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By John Helmer, Moscow

If, and it remains a big if, Victor Rashnikov’s Magnitogorsk Metallurgical Combine (MMK) is not clandestinely behind the attempt last week by an unknown shareholder to block the completion of MMK’s proposed takeover of Australian iron-ore prospector, Flinders Mines, then a ruling yesterday by Judge N.A.Bulavintseva is the first sign.

According to the website of the Chelyabinsk Arbitrazh Court, yesterday the judge issued a ruling agreeing to MMK’s request for accelerated consideration of the injunction, which she issued on March 30. Instead of a scheduled date of April 25 for hearing the case of plaintiff Elena Egorova, and MMK’s defence and counter-claim, the judge has now advanced the hearing date to April 12. Here is the latest court record.

Neither the court nor MMK will disclose the text of the April 9 ruling, nor explain why the first two orders imposing the injunction against MMK were released, but everything else in the case so far, including Egorova’s submission and MMK’s defence, remains closed. When requested, the names of the lawyers representing the two sides are also being withheld by the court.

Among local lawyers Judge Bulavintseva enjoys a solid reputation, and there are no known controversies associated with her prior cases. Local sources express surprise that the judge was able to draft two closely reasoned orders, each six pages in length, in the few hours between Egorova’s appearance on March 29 and the release of the orders on March 30. A lawyer practising in Chelyabinsk said the shortness of the time between application and ruling is “technically possible”. But in most cases, the source noted, a ruling usually takes the judge five days to prepare.

The source also acknowledges that in the Chelyabinsk jurisdiction “MMK is a large company, so it has an impact on the judicial system.” At the level of the governor and the regional government, he added, “not directly on the judges.”

Egorova remains incommunicado, and noone who has searched for her locally reports finding her. MMK’s press spokesman Elena Yevstigneyeva refuses to respond to telephone and email questions, or claims through secretaries that she is as incommunicado as Egorova. MMK’s investment relations spokesman Andrei Serov says only that MMK’s latest filing is not a public document, and that the court procedural rules require a hearing within five days of the April 9 lodgement.

It would be normal practice for MMK to issue a market announcement when it filed its first defence on Friday, and spell out to public shareholders – Rashnikov owns 86% of the stock — why the company thinks the takeover of the Australian iron-ore miner is beneficial for the shareholding minority; what the full infrastructure, port and mine construction costs will come to, on top of the purchase price; and why MMK should be leveraging its Russian assets to finance the offshore project.

So far Rashnikov has told the Australian shareholders of Flinders Mines more than he has confided to his own shareholders or announced in Russia. The only official announcement Rashnikov’s subordinates have made to date is the disclosure that Egorova had won from Judge Bulavintseva a freeze order blocking the Flinders Mines transaction.

Never before in Russia has there been a case quite like this, in which a company of national significance has been barred from making an offshore acquisition in the metals and mining sector by a Russian court. The nearest parallel was the purchase in March 2004 by Norilsk Nickel shareholders, then Vladimir Potanin and Mikhail Prokhorov, of a 20% stake in South African mining company, Gold Fields, with the plan to separate Gold Fields’s foreign mines from its South African ones, and reverse Norilsk Nickel into the rump company, achieving thereby a safe haven, offshore stock market listing for Potanin and Prokhorov. Here is how that scheme began to unravel.

After the deal was announced, Potanin was summoned for questioning by Moscow prosecutors, then left the country for an extended holiday. The Central Bank of Russia investigated offshore transfer rule violations. In the end the plan was aborted on Kremlin orders, but time was allowed for the stake to be sold off profitably. The plan initiator, Leonid Rozhetskin, was fired by Potanin. Three years later, for other reasons and in other circumstances, Rozhetskin disappeared, leaving behind a pool of blood.

The key to the failure of that deal was the Kremlin. To date, nothing comparable has occurred in the steel and related coking coal and iron-ore sector. On the contrary, between 2006 and 2008 Kremlin officials encouraged the steel oligarchs to pay premium prices to take over European and North American assets. Then late in 2008, after the steel price cycle went into tailspin, they agreed to bail the oligarchs out with state bank loans, when their offshore acquisition debts undermined the solvency of their Russian operations.

At inception, the Gold Fields deal cost $1.16 billion in 2004 dollars; at the time Gold Fields was producing gold at the minehead and profit on its balance-sheet.

Flinders Mines is at least three years from producing anything but red ink. It is costing Rashnikov A$554 million (US$571 million) to buy out, an 80% premium to what the Australian stock market has calculated it is worth. The estimated costs of building the mine and getting the iron-ore to ships for the voyage to China are estimated in recent company documents at another A$1.13 billion (US$1.16 billion) – much more if the costs of new rail line and port construction balloon. If Rashnikov had assured the Kremlin this was a relatively low-cost portfolio investment, the facts are now evidently different.

The judge and her clerk declined to provide any information about MMK’s latest submission. A source at the court registry said he was authorized to make available this excerpt from MMK’s filing: “the defendant [MMK] asks to cancel the maintenance of the [injunction], as the plaintiff [Egorova] acted in bad faith and abused the privileges given to her.”

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