Starting in the third quarter of last year, United Company Rusal started cancelling shipping contracts for cargoes of bauxite between Australia and Sardinia. On February 4, 2009, Norden, a Danish company with whom Rusal had a long-term contract for vessel delivery of its bauxite, filed suit in the federal US Court in New York, seeking the freeze and attachment of almost $100 million in cash which the company was believed to have on deposit in banks in the New York area. The bank accounts and money were ordered frozen by a court order on February 10. The legal proceedings for contract claims will now be heard in an arbitration court in London.

The freeze order obtained by Norden was the largest secured to date by a creditor against the Rusal group, which is now facing debt claims from more than 70 foreign banks and at least half a dozen Russian banks.

For readers with a special interest in these matters, here is Norden’s US complaint:
Norden A/S v Rusal Trading International Limited

And here is the freeze order that followed:
US court order of attachment against Rusal Trading International Limited

by John Helmer - Tuesday, March 24th, 2009
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By John Helmer in Moscow

Prime Minister Vladimir Putin has put his signature on one of the strangest mining prospector’s pay-sheets ever drafted in the history of mining.

According to the prevailingRussian law, now one year old, if a miner does not qualify as Russian, and if what he discovers is big and valuable enough, he must hand over what he’s found to the state, which may then auction it to the highest domestic bidder. In compensation, Putin’s formula, according to a decree he signed on March 10, will provide reimbursement of prospecting expenses, plus a finder’s fee ranging from 25% to 50% of these expenses, depending on how inhospitable the territory that has been explored.

There’s also a catch — the expense reimbursement, and the premium, cover only those costs for exploring, finding, and proving the deposit which the state takes back. Thus, the unlucky prospector has to be really lucky to hit paydirt with a single drill-core, otherwise Putin will slam the pay-window down on his fingers. A prospector might count himself more fortunate if he should find much less than the state, or his Russian rivals, would like to acquire.

In practice, the Putinformula encourages the very schemes which Oleg Mitvol, Russia’s mining regulator until he was ousted last year, attacked as boosting London-listed share prices, instead of investing in mining as such. It remains to be seen whether the formula proves to be El Dorado for consolidators of junior assets and M&A speculators.

A year ago, the Russian parliament enactednew legislation setting out a list of 42 strategic sectors and metals, and also thresholds for mineable reserves of oil, gas, copper and gold that identified such deposits as “strategic”. The purpose was to protect the national resource base from takeover by cash-rich internationals. After several years of argument over the thresholds, the new legislation fixed the foreign exclusion limit for oil at 70 million tonnes (490 million barrels); gas at 50 billion cubic metres; gold at 50 tonnes (1.6 million ounces); and copper at 500,000 tonnes. A zero threshold was fixed for the mining of uranium, diamonds, quartz, cobalt, nickel, platinum group metals, beryllium, and lithium.
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by John Helmer - Friday, March 20th, 2009
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By John Helmer in Moscow

The Moscow and New York stock markets appear to have been taken unawares by the disclosure that Igor Zyuzin’s steel and coal-mining group Mechel is in court over an unpaid demand by BNP Paribas for $60 million. The share price of the fifth-ranked Russian steelmaker rose 1.3% in Wednesday’s Moscow market trading, and 10% in subsequent trading in New York. However, there is no sign that Mechel has informed the US Securities & Exchange Commission (SEC) of the material change in the company’s financial position and asset value, stemming from the court action in Geneva.

This is the second instance in as many months when Mechel has failed to notify the US regulator and US shareholders of material changes. The first, reported by CRU Steel News on February 26, exposed Zyuzin’s acquisition of the West Virginia-based Bluestone Coal for a cash down-payment of $425 million, and the issue of 80 million Mechel preference shares. As one analyst reported what happened at the time, “the money simply disappeared from Mechel’s balance-sheet, without an explanation.”

Zyuzin’s spokesman Ilya Zhitomirsky has refused to clarify the circumstances of the Bluestone Coal deal. He is also refusing to answer questions about the BNP Paribas claim.

