By John Helmer in Moscow

In the Russian fertilizer business, the days are gone when you could make enormous profits mixing fertilizer ingredients into sacks; loading the sacks aboard ship; and earning your profit margin between the rising export price of the sack, and the government-fixed price of its constituents in the home market.

Today, manufacturers of these mixtures, known in the fert trade as complex fertilizers or NPK, must restructure, or die. That’s in part because the export prices of nitrogenous fertilizers, phosphates and potash (NPK, with K the chemical symbol for potassium) have collapsed worldwide. In part, it’s because the Russian government has imposed export taxes to reduce the spread between external and internal prices, and cut the profit. Finally, it’s because Russian gas and other energy prices have been deregulated, and must rise towards the international level.

It is also commonsense for state administrators to reason that there is greater profit for the state, and for themselves, in regulating domestic fert supply prices to the farm sector within one or two vertically integrated fert companies, instead of the existing collection of competing gas refiners, phosphate and potash miners, and intermediary traders and distributors.

In circuses these days, the crowds pay to see the lady tame the lion. It’s been two thousand years since the Romans paid to see the lion eat the lady. Naturally, vertical integration of nitrogen-refined ammonia, phosphate and potash production into a single corporate structure makes more pleasant sense if you are on top of the incorporation, rather than on the bottom. The reason Dmitry Rybolovlev, controlling shareholder of potash miner Uralkali (URKA:LI), has been feeling so uncomfortanble for months is that he suspects the Kremlin is preparing to subordinate his company, and buy his shareholding out, in favour of the NPK producer, Acron (AKRN:LI).

Acron’s new mining unit, Salt of the Earth (real name, no joke), has been created to consolidate phosphate and potash mining licences which Acron has acquired since 2006, and which, for the time, it lacks the cash to develop. Whether it also absorbs Rybolovlev’s chunk of Uralkali remains to be seen.
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by John Helmer - Wednesday, April 1st, 2009
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1. Recently, President Medvedev urged Russian oligarchs to pay their “moral debt”? What does this mean in concrete terms?
Moral debt in Russia is a case of the three monkeys who see, hear, and speak no evil.

In theory, the Russian President means that men who seized most of Russia’s natural resource wealth more than a decade ago by a combination of corrupt and fraudulent means, and then generated vast fortunes abroad by manipulating Russia’s weak tax and capital controls, have an enormous debt to repay to the state and the economy. In practice, Medvedev does not intend to name names, let alone take any action to collect that debt, whether moral or fiscal.

Indeed, Medvedev is going to unusual lengths to protect one of the oligarchs, Oleg Deripaska, from having to honour the loan obligations he has to Russia’s state banks, as well as to a group of more than 70 commercial banks, some Russian, most foreign. If anyone in Russia carries the largest moral, as well as money debt today, it is Deripaska. Consider then why Medvedev said, at a regional conference in Irkutsk on February 20, in Deripaska’s presence: “I fully agree with what Oleg Vladimirovich [Deripaska] said about situations when the crisis leads to settling scores… There should be no situations when different structures’ rivalry can lead to the collapse of an entire group of companies…Such actions should get adequate reaction from the state. For that purpose we have one serious institution, the government of the Russian Federation … There are situations when power must be used.”

In case anyone was in doubt that Medvedev meant to reach up, and put his arm around Deripaska, he repeated the message at a Kremlin meeting on March 17. On that occasion, the president was meeting with Mikhail Fridman, controlling shareholder of the Alfa Bank group. Alfa, to whom Deripaska is overdue in repaying between $650 million and $1 billion, has led the commercial banks in launching court action in Moscow, and also in Jersey (where Deripaska registers some of his companies). Medvedev the lawyer appeared to be telling Fridman the banker: “We cannot sacrifice entire companies with many thousands of staff to meet the ambitions of certain credit organizations.”

It is one thing for a politician not to mean what he says, or to mean different things to different audiences. It is quite another thing for a politician to say things he has no power to do, with the purpose of intending to do in secret what he would not dare acknowledge in public.
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by John Helmer - Monday, March 30th, 2009
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By John Helmer in Moscow

The announcement from Mechel on March 26 that it has agreed with its bankers on a 51-day extension of time to repay or refinance a $1.5 billion loan, which fell due on March 20, has exposed a grave failure of arithmetic in the marketplace. And that’s not all.

Headlined by Bloomberg and Reuters as a two-month extension, and repeated by rote in client bulletins from the principal Moscow brokerage and investment houses, the new loan payment deadline, which New York-listed Mechel reported to the Securities and Exchange Commission, is May 15. That was just 51 days away from the signing of the new agreement — not 60 or 61, as two months usually add up to. The nervousness of the banks in setting the short deadline seems to have been obscured by the unwillingness of the market-makers and media to take out their fingers and thumbs, and check the official release from Mechel itself.

