By John Helmer in Moscow

It’s just as normal, geologically speaking, for potash mines to subside and flood, as for high-profit businesses to be taken over, if the price is a bargain, commercially speaking. Deputy Prime Minister Igor Sechin deserves some credit for combining the two — reviving a two-year old geological anomaly, in order make the takeover of Russia’s most expensive potash miner affordable.

On October 29 last, Uralkali (URKA:LI) had a market capitalization of $6.373 billion. In the three months since July, it had lost 64% of its value, because of the global collapse in equity values. In comparative terms, this was marginally better than the Russian RTS stock market index as a whole, which had dropped 67% in the same period.

This week, Uralkali’s share price fell 20% in Monday trading, and now stands at $2.145 billion. It has lost $4.228 billion in value in the three-month interval since October 29, roughly double the decline of the RTS index. The potash miner has been losing asset value at a rate of $45 million per day, including Saturdays and Sundays.

But the spot price for potash has remained virtually flat, unchanging since last July. A big deficit in supply of potash in the first half of 2008, and rapid action by Russian and North American producers to cut output in the second half of the year have combined to hold the bellwether price for potash delivered to Brazil at the $1,000 per tonne mark. It is also being held up by demand drivers — a sharp contraction in grain inventories, and a forecast improvement in grain prices.

Uralkali’s North American peers also lost share value and market capitalization from July. But they bottomed in December, and have been gaining value since then. Potash Corporation (POT:US) is up 44% since its December low, and its current market cap is $22 billion. Mosaic (MOS:US) is up 60% since December, and its market cap at the moment is $16 billion. Comparing the ratios of share price to earnings (P/E), Uralkali dropped to 2.7 for 2008, compared to 11.7 in 2007; and compared to 5.3 and 5.5 for Potash Corp and Mosaic, respectively, in 2008.
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by John Helmer - Tuesday, February 3rd, 2009
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By John Helmer in Moscow

Russia’s leading maritime fleet executives, who were keen to announce newbuild orders and fleet renewal plans a year ago, have become very coy in the face of falling cargo volumes and freight rates, and the expiry of long-term charters. The principal lenders to the Russian shipping companies are even more uncommunicative.

State-owned Sovcomflot is the fleet leader with 132 vessels totaling 9.4 million dwt, and 31 vessels currently on order for another 2.7 million dwt. Ranking itself in the top-5 global tanker companies, Sovcomflot’s last annual report for 2007 refers to long-term debt of $2.1 billion, up 11% on 2006; the “current portion” of the long-term debt is $153 million. The interest expense line shows interest repayment in 2007 at $90 million, up 29% from 2006, when it was $70 million. There are no auditor’s notes or elaborations of debt or fleet valuations in the text of the report. The only reference to bank lenders for fleet says: “Sovcomflot has long established relationships with major Russian and international banks allowing it to secure long-term debt financing on attractive terms.”

Novorossiysk Shipping Company (Novoship), also state owned, reports that its current fleet of 52 vessels comes to 4 million dwt, and its order-book includes 14 vessels for another 1.4 million dwt. The company provides no further detail on fleet financing or debt.

A Russian fleet insider says that Sovcomflot, which has taken shareholding control of Novoship, has persuaded lenders to value ships with a formula based on the purchase price extended for 25 years. Before the adoption of this formula, the Sovcomflot fleet was valued every year at market value, with revaluation differences reflected in the annual financial statement on the profit/loss line. It is unclear what valuation policy Sovcomflot’s lending banks are now insisting on, or what balance-sheet and replayment impacts this is having at present.
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by John Helmer - Monday, February 2nd, 2009
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By John Helmer in Moscow

In outer space, as everyone knows, the absence of the force of gravity produces the appearance of weightlessness. Everything floats away.

The markets have decided that Russia is now without gravity; its equities are without weight, and at risk of floating away. Late last year, the RTS, the principal stock market index, starting decoupling from the price of the principal Russian export, oil, as the latter started to plummet. The emerging market investment funds, which have also moved with oil and Russia’s other exportable commodities, also decoupled from commodity prices and the RTS. Since the start of January, the RTS and the oil marker have been in negative correlation. That means that even if the oil price goes up, Russian share prices go down. This is the equivalent of outer space.

It is no surprise, therefore, that everyone in the Russian market is gasping for an oxygen-mask, and a safety belt.

