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By John Helmer in Moscow

De Beers has agreed to sell its controlling stake in Archangel Diamond Corporation (ADC) to a North American investment fund which aims to intensify the litigation campaign in the US and Europe against LUKoil and Archangelskgeoldobycha (AGD), the two Russian companies charged with raiding the Grib diamond pipe.

At a board session on Friday, a bid by De Beers to call in a $10 million loan, and put ADC into liquidation, was topped by an offer to repay the loan, ADC’s remaining creditors, and conserve the company and its minority shareholders. Had the liquidation plan gone ahead, the latter would have lost everything.

ADC has yet to make an announcement, identifying who has made the offer which the board has accepted, or the terms. It is believed the offer comes from a lawyer-managed US fund, which is well-known as an investor in high-value litigations, with a strong record of winning large settlements for the cases it has taken on.

At this point, the fund appears to be paying about $14 million to clear ADC’s debts, and committing itself to a litigation budget of another $10 million, in order to pursue claims against the Russians of $4.8 billion; this sum includes $30 million in ADC’s direct investment in the exploration and testing of the Grib pipe; $400 million in lost profits according to ADC’s 40% stake in the halted mining venture; $800 million in profits lost from other diamond pipes within the Verkhotina-area exploration and mining licence; and $3.6 billion in triple punitive damages under the Colorado state racketeering statute.

The most recent De Beers valuation of the Grib pipe, based on early 2008 diamond prices, puts the project’s mineable value between $8 and $10 billion.

On Friday, De Beers told Minesite that “ADC has reported its failure to reach agreement with Firebird Master Global Fund and Cencan on appropriate financing terms. Subsequently, Cencan has requested repayment of all amounts outstanding to it. This follows the decision by the minority shareholders, and other investors, late last year to withdraw funding to finance the transaction with LUKoil in regard to the Verkhotina project, as certain conditions precedent had not been fulfilled.”

De Beers owns 58% of ADC through the wholly owned subsidiary Cencan S.A., which has outstanding to ADC a loan of about $9.95 million. That comprises loan principal of $8.8 million, plus fees and interest owing to De Beers. They were reported to be $1.3 million at September 30 last. The deadline for the loan was fixed at April 30, 2009. On May 12, ADC announced that Cencan had demanded repayment “within three business days”. The company also conceded that had “exhausted all financing options and does not expect to be able to raise the funds to repay Cencan by this deadline.”

Asked a fortnight later, on May 29, what the status was of De Beers’s bid to put ADC in liquidation, Lynette Gould, the De Beers spokesman, said: “Cencan has given careful consideration to its shareholding in ADC, and…has put forward a proposal to ADC’s board whereby Cencan would provide limited interim funding for a restructuring of ADC that will address, in part, ADC’s inability to settle with its creditors, the largest of which is Cencan. This proposal requires approval from the appropriate authorities and would be subject to Cencan’s conditions. Through this process, if successful, ADC will become 100% owned by Cencan.”

This stops short of clarifying De Beers’s intention, which sources familiar with ADC’s position say amounted to a plan to liquidate the company, and abandon its legal claims to its share in the Russian diamond project.

ADC’s financial reports indicate that during the first nine months of 2008, it spent $3.9 million on legal fees. But much of this was spent, not on litigating the claims against LUKoil and AGD, but on supporting the joint venture agreement, which LUKoil and De Beers signed in April of 2008. That provided the Grib pipe project with the go-ahead on the basis that De Beers would pay LUKoil $225 million in three installments; and the Russian government would approve the 49% foreign stake in the venture, as required by the special restrictions on foreign ownership of Russian diamond mines in the Russian statutes. When the latter authorization failed to materialize, the joint venture collapsed in January of this year.

Before the LUKoil joint venture agreement, ADC’s financial reports indicate its legal fight spending amounted to $150,000 in 2007 and $73,883 in 2006. It is unclear whether these sums included the salaries of in-house De Beers lawyers.