Zyuzin is generally believed in the Russian market to have overpaid for previous mining acquisitions — of coking coal deposits in the Sakha region in January 2005, and again in October 2007, for a combined total of $2.7 billion; and of Oriel Resources, a chrome miner and refiner, in March 2008 for $1.5 billion. Following the Oriel deal, transacted at a 90% premium to the prevailing market price, Mechel’s share price dropped 3%.

Today, Thursday, a note from Alfa Bank confirms that Mechel’s trouble with BNP Paribas is connected to this week’s March 20 deadline for repayment of a $1.5 billion loan. That was issued last year to finance Zyuzin’s premium-priced acquisition of Oriel, whose assets are located in Kazakhstan and Russia. According to the report by Alfa steel analyst Barry Ehrlich, Mechel “had a low cash balance at the beginning of the year, we estimate, and then obtained a three-year $1 bln credit line from Gazprombank in February.” Referring to the BNP Paribas debt, Ehrlich said: “We believe this conflict may be related. We also believe that negotiations with the Oriel Resources loan syndicate are still ongoing.”
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by John Helmer - Thursday, March 19th, 2009
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By John Helmer in Moscow

Sometimes it can happen that men of steel have a soft underbelly. It’s to protect that that they wear armour-plate.

The release this week of group financial results for Severstal, the third ranked Russian steelmaker owned by Alexei Mordashov, exposes the high cost, and poor judgement perhaps, of Mordashov’s purchases of US steelmaking and coal assets last year.

According to Uralsib Bank steel analyst Michael Kavanagh, “the consensus [is] that Mordashov bought the US assets as a hedge against losing the Russian assets. However, bear in mind that the Russian steel operations are subsidising all other assets. With hindsight, all acquisitions made in the last two years will look expensive. Acquisitions should be judged over time and through the cycle. However, it does look like they [Severstal] over-paid in the context of today’s market.”

According to Severstal’s financial report for 2008, issued last week with auditor’s notes by KPMG, a total of $1.54 billion has been written off against 2008 operating profits, slashing the pre-tax profit figure by almost 50%. The comparable writeoff loss for 2007 was $28.9 million; $57.8 million in 2006.

Mordashov is quoted in the company’s press release, accompanying the financial report, as claiming that a healthy 44% increase in the group’s 2008 revenues (to $22.4 billion) was “due to strong demand in the first nine months of the year, a favourable price environment and the consolidation of our assets in North America.” Mordashov was coy when it came to explaining the unprecedented loss of asset value. The public statement says: “There was an exceptional drop in the demand for steel in Q4 2008. This, combined with valuation adjustments of $411 million on inventories to NRV and a $1,540 million of impairment of non-current assets, contributed to a net loss of $1,208 million in the last quarter.”

Nowhere in Mordashov’s public statement is there any mention that most of this “impairment” was caused by the loss of value of the American assets Mordashov has recently purchased. All that he could find to say about the performance of these assets was how much better they are doing than before he paid premiums to take them over a year ago; and also how successful the company’s lawyers have been in claiming insurance and contract violation pay-outs.
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by John Helmer - Wednesday, March 18th, 2009
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By John Helmer in Moscow

Steelworkers at the Zlatoust steel mill, which is owned by Vadim Varshavsky’s Estar group, have won an unprecedented claim for wages cut by the company, following a local court ruling and a 5-day hunger strike. It is the first known case of a successful protest action by Russian steelworkers since capacity reductions, furnace shutdowns, and layoffs began last October. Zlatoust produces specialty steels for auto, military, toolmaking and other applications; before the crisis, output was running at about 40,000 tonnes per month.

The steelworkers’ success coincides with an ongoing negotiation between Varshavsky’s managers and the state-owned Vnesheconombank (VEB) to refinance Estar’s loans. Some of these loans support Varshavsky’s acquisitions of Alpha Steel in Wales; and the Istil group, with a mini-mill in Donetsk, Ukraine; and another in construction in the UAE. According to a source at Estar, there have been no layoffs in the UK at the re-named Mir Steel plant.

