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What an enterprising lad! While Highland Gold, a London-listed public stockholding company, was looking in a forward direction, last Friday Roman Abramovich sold it a gold and silver prospect called Klen for the greater part of which he had paid $103,774 eighteen months earlier. Abramovich has now relieved Highland Gold of $69 million of its hard-earned money for this exchange. In the interval, since Abramovich spent peanuts on prospecting, his rate of return was 34% per month, 610% overall.This, at least, is one arithmetic of what has happened. Abramovich’s spokesman, John Mann, says there is another truer one, although one of the crucial numbers in that calculation is missing. Highland Gold’s spokesman, Dmitry Yakushkin, isn’t providing that number. Nor is he explaining how Highland Gold counts the reserves and resources which Abramovich has just sold it.
Numis Securities, a London brokerage, which is the nominated (paid) financial advisor to Highland Gold, was asked to say whether $69 million for Klen was a fair and reasonable price. According to the Highland Gold announcement, Numis has calculated very carefully and reported: “Numis Securities Limited, consider that the terms of the said transaction are fair and reasonable insofar as the shareholders of the Company are concerned.” It isn’t known which of the shareholders of Highland Gold Numis had in mind, if not Abramovich and his Millhouse holding, which control 32.6%.
Numis cannot have been thinking of the Canadian goldminer, Barrick Gold, because it had completed selling off all of its 20.37% stake in Highland Gold by April 26, little more than a month before the Klen deal was announced. Company managers own 8% of Highland Gold, and 59.4% is classified as in “public hands”. They have lost 3% of the value of their shares since the Klen transaction was announced.
A geologist employed by Highland Gold, with a degree in his subject from the University of Toronto, is reported in the June 1 deal announcement as “having reviewed and verified the information contained in this release with respect to reserve and resource matters.” As he wasn’t asked to count the reserves and resources in 2010, when they were worth $103,774, and calculate if there had been any increase until last Friday, when they were worth $69 million, his expertise is limited, if not to say irrelevant.
According to the Prime-Tass announcement of November 26, 2010, the Chukotka division of the federal Ministry of Natural Resources estimated the mineable resources of the Verkhne-Krichalskaya licence area as 32 tonnes of gold (1 million troy ounces) and 69 tonnes of silver (2.2 million oz). Then in February of this year, during a public hearing called to consider the environmental impact of mining in the area, the Klen reserves were reported to be 18.6 tonnes (598,000 oz) of gold, 43.8 tonnes (1.4 million oz) of silver. Allowing for imprecision in the terms, reserves and resources, as well as in the geography of Klen and Verkhne-Krichalskaya, about 40% of Abramovich’s gold seems to have disappeared, and 37% of the silver.
The June 1 announcement from Highland Gold announcing the sale and purchase deal with Abramovich compares the Russian classification for reserves and resources with an international one — and more value goes up in smoke. “Based on the results of this activity a C1+C2 reserve of 18.6 tonnes of gold at an average ore grade of 6.3 g/t was registered with the Russian GKZ [State Reserves Committee]. A JORC [Joint Ore Reserves Committee benchmark] compliant resource audit (MICON, 2012) evaluated the deposit as containing potentially mineable gold resources of approximately 0.51 moz of Indicated and 0.04 moz of Inferred resources at an average ore grade of 5.14 g/t for the combined resources.”
Allowing again for imprecision between the two systems of classification, another 48,000 oz of gold have vanished, or 8% of asset value.
And yet Abramovich persuaded the board of directors of Highland Gold, including Eugene Shvidler, Abramovich’s long-time business partner, and Eugene Tenenbaum, his long-time financial advisor, to pay more for less. According to the Highland Gold announcement, Shvidler thinks otherwise. “The Klen addition is an important extension of Highland’s asset base,” he is quoted as saying, “and will have an immediate impact on the Company’s resources.”
Shvidler cannot have studied the annual report of the company, released this past April, carefully enough. For it reports its “JORC compliant resource base” as 11.1 million oz as of December 31, 2011. If the June 1 numbers are reliable ones, they add up to just 4.5% of the company’s aggregate.