That said: “On March, 25, 2009, following negotiations with the banking syndicate which provided Mechel a one-year loan for the Oriel Resources Ltd. (United Kingdom) acquisition, an agreement for a two month payment term extension was reached. The new payment date is May 15, 2009. The prolongation period will be used to complete negotiations with the bank participants of the syndicate aiming at refinancing the bridge loan with long term instruments.”

As has been reported in the archive, Oriel is a chrome miner and refiner. Since the takeover a year ago, it has been included in Mechel’s ferroalloy division, supplying chrome to Mechel’s specialty steel diivision for the production of nickel and chrome-plated products.
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by John Helmer - Sunday, March 29th, 2009
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By John Helmer in Moscow

Far Eastern Shipping Company (Fesco) has released through a wire service a set of unaudited financial estimates for the full year 2008. The release was unusual, analysts said, and appears timed to counteract the impact of a downgrade by the Moody’s rating agency in Moscow on Thursday.

Despite better than expected revenues, as well as the earnings figure Ebitda, the shipping, ports and rail group has acknowledged a heavy writedown in the value of its fleet. In a note to clients and investors, Troika transportation analyst, Kirill Kazanli, says “the group’s bottom line is expected to range between breakeven and net loss of around $1 mln.” Fesco’s controlling shareholder Sergei Generalov, the executive chairman, issued a public statement confirming the possibility of this bottom-line loss for the year.

The company has not released a financial report for the year on its website, and spokesmen for the company refuse to answer questions about the calculation of the vessel writedown, which appears to have been taken in the fourth quarter of 2008.

The last financial report, audited by Moore Stephens, was issued for the six months to June 30 last, and posted on November 28. This identifies Raffeisen and ING as the biggest lenders to Fesco for fleet additions. With Citibank and Unicredit (Italy), these banks take up about 66% of the Fesco loan book.

As ships lose their market value, banks which have made loans for their purchase and which hold the vessels as collateral for repayment are likely to raise cash or margin calls from the borrower, or seek additional security. When asked whether it has considered margin-calls on Fesco loans, Raffeisen asked for a written letter of request, and then refused to reply. Unicredit and Citibank refused to talk about loan terms, margin-calls or vessel valuation policy.
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by John Helmer - Friday, March 27th, 2009
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By John Helmer in Moscow

In 1930, at the start of the Great Depression, a story was published in the US with the purpose of convincing children that if they worked hard, they would be rewarded. That idea being none too original, it turns out that the tale of the small anthropomorphic locomotive, who pulls a heavy line of freight-wagons over a mountain-top, was cribbed from a publication a quarter of a century before.

If your mother read it aloud to you as a youngster, you’ll remember the best parts. The first was at the shunting yard when the bigger locomotives refuse the job, and the little one chants: “I think I can. I think I can. I think can.” With tantalizing tension as he slows on the up-grade, he manages the feat, and then celebrates as he runs downhill: “I thought I could. I thought I could. I thought I could.”

High River Gold (HRG:CN) is the Toronto-listed junior who’s lived to tell this tale. Only the children in the market don’t appear to have heard it, yet.

With four operating gold mines in Russia and Burkina Faso, tw and two mine projects in development, HRG has currently attributable production of about 300,000 ounces per annum, and is cashflow positive. Attributable gold reserves were estimated in February by Dan Hrushewsky, HRG’s investment relations director, at 2.2 million oz, with silver reserves at 5.2 million oz. A subsequent release from the company on March 17 reported a MICON expert audit of gold reserves at the Zun-Holba and Irokinda mines (Buryat region of southeastern Siberia). Altogether, counting the Bissa gold project in Burkino Faso and the Prognoz silver project (Sakha region of fareastern Siberia), and converting silver reserves into gold equivalent, HRG’s gold equivalent reserves and resources, on the Canadian NI 43-101 basis, add up to 6.1 million oz.

A recent international investment bank valuation of HRG estimates it at almost $770 million. The current market capitalization, however, is C$112 million (US$91 million). This compares with Russian peer Polyus Gold (PLZL:LI) at $9.1 billion; Polymetal (PMTL:LI), $2.2 billion; Peter Hambro Mining (POG:LI), $686 million; and Highland Gold (HGM:LI), $203 million.
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by Editor - Friday, March 27th, 2009
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By John Helmer in Moscow

Russia’s steelmakers have a better chance to lift output and revenues on a recovery in export demand, especially in the China market, than on reviving domestic demand for steel. This forecast, issued in a steel sector report of March 24 by Troika Dialog investment bank in Moscow, flatly contradicts the consensus of Russian steel analysts a year ago. At that time, they told investors they were certain Kremlin spending on public works would sustain demand for steel for domestic construction and infrastructure, and so buffer the domestic steel industry against external shocks.

