VEDANTA BUYS GOLD LICENCE TROUBLES
John Helmer

Mineweb.com
20-Jun-06 14:00

MOSCOW (Mineweb.com) — Sterlite Gold, a Canadian registered junior
miner, has been bought out by London-based Vedanta Resources in a
transaction that appears to have been negotiated while the Armenian
government decides whether to revoke the licence for Sterlite’s sole
gold-producing asset in Armenia.

The timing has proved to be controlling shareholder Anil Agarwal’s
lucky day; although just how lucky, or unlucky, Vedanta’s other
shareholders may regard themselves after this deal is not yet clear.

Sterlite’s controlling shareholder, with a 55% stake, is Twin Star
International (TSI), which is fully owned by Volcan Investments,
which in turn is controlled by Anil Agarwal. Thus, he appears to be
on the receiving end of the $34 million (C$37.68 million) Vedanta
agreed earlier this month to pay for its takeover of the TSI stake,
plus $27 million (C$30.8 million) for the other shares in Sterlite.

Vedanta is also controlled by Volcan, with about 54% of Vedanta’s
shares, and thus by Agarwal; his official title at Vedanta’s
headquarters, just off Berkeley Square in London, is Executive
Chairman.

In disclosing the buy-out of Sterlite, Vedanta’s statement of June 13
does not mention Agarwal. But it acknowledges the deal was "a related
party transaction under the Listing Rules of the UK Listing Authority
and an insider bid under Canadian securities laws." To prepare a
valuation and supervise the deal, "a special committee of directors"
was appointed, "who are independent of Volcan". In addition, Ernst &
Young "provided Vedanta with written confirmation that the terms of the
TSI acquisition and Sterlite Gold Offer are fair and reasonable as far
as the shareholders of Vedanta are concerned." The other shareholders,
Vedanta must have meant, since it is obvious that Vedanta is paying
Agarwal handsomely to take the asset off his hands.

Little more than six months ago, Vedanta and Agarwal were at pains to
deny they were even thinking of trading Sterlite. The Finsbury public
relations firm of London, which represents Vedanta, told Mineweb at
the time: "Vedanta Resources PLC does not own Sterlite Gold. It is our
understanding this company is separately owned by Mr. Anil Agarwal,
and therefore it would not be appropriate for us to comment, as we
solely represent Vedanta." Asked to say whether Vedanta would buy
out Agarwal’s stake in Sterlite, spokesman Alex Pettifer told Mineweb
"we have no comment to make on this."

Now, according to Vedanta, the buyout represents a price of C$0.258
for each share of Sterlite Gold. This is a 20% premium on the 3-year
high achieved by the share of C$0.215. It is even more generous in
relation to the price of the share just before Agarwal’s sale, when
it was three times lower, at C$0.080.

PriceWaterhouseCoopers (PwC), the famous defender of dealmaking
proprieties, was engaged by Sterlite’s board to value the company:
it came up with a range of C$0.24 to C$0.275 per share.

Did PwC’s valuation, and Ernst & Young’s opinion, report that
Sterlite’s sole source of income, and principal asset, is facing
substantial new capital expenditure costs, and at the same time,
possible revocation of its mining licence?

The Armenian Minister of Nature Protection, Vardan Aivazyan, told
Mineweb, through a spokesman, that at the moment there are no stop-work
or ministry orders against Sterlite’s subsidiary, AGRC.

"The problem," he said, "is that to continue profitable development
of the Zod deposit, AGRC is asking to build a new refinery close
to the deposit itself, on the shore of Sevan Lake. This violates
ecological restrictions."

According to Vedanta’s corporate website, "the company aims to reduce
the impact of its activities on the environment wherever feasible."

For the initial period after Sterlite took over in 1998, AGRC was
able to produce almost 100,000 troy ounces per annum, 330,000 oz.

over five years, from processing tailings accumulated during the Soviet
era. However, as the easy gold was extracted from the tailings stored
close to the refinery, it has proved prohibitively expensive to mine
ore at Zod (also known in Armenia as Sotk) and Meghradzor, and rail
it 268 kilometres to Ararat, in southern Armenia, for processing. In
calendar year 2005, output for AGRC fell to just 44,000 oz. For the
year, Sterlite reports that it gathered revenues of C$20.6 million,
and after meeting costs and paying taxes and royalties, was in the
red by C$12.5 million.

The two AGRC mines, Zod and Meghradzor, could produce about 120,000
oz. of gold per annum, according to a presentation of the transaction
issued by Vedanta last week. But an investment of $80 to $85 million
is now estimated by AGRC’s international consultants to build
a new refining plant close enough to the mine sites to restore
profitability. Just $11 million has been spent on the project to
date. According to Vedanta’s presentation, "the potential exists to
more than double" the mineable resource at Zod. Based on drilling
which is reportedly still ongoing at Zod, gold resources are currently
calculated at 2.1 million oz, according to JORC standards; more than
5 million oz by Russian criteria (C1 + C2).

Just how much lies under the ground has been a sore point for both
Sterlite’s AGRC and the Armenian government. Aivazyan confirmed to
Mineweb that, following a September 28 order last year, his ministry
authorized a review of operations at Zod and Meghradzor. Referring
to Sterlite’s licence for Zod, dated 7 June 2004, the report charged
violations of land allocation; uncertified laboratory work; improper
control of drill samples; and underground mining termed "illegal".

The report also alleged that Sterlite had under-estimated gold
reserves at Zod "by more than 2 times". Royalty payment calculations
have allegedly under-counted the amount of precious metal produced,
the report also claimed.

A legal representative of the company, Armen Ter-Tachatyan, told a
local press conference in Armenia recently that it would be impossible
for AGRC to hide either reserves, or current production, and it would
have no economic motive for doing so.

AGRC has filed suit in an Armenian court to challenge the ministry;
and according to Aivazyan’s spokesman, the dispute was resolved by
an out of court agreement on how to count reserves. But the minister
has now launched a fresh review, and that is currently under way,
his spokesman told Mineweb. If it finds violations, then the mining
licence could be withdrawn, he added.

Last December, following Mineweb and other reports in the Armenian
media, Sterlite issued a statement denying that "the Company is in
violation of various requirements in respect of its Armenian mining
operations. The Company wishes to state that it categorically denies
all such suggestions and statements. Many of the allegations cited
are based on unsubstantiated, inaccurate or outdated information."

Sterlite went on to say that it "is currently in the process of
conducting studies to complete detailed open pit design, plant
engineering, metallurgical test work, and permitting with the aim
of expanding the present mining operations at Zod. These initiatives
are expected to be completed by the first quarter of 2006."

Neither the Vedanta nor the Sterlite company websites currently
discloses an ongoing problem with the Armenian operations.

Agarwal and Vedanta were asked to say how they calculated the
asset value, ahead of Agarwal’s sale to Vedanta, in light of this
uncertainty. They were also asked to confirm whether the assessments
provided by PwC and Ernst & Young identified this uncertainty as a
factor in their valuation of the asset, or the price at which it is
now changing hands.

Agarwal replied through spokesman, Faeth Birch: "Vedanta is not aware
of any challenge to the license." Without being specific about the
risks involved, she told Mineweb: "The valuations and assessments
performed were done by independent professionals and with financial
and legal advisers alongside, all of whom were fully cognizant of
the fact that this would be a related party transaction. In addition,
independent board sub committees were involved and the related party
was not a party to the valuation process and appropriate regulatory
processes were complied with. In any such valuation a wide variety of
matters are taken into account including risks and opportunities and
there is no reason as to why this transaction would be an exception.

Sterlite Gold offers good potential and hence the Group’s attraction
to it. "