The two Moscow institutional analysts who have examined the transaction so far haven’t been persuaded either. This is how Aton counts for comparative valuation: “Highland Gold said today that it has reached agreement to purchase the company Klen, which owns the rights for exploration and production on the same gold mine. The agreed price is $ 69 million, excluding debt. Klen is a subsidiary company, associated with Primerod International Ltd, the main shareholder of Highland Gold. An audit of the resource base of JORC indicated resource estimate of 0.5 million ounces of gold at an average grade of 5.14 grams of precious metal per tonne. In 2011 the company acquired Polymetal’s Kutyn gold deposit for $67 million to stockpile 1.2 million ounces of gold, that is, the transaction price was $ 56 per ounce of reserves. Highland Gold is going to buy Klen for $ 138 per ounce of reserves, ie almost 2.5 times more than the Polymetal transaction. The fact that the transaction will [involve] an affiliate of Primerod creates a negative opinion about the transaction.”
As arithmetic goes, that’s pretty discreet. Valentina Bogomolva, mining analyst for Uralsib Bank, does her counting this way: “The Klen gold deposit will be mined by the open pit method, with production scheduled to commence in 2015. The deposit’s JORC resources amount to 0.51 moz of indicated and 0.04 moz of inferred resources at an average ore grade of 5.14 g/t…. The seller of the Klen deposit, LLC Klen, is affiliated with Primerod Int, HGM’s main shareholder (owns 32%). The resource base is the only disclosed parameter; we value the project at an EV/reserves & resources multiple of $125/oz, which implies a 45% premium to the average price of $486/oz of Russian gold companies. Our average multiple includes Polymetal Int, the most expensive Russian gold name, which is traded at $181/oz EV/reserves & resources; we note that the resource base of all public Russian gold names includes the resources of operating facilities. Based on our estimation, Highland itself is traded at an EV/reserves & resources multiple of $31/oz and therefore the acquisition of a greenfield deposit at an EV/reserves & resources multiple of $125/oz appears to be expensive….As we consider the acquisition expensive, and given it was purchased from a party affiliated to the main shareholder company, we remain cautious on the corporate governance at Highland Gold Mining, and, based on the information disclosed by the company, we consider the deal to be dilutive for minorities. As we are not very optimistic on HGM’s operating prospects, we also reiterate that despite the fundamental upside we see in Highland, it is a relatively risky investment.”
Abramovich’s spokesman, John Mann, explains that much of this arithmetic is mistaken. That’s because Abramovich bought Klen in October 2009, Mann claims, and only a year later added the Verkhne-Krichalsakaya prospect. In Mann’s arithmetic they are separate and their reserves and resources must be counted cumulatively.
Geographically and geologically, the latter is adjacent to, surrounds, and includes the former. Or as Highland Gold claims: “The Klen licence area encompasses approximately two square kilometres and hosts an epithermal vein-type gold deposit with similar geological characteristics to other gold deposits in the region… The Verkhne-Krichalskaya exploration and mining licence incorporates the Klen licence and encompasses an area of approximately 996 square kilometres, hosting a number of small placer gold deposits. Historic exploration work on the property recognised numerous other geological features, including wide areas of hydrothermal alteration and geochemical anomalies, which are indicative of the gold prospectivity of the property. Several exploration targets have been identified which the Company believes have the potential to substantially contribute to Klen’s current resource base. In the course of the development of the Klen deposit the Company plans to systematically explore the prospects on the Verkhne-Krichalskaya licence.”
According to Mann, “Klen and Verkhne-Krichalskaya are separate licenses, so yes, the counts are separate. The 18.6 tonnes is just Klen.” Klen plus Verkhne-Krichalskaya ought to sum to more than each counted one by one.
Asked to clarify which is which, and how to count, Mann says: “In October 2009, Millhouse acquired the company Klen, and with it the Klen licence. We subsequently continued exploration work, more than doubling booked reserves, and prepared a technical plan for production at the site by 2015. (as per Highland release: 18.6 tons of gold reserves) In November 2010, Klen won a natural resource auction for the adjacent Verkhne-Krichalskaya block, paying 3.3 million rubles [$103,774]. We subsequently drafted an exploration plan and began initial exploration work. (when acquired, the site’s estimated resources were 32 tons gold, 69 tons silver).” According to Mann, in 2009, when Millhouse bought Klen, its reserves were just 8 tonnes of gold (257,200 oz).