President Dmitry Medvedev and Prime Minister Vladimir Putin believe they are the constitutionally elected heads of government, and imagine their government is the air supply and safety-belt of the state. Those officials aligned with them — Deputy Prime Minister Igor Shuvalov with Medvedev, Deputy Prime Minister Igor Sechin with Putin — like to think that, although elected by noone to nothing, they too are the safety-belts, and pilots, of the state. Watch them closely — the more carefully Shuvalov brushes at his coiffure, and Sechin draws his face into a scowl, the more you can be certain they think they are in charge of Russia’s mass, motion, weight, air supply.

Without a banking and state audit system accountable to parliament, without a parliament accountable to the voters, and with regional governors and mayors appointed, not elected, where else can the force of gravity be located? If not with them, then all of Russia has indeed decoupled, and equity is in danger of valuelessness.
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by John Helmer - Friday, January 30th, 2009
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By John Helmer in Moscow

In the Kingdom of Russian fertilizers, there has been the Power and the Glory of hugely profitable export margins and high-flying share prices. But there is only one Will which can be done.

Prime Minister Vladimir Putin visited Acron’s Novgorod chemicals plant last Sunday, January 25, and he appeared to give his personal blessing to a string of costly financial and industrial blunders by Vyacheslav Kantor, the Geneva-based founder and controlling shareholder of the company. Putin was accompanied by Deputy Prime Minister Igor Sechin, who is currently reviewing several plans to consolidate Russian mining companies, including the principal potash and phosphate producers.

At the Acron plant, Putin is quoted by Bloomberg as saying: “The owners of this enterprise not only keep jobs in quite difficult conditions, they also develop the social sphere. Owners of the enterprise are not poor people. If those who deal with real production also have a feeling of social responsibility, we will support such people.”

The list of Acron’s supervisory board and senior management, and the disclosure of shareholders, do not include Kantor, who owns almost 72% of the company. But it isn’t difficult to determine how much of Acron’s profit, and Kantor’s wealth, derives from what can be termed “real production”. An experienced kabbalist might be needed, however, to interpret why substantially more “real” producers in the fertilizer sector than Acron have failed to qualified for Putin’s nod.

Kantor’s company Acron (ticker AKRM:RM) is Russia’s leading producer of complex fertilizers. These are a combination of the three basic chemical nutrients for plant growth — nitrogen, potassium, and phosphorous; or a combination of urea, phosphate, and potash, referred to by the acronym NPK. Nitrogenous fertilizers are derived from natural gas; potash and phosphates are mined. Acron mixes the ingredients and trades the NPK product in higher volumes than any other fertilizer producer in Russia, earning a higher margin on the spot price than the individual fertilizers which comprise it. But Acron doesn’t produce — that’s real production — the feedstocks which comprise the product it sells. It has bought licences to start mining the real stuff. But it is years away from that — and if what Kantor told Putin is the truth, Acron has no hope of ever getting there.
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by John Helmer - Thursday, January 29th, 2009
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By John Helmer in Moscow

Jonathan Oppenheimer, the embattled heir to Nicky Oppenheimer and to the struggling De Beers group, and Vagit Alekperov, chief executive and controlling shareholder of LUKoil, one of Russia’s leading oil producers, have started fighting again over the disputed Grib pipe; also known as the Verkhotina project in the northwestern Russian region of Arkhangelsk.

The diamonds at stake, unmined below the surface, were estimated a year ago to be worth $9.7 billion. Until the start of January, Oppenheimer and Alekperov were almost equal partners in a joint venture, signed last April, to develop a mine at Verkhotina. Now they are adversaries again, as Oppenheimer reshuffles his crew for a fight; and Alekperov signals that he is engaging a French company to start independent drilling at the minesite.

Oppenheimer has appointed one of his closest associates in the company to the board of Archangel Diamond Corporation (ADC). The announcement of Tony Guthrie to the ADC board was issued by ADC on January 23.

ADC’s Toronto listed share (ticker TSXV:AAD) lifted from 5 Canadian cents to 6.5 cents on the news. The Candian junior, controlled by De Beers, is the only foreign mining company ever to find, and try developing a diamond mine in Russia.

The ADC release is curt, giving no reasons for the shakeup of its board. “Archangel Diamond Corporation … has announced the resignation of Mr. Bruce Cleaver as Chairman of the Board and a director of the Corporation and Mr. Jonathan Dickman as a director of the Corporation. The Board expresses its appreciation for their services to the Corporation. Mr. Robert Shirriff, a current director of Archangel, has been appointed Chairman of the Board in place of Mr Cleaver. The Board has appointed Mr. Tony Guthrie and Mr. Steven Thomas to the Board to fill the vacancies created. Mr. Guthrie is a mining engineer and senior manager with De Beers Group Services in Johannesburg. Mr. Thomas is Chief Financial Officer of De Beers Canada in Toronto and is also Chief Financial Officer of Archangel.”
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by John Helmer - Thursday, January 29th, 2009
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By John Helmer in Moscow

Premature ejaculation is not usually an event which gentlemen call a public meeting to disclose. At least, not unless they are selling a cure.