Since the January 2009 termination of the LUKoil pact, ADC has warned that “the Board of Archangel is now considering future options for the Corporation including financing options and a potential resumption of the litigation currently suspended.” In retrospect, it now appears that the options De Beers, Cencan and the ADC board preferred were not to finance ADC beyond the April 30 deadline for the Cencan loan, and not to resume the litigation against LUKoil.

Although minority shareholders have been seeking regulator response in Toronto and Denver to complaints of faulty disclosure by ADC, they have been taken by surprise by the De Beers move to bankrupt ADC through calling in the Cencan loan. This plan drew a fierce protest from a long-time independent board member and minority shareholder, Clive Hartz, a West Australian entrepreneur. Hartz resigned in protest, and ADC issued a brief announcement of his exit on May 20. Hartz has been incommunicado in a remote part of Western Australia, and unable to respond to follow-up questions.

Without Hartz, the ADC board currently comprises three employees of De Beers, and Robert Shirriff, a Canadian lawyer who has been chairman of De Beers Canada. In the past, Shirriff has refused to answer questions about his relationships with ADC, De Beers, and the Ontario Securities Commission, the local regulatory agency where Shirriff has also served as a director. The one independent director remaining on the board is Lamont Gordon.

The Firebird fund of New York has been holding a 19% stake in ADC, which has been managed for many years by James Passin. Apart from the ADC report of its disagreement with De Beers, it has not registered a public objection to the liquidation plan. As of May 20, Firebird appears to have been resigned to writing off its investment.

As Hartz went out the door, ADC issued a statement hinting at the bankruptcy to come. “Archangel Diamond Corporation announces that it has approved the commencement of discussions with Cencan S.A., ADC’s majority shareholder, concerning a proposal from Cencan to provide financing support to ADC by way of a re-structuring of ADC under the provisions of the Bankruptcy and Insolvency Act (the “BIA”). Pursuant to such proposal, ADC would appoint a trustee to assist with its submissions to regulators and its discussions with Cencan and any other party that may make an alternative financing proposal.”

The statement also appeared to leave the door through which Hartz had disappeared slightly ajar for a new bidder to enter. According to ADC’s statement, the company “is continuing to seek alternative proposals from any other interested parties. The Corporation confirms that there are no insolvency proceedings against it as of the date of the news release…”

This statement makes it appear that ADC and De Beers had already been negotiating to sell the Cencan debt and allow a share buy-in by a new investor. But if that were so, there was no word on what offers De Beers had considered before May 20; and if it had rejected them, what its reasons might have been. The impression was that as of May 20, noone had come in with any offer to warrant De Beers to pull back its bankruptcy scheme.

Nine days later, on May 29, an offer did materialize that was too good for ADC for De Beers to refuse. If the due diligence confirms the picture of ADC’s prospects which the litigation fund has already formed, then within days, ADC will have a new owner – and a new attack strategy, and a new budget.

The prospect of scoring in the Colorado court against Vagit Alekperov, the controlling shareholder of LUKoil, which in turn owns AGD, and Alisher Usmanov, his onetime partner in the diamond venture, jumped last month when a Denver, Colorado, judge signed an order compelling LUKoil to disclose hitherto sensitive documents. These have been sought by ADC as part of its effort to substantiate for the Colorado court that it has jurisdiction over the Russian company, The discovery order relates to LUKoil’s business presence in the state, and to millions of dollars reportedly transferred for that business between Colorado and LUKoil headquarters in Moscow.

The Colorado court is one of two selected by ADC in pursuit of its claims against the Russians for breach of contract and other wrongdoing. The other is Stockholm, Sweden, where the arbitration tribunal is located that is designed in the original agreements signed by ADC with its Russian partners. Usmanov is described in the court documents as having “individually, or in cooperation with LUKoil and others, operated and controlled AGD during the time periods described herein.”

Alekperov and Usmanov deny the claims against them, and have challenged the jurisdiction of the US courts to compel them to testify. LUKoil and AGD deny ADC’s allegations, and claim the Russian courts have vindicated AGD’s management of the licence and shareholding agreements. ADC counter-claims in its Denver filing that the Russian court system allows “powerful Russian interests, such as LUKoil, [to] obtain corrupted and influenced results in commercial disputes with less powerful and Russian and foreign interests.”

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