How much did Abramovich (Millhouse) pay for Klen in October 2009, and from whom did he buy it? On the answers to these questions depend the valuation of the assets which Highland Gold has just paid $69 million to acquire, and the margin of Abramovich’s profit which Numis judges to be fair and reasonable. According to Mann, the seller was “a local small businessman (sorry, don’t have the name).”
As for the price Millhouse paid, Mann says: “I don’t have that figure (anyway, wouldn’t the fairness opinion be based on reserves and other current considerations?!) I honestly don’t have the name.”
The history of the Klen prospect is obscure. According to a release by the federal mine licence regulator Rosprirodnadzor, on April 6, 2006, the Klen mining licence was revoked; at the time the owner or licensee was something called Northern Ore Technologies. At that point, the asset value was zero, according to a source at the Chukotka branch of the Regional Fund for Geological Information. That’s because Northern Ore Technologies, which had first acquired the Klen licence from the state in 1999, was bankrupt.
What happened next isn’t clear. If Abramovich bought Klen from a local businessman in October 2009, as his spokesman now claims, that businessman must have acquired it from the regional administration sometime in the previous three years.
Presumably, ownership reverted to the state in April 2006, under the administration of the Chukotka regional branch of the natural resources ministry. The governor of the region until July of 2008 was Abramovich. He was a busy man; perhaps he didn’t know what was happening in the bowels of his administration, let alone in the bowels of the earth comprising the Klen and Verkhne-Krichalskaya prospects.
Asked to say what happened to the Klen licence between its revocation and reversion to the state in April 2006 and the acknowledged Millhouse purchase in October 2009, Chukotka officials reveal that it was acquired in 2007 by a company called OAO Klen. In 2011, Chukotka officials say, the licence was transferred to OOO Klen. That’s a change from open-joint stock company (OAO) to limited liability company (OOO) — a corporate restructuring, but not a change of ownership. Abramovich appears to have behind the ownership of the Klen licence from 2007, when he was still governor.
The Chukotka officials also reveal that because of the bankruptcy of Northern Ore Technologies and the reversion of the Klen licence to the state, the subsequent sale transaction was a “quiet one” at a “low price”. Just how low isn’t on record. According to one Chukotka official, “the story is very muddy and it’s difficult to dig out. Who has outbid [another] and for whose benefit he acted it is difficult to say. It’s possible there was a special purpose vehicle [for someone]. If you dig, the fate of many fields comes up as very strange.”
Step back further in time, because there is something about Abramvoich’s latest deal which is reminiscent of one he arranged in Chukotka nine years ago. In September 2003 Abramovich was almost three years into his governorship. That was one reason he went to a great deal of trouble to disguise a transaction that month in which he got Highland Gold to pay him $34.9 million for a gold prospect he owned, also in Chukotka region, called Maiskoye. On that occasion, he used a front-man named Oleg Savchenko. The evidence of Abramovich’s part and profit in the transaction came directly from Christine Coignard, an employee of Highland Gold at the time. Five and a half years later, Highland Gold sold Maiskoye for $109 million, so if there were sore feelings about Abramovich’s earlier price and profit-taking, this deal helped salve them. And of course , as a stakeholder in Highland Gold Abramovich was entitled to a one-third share in the threefold profit. Here’s the rest of this tale.
So was Abramovich behind the local businessman who bought Klen from the regional branch of the Ministry of Natural Resources a year after the local regulator had taken it away from somebody who had run out of cash? And how much did Abramovich pay when he officially got his hands on it? This is the arithmetic Abramovich isn’t acknowledging. According to spokesman Mann, “you’ve obviously not looked in the right place because we acquired the company Klen in October 2009. The previous owner was not affiliated with Millhouse. But I am impressed by the level of imagination involved in your giant leaps of logic! Your assumptions are, of course, entirely inaccurate.”
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