The announcement this week in Moscow by Tye Burt and Yevgeny Ivanov, chief executives of Kinross Gold (KGC:US) and Polyus Gold (PLZL:RU), that they have signed a preliminary undertaking to think of doing a feasibility study in eighteen months’ time of the Nezhdaninskoye goldmine in Russia’s fareast is puzzling for its circumlocution, and its lack of specificity. According to the Polyus Gold announcement, the two companies “have concluded Memorandum of understanding on the possible joint development of Nezhdaninskoye hard-rock gold deposit located in the Sakha Republic (Yakutia)….within the time frame of 18 months the companies are planning to jointly prepare a Feasibility Study for the industrial development of the Nezhdaninskoye deposit.” Thereafter, another pair of conditionals — “upon completion of the Feasibility Study and, if warranted by its results, the parties will review the possibility to enter into a joint venture agreement for developing the Nezhdaninskoye deposit.”

Kinross has so far omitted to refer to Nezhdaninskoye, and Burt is not usually so coy. What is more, he already knows at least as much about Nezhdaninskoye as Ivanov. For this is one of the most carefully studied and valued gold deposits in Russia. First discovered in the Soviet period, and mined from 1975, it was thoroughly appraised in the early 1990s by David Deuchar, then technical director for Anglo American. The company decided the technical problems of the deposit raised costs above Anglo’s threshold of profitability, at the gold price prevailing at the time.

The mining rights subsequently went to Celtic Resources in its Irish phase. Then taken over by the West Australian Kevin Foo, all the detail the market might want for the deposit was issued in London, when Celtic was listed on the Alternative Investment Market (AIM). Although mining had been mothballed, and Celtic produced no gold for sale from the mine, Nezhdaninskoye performed as Celtic’s principal value- driver in the stock market, representing about 90% of its asset inventory. According to Celtic’s pre-feasibility studies and JORC count, Nezhhdaninskoye held 14 million oz of gold, with a prospective production rate of 450,000 oz per annum.
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by John Helmer - Wednesday, January 28th, 2009
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By John Helmer in Moscow

Once upon a time, in not so ancient Greece, a crooked banker had the idea of hedging the consequences of his crimes by buying a popular newspaper, and also a popular football team.

But the risk hedges didn’t work quite as he intended. The banker was indicted and jailed in his homeland; then escaped prison; and flew for asylum to the United States. He might have succeeded in securing safe haven there, for US officials wanted to give him asylum in return for his support of a Greek putsch they were planning. Instead, he was arrested before there was time for them to act. He spent three years in a US prison fighting extradition; and then a decade in prison at home. The government he tried so hard to attack survived him, and was re-elected.

That was an inauspicious debut for the idea of purchasing an asylum hedge through pop media and football teams.

The modus operandi – football team minus media – has been tested with greater success by the Russian, Roman Abramovich, in the United Kingdom. He hasn’t applied for asylum in London, where his team plays, but then he hasn’t needed to. A Russian state bank, chaired by the Russian Prime Minister, is lending his over-leveraged enterprises bailout money, and noone accuses Abramovich of indictable offences. Noone dares to.

Alisher Usmanov, another Russian who has bought a stake in an English football team, owns a newspaper in Moscow, and has also avoided the necessity of applying for asylum outside his homeland. His name appears in the civil court papers of a US court case involving a diamond mine, but he too is not guilty of anything.

Let’s be clear – just because a wealthy Russian buys pop assets in foreign lands doesn’t mean he’s guilty of anything. Except, possibly, of poor commercial judgement.
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by John Helmer - Tuesday, January 27th, 2009
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By John Helmer in Moscow

When it comes to the heroics of the free press, London reporters and their proprietors prefer to tell of chests bared and bloody corpses on foreign streets, preferably in places designated by Her Majesty’s Secret Service as enemy country. Moscow, for example.

In the City of London, by contrast, the spectacle of reporters putting on their blinders and dropping their shorts for money, or the fear of it, is not even anti-heroic, but the kind of reality show that can’t win awards in the light entertainment or comedy categories.

