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By John Helmer in Moscow

Co-owner of Polyus Gold Mikhail Prokhorov and chief executive Evgeny Ivanov are planning a roadshow this week to answer questions from minority shareholders. The presentations have been scheduled two weeks before the annual general shareholders meeting of the company, Russia’s largest and most valuable goldminer, due on June 26.

Prokhorov kicked off with a statement that flies in the face of everything that has emerged to date from his year-long conflict with co-controlling shareholder, Vladimir Potanin. Speaking on the sidelines of a St. Petersburg economic forum, Prokhorov said: “I didn’t break any agreements, the situation simply changed…And we are still friends.”

Continuing gyrations in the stock price of Polyus Gold, along with new evidence that a share option agreement of last July was designed to reward loyalists to Prokhorov, and disadvantage Potanin’s supporters, suggest that the negotiation between Prokhorov and Potanin is anything but friendly, while the appearance of their conflict continues to threaten the future of the company’s value, and add fuel for investigation by the London regulatory agency, the Financial Services Authority (FSA).

Alrosa chief executive Sergei Vybornov added a warning of a deep price correction to come. As he positions the state-owned diamond miner to buy back goldmining assets it sold to Polyus in 2005, and also to bid for Polyus shares, Vybornov warned over the weekend that a “normal price range” for the shares should be between $40 and $50. This implies that if the state engages in the Polyus tussle, it will be expecting a discount to current value of between one-quarter and one-third. Vybornov also said that he will wait until the conflict between Prokhorov and Potanin is settled.

If they get the chance in London this week, the Polyus minorities are likely to begin by asking Ivanov to say exactly what size of stake in the company is currently held by Prokhorov, his Onexim holding, and related parties. A recent Moscow press report claimed that a spokesman for Onexim has said that if the group were to acquire a 6.54% stake in Polyus, currently owned by the Polyus offshore vehicle, Jennington, then it surpass the 30% threshold at which it will be obligated by Russian regulation to make a buyout offer for all minority-held shares. If the free float in Polyus shares – aside from Jennington – is about 30%, an obligatory offer from Prokhorov might cost him up to $5 billion.

By contrast, sources close to Prokhorov claim he has been telling associates that his group holds no more than 23% of Polyus Gold at present, and will not strike the 30% level, nor cross the buy-back threshold.

What may be equally difficult to explain for Ivanov is whether the publicly announced offer for the Jennington stake recently issued by Onexim was a genuine one, since it followed immediately after the London-based Kazimir Patrners’ bid for a 2.5% stake had been rejected by Ivanov and the Prokhorov-controlled board. Each of the bids triggered an upward spike in the share price, and this, according to a letter the FSA sent Polyus in Moscow, is under investigation.

According to sources close to Polyus, there was also a third bid from Alrosa, although officially Vybornov’s spokesman is denying this. The sources claim that the Alrosa offer was already being negotiated with Vybornov, btut he didn’t make his move until after Onexim had tabled its offer. It too was rejected by Ivanov and Prokhorov. But word of the bidding led to a proposal by some board members, who are aligned with Potanin’s Interros holding, that the company should formalize the bidding process, and encourage higher pricing and value for shareholders, by conducting a competitive tender.

If a tender were called, then Prokhorov would have been facing a lose-lose situation. Either he would lose to one of the other bidders, and thus lose the voting power of the Jennington votes ahead of the AGM. Or else, he would be forced to pay the tender winning price – at least $900 million – plus trigger the minority share buy-back condition. Since the Jennington votes are in Prokhorov’s pocket already, without his being obliged to pay a penny, the proposed tender was dismissed, along with all three bids – from Kazimir, Alrosa, and Onexim.If, however, the FSA probe discovers evidence that the Onexim bid was a ploy, and that the share price gyrations that have resulted were the outcome of undisclosed insider operations, then sanctions for Prokhorov and Ivanov may follow.

Sentiment inside Polyus Gold is uncomfortable and embarrassed by the visible signs of what is happening at the shareholder level. There are also signs that senior managers are being influenced to take sides in a manner that may be incompatible with their fiduciary duty. The leak of a 39-page share options agreement indicates how the company’s managers, and at least two directors on the board, are being influenced by Prokhorov.

According to a share options agreement, dated July 11, 2007, Polyus Gold agreed to issue and redeem 4,575,065 shares; 2.45% of the total share issue of 190.6 million. These were to be sold to a British Virgin Islands (BVI) vehicle called Alula Trading Ltd., set up for the express purpose of handling the options transaction. Just five beneficiaries are signed for – Ivanov; a second board director Valery Rudakov, Vladimir Sovmen, general director of the closed stock company ZAO Polyus; German Pikhoya, deputy general director of the open stock form of the company; and Alexei Osenmuk. Osenmuk had been chief financial officer of Polyus until April of 2007, when he was made chief executive of the spinoff company, Polyus Exploration.

The payout through the options was to be arranged through a trust scheme, in which each beneficiary was to have a separate trust, “with one trustee – Sara Alfa Limited,” which was also BVI registered.
The options transaction documents show that the strike price of the option scheme was $14 per share. The text of the agreement provides for Alula to borrow from Prokhorov, through Onexim, to acquire the shares from Polyus; estimated cost must have been just over $64 million.

The agreement also sets out that the “parties intend that the sale of all PG shares shall occur until October 1, 2007, at the price not lower than fifty-five (55) US dollars”. Until that deadline, the five beneficiaries agreed to a lock-up. Estimated redemption value, when Alula were to sell to the market, should thus have been about $252 million.

But the share price didn’t reach $55 on October 1. Between May and July of 2007 the Polyus price plummeted, hitting a year-low of $38.50 on June 13. It was to recover into the $40s in July, only to fall again to below $40 at the beginning of August. It did not reach $55 per share until February 2008, and then not for long. It was not until word of the Kazimir and Onexim bids reached the market that Polyus Gold shares have sustained a price over $55.

As of October 1, however, the net gain accruing to Ivanov, the second board member, and three managers should have been $188 million. If $55 per share had been paid to the five beneficiaries, Ivanov’s 1.5 million share allocation should have netted him $84 million; Rudakov’s 1.39 million shares, $73 million; Sovmen, $68 million on 1.239 million shares; Pikhoya, $21 million on 381,255 shares; and Osenmuk, $5.2 million on 95,314 shares.

These are the hypothetical gains. They did not materialize, but what exactly happened is not clear. Ivanov told a Moscow newspaper this week that Alula repaid its loan to Onexim without defaulting, and the shares were sold by year’s end. Who bought them, and at what price, he did not say. Whether the shares will be voted alongside Onexim at the AGM remains to be seen.

Favour may be fickle inside the Prokhorov group, and loyalty has its price. But as Ivanov tries at his roadshow this week to persuade Polyus’s minority shareholders to vote with the Onexim group at the AGM in a fortnight, they and he appear to share the same predicament — if they don’t hang together now to do as Prokhorov wants, each of them will hang one by one.

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