Armenian Government To Oust Vedanta From Zod Gold Mine

ARMENIAN GOVERNMENT TO OUST VEDANTA FROM ZOD GOLD MINE
Author: John Helmer

Mineweb, South Africa
April 20 2007
MOSCOW

Armenia reckons that Vedanta is trying to sell out its Zod gold mining
operations before it may revoke the mining licenses altogether.

The Armenian government is furious at the Vedanta group in London,
headed by Anil Agarwal, for attempting to sell the rights to the Zod
gold mine and other gold prospects in Armenia. Evidence of the sale
attempt has been obtained in Yerevan, the Armenian capital, where
a ministerial recommendation is pending at the presidential office
to revoke the Zod licences, and oust Agarwal. The latter claims,
through a spokesman, that the sale is no more than a "rumour", and
no disclosure has been made to shareholders.

According to sources in Yerevan, senior government officials learned
recently that Vedanta has called for bids for the Armenian gold
assets, which Vedanta controls through its Canadian-listed subsidiary,
Sterlite Gold (SGD-T is the Canadian stock ticker).

These include two mines, Zod and Meghradzor, and a processing plant
at Ararat. The officials have already called a halt to mining at
Zod, and a criminal investigation has been opened into charges that
Sterlite and Vedanta have been engaged in a variety of allegedly
unlawful gold operations.

All Sterlite’s minority shareholders have been told to date is that
they may sell their shares to Vedanta at a price that appears to be
lower than the value Agarwal is asking for the assets themselves.

The Armenians believe they alone have the authority to award the
goldmine and prospecting licences; and that the decision on who will
take over Zod will be made in Yerevan, not in London, where Agarwal
has his headquarters.

The ministerial recommendation to revoke the licences cites several
charges, including under-fulfilment of the required mining volumes,
under-counting of gold reserves and output, and shorting payments to
the state budget.

The Armenians say they don’t yet know to whom Vedanta has been trying
to sell the assets. But they suspect Vedanta has not disclosed to
potential buyers the full extent of the sanctions already imposed
on Sterlite. These include a freeze on the bank accounts of the mine
operating company, Ararat Gold Recovery Company (ARGC), and a refusal
to re-register and confirm the licences, on which mining operations
depend. For practical purposes, ARGC, Sterlite and Vedanta can no
longer operate in Armenia.

Sterlite’s disclosures to its shareholders have been limited. The
latest production details released by the company for the Armenian
operations refer to the years 2004 and 2005. No results for the full
year of 2006 appear to have been issued.

The latest operations summary on Sterlite’s website refers to a
February 2002 implementation agreement, according to which Sterlite
risks the forfeit of its ARGC licences, if gold production is halted.

Sterlite’s report says: "The Implementation Agreement stipulates that
should AGRC terminate work either in Zod, Meghradzor or Ararat for
a period exceeding three successive months other than for economic
and business circumstances or for reasons beyond the control of
Sterlite, then Sterlite either must relinquish its mining rights to
the Government or pay the Government an amount of $50,000 for each
month of stoppage beyond the initial three months."

Sources in Yerevan told Mineweb that an application from ARGC to renew
and extend this implementation agreement has not been agreed by the
government. Instead, the sources say, the government has invited
Russian state and commercial interest in acquiring the licences,
and redeveloping the project.

A letter from Russian Finance Minister Alexei Kudrin to Armenian
President Robert Kocharyan recently called for Russian involvement
and assistance to Armenia’s precious metals mining sector. Armenia’s
Prime Minister Andranik Margaryan followed with a letter to Alrosa,
the Russian diamond-miner now diversifying into gold and other
minerals. Armenian sources believe Margaryan may have met Sergei
Vybornov, Alrosa’s chief executive, not long after the latter’s
appointment in February.

This was followed by a public statement from Vybornov of Alrosa’s
interest in gold mining projects in the Commonwealth of Independent
States; Vybornov explicitly mentioned Alrosa’s gold mining interest
in Armenia. Mineweb has reported that the Azatec deposit in Armenia
was acquired by Alrosa about a year ago; details are not yet available
of the acquisition, which was arranged through intermediary companies
in the British Virgin Islands.

The Azatek deposit, in the Vayots-Dzorskaya area of Armenia, was
prospected during the Soviet era, and was reported in the past to hold
13 million tonnes of gold-bearing ore. No grade or reserve estimate
is currently available.