What a canard that turns out to be.

“Now that demand for steel is falling,” the new Troika report claims, “international trade is going to decline dramatically as well, but we think that Russian players are well positioned to claw back at market share thanks to the cost advantage, and hence protect export volumes from falling massively…On the domestic front… we expect demand to drop by around 40% in 2009 from its peak 2007 level…At the same time, we do not entertain illusions about a possible positive impact from the government economic stimulus program, which seems to be growing smaller by the day.”

The report predicts that the protectionist option may also grow in importance, as Russian mills and pipemakers apply to the Trade Ministry in Moscow for domestic injury or anti-dumping relief, primarily to keep out Chinese steel imports. “Russian producers could partly offset the drop in demand by squeezing out imports, which averaged 13% of Russian consumption last year (the same as during the entire previous decade), but this might be difficult without official support. The Russian government took the first step in January, imposing import duties on certain types of long products and pipes ranging from 15-20%, thoughthis may not be enough to put a barrier in the way of imports.”
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by Editor - Thursday, March 26th, 2009
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By John Helmer in Moscow

For weeks, Alrosa, Russia’s diamond mining challenger to De Beers, has been waiting for the appearance of a miracle to keep the mines producing at last year’s volumes, and avoid layoffs and financial damage to the fareastern region of Sakha, where Alrosa is the chief income generator.

That miracle is a secretive government agent called Gokhran. Legally a branch of the Ministry of Finance, it has a history going back three hundred years to the time when Tsar Peter the Great decided he needed something more formal than bodyguards and hobnailed chests in which to keep his treasure.

During the 1990s, Gokhran played a key role in releasing, as well as withholding Soviet-era stocks of rough diamonds, plus platinum and palladium. The result created several diamond fortunes in Tel Aviv and San Francisco; the speculative spikes in the price of the platinum group metals were the foundation on which several celebrated Johannesburg mansions and Eastern Cape beach villas were erected.

Today, much depleted in valuables, compared to fifteen years ago, Gokhran is rebuilding its strategic significance in the international diamond market. This is because it has the potential, with Russian state funding, to buy up Russian rough diamond production. Unlike the other global diamond miners, which are halting mine operations, slowing mills, and laying off miners and prospectors, the alliance between state-owned Alrosa and state-funded Gokhran has the potential to make an enormous Russian grab of global diamond market share — and keep it.

That is what Alrosa, with a 25% share of the market, is waiting for. But will Godot, I mean Gokhran arrive in time? On Thursday last [March 19], it seemed so. Russian government ministers agreed then to make a substantial increase in budget money for Gokhran to buy Alrosa’s mine output this year. It is far from clear, however, what proportion of the production will not be bought by Gokhran; and what cuts to the mine output plan Alrosa management may now be obliged to make, if any.
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by John Helmer - Thursday, March 26th, 2009
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By John Helmer in Moscow

Denmark-based fleet operator Norden has hit United Company Rusal, the Russian aluminium monopoly controlled by Oleg Deripaska, with claims for shipping contract violations since last September. The liabilities total $98.3 million. Court documents break publicly for the first time the code of silence which usually covers Russian commodity trades, the cargo owners and the shippers.

Norden chief executive Carsten Mortensen refuses to say if London arbitration to enforce Norden’s contracts has already commenced.

US court records from the southern federal district of New York show, however, that Norden is charging a Jersey-registered Rusal trading company with breaking contracts for the shipment of 2.6 million tonnes of Queensland bauxite from the port of Weipa to Porto Vesme, the alumina refinery port in Sardinia. The tariff agreed was $64.64 per tonne, making a gross charge of $167 million. For this year, the contracts specify 15 shipments of 300,000 tonnes.

Rusal, one of the leading primary aluminium, alumina and bauxite producers in the world, has said in the past that all shipping data are company secrets; the company itself is privately owned and publishes no financial reports. Trade data are kept secret, because of the complex tolling and tax schemes which Rusal uses in Russia, and in its international operations. The Australian government keeps bauxite export data confidential.

According to the US court documents, Norden went into the New York federal district court in February to attach Rusal bank funds to secure payment, in the event the London arbitration awards Norden its claim. On February 10, US judge Richard Berman ordered 15 US and international banks, including Nordea of Finland, to freeze Rusal accounts up to $93.8 million in cash value.
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by Editor - Wednesday, March 25th, 2009
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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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