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By John Helmer in Moscow

Ivanov tries a second board meeting to push through mine licence and share transfer.

In Russian villages, they say the law is like a sleigh. A clever man can steer it either way. If the villagers knew about share emissions, their suspicion would be the same.

On December 18, the board of directors of Polyus Gold is scheduled to consider a proposal for a share emission, which is being steered by Mikhail Prokhorov, at the moment the controlling shareholder of Polyus, and his chief executive, Evgeny Ivanov. They are proposing the board agree to a share emission by Polyus subsidiary, Polyus Exploration (Russian name, PolyusGeologoRazvedka, PGR) that would do two things – dilute the stake of Prokhorov’s rival, Vladimir Potanin, in the new company; and transfer gold exploration and mining licences, plus mine company shares, from the parent company to the affiliate, in order to pay for the vesting.

To analysts and other gold miners in Moscow, the scheme looks like a new attack by Prokhorov on ex-partner Potanin, stripping value from Polyus Gold before the two of them have agreed on a sale-purchase agreement to dispose of what was once a harmonious partnership of equal shareholdings. Interros, Potanin’s holding, has told Mineweb no more than, at this stage, it has not been notified of the details of the share emission, neither the intended outcome, nor the asset transfer to pay for it.

Polyus board chairman, Sergei Batekhin, a Potanin supporter, lost his chairmanship when Prokhorov switched votes and chairs at the company board meeting in October. Mineweb reported this at: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=38546&sn=Detail

Batekhin was unavailable to comment on the proposal to enlarge Polyus Exploration at the expense of the parent company. An Interros spokesman confirmed the concern, telling Mineweb: “This is why we charged general director Ivanov approximately two years ago to streamline structure of the company, and put it in compliance with the standard conditions expected of public companies. But this was not done.” The Interros source added that Pavel Skitovich, who became chief executive instead of Ivanov, tried to fulfill this mandate. But then in October Mikhail Prokhorov got him removed, and returned Ivanov to the chief executive’s post. The very first move he decided on was the new emission of Polyus Exploration.”

Polyus Gold – listed in the UK – is currently valued in the market at $8.3 billion. It is one of the rare major gold miners in the world to show a downward trend in value – minus 12% in the year to date – against the rising Russian market index, and against the rising price for gold. Its current market cap translates into a share price of $43, at the low end of its high-low range for the year of $36.50 to $55.75.

Potanin’s stake in Polyus is 22%, Moscow brokers say. Prokhorov holds a similarly sized stake. In addition, through a joint holding company called KM Invest, they share 7.5% of Polyus. But as the war between them has become fiercer, Prokhorov claims to have bought another 3% in the market, boosting his base stake to 25%. No-one is certain if that’s true. What is clearer is that, since October, Prokhorov controls more votes on the Polyus board than Potanin. Does he have the votes for next Tuesday’s meeting to push through the emission and licence transfer? Is that tantamount to stripping value out of Polyus, and into a company differently structured from the parent? The 45% free float of unaligned shareholders in Polyus has yet to be told. What they realized months ago is that the fighting between the two men is taking strips off the company’s market cap.

When Potanin stepped in May to replace Prokhorov’s CEO, Ivanov, with Pavel Skitovich, the Polyus share price had been falling for two months. It then recovered some of the lost value until early November, when the rot set in again. By that time, Prokhorov had lured Potanin supporters on the Polyus board, and procured enough votes to reinstate Ivanov.

The London peer, Lord Patrick Gillford, one of the independent directors on the Polyus board, has refused to tell Mineweb what he thinks of the shenanigans, or how he has been voting to protect the independent shareholders.

Polyus Gold filed a listing prospectus for its American depositary receipts (ADRs) with the London stock market in December 16, 2006. That document lists 31 “significant subsidiaries” of the parent company. Polyus Exploration (PGR) isn’t one of them. The reason for that is that this is a brand-new concern, formally announced by Ivanov on April 2, the month before he was ousted. According to the announcement, “Polyus Exploration will be holding licenses for greenfield exploration projects which are currently in Polyus Gold’s pipeline. The decision to create Polyus Exploration was taken by the Board of Directors of Polyus Gold by absentee ballots in March 2006….” Ivanov is quoted in the announcement as explaining: “the programme is focused on bringing good organization to our greenfield exploration projects and aimed at making the process more transparent for investors. The Company’s exploration business has proved to be highly efficient, and the programme will help to raise its investment appeal and to achieve even better results in the future”.