According to the last resource estimate issued by Sterlite, at the end
of 2005 the company claimed the Zod deposit held measured resources
of 215,495 ounces, and indicated resources of 1.9 million oz, at an
estimated grade of 3.9 grams per tonne. For reserve-hungry gold mining
companies eager to boost their share price with an expanded asset
base, as swiftly as possible, Armenia is an alluring opportunity,
at a relatively low entry price. The Russians are bound to have the
inside track, though not all Russians equally.

In addition to Alrosa, interest in Zod may come from Polyus, which is
still the property of Mikhail Prokhorov, an oligarch out of favour
with the Kremlin; and Polymetal, the property of Suleiman Kerimov,
another Moscow oligarch. Kerimov’s spokesman Vitaly Nesis said this
month that Polymetal, which disappointed the market at its recent
London IPO, is on the acquisition trail to strengthen its resource
portfolio. According to Nesis, it is looking to buy prospecting and
mineable properties in the former Soviet Union.

With bidders like these, the Armenian government has lost patience
with the unfulfilled promise of Agarwal. Although he and his spokesmen
at the Finsbury PR firm in London decline to discuss their position
in Armenia, the Armenians say they know he is trying to exit from
Armenia at the best price he can fetch.

On March 25, Armenian Prime Minister Margaryan died suddenly of
a heart attack, and he has been replaced by Serge Sarkisyan, who
previously served as a close aide to President Kocharyan, heading
the president’s national security apparatus, and the security forces
as defence minister. Parliamentary elections are also scheduled in
Armenia for May 12.

The political contest has sharpened criticism in Yerevan of the
alleged violations by ARGC and Sterlite, and the costs to the Armenia
treasury. At the same time, the Armenians believe that Agarwal made a
sizeable personal profit selling his personally held stake in Sterlite
back to Vedanta. Confirmed details of this sale-back transaction have
already been reported in Mineweb.

The last public statement issued by the company relating to the
Armenian government’s concerns appeared more than fifteen months ago,
on December 7, 2005. At the time, Sterlite said it "has recently become
aware of certain press articles suggesting or implying that, among
other things, 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 it "remains committed to its Armenian mining
operations and to expanding those operations. The Company 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."

This past February, Mineweb reported that a state prosecutors’
investigation in Yerevan had uncovered serious and fresh licence
and regulatory violations by ARGC. The move by Armenia’s prosecutors
followed eighteen months of special commissions and ministry-level
investigations that failed to produce compliance by Vedanta.

A 5-page report was also issued in February by three experts,
officials from Armenia’s ministry of natural resources. Their report
had been commissioned on January 24, when 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 accused Vedanta’s Armenian mining company of under-spending
on required mine operations and under-valuing taxable assets.

In addition, Armenian ecological experts charge that serious
environmental problems, particularly water pollution, have resulted
from Sterlite’s management of ARGC operations. The mine sites at
Zod and Meghradzor are at opposite ends, northwest and southeast,
of Lake Sevan, which is the largest body of water in Armenia, and
accounts for more than half the potable water supply.

In 2002, Sterlite says 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, at the junction
of the Turkish and Iranian borders. The plant has the capacity to
process about 1 million tonnes 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 according to 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." The clearance has not been granted
by the government, and no fund raising by Sterlite has taken place.

A posting on Sterlite’s website calls for expressions of interest from
"experienced contractors who can bring in their equipment and manpower
to carry out exploration/confirmatory drilling (approximately 80,000
meters) on per meter basis and mining operations (approximately 40
million tons per annum) on per ton basis". In addition, the company
calls for "experienced and reputed parties to provide the latest
technology, engineering, design, supply of equipment, construction,
commissioning, training of manpower and other related facilities for
implementation of the processing plant with pox [sic]".

The implication is that Sterlite and AGRC are planning to resume
operations. Agarwal’s spokesman in London, Faeth Birch, was asked to
clarify details of this call for miners. In addition, she was asked
to explain why Sterlite is trying to sell out of Armenia. Birch told
Mineweb: "Apparently the tender relates to May 2006 and is no longer
current. I have no comment on your second (and unrelated) point as
we do not comment on rumour."

The first to make for the door was Agarwal, whose sale of his 55%
stake in Sterlite to Vedanta last year drew $34 million. Now Vedanta
is trying to exit with a premium, but the Armenian government says
it will intervene.

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