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By John Helmer in Moscow

If you recall Enron executive Jeffrey Skilling’s Hypothetical Future Value (HFV) system of accounting, one might find some parallels in Polyus Gold’s share marketing program.

The man who invented the accounting system for promoting the value of a share today, for what it will be worth in the future, when he will have sold out, is well-known.

Jeffrey Skilling called the system Hypothetical Future Value (HFV). Skilling used to be the chief executive of Enron Corporation. He is serving a 24-year sentence in Minnesota for conviction on 19 counts of fraud and other crimes. He was fined $45 million, and he spent $40 million on his legal defense. His HFV for the year 2028, when he is eligible for release, is zero.

The story of Enron’s frauds is well-known. But as the documentary film on the case, just released, makes vividly clear, the share market could not have been deceived by Enron, unless Skilling had the assistance of investment banks, accounting firms, lawyers, stock analysts, and business media, all but three of whom promoted the share price — and were richly rewarded for doing so. One of the exceptions was a stock analyst who was fired by Merrill Lynch. Another was famously called an “asshole” on air, to the applause of the Enron trading floor. A third was a journalist, whom Skilling accused of unethical aggressiveness for asking questions others had been paid not to ask.

There is a little Skilling in every share promotion; and a little asshole in every skeptical analyst. That isn’t an allegation — it’s a reason to ask questions, and to take care over the answers.

So here’s today’s question: What is the goldbug to make of Polyus Gold, Russia’s leading goldminer? Once it had a portfolio of Russian mines, prospects, and paper reserves that cost the company about $1 billion to assemble, and achieved a ninefold increase in market capitalization to more than $9 billion within 12 months.

But since the start of this year, the share price has dropped 20% to just under $40. The gold price in the same period has had its ups and downs within a $50 range between $650 and $700. That isn’t as high as last year’s high; coincidentally when Polyus made its debut on the market. But it is well above last year’s average. And that was high enough to surmount the paltry 4% growth in Polyus’s gold production for 2006, in order to generate 56% growth in Ebitda, and a tenfold increase in net income.

Just one mine, Olympiada in the Krasnoyarsk region of central Siberia, currently accounts for 67% of the Polyus company’s total annual output of 1.2 million oz. The best this mine can expect to grow by is 8%; and that is from low-grade pit deeps, and from deposits peripheral to the main mine.

But the costs of going after this marginal growth are significantly higher. This year, projected output will be flat at 1.2 million oz, but cost per oz will jump 14% to $327. Last year, Polyus achieved profit gain because of a 34% year-on-year increase in its realized gold sale price of $604/oz. This year, analysts promoting the share are projecting a price gain of 16% to $700/oz.

As for the longer term future, listen to Renaissance Capital, a Moscow investment bank, whose stock-picking Market Call, issued Monday, announced the “standout feature, relative to its global peers, is the company’s huge growth potential.”

Watch closely for the subjunctives and conditionals, as the bank rolls out the future to an Ebitda of $739 million in 2012, based on “the company’s strategy plan through to 2015 to become a top-five player, tripling its production.” This is to be achieved by “favourable government relations. Polyus has an ambitious $2.9 capex plan, and could receive state funding for $565 million of that for new roads and power-supply lines.” Then there is this: “we believe the company is moving toward good levels of transparency and corporate governance…”

Now does that sound like Jeffrey Skilling talk?

Not mentioned is the falling-out between Polyus’s two controlling shareholders, Vladimir Potanin and Mikhail Prokhorov; the recent naming by President Vladimir Putin of Potanin as a licence violator in another case; the replacement in May of Polyus’s chief executive, Yevgeny Ivanov; and a series of telephone calls, first by Ivanov, then by Prokhorov’s agent, Dmitri Razumov, trying to sell Polyus in parts, or as a whole. When the leadership of a company is trying to jump overboard like that, it’s difficult to see the transparency for the splash.

When Skilling started selling Enron stock, one knew the company’s stock price was headed for a fall. Only he didn’t let anyone else know.

Mineweb’s correspondent invited Renaissance Capital to answer these questions:

What “favourable government relations” do you think Prokhorov and Potanin currently enjoy?

What explains Polyus’s share price decline, if gold has been flat?

What movement towards “good levels of corporate transparency and governance” can you be thinking of, if you omit to mention the break-up of the Prokhorov-Potanin asset partnership, Razumov’s for-sale telephone calls, the failed sale and value writeoff of Lenzoloto, etc.?

Here is the reply from analyst Tom Mundy:

“We enjoy all feedback for the products that we offer and it is important that we hear views that our different from our own….Your questions are very pertinent though.

“As I said, we look at stocks which we believe will offer returns to investors. Polyus has performed poorly vs. both the index and the spot gold price, though we believe this is not necessarily an indication of where the stock will be in a few months time, even if, as you say, investors have a poor perception of corporate governance. Our point is that though it is not perfect, we think it can improve and should that be the case, the market would be welcoming.

“Polyus is a growth story and we believe it has excellent potential in that regard. It is also cheap in relation to its international peers. These are the key points.

“On your point regarding government relations, we do believe though that connections and good government relations help in business. This is the case in Russia as it is in many countries. Polyus Gold is a major strategic company, why would it not want to position itself well?”

It remains to be seen whether Polyus will become a major strategic company, or will be sold up, dismembered, or taken over. Capex of almost $3 billion will definitely be needed as Olympiada peters out; it remains to be seen whether the current controlling shareholders, either of them, intend to stick around to raise it. The gold price also remains to be seen.

When it comes to Hypothetical Future Value, the rhetorical question isn’t whether HPV is an appropriate way of projecting a share price several years into the future. In the Enron case, the issue that went to the jury was that Skilling and his associates didn’t believe it themselves. They used confidence tricks to give them time to make money out of their own exit.

Polyus is different. As this article was being drafted, and then sent to press, the market traded the share at $42.24; that was a gain of 6% on the day.

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