Take, for example, the recent sale and purchase of the London Evening Standard for the price of one English pound by Alexander Lebedev. The seller was the Harmsworth family, which has run out of ready cash. The fourth Viscount Rothermere inherited a peerage that was his progenitor’s reward for publishing newspapers that entertained politicians just before World War 1, and who subsequently promoted reporting that was good for his real estate, commercial, and sexual interests in the fascist states of Hungary and Germany. The cash the current viscount has explained he doesn’t have is estimated at ₤1 million per month, which the Standard is said to have been losing over the past year.

Lebedev is reported in the London papers (and reports himself on his personal website) as a former lieutenant-colonel of the KGB, whose job as a spy once posted in London required him to read, clip and file the newspapers.

The Financial Times reported the transaction, noting that Lebedev was buying through a special purpose vehicle (SPV) he had set up in December for his son Yevgeny to run. Called Evening Press Ltd., in which a Rothermere company retains a 24.9% stake, the new company is, according to the Guardian, “a shell”. According to the Financial Times, it has a “£40m equity value”. Financial reporters should know how to count, but it isn’t clear how the SPV can be worth so much if 75.1% of its only asset is currently worth ₤1.
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by John Helmer - Monday, January 26th, 2009
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By John Helmer in Moscow

It was the the 19th century German politician Otto von Bismarck, who famously claimed that politics is the art of the possible — before he sent his armies to invade westwards.

To judge the outcome of this month’s “gas war”, initially between Russia and Ukraine, but then involving many of the East European states as well, Russia’s prime minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, have devised the politics of the impossible, thereby warming Ukrainian stoves for less cost, while earning Gazprom, Russia’s principal enterprise, more profit.

The details are being studied in Beijing by Chinese bank and oil negotiators, who have not yet to agree with Rosneft for supply guarantees and an oil-price and loan repayment formula to regulate the next decade of Russian deliveries of crude oil to northern China.

A purported text of the gas agreement, signed on January 19 by Gazprom and Naftogas Ukrainy, has been released to the press in Kiev, but Gazprom officials refuse to answer questions about the terms of the new contract. Denis Ignatiev, the spokesman for the company’s foreign relations, told 21st Century Business Herald that he cannot add comment or clarification to the official Gazprom statement, released at the time of the contract signing in Moscow, in front of Putin and Tymoshenko.

The Russian position is focused on defining the price of gas at Ukraine’s eastern frontier; establishing a formula for quarterly adjustments to this price for the remainder of this year; fixing the volumes of new gas to be delivered to Ukrainian consumers and to European customers for the quarter, and for the year; and to exclude commercial intermediaries upstream, between Gazprom and Naftogas, while allowing them downstream, between Naftogas and end-users in Ukraine.
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by John Helmer - Friday, January 23rd, 2009
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By John Helmer in Moscow

Noone, least of all Dmitry Pumpyansky, should be faulted for not anticipating exactly when the oil and gas bubble would burst. But what can be said of Pumpyansky’s calculation that he had at least two more years of defying gravity, and no hedge against the risk that he might be wrong?

Pumpyansky, who turns 45 years of age shortly, is the figure who managed the creation of TMK, Russia’s largest alliance of steel pipemills (ticker TMKS:LI), out of murky origins, and with associates who are now best left unnamed. His acumen is undoubted; so was his good fortune. Between October 2006 and November 2006, TMK jumped in price from $4 billion, when Pumpyansky arranged to buy out his Russian partners, Sergei Popov and Andrei Melnichenko, to $7 billion, which was the market capitalization of the company at its London initial placement offering (IPO). In the twenty months that followed to June 2008, TMK doubled its value to $9.4 billion.

By then Pumpyansky, the number-3 pipemaker in the world after Tenaris (Argentina, TS:US) and Vallourec (France, VK:FP), had set his sights on matching, besting, buying out, or swapping his stake into one of the other two. For that he needed to become bigger, and more international. And for that he needed to borrow money. The idea was impeccable; the timing was off. According to a new report issued in Moscow today by Troika Dialog, a Russian investment bank, Pumyansky led TMK into a serious miscalculation of financial and trade risks. These have placed the company today in dependence on favour from the Kremlin — favour which Pumpyansky has been unable to demonstrate on the way up.

Pumpyansky individually, or with others, controls 77% of TMK’s stock; 23% is the currently estimated free float. Market capitalization of TMK today is $720 million. Yesterday it was $835 million. Tenaris is currently at $12 billion and rising; Vallourec, $4 billion, and also on the up. From the banking point of view, it is difficult to catch a falling star, and put it into your pocket.
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by John Helmer - Thursday, January 22nd, 2009
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