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By John Helmer in Moscow

The break-up of the partnership controlling Norilsk Nickel and Polyus Gold grows more interesting by the day.

A half-century ago, hardboiled US city cops used to prosecute the so-called badger game. At its origin, this involved a woman luring a man into a compromising position, only to be caught in flagrante by the woman’s “husband”; in fact, her accomplice. The victim was then told to pay blackmail to avoid exposure by the “badger”.

Very occasionally, more in the fiction of Dashiell Hammett than in reality, the badger got nabbed, and sent up.

This past January, when Mikhail Prokhorov, one of Russia’s richest mining entrepreneurs, was arrested and sent to prison in the French city of Lyon, he believed he had been framed by his partner, Vladimir Potanin. The two are co-controlling shareholders of Norilsk Nickel and Polyus Gold, the dominant Russian hard-rock mining companies listed internationally.

As Mineweb has already reported, before the January episode — Prokhorov was released after the French interrogation without charges being filed — Prokhorov and Potanin had been unable to agree on terms for breaking up their partnership, and selling their shareholdings.

In February, Prokhorov formally announced the breakup of the partnership. He then resigned from the chief executive’s post at Norilsk Nickel. In April, Yevgeny Ivanov, Prokhorov’s man in charge of Polyus Gold, was replaced by Potanin’s appointee. In May, Prokhorov went public in an attack on Potanin for bidding too high a price to take over LionOre Mining.

Watching the conflict deepen, the Moscow market allowed the Norilsk Nickel share price to rise 39% since January 1, with a current market cap of $41.6 billion. Polyus, by contrast, has been marked down 16% in the year to date; its market cap is currently $7.9 billion.

Seeing his price clout dwindle with Potanin, Prokhorov has launched a classic Russian manoeuvre — call it the reverse badger game. This involves one partner luring an accomplice into a position that threatens to compromise the other partner, thereby raising the price the second partner can be persuaded to pay for extricating himself.

In reaction to Potanin’s tactics to raise the price for Norilsk Nickel shares, Prokhorov has encouraged the exposure of negotiations he has opened to sell his stakes in Norilsk Nickel and Polyus Gold to third parties willing to pay more than Potanin, and then put pressure on him to pay even more.

In August, it was disclosed that Prokhorov is in negotiations to sell his 25% stake in Polyus to Alrosa, the state diamond miner, with financing from VTB, a state investment bank. The transaction carried an implied warning to Potanin that if he wouldn’t pay Prokhorov’s asking price, Prokhorov’s 25.5% stake might be sold at a substantial premium, while Potanin’s stake might be commandeered by the state at a later discount.

The problem with this deal is that state officials don’t have a high estimation of either Prokhorov as seller or Sergei Vybornov, Alrosa chief executive, as buyer. In 2005, Vybornov had sold Prokhorov and Polyus Alrosa’s control stake in junior gold miner, Celtic Resources, thereby divesting the Sakha region’s three major gold deposits — Nezhdaninskoye, Kuranakh, and Kyuchus.

Details of the full price paid in that deal, and to whom, have not yet been disclosed. What appears to have happened is that, in a sequence of transactions, a 30% stake in the Nezhdaninskoye goldmine was sold at a higher valuation than a 50% stake, although title uncertainties should have led seller and buyer to accept a lower one. Tax liability to the Russian exchequer also remains uncertain, but sizeable, if the transaction chain were opened up. Also uncertain ae the terms on which Polyus’s shareholders were obliged to pay Interros, Potanin’s holding company, a premium of several scores of millions for passing through the property title — from the right hand to the left hand, from Potanin to Prokhorov.

It is no surprise that Alrosa’s state shareholders are divided over whether to pay Prokhorov’s price for buying this all back. Prokhorov has hinted in the press that he wants $54-$57 per share for Polyus; the current share price is $41.30.

This week Prokhorov launched the reverse badger on to Norilsk Nickel. In a Moscow newspaper, published Monday, it is reported that Prokhorov and his Onexim holding have recently added another 3% to his shareholding in Norilsk Nickel, and that they now hold about 25% of the company — slightly more than Potanin controls directly himself. A blocking stake of this size, the report claims, is being offered for sale to such third parties as BHP Billiton, Oleg Deripaska, and Roman Abramovich.

Although both BHP Billiton and Rio Tinto have signed cooperation agreements with Norilsk Nickel, little has come of them. The prevailing sentiment in Moscow is that a state takeover of Norilsk Nickel is more likely than a foreign buy-in.

Alrosa has been a candidate for this in the past, but internal turmoil over its shareholding arrangements and executive appointments has hobbled its availability for bigger action.

Both Deripaska and Abramovich — also Suleiman Kerimov, proprietor of Polymetal — are viewed as warehousers; that is, financiers capable of buying at the Kremlin’s direction, holding the asset, and then reselling it to a designated state holding, at a pre–aranged price. Abramovich is believed to be doing this with a 42% stake in steelmaker Evraz, initially acquired in 2006; Deripaska is doing it with the takeover now under way of second-string oil company, Russneft.

There is no evidence that this speculation has been launched by anyone save Prokhorov; his holding claims it is not negotiating with anyone.

Potanin has followed into the Moscow press with his own version of what is happening. In an interview, published on Monday, Potanin acknowledges that dividing up assets worth about $30 billion is “a difficult business”. He says his aim is to buy Prokhorov out, and end up with about 70% of Norilsk Nickel.

Most surprisingly, according to Potanin, Prokhorov has yet to make a price offer for either Norilsk Nickel or Polyus, and this “disturbs me”. He also hints that “various arrangements — oral, written” preclude Prokhorov from selling his stakes to third parties, at least unless Potanin has the right of first refusal.

If Prokhorov thought that Potanin would feel uncomfortable with the badger game, Potanin’s retort is that he can afford to wait Prokhorov out, without paying a penny. “Indefinitely” is Potanin’s estimate of the time he’s prepared to wait for divorce on his terms. Sticking to the agreement on mutual redemption of shares, without outsiders, Potanin said, will make it “easier for us to complete the divorce process. If everyone departs from the stipulated agreements, then the process will become complicated. And these complexities will arise in different areas — legal, reputational, material.”

Potanin acknowledges that both he and Prokhorov face the risk of discount-priced takeover by the state. Claiming he has not yet engaged in negotiations with Alrosa over Polyus, he expects he will be, if the negotiations continue at market pricing. He dismissed as “ridiculous” that Alrosa, with market cap of “some billions of dollars intends to buy a company worth $40 billion”. But he concedes that “if the transaction goes through on market conditions”, it is both possible and “expedient for two reasons: if the company is strategically significant for defence of the country; or when when industry sectors have problems which are impossible to solve without the state. But the logic of purchase of successful enterprises I do not see. One more reason for the state to buy shares is the necessity for additional income. But such problems with the state are now present.”

The sound Potanin makes when he speaks is the crossing of his fingers, and the nervous tapping of his toes. What Potanin knows, however, is that it is the Kremlin which is cause for nervousness. He believes that Prokhorov’s badger game has yet to demonstrate any support from behind the big wall.

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