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By John Helmer

Georgian gold miner Madneuli gets Russian financing for goldmine moves in Armenia, Azerbaijan lodges protest

Georgian gold miner Madneuli gets Russian financing for goldmine moves in Armenia, Azerbaijan lodges protest.

Queen Tamar, the greatest of the Georgian sovereigns (1184-1213), is responsible for the habit Georgian rulers have displayed for the past millennium of treating neighbouring Armenia, Azerbaijan, Ossetia, and the Black Sea coast of Turkey as protectorates. But as Tamar also taught her countrymen, Georgian ambition always runs out of gas when the neighbours prove to be just as ambitious, richer, or tougher.

It is thus quite natural that the current President of Georgia, Mikhail Saakashvili, will regularly denounce the Kremlin for ordering airborne attacks on his country, including a missile which fell, unexploded, near the Georgian capital Tibilisi, on August 6. The Washington Post thundered: “The United States and Europe should help Georgia bring the issue before the U.N. Security Council.” Latvia and Lithuania sent experts to investigate. Russian officials accused Georgia of planting the missile, and fabricating the aircraft incursion as part of an alleged “theatrical show”.

Then on August 21, the government in Tbilisi claimed there had been a fresh crossing of Georgian airspace by a Russian aircraft. The chief of the Russian general staff, Yury Baluyevsky, responded that the allegations were proof that “our Georgian colleagues have started hallucinating.”

Unreported and almost unnoticed, but at the same time, Saakashvili ordered his kin to apply to Moscow for financing to support Georgia’s principal mining company, Madneuli, in a bid to acquire goldmines and deposits across the border in Armenia and Azerbaijan. This month, Russian financing has covered the purchase of about $80 million in cash, plus assumption of debt, for the Zod gold mine and other assets controlled, until now, by Sterlite Gold, a wholly owned unit of Vedanta Resources, and its chief executive, Anil Agarwal.

Mineweb has reported for months that Agarwal was operating a silent auction of Sterlite’s Armenian assets, in defiance of Armenian government claims. Agarwal, Vedanta, and Sterlite said nothing to the market. Then, on August 15, eleven days after Mineweb revealed that Armenian government prosecutors had started court proceedings to revoke Sterlite’s licences, this announcement appeared on Sterlite’s website: “Sterlite Gold Ltd. (TSX:SGD) announced today that it has been advised of an agreement between its controlling shareholder, Vedanta Resources plc and GeoProMining Ltd. (”GeoProMining”), parent company of Georgian mining Joint Stock Company Madneuli, which may lead to an offer for the shares in Sterlite Gold. The Board of Directors will appoint an independent committee to receive, consider and make a recommendation regarding any proposal that may be made. Vedanta Resources plc, the holder of 84.2% of the common shares of Sterlite Gold, announced today that it has entered into an agreement with GeoProMining to tender its Sterlite Gold shares at a price of US$0.3845 per common share in cash. The Board of Directors of Sterlite Gold will communicate its views to shareholders on any offer made by GeoProMining once it has received and considered the recommendation of the independent committee.”

Sources close to the transaction say they value the Zod and related Armenian gold assets at $127 million on a debt-free basis. They believe Vedanta took $80 million in cash for the sale, plus a hand-off of obligations.
But the money didn’t come from GeoPromMining, nor from Madneuli. It came from a well-known Russian conglomerate called Industrial Investors, headed by a former state minister and ex-parliamentary deputy, Sergei Generalov. Sources close to him have been telling Mineweb for some time that they cannot speak on the record about the links between Industrial Investors, Generalov, his partner Siman Povarenkin, and the Georgian business. But they confirm that Generalov is bankrolling Madneuli in its bid for Armenian gold.
The reason why is not explained; but the question needs asking because Generalov is no gold miner. He has been focusing primarily on building up a transportation conglomerate with Far Eastern Shipping Company (Fesco); Trans-Garant, a freight railroad; National Container Company, Russia’s largest box transporter; a Baltic cargo feeder line operating from Rotterdam; and with a big new container terminal in planning for Riga, Latvia. Acquiring these assets has cost Generalov almost $850 million in debt in the past year — a heavy burden that is uncomfortable for him to bear. Last month, he offered investors a new share issue to raise $200 million in fresh cash.

Generalov is also uncomfortable to discuss the fact that Madneuli is controlled by President Saakashvili through his family. According to published remarks from Shalya Natelashvili, head of the Georgian Labour Party, “the president has played a cardsharp and stolen the gold of the Georgian people, and now it has passed into the personal possession of his family.” Natelashvili is referring to Madneuli strongman, Timur Alasaniya, Saakashvili’s uncle.

