ARMENIAN GOVERNMENT ACCELERATES MOVE AGAINST VEDANTA’S STERLITE GOLD
Author: John Helmer
Mineweb, South Africa
July 24 2007
Moscow
Anil Agarwal’s Zod gold mine stake will not be sold to the highest
bidder, if Armenian government has its way.
The Armenian government ordered prosecutors last week to put a stop
to an attempt by the Vedanta group in London to auction off its rights
to the Zod gold mine to the highest bidder.
Two weeks ago, following six months of investigation, the Armenian
prosecutor’s office in Yerevan went to court on behalf of the Ministry
of Natural Resources, to seek a ruling to revoke the Zod licence, which
has been held since 1998 by Vedanta’s Canadian-listed subsidiary,
Sterlite Gold (ticker SGD). The judge deferred his ruling on the
procedural ground that the due diligence, which had been undertaken
by the prosecutor’s office since January, lacked the appropriate order
from the government. The Armenian prime ministry then arranged for the
ministerial resolution to be drafted and issued, and an accelerated
investigation has already begun.
"The government wants to end the tender process being conducted
in London by Anil Agarwal [controlling shareholder and chairman of
Vedanta]", according to a source close to the litigation in Armenia.
"The Indians are trying to get a high price for the asset, and
the Armenian government sees no reason why they should pocket that
profit, and walk away, when they are in violation of their licence
obligations. That is why the licence revocation process is being
accelerated now, publicly, so that bidders for the assets should
understand what is at stake".
Vedanta and Sterlite Gold have repeatedly refused to answer questions
about the informal tender. This has been conducted by Ernst & Young;
the latter has drafted and circulated a marketing document on the
Armenian assets, and a score of bidders have responded. The assets
include two mines, Zod and Meghradzor, and an ore-processing plant
at Ararat. The official proceedings and investigations 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.
The Armenians say they don’t yet have a full list of those 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.
Armenian officials believe the leading bidder at present is the
Russian conglomerate Industrial Investors, which is headquartered in
Moscow, and controlled by two partners, Sergei Generalov and Siman
Povarenkin. Generalov, a former Russian energy minister, and former
member of the State Duma, is financially the stronger of the duo.
Generalov’s primary business is in maritime fleet, port, and land
transportation. In the past two years, he has moved swiftly to create
a multi-modal transportation group, with Far Eastern Shipping Company
(Fesco); Trans-Garant, a freight railroad; National Container Company,
Russia’s largest box transporter; a Baltic cargo feeder line operating
from Rotterdam; and with a big new container terminal in planning
for Riga, Latvia. Acquiring these assets has cost Generalov almost
$850 million in debt — a heavy burden that is uncomfortable for him
to bear. This week in Moscow, he offered investors a new share issue
to try to raise $200 million in fresh cash.
Part of this is for reducing his debts; part may be intended for
the Zod buy-out. But at an estimated $100 million to $120 million,
which is Vedanta’s price-tag, the sum may be too large for Generalov
to accept. He has signed a memorandum of understanding with Sterlite
and Vedanta, in order to cover his due diligence, and allow him
time to find the money. The Armenian government appears unwilling
to allow the transaction to go through at all. Sources close to
official thinking have told Mineweb the government wants "to get it
all back", and then determine who should win a licence competition,
to be conducted on the government’s terms.
Mining sources familiar with Zod, and with the territorial claims
neighbouring Azerbaijan is making on Armenian land and gold deposits,
believe $50 million is the maximum price that can be paid for the
assets.
Generalov is a newcomer to the mining sector, and in Yerevan it is
suspected that Zod is Povarenkin’s baby. However, Povarenkin has even
less cash or credit than Generalov to make the purchase. According
to sources in Tbilisi, Georgia, Industrial Investors is behind
Joint Stock Company Madneuli, which in May was the only bidder at a
government auction for mineral licences in the Ambrolauri region of
western Georgia. The equivalent of $135,000 was paid for the rights.
Speaking for Generalov and Institutional Investors, Oleg Rumyantsev
told Mineweb they refuse to comment, and decline to confirm that they
are participating in the bidding.
A source in Tbilisi told Mineweb that Institutional Investors is the
silent partner backing the Madneuli management in making the bid for
Zod, and that it is the latter who are making the running.
Madneuli’s current business is mining copper, and leaching gold from
the tailings.
This disclosure is a problem for the Armenians, however. For they have
already demonstrated their concern that Agarwal and Sterlite lacked
the financial capacity and will to meet the investment requirements of
ARGC’s licences, and would not brook the $100 million obligation for
a new ore-processing plant. The conviction that Agarwal was holding
Zod in order to flip it has led to this month’s moves to accelerate
the revocation proceeding.
The Madneuli partnership with Institutional Investors compounds
the problem of financial capacity, from the point of view of the
Armenians. And more — from the perspective of Caucasian politics,
the Armenian government is reluctant to cancel the ARGC licences, and
oust the Indians, only to hand the assets over to a Georgian group,
even if they claim to have Russian backing.
Sterlite’s disclosures to its shareholders have been limited. An
operations summary on Sterlite’s website refers to the February
2002 implementation agreement, according to which Sterlite risks the
forfeit of its Armenian licences, if gold production is halted.
Sterlite’s report says: "The Implementation Agreement stipulates
that should AGRC [Sterlite’s local company, Ararat Gold Recovery
Company] 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."
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.
In May, Sterlite told shareholders that "the 2007 mining plan of its
subsidiary, Ararat Gold Recovery Company LLC ("AGRC"), has not been
approved by the Armenian government and as a result, AGRC’s mining
operations have been temporarily suspended. AGRC is working with
government authorities in an effort to secure approval for its mining
plan so that operations can be resumed. AGRC has previously received
approval for each of its annual mining plans during the term of its
Implementation Agreement with the Armenian government.
Following various media reports in the last few days, the Company also
advises that, in connection with the previously announced investigation
by Armenian governmental authorities of AGRC’s mining operations,
AGRC has received from the Armenian authorities a preliminary notice
of penalties and fines in the amount of approximately US$46.5 million
that the Armenian government intends to levy on AGRC. The notice is
preliminary in nature and the Company understands that the notice
is to undergo further analysis and expert review at the relevant
Armenian governmental agencies in the coming weeks, before it is
served in final form upon AGRC. As advised previously, Sterlite Gold
and AGRC will vigorously contest any allegations or claims that may
be made against them arising out of the investigation."
On June 14, Sterlite posted this fresh cautionary: "Sterlite Gold
Ltd. advises that, in connection with the previously announced
investigation by Armenian governmental authorities of AGRC’s mining
operations, AGRC has received from the Armenian state tax authority
a notice of penalties and fines in the amount of approximately
US$11.5 million. This tax authority notice is in addition to the
previously announced preliminary notice of penalties and fines issued
by the Armenian Ministry of Finance. The investigation by Armenian
governmental authorities is continuing. As advised previously, Sterlite
Gold and AGRC will vigorously contest any and all allegations and
claims that may be made against them arising out of the investigation."
No notice to shareholders of the attempted sale of the Armenian assets
has been posted to date. Agarwal did not reply to Mineweb’s request
to explain why he is selling Sterlite’s principal asset.