Local press reports indicate, and Estar sources confirm, that 16 steelworkers from the Zlatoust plant, in the Chelyabinsk region of central Russia, suspended a hunger strike on the weekend, after the Zlatoust mill director confirmed by letter that a claim for an initial Rb6.7 million ($186,111) in back pay for October through December would now be paid. The protest organizer, Alexander Negrebetskikh, was reported as saying: “Estar agreed to pay 30 percent of the sum they owe the workers by March 18. We are suspending the hunger strike, but if they don’t pay [the rermainder of the pay claim] we will resume.” The total backpay claim amounts to almost Rb40 million ($1.1 million, repayable over six months).

An Estar source told CRU Steel News “the delay in wages was not actually a delay. Currently, the amount of orders [for the mill’s products] has declined by fourfold. So Estar has moved its workers to a shorter week of 3 to 4 days. The payment for the idle period was two-thirds of the regular wage. The workers appealed to the local court, and demanded the full wage to be paid. They won the court ruling, so now Estar will compensate this money.” A schedule for repayment has been agreed, starting from March 18.
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by John Helmer - Monday, March 16th, 2009
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By John Helmer in Moscow

Despite a blackout of news from Archangel Diamond Corporation (AAD:CN), the Canadian mining junior will seek US court orders to oblige two key Russian executives to give testimony on oath in ADC’s claim that it has been unlawfully deprived of its stake in the multi-billion dollar Grib diamond pipe, in northwestern Russia.

The threats of a US court order to testify, and of legal sanctions for possible evasion of the subpoena or perjury, have been the most powerful weapons ADC has held in its decade-long attempt to recover its mining rights from the Russians named in the court claims. It has taken that long for the US courts to consider whether to exercise jurisdiction over the Russians — the ruling could come very soon.

Before diamond values crashed last year, De Beers had estimated the Grib deposit to contain 74 million recoverable carats, worth about $8.2 billion. It is the largest diamond mine ever discovered by a foreign mining company in Russia. Despite technical mining difficulties, the project is believed to have significantly better profitability prospects than new DeBeers projects in Canada, where book values have been heavily written down.

Financed by DeBeers, which holds a 59.4% stake, ADC held a conference last month with the presiding judge in the Denver, Colorado, District Court. The judge has called for the filing of third-party deposition notices, which may be signed shortly. Lawyers for ADC will not comment on the identities of those to be deposed. However, in an earlier phase of the US proceedings, 11 individuals were listed for interrogation. They included the former CEO of ADC, Timothy Haddon; Vagit Alekperov, the CEO of LUKoil, one of Russia’s leading oil companies; and Alisher Usmanov, a well-known owner of iron-ore mines and steelmills in Russia, and part-owner of the UK football club, Arsenal.

The named defendants in ADC’s claim are two Russian companies, Arkhangelskgeoldobycha (AGD), the current licence holder and miner of the diamond project; and LUKoil, the controlling shareholder of AGD. Alekperov and Usmanov are accused in ADC’s court claim of being participants in “a scheme of fraud, breach of express and implied contract, civil conspiracy, intentional interference with contract, breach of fiduciary duty, and unjust enrichment”. ADC is claiming $1.2 billion in compensatory damages for the loss of its investment and profits in the diamond project, plus triple punitive damages of $3.6 billion for the alleged racketeering conspiracy.
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by John Helmer - Wednesday, March 11th, 2009
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By John Helmer in Moscow

On February 24, at the headquarters of Russia’s state media, Prime Minister Vladimir Putin visited the offices of Russia Today, an English-language cable and satellite broadcaster. He was escorted by Svetlana Mironyuk, the head of the Russian News and Information Agency (RIA-Novosti), an administrative holding for state media; in the Russian administrative jargon, the holding is a “federal state unitary enterprise”, without shareholdings, fully funded from the state budget.

Her boss, Mikhail Seslavinsky, head of the Federal Agency for Press and Mass Communications (FARMS, aka Rospechat), wasn’t reported to be in attendance. But then Putin wasn’t visiting for long. Actually, fifteen minutes — according to Moscow News, a weekly tabloid in English, which is also funded and managed by the state from an office in the same complex, a stone’s throw from the Foreign Ministry.

Mironyuk has headed the state news agency since 2003; before that she worked for Vladimir Gusinsky’s Most media group, and survived his downfall. Her agency began before she was born, in 1941, as an information outlet for the Communist Party’s Central Committee, focusing on reporting from the war fronts. By the war’s end, it was running media outlets, including newspapers, magazines and radio stations, in more than 20 countries. The target audience had shifted from domestic to foreign.

