Now You See My Gold Assets, Now You Don’t: London’s Regulator Takes A Good Look At Polyus Gold
By John Helmer in Moscow
minesite.com
For the first time since Russian gold mining companies began to list on the London Stock Exchange more than a decade ago, Russian shareholders have taken a major Russian gold miner to the UK regulator, alleging asset stripping and share value dilution, with the added charge that no justice is possible in the Russian courts. At the heart of the complaint filing is the sale of shares at what is alleged to have been ten times less than their fair value, and the valuation of gold reserves transferred at many multiples below book value. The gold in question includes part of the most celebrated vein of unmined gold in Russia – the fabled Sukhoi Log deposit, in the southeastern Siberian region of Irkutsk.
A Moscow-based holding, Westway Alliance Corporation, with an eight per cent shareholding in the Irkutsk region gold miner Lenzoloto filed its claim with the Financial Services Authority (FSA) on January 29. The corporate targets identified in the complaint are Polyus Gold, its management, and controlling shareholder, Mikhail Prokhorov. The FSA told Westway in March that an investigation has commenced. However, the FSA declines to respond publicly to questions about the case. The agency also warns complainants that its charter allows it to dispose of a complaint without informing anyone, unless the outcome is a disciplinary action posted on the FSA’s website. In 2007, the FSA says it issued just one disciplinary order or enforcement notice. In 2008, there were eight. And in 2009 so far, two.
Westway told Minesite that between 2003 and 2006, Polyus took over the gold-producing and exploration assets of Lenzoloto at one price; then devalued them for transfer to Polyus; raised their value to achieve a significantly greater capital value for Polyus; and thereby deprived Westway as a minority shareholder in Lenzoloto of the substantial difference in value. Calculated on the basis of under-valued or reserves allegedly lost to Lenzoloto, Westway’s claim amounts to an estimated US$526 million. Of that, its eight per cent stake should represent a claim to about US$42 million.
In 2007, when Westway filed its initial claim in the Irkutsk regional arbitration court, the case was dismissed on a technicality. This was that, at the time of filing, and in the court papers, Westway failed to provide proof that it was the owner of Lenzoloto shares, although at the time the record of title indicated a nominee shareholder. Westway’s Russian lawyers also warned that Prokhorov, one of Russia’s wealthiest individuals was such a powerful figure in Russia that it was unlikely that Westway’s claim could receive a fair hearing in the Russian courts. Prokhorov currently controls Renaissance Capital investment bank, and 18 per cent of United Company Rusal, the bauxite and aluminium monopoly.
The UK High Court recently upheld this view, when Justice Christopher Clarke ruled that one of the original, founding shareholders of Rusal, Michael Cherney (also known as Mikhail Chernoy), could not receive a fair hearing in the Russian courts up against Rusal’s controlling shareholder, and his one-time protégé, Oleg Deripaska. Clarke said in his July 3, 2008, judgement, ordering Deripaska to trial on Cherney’s suit in the High Court: “It is…apparent to me that, if this claim is not allowed to proceed in England, it will not proceed in Russia...in this particular case, there is a significant risk that Mr Cherney will not obtain in Russia a trial unaffected by improper interference by State actors and that substantial justice may not be done.”
For the time being, Westway has taken the less costly step of applying to the UK market regulator to rule on the conduct of Polyus’s management and shareholders towards minorities. In summary of Westway’s 11-page filing with the FSA, which sets out five counts of alleged value stripping, the complaint declares: “Various corporate schemes are applied in which the minority shareholders do not only lose their ability to participate in decision-making but also suffer tremendous damages. In the meantime, the shares in Polyus Gold itself are offered to investors on the London Stock Exchange, and the investors cannot even start to suspect the true origin of the assets, which Polyus Gold OJSC is comprised of”.