Public records and media reports from Georgia are full of scandal associated with Madneuli. In 2004, several executives were arrested, one of them in Switzerland, on warrants from the Georgian prosecutors alleging tax evasion. In 2005, the government arranged the privatization of its 97% stake in Madneuli, triggering recriminations from the parliamentary opposition. They allege that Saakashvili had arranged for his uncle to take control of the company through a British Virgin Islands front company, Stanton Equities, which was financed in turn by Industrial Investors. It was reported at the time that the sale price of $35 million (plus $16 million to cover debt obligations) was too little; Madneuli’s operating profit for the year was alleged to be around $60 million.

Generalov was asked today how he explains financing the Saakashvili family company in light of the strategic and military conflict between Georgia and Russia. He and his spokesman were not available, and did not respond.

So what exactly is a major Russian financial group, with a high-profile figure like Generalov, doing as business partner and banker to the Saakashvili family, while Saakashvili himself is lodging charges against Russia at the United Nations? In a page-long, friendly interview with Saakashvili, published by the Wall Street Journal last Monday, Saakashvili attacked his “hostile, powerful northern neighbour, even more powerful every day with oil money. But we can’t be living in a state of gloom and paranoia.” The president went on to explain how every time Russia attacks Georgia with commercial sanctions, cutting off wine import licences or gas supplies, “we had to work on developing new sources. Next year we’ll be fully supplied by Azerbaijani power.”
Saakashvili’s interviewer did not ask, and Saakashvili did not mention, the $80 million in mint Russian money delivered so recently to Madneuli. Nor did they react to the official statement, issued by the Azerbaijani government the same day, last Monday, attacking the Georgians for attempting to mine the Zod gold on territory that traditionally, and legally, belongs to Azerbaijan.

How much electricity Saakashvili can expect to get from a government which has officially ordered its Foreign Ministry to demand an explanation from the Georgian government in Tbilisi? According to the text of a statement by Arif Iskenderov from Azerbaijan’s Natural Resources Ministry, issued in Baku on August 27, the Madneuli partnership with Industrial Investors intends to mine unlawfully, because 73% of the Soyudlu (Zod) gold deposit is located on territory occupied by Armenian forces. Other estimates of the illegal extension of Armenian mining claims indicate that about 50% of the deposit belongs to Azerbaijan.

Russian sources confirm the position. They told Mineweb that, following the outbreak of inter-ethnic violence between Armenians and Azeris as the Soviet Union collapsed in 1990 and 1991, the Armenian army took control of the Nagorno-Karabakh territory, an Armenian enclave within Azerbaijan’s borders. They also moved on to land which was fully Azerbaijan’s during the Soviet administration. According to these sources, the Armenians then moved their border westwards, and for western miners interested in the Soviet-proved gold deposits, they changed the maps.

It is unclear what the Armenian government intends to do about the Georgian incursion, except support it. As Mineweb reported early this month, the Yerevan government had launched a court prosecution to revoke the gold mining licence issued in 1999 to the Ararat Gold Recovery Company (AGRC). This is the local operating affiliate of Sterlite Gold.

Officials in the General Prosecutor’s Office in Yerevan, the Armenian capital, confirmed at the time that the legal action also sought a judicial order cancelling all operating permits for ARGC, and freezing the company’s bank accounts and moveable property.

The prosecutors claimed they were also seeking payments by ARGC into the court of 4.6 billion Armenian drams ($14 million), plus another $10 million, to cover claims the Armenian government alleges are owed by the mining company to the state budget. Agarwal and his spokesmen refused to respond to Mineweb questions on the Armenian troubles.

Sources in Yerevan now claim that the case against Sterlite was suspended, and that no action has been taken to revoke the Zod licences. This suggests de facto endorsement of the transfer of the assets to Saakashvili and Generalov. But the Armenians appear to be undecided on the financial position. They reason that since they are the underlying owners of the assets, for which Vedanta has just taken $80 million, they must be owed something, too. Of course, this value is complicated, or zeroed, by the Azerbaijan government’s claim on the territory. The Armenians are thus looking to the “powerful northern neighbour” to show whether, in fact, it is backing Saakashvili to develop Zod — in defiance of the Azeris. Or whether Generalov and Uncle Timur have gone too far.

Saakashvili has a big interest in knowing the answer to that question, along with President Ilham Aliyev of Azerbaijan. With its $80 million, Vedanta has gotten clear away from the shaky ground, under which the Zod gold is buried. But everyone left behind can see that a great deal more money will be required from the Saakashvili family and Generalov to satisfy the Armenians, and pacify the Azeris. And that’s before a single shovel can be driven into the ground for mining purposes. Saakashvili noted ruefully to the Wall Street Journal this week: “If you relax on corruption, it will come back in two months.”

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