In 1961, the two audiences were combined in a mission charter that aimed “to contribute to mutual understanding, trust and friendship among peoples in every possible way by broadly publishing accurate information about the USSR abroad and familiarizing the Soviet public with the life of the peoples of foreign countries.” During Mikhail Gorbachev’s perestroika, the charter was modified to democratize the media themselves. The Gorbachev mission statement of 1990 said the new agency was “to provide information support for the USSR’s state domestic and foreign policies and proceeding from the interests of the democratization of the mass media.” At the time, the agency was running an extraordinary number of bureaux in 120 countries.

Whether the media output was propaganda, or accurate news reporting, depended on which side of the Cold War and the Iron Curtain you were on. When the curtain came down on the Soviet Union, according to Mironyuk’s agency website, “the main criteria of RIA Novosti’s information services were the combination of promptness, objectiveness, authenticity and its own opinion regardless of the political situation.”
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by John Helmer - Tuesday, March 10th, 2009
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by John Helmer - Thursday, March 5th, 2009
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By John Helmer in Moscow

The only internationally listed Russian port company is turning out to be one of the stable revenue survivors in the shipping, trading, container, and currency storms now blowing havoc across the Black Sea. But don’t pay attention to the stock markets, the company management and Russian maritime analysts warn.

Shares of Novorossiysk Commercial Sea Port (listed as NCSP:LI in the London market, NMTP:RU in the Russian market) retreated 10% in trading on March 2; they have lost 40% since January 1. At a current share price of 60 US cents, market capitalization of the company is currently $1.2 billion. At peak in June 2008, the share price was 22 cents, and the market cap, $4.3 billion. The controlling shareholder is board chairman Alexander Ponomarenko; the Russian government holds a 20% stake; and since a London initial public offering in 2007, the free share float is between 20% and 30%.

However, share turnover has been minimal, according to a source close to the company, adding that when a Moscow investment bank stopped speculating in the shares last year, the volume of shares offered for sale has been too small to be significant. Large swings up and down in the share price are therefore dismissed by senior management of the company as lacking meaning. Whether the instability is without impact on the management, the institutional shareholders, and bank lenders to the port is another issue.

A London broker told Fairplay there was significant dumping of shares in the last quarter of 2008, and in January of this year, as hedge funds sold out of all their emerging market positions. More recently, he said the position for Novorossiysk port has stabilized, as the management message begins to get through. The management claims the main institutions, which bought into the company at the IPO, haven’t budget. It also claims that’s the message it is getting regularly from Morgan Stanley and other marketmakers.
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by John Helmer - Thursday, March 5th, 2009
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By John Helmer in Moscow

The Belarusian Potash Company (BPC), the trader for Uralkali and Belaruskali, has announced it will offer a 25% discount off the spot price of potash on the Brazilian market from $1,000/tonne to $750-$765/tonne (including cost and freight, CFR). The offer is good from this month to end-May.

Brazil is one of the drivers of the spot market for potash; whither the Brazilians lead, the Chinese and Indians are bound to follow.

To date, producers have managed to defend pricing at the nominal $1,000/tonne CFR level reached in mid-summer 2008 by concerted production and supply cuts. In practice, during the grim second half of last year, only a minor share of global potash sales — maybe no more than 5% — were done at the $1,000/tonne price, while the de facto average price on the market has been at the $600 to $650/tonne level since August.

Industry analysts claim that Brazil has been hit hard by the liquidity crisis and economic slowdown, with fertilizer purchasing activity virtually coming to a halt. But in 2008, Brazil imported more potash than China, India, or the southeast Asian market altogether, and the accumulated inventories have yet to be emptied to the point where importing can start again. To do that, there is anecdotal evidence that Brazilian importers are demanding the “Carnival discount” of 50%; the price of boxes to watch the Rio Carnival’s closing pageant last month were reportedly cut to 50% of the 2008 level in dollar terms.

The BPC discount price offer is less than it seems, for the new price represents a 3% to 5% increase over the average price to Brazil for all of 2008, which was $725/tonne CFR.
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by John Helmer - Thursday, March 5th, 2009
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