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By John Helmer, Moscow

It isn’t known whether Alexei Mordashov is religious enough to have studied the Proverbs section of the Old Testament. But as a guide to mining in Africa, he ought to have read this one: “Whoever digs a pit shall fall therein: and he that rolls a stone, it will return on him.”

The reason this might have occurred to Mordashov and his Severstal mining division is that the pit he dug for himself in the Republic of Guinea at the LEFA goldmining concession, he is now about to fall into at the Putu iron-ore project in Liberia.

If you were to read the press releases, this much you would now know: Afferro Mining, the junior iron-ore miner listed in London and Toronto, has announced that it has been obliged to delay the sale of its 38.5% stake in Severstal Liberia Iron Ore Ltd., which owns the Putu mining concession in the west African country. The sale to Lybica Holding, a Severstal affiliate registered in Amsterdam, has already been cleared by the Canadian regulator – what isn’t?– and was expected to close this month with a down-payment to the Afferro shareholders of $65 million.

Afferro Mining (which previously absorbed the names Mano River Resources and African Aura Mining) made the delay public on February 28; Severstal is stonily silent.

When this part of their deal was first announced last December, Mordashov, who had already bought 61.5% of the Putu project in May 2008, promised to make additional instalment payments of $50 million and $70 million in the event that feasibility studies of the Putu project revealed significant mineable value by the end of 2014. For his May 2008 purchase, Mordashov paid $12.5 million to the project shareholders in several instalments, starting with a down-payment of $8.3 million.

Those shareholders included a Belgian, Guy Pas (right, top), and a Liberian-American, Ethelbert Cooper (right, bottom).

Severstal also promised to invest another $30 million in the project, letting the Afferro shareholders off the hook entirely. Mordashov arranged that by a combination of borrowings and new shares. As a history of the dealmaking issued by Afferro this past January reveals, by proposing to sell out the remaining 38.5% shareholding “the Company [Afferro] would be relieved from all funding obligations in relation to the Putu Project after December 31, 2011.”

That put Putu under the full control of Severstal’s mining and resource division. Last July Severstal claimed that Putu contains about 3.2 billion tonnes of reserves, a 33% increase on previous reserve estimates. Severstal also estimated at the time that capital expenditure to develop the Putu mine will come in between $2.5 billion and $3.5 billion, with production scheduled to begin in 2017 or 2018. That’s not a sum Afferro ever intended to spend on digging holes in Liberia.

Just to be sure Mordashov and the Afferro stakeholders were locked into this lucrative scheme, they also signed an agreement in January that “each will pay to the other the sum of US$3 million in the event that: (a) the Transaction does not complete prior to February 28, 2012 as a result of that party’s failure to use its reasonable endeavours to satisfy the conditions precedent to completion; or (b) upon satisfaction or waiver of all the conditions precedent, it fails to fulfil its obligations with respect to the completion of the Transaction.”

In short — so far undisclosed by either Afferro or Severstal — the delay announced at the start of this week could end up costing someone not less than $3 million. In reality, the liability may run to $29.6 million, if the Liberian government can do its sums.

The small and large numbers may sound peanuts for a project of such enormous equity and investment value to the offshore companies which have been raking in the gold since May 2008. But to the Liberian government, which granted the mining rights on September 2, 2010, and ratified the concession terms in the Monrovia parliament on September 10,2010, not a kopeck has been seen. Afferro seems to be surprised that this has crossed the minds of the boys at the Liberian Finance Ministry.

This week’s statement by Afferro reports the delay in closing the deal with Mordashov as due to a tax dispute. “The parties have received correspondence from the Ministry [of Finance] claiming that Lybica should withhold tax at the rate of 15 percent upon payment of the purchase price of the Transaction. After consulting with Liberian tax advisers and legal counsel, Afferro and Severstal believe that such a tax is not applicable to the Transaction. This advice is consistent with the advice obtained by the parties prior to entering into the Transaction. Representatives of both companies have made arrangements to meet with the Ministry to resolve this matter in a prompt manner. Afferro and Severstal have agreed to delay the closing of the Transaction to focus on addressing the Ministry’s claim and as a result have amended the share purchase agreement to provide an outside closing date of 31 March 2012.”

This is not quite the way the Liberians see the matter now. Nor have they been as mute as Afferro’s statement implies they have been since May 2008. In fact, according to well—connected sources in Monrovia, the view of the Liberian tax authority is that the Afferro shareholders have been trading on the Putu assets with Mordashov, and pocketing far more in value than they have spending on digging for the iron-ore in the ground. One Afferro financial report has estimated total exploration expenditure by the shareholders on Putu, plus other African projects, as $8.4 million in 2007, $10.4 million in 2008. Subtract the other projects, and the Liberians may well be right – Pas, Cooper et al. have been mining Liberian value offshore, earning sizeable capital gains, but paying no tax in Monrovia on their profits.

There have been informal explanations by Finance Ministry officials of this point of view in the three years since 2008. The message has been unofficial but clear – the proceeds which the Putu concessionaires were already taking for themselves far outweighed what they had spent in Liberia itself. One source has summarized what Afferro was told: “it’s our assets which you are trading, and we aren’t seeing the gain.” The source isn’t certain that the Afferro stakeholders selling to Mordashov passed the message on. But Mordashov had every reason to inquire at the Finance Ministry when he was doing his due diligence in 2008. There he would have been told that the government intended to tax the capital gains profit which Mordashov was paying to Pas and Cooper; and if the Russian made a profit on his equity, he would be taxed too.

Mordashov may have been hard of hearing when he acquired Crew Gold and the LEFA goldmine concession in neighbouring Guinea, but that problem has been so obvious, he cannot have been surprised when the Liberian government sent him and the selling shareholders a 15% tax levy. Here’s the story as it has been developing in Guinea.

According to Alfa Bank steel analyst Barry Ehrlich, the delay in the Afferro sale to Severstal is a minor matter. “We expect a neutral market reaction due to the small size of the transaction – a potential tax would be $17m, or just 1% of forecast net income for the year.” In fact, in Monday trading on the London stock market, Afferro shares lost 11.3%, while in Toronto trading, the share price fell 9.1% on the day. The share price has recovered half that loss by this morning.

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