflicts over their assets have also spilled over into investigations of regional and federal officials alleged to have taken sides, possibly corruptly. One of the allegations being aired publicly is that regional mine licence inspectors are not enforcing mandatory licence deadlines to produce gold from deposits under development.

Ovoca claims 74.3 million oz of silver reserves (C1 and C2, according to the Russian reserve classification). Production is not scheduled until the December quarter of 2008, so it doesn’t rank yet on the gold miner’s league of the Russian Goldmining Association. Highland, ranked 4th, is currently producing well below peak at 70,000 oz of gold for this year, with reserves estimated at 8.1 million oz. Almost half this total, or 3.7 million oz, is buried at the Mayskoye deposit in Chukotka, where mining has been delayed, and is not expected to start for at least two more years.

After weeks of deteriorating share price, Ovoca’s market capitalization currently stands at about $60 million. Moscow industry sources are convinced that the company’s Goltsovoye deposit, in Magadan, is the target of a raid; no-one claims to know for certain who is attacking.

Ovoca’s vulnerability stems from problems it is having with its mining licence. As reported in May in Mineweb, the chief inspector for licence compliance, Oleg Mitvol — deputy chief of Rosprirodnadzor — told Mineweb: “I have the inspection report for this artel Ajax [Ovoca’s Russian asset management subsidiary and licence-holder]. They do not mine anything, and more to the point – they do not comply with previous regulations. In 2003 they received an order for correcting violations – [these included] reserves [that] are not listed in GKZ; the inventory of reserves has not been fulfilled.” According to Mitvol, “their main violations are that the mine works have not yet begun, although the mine should be at the project capacity by now; and the level of extraction was not confirmed.”

“The license was granted in 1993, and since then nothing was done on the mine. But the company has intentionally misled western investors. Our steps now will be to send documents to [the Ministry of Natural Resources’] commission on license withdrawal, and to manage an official check of the Magadan inspectors of Rosprirodnadzor, who have been covering all this for a long period of time.”

Mitvol was contradicted by other officials in the Moscow office of his ministry, the Ministry of Natural Resources. His claims were also denied by Leonid Skoptsov, Ovoca’s chief executive. In May Skoptsov told Mineweb that statements quoted from ministry officials by Prime-Tass, a Russian news service, make “a better answer than I can provide to you.”

According to Prime-Tass, an investigation is under way at the ministry of the apparent contradiction between officials over Ovoca. “There is a letter that there are infringements,” Prime-Tass quoted the spokesman of the Ministry, Rinat Gizatullin, “and there is a certificate that infringements are not present. Now we understand that such situation could arise”. According to the spokesman, Rosprirodnadzor had charged licence violations in a letter of May 10, directed to the Ministry’s agency for sub-soil resources, Rosnedra. But the spokesman also confirmed the authenticity of the regional inspectors’ report, published by Ovoca. Gizatullin implied that Mitvol had made a mistake. Mitvol says that the regional inspection reports deal with different issues from the federal ones.

Mitvol said he is returning to the fray next week. Meantime, the earlier Mineweb report, quoting Mitvol, was cited in a letter which Skoptsov and Ovoca have sent to Yury Trutnev, Minister of Natural Resources, and Mitvol’s superior. Trutnev ordered an internal

investigation. “We are all now writing him letters,” a ministry source told Mineweb.

Skoptsov told Mineweb: “I appreciate your continuing interest in Ovoca.” He refused to say what his letter of complaint had contained. Asked what has happened since the letter was sent, he replied “no comment”.

Ovoca is also studiously avoiding making an explicit statement of criticism of Mitvol, or responding directly to his public criticism. Instead, Skoptsov referred Mineweb to statements issued by Ovoca’s supporters inside the Natural Resources Ministry. He claims that “the only official position from the Ministry of Natural Resources is from official spokesperson Mr.Rinat Gizatulin.”

Highland Gold’s troubles at Mayskoye have been widely understood in the market. They were reported by Mineweb last week:


Mitvol said he is aware of the reporting, and has not been dissuaded from pursuing the revocation of Highland’s Mayskoye licence, neither because Roman Abramovich, Chukotka’s goivernor sold the project to Highland in 2003, nor because he may be one of the raiders now manoeuvering to buy it back. “If Abramovich is participating there, this doesn’t give me a stop signal,” Mitvol told Mineweb.

Mitvol’s position is that the Ministry should disallow an application from Highland to extend the production deadline for its development of Mayskoye. Rosnedra, he is reported as confirming to Russian wire agencies yesterday, should not permit the company to push back the start date at the Mayskoye mine. The current licence requires Highland to produce at least 32,000 oz from Mayskoye this year.

Highland’s only public response to Mitvol was issued on July 4, when it said “the Company is currently in the process of negotiating the necessary changes to the terms of the Mayskoye licence.This will be the first license extension request since the acquisition of the asset.” Highland spokesman Dmitri Yakushkin told Mineweb at the time: “I’m not aware of any hostile takeover.”

In a market caution, Alfa Bank metals analyst Vladimir Zhukov warns: “We do not believe that changing license terms is a pure formality: although Highland has started negotiations to change the Mayskoye license’s terms, we understand that this is a fairly lengthy and complicated process, which might take as long as a year and does not necessarily guarantee a successful outcome.”

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