ARMENIA MAY START PROSECUTION OF VEDANTA-CONTROLLED ZOD GOLD MINE
By: John Helmer

Mineweb, South Africa
Feb 28 2007

MOSCOW (Mineweb.com) –A state prosecutors’ investigation has uncovered
serious and fresh licence and regulatory violations by Vedanta’s
gold mine operator in Armenia. The move by Armenia’s prosecutors
follows eighteen months of special commissions and ministry-level
investigations that failed to produce compliance by Vedanta. This
time, if the Armenian government moves into court against Vedanta,
the company could lose the Zod gold mine altogether.

A 5-page report was issued last week by three experts – government
officials from Armenia’s ministry of natural resources. Their
report had been commissioned on January 24, and they were ordered to
assess Vedanta’s performance in line with a list of 16 statutory and
regulatory agreements and undertakings.

The findings followed within a month. They accuse Vedanta’s Armenian
mining company of under-spending on required mine operations and
under-valuing taxable assets.

Zod, located in the eastern corner of Armenia, close to the Azerbaijan
border, has been evaluated over more than a decade by Soviet
geologists, Kilborn-SNC, SRK, Snowden, and Micon. First identified
in 1976, and prospected when Armenia was part of the Soviet Union,
the mine project has also included substantial, high-grade tailings
from Soviet-era mining.

Mining rights for Zod (also known in Armenia as Sotk), and a second
deposit known as Meghradzor, were initially vested in the Ararat Gold
Recovery Company (AGRC) for 25 years each. Following the break-up
of the Soviet Union and Armenia’s independence, Canadian mining
entrepreneur Robert Friedland acquired the rights for a company of his,
called First Dynasty Mines Armenia, in a joint venture with a local
state-owned mining enterprise. The state sold out, and full rights
were sold in 2002 to Indian entrepreneur Anil Agarwal’s company,
Sterlite Gold. Agarwal is reported as holding the titles of chairman
and director of Sterlite, whose principal office is in Mayfair,
London. Sanjay Dalmia is the CEO. Agarwal’s bigger title and property
is Chairman of Vedanta Resources, also officially based in London.

In 2002, Sterlite said it produced 102,960 oz, primarily from tailings
accumulated at the Ararat processing plant. In 2003 output fell
to just over 59,000 oz, as the tailings dwindled, and costs rose
for transporting the ore, mined at the Zod pit, by railway to the
processing plant, 235 kilometres away to the west, on the Turkish
border. The plant has the capacity to process about 1 million tons
of ore per annum, but the cost of transportation is prohibitive.

According to company releases, in 2005, gold produced from tailings
and ore totalled 44,137 oz, a decline of 35% on the year before. The
costs of production outstripped revenues; and financial statements
issued by the company, losses in the nine months to September 30,
2005, had mounted to almost $7 million. In the most recent financial
report for the nine-month period of 2006, the Armenian operations
were still running at a loss. The company blames the loss on falling
grades at the Zod mine, falling tonnages of tailings, and lower grades
in the tailings.

Substantial investment in a new mill at the mine site was promised by
Sterlite, and according to the company, it was targeting a revival of
production to at least 160,000 oz per annum. A website statement claims
"the Company estimates that a minimum capital expenditure of US$ 80
million will be required to execute the move and will take a minimum
of 18-24 months to complete. The Company is committed to undertake
the move once environmental clearance is provided by the Government
of Armenia. For financing this move, the Company is looking to raise
funds using a variety of options."

There is no mention in Sterlite releases of the trouble it was in with
the Armenian government. In a note on contingencies, attached to the
3rd-quarter financial statements issued last year, Sterlite admits
it had been obliged to pay additional royalties on an under-counting
of gold production. Payment was made in December 2005.

A further royalty tax claim for the period 2004-2005 was in court,
Sterlite contended — without referring to the broader dispute over
licence violations.

No fund raising by Sterlite has taken place. Instead, in the second
half of 2006 Agarwal sold his control stake in Sterlite to Vedanta,
making a handsome profit. As Mineweb reported last June, Sterlite’s
controlling shareholder at the time, with a 55% stake, was Twin Star
International (TSI), which is fully owned by Volcan Investments, which
in turn is controlled by Anil Agarwal. Thus, he appeared to be on the
receiving end of the $34 million (C$37.68 million) Vedanta agreed in
June 2006 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.

In disclosing the buy-out of Sterlite, Vedanta’s statement of June
13, 2006, did not mention Agarwal. But it acknowledged 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 buyout represented a price of C$0.258 for each share of Sterlite
Gold. This was a 20% premium on the 3-year high achieved by the share
of C$0.215. It was 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. Today’s price for Sterlite is almost unchanged from
Agarwal’s selling price.

Meanwhile, remote from London investors, a great deal has changed in
the Armenian government’s attitude towards the gold asset.

A source familiar with Zod has told Mineweb:"The main problem is that
the company owner is not investing anything into the deposit. Maybe
because of the political situation, maybe because the deposit is
located on the Azerbaijan border, nobody wants to buy it."

The Armenian Minister of Nature Protection, Vardan Aivazyan, has told
Mineweb, through a spokesman, that 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."

The expert report to the state prosecutor’s office last week accuses
ARGC, and thus Vedanta, of three main violations — of mining more
gold than planned, instead of over-burden operations; of disposing
less mine waste than required; and of under-valuing reserves. The
charges amount to short-changing the government and its tax budget,
while the miner has tried maximizing the gold offtake for every metre
of earth and ore removed. An additional $20 million in mine spending
will be required, the report recommends. An additional environmental
impact report is likely.

Agarwal and Vedanta were asked by Mineweb to respond to the charges,
and to indicate what financial set-aside or contingency payment they
would report to shareholders for the Armenian prosecution. They did
not respond.

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