In the risk section of its London prospectus the previous December, Polyus Gold had acknowledged “our business could be adversely affected if we fail to obtain, maintain or renew necessary licences, including subsoil licences and export licences, and permits or fail to comply with the terms of our licences and permits.” There was no hint then, nor a scintilla of suspicion when Polyus Exploration was launched, that the new company might be designed to siphon off Polyus Gold assets. That is the suspicion in the Moscow market today.

Polyus publications indicate that the company’s JORC-classification reserves as of 10 September 2007 totaled 68.6 million ounces; the estimates included a new Micon International assessment of the big Natalka deposit (Matrosov mine) reserves. The aggregate Polyus reserves officially endorsed by the Russian State Committee of Reserves (GKZ) at January 1, 2007 amounted to 3000.7 tonnes (96.5 million oz) of В+С1+С2 class reserves, including 2149 tonnes (69 million oz) of Russian В+С1 reserves.

In April, press briefings by Polyus Gold implied that the capital structure and shareholding of the new subsidiary would mirror the parent, and effect no shift in the balance of power between Potanin and Prokhorov. It was not clear, however, what licences would be vested in Polyus Exploration.

In May, the list was said to be incomplete. In November, Prokhorov announced that he was trying to have the board adopt his recommendation to raise the junior company’s capital from Rb45 million ($2 million) to Rb4.5 billion ($180 million), and to pay for this with shares from several of the parent’s most important mining units, as well 11 prospecting licences from among the hundred Polyus held at the time.

Potanin objected immediately. He was quoted publicly as saying the scheme was intended to create an independent company, devalue Polyus the parent, and result in inequitable treatment for shareholders — other than Prokhorov and his allies. According to calculations reported in the Moscow media, Ivanov’s scheme aims to dilute the 100% ownership by Polyus Gold of Polyus Exploration to 3%. The board could not decide the issue in November, Interfax reported, because it lacked a quorum.

Next Tuesday, the board is scheduled to meet again. Since October, Polyus has announced that it has bought at auction three fresh gold prospecting licences in the Irkutsk, Magadan, and Krasnoyarsk regions, for a total of Rb91.8 million ($3.7 million). Rob Edwards, Renaissance Capital’s mining analyst, commented skeptically: “Polyus has lagged in terms of performance, considering that the gold price is close to 27-year highs. Polyus needs a flow of good news to remind the market that it has great positioning and great growth potential, despite a disproportionate level of execution risk.”

Polyus Gold spokesman, Yelena Evstigneeva, was asked what licences had already been vested in Polyus Exploration, if any. She told Mineweb: “I will try to answer your question within today. I am not sure what licenses are in PGR already, and if the new licenses are vested in there. I know that the board of Polyus will discuss the PGR issue next week.” By day’s end, it appeared that Ivanov had not authorized her to say more.

The clash between Prokhorov and Potanin over Polyus Gold has also been arousing official interest in Alrosa, the state owned diamond-miner, one of the potential buyers for his stake, whom Prokhorov courted several months ago. A sale and purchase deal has been discussed by Alrosa chief executive Saergei Vybornov and Prokhorov. Sources close to their talks believe the two have failed to agree on price and other terms. Finance Minister Alexei Kuydrin, who is chairman of Alrosa’s board, announced publicly that the asking price was too high. This wasn’t the only stumbling block.

Interros sources are aware of problematic accounting and tax interpretations that were accepted by Ivanov, when he and Vybornov negotiated in 2005 for the acquisition of Alrosa’s stakes in Sakha region gold assets, which had earlier been held by Celtic Resources. Shares in the Sakha region goldmines are also proposed for transfer from Polyus Gold to Polyus Exploration, if the Prokhorov plan goes through.

But legal aspects of the provenance of the Sakha asset deal, and potential tax liabilities, are thought to be Ivanov’s liability, because, the sources say, not all Polyus asset acquisitions were handled by the board.

At least one official audit has been scheduled of this and other Alrosa operations by the independent state auditor, the Accounting Chamber.

Exactly when the audit will commence, and what it will cover is sensitive, and still undecided, Mineweb was told. Sergei Stepashin, the Chamber head, has authorized auditor Valery Goregljad to start work this year, and to complete the assignment next year. Ruslan Shlyk, speaking for Goreglyad, told Mineweb: “the problem is that the Alrosa check is scheduled but not yet begun. It is in the preparation stage. It may begin before the end of this year, but I am not sure. ” He said also that Goregljad may be rotated out of the assignment. No decision has been made yet, he added, on what years the audit will cover.

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