The facts in the FSA case begin in 2003, when Lenzoloto, a partially privatized placer-mining company with roots dating back to Soviet times, was sold to Norilsk Nickel. Subsequently in 2006, when Norilsk Nickel spun off and separately listed its gold assets, Lenzoloto and its subsidiary and affiliated companies became part of Polyus Gold. Before the takeover began, Lenzoloto was the leading placer producer in Russia, with annual output of around 300,000 ounces, and reserves estimated at 6.4 million oz, not counting Sukhoi Log. That deposit, with 33 million oz in reserves estimated at the time, had been part of Lenzoloto’s asset base in the 1990s. But this was stripped out of the enterprise by government fiat and court rulings in 1997, thereby ousting an Australian-South African partnership, with Standard Bank, from the Sukhoi Log mine plan.
The Sukhoi Log mining licence was revoked at the time, and the Kremlin has delayed reissuing it. But in 2003, when Prokhorov sought to buy Lenzoloto, it was recognized in the Russian market that whoever controlled Lenzoloto stood a good chance of taking the Sukhoi Log licence. Consequently, it was reported that the competition at a state auction of Lenzoloto’s shares on 17th September 2003 was fierce. Deripaska and two other major bidders drove up the price, obliging Norilsk Nickel to bid US$152 million for the 45 per cent stake. Counting earlier share purchases, Norilsk Nickel then held a control stake of 76 per cent.
It didn’t take too long for Norilsk Nickel to acknowledge, if quietly, that it had over-paid. According to accounts and auditors' notes issued by Polyus for 2004, the Norilsk Nickel group “reviewed the carrying value of goodwill arising on the acquisition of OJSC Lenzoloto”, and wrote off a total of US$114.6 million. At the time, Maxim Finsky, the asset buyer for Prokhorov, justified his price by claiming that control of Lenzoloto improved the Norilsk Nickel group’s chances of winning the Sukhoi Log tender. Russian press reports from the time indicate he calculated that in the ultimate bidding for Sukhoi Log, the Lenzoloto assets were worth to Norilsk Nickel about US$300 million.
Westway now charges that once Norilsk Nickel, and then Polyus had control of Lenzoto, they got the Lenzoloto board to agree to sell a 26 per cent stake of the Pervenets deposit, one of the satellite gold deposits around Sukhoi Log, at a heavily discounted price. Westway has told FSA the fair price derived from an earlier transaction with Pervenets should have been US$9.1 million. The second count alleged against Polyus in the FSA claim sheet is that Lenzoloto subsidiaries were sold for US$26 million, which was at the time “clearly lower than the market prices.” The third count alleges a complex restructuring of Lenzoloto into a new company of similar name at a loss to the original company of US$28.5 million in profit. The fourth count charges that between 2003 and the end of 2006, about 3.9 million oz in gold reserves, originally ascribed to Lenzoloto, “were ultimately transferred to the 100%-controlled subsidiary companies of the Polyus Group that fraudulently increased its capitalization on the London Stock Exchange.” Applying an April 2008 price for the reserves, the complaint charges that the reserve transfer between Lenzoloto and Polyus was US$552.7 million. “Lenzoloto OJSC received for the assets with the market value of USD 552,665,991 USD 25,996,211 in total, which is more than 20 times less than their market value,” according to the text of the complaint.
Prokhorov’s Moscow holding is known as Onexim, and is headed by former Norilsk Nickel executive, Dmitry Razumov. The two were asked to respond to the charges in the FSA complaint by Westway. Their spokesman Igor Petrov took the questions, and has not responded. The current chief executive of Polyus Gold, Evgeny Ivanov, and his deputy for corporate development, German Pikhoya, were asked to say whether they have received a letter from the FSA confirming the complaint. They were also asked to respond to Westway’s charges. Spokesman Anton Arens said that, to his knowledge, Polyus is unaware of claims by minority shareholders of Lenzoloto to Polyus Gold, and also unaware of any FSA investigation. Arens added that, to date, he does not know of any contact the FSA has made on the matter with Polyus Gold. He said he would ask Ivanov and Pikhoya, but they have not responded.
In a separate development, the federal mine licensing agency Rosnedra has revealed that it will not be putting the Sukhoi Log licence up for auction for at least another year. The deposit has been re-analyzed, and is now estimated to contain 60 million ounces, double the amount believed a decade ago. Costs for building the mine have also doubled, and are now projected at almost US$2 billion. |
