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By John Helmer

Armenia plans revocation of Zod gold mine licence, as Georgians push for bargain-priced asset flip

The Armenian Government goes to court on Monday of this week to revoke the gold mining licence issued in 1999 to the Ararat Gold Recovery Company (AGRC). This is the local operating affiliate of Sterlite Gold, which in turn is controlled by London-based Vedanta Resources and controlling shareholder, Anil Agarwal. The Armenian gold assets include two mines, Zod and Meghradzor, and an ore-processing plant at Ararat.

Officials in the General Prosecutor’s Office in Yerevan, the Armenian capital, have confirmed the legal action also seeks a judicial order cancelling all operating permits for ARGC, and freezing the company’s bank accounts and moveable property. The prosecutors are also seeking payments by AGRC into the court of 4.6 billion Armenian drams ($14 million), plus another $10 million, to cover claims the Armenian government alleges are owed by the mining company to the state budget.

Vardan Vardanyan, AGRC’s chief executive, is quoted in the Armenian media as saying the company is aware of the suit, but had no information yet about the specifics of the government’s claims.

Agarwal and his spokesmen have refused to respond to Mineweb questions on the Armenian troubles, as they have conducted, through Ernst & Young, a silent auction of Sterlite’s Armenian assets to a group of bidders. The Ernst & Young prospectus has been less than clear on the situation on the ground in Armenia.

Word of the auction in London has also accelerated the determination of the Armenian government to take back the assets, before Agarwal can sell them. This, in turn, has discouraged some of the bidders, and encouraged a Georgian group, backed from Moscow, to lobby the Armenians for ouster of Sterlite, and a bargain-priced flip of the assets. The Georgian Madneuli group, however, carry heavy baggage of their own into this contest.

Of the shenanigans, there has been no report to shareholders from Toronto-listed Sterlite Gold since June 14. At that time, a company statement acknowledged that trouble was brewing. “Sterlite Gold Ltd. (TSX:SGD) 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.”

AGRC was equally hesitant to confirm that revocation of the mining licence is at stake.

“Only the court can comment on the decision of the Prosecutor General’s Office, if there is one,” CEO Vardanyan said. “The Company will follow the development of the events: we will wait for the suit and notification from the Prosecutor General’s Office, after that our lawyers will take up the case.”

Mineweb has already reported on the charges against AGRC, which focus in the main on lifting more gold than has been disclosed for tax payment; for withholding information on higher gold reserves; and for failing to meet investment conditions in the licence agreement. An Armenian judge required the government to put its instructions in lawful order, and repeat an inspection of AGRC’s facilities, before returning to court with an application to revoke the licence. A fresh inspection by the State Inspection on Nature Protection began on July 24.

The Armenian government hopes that court proceedings will beat Agarwal to the punch. But at the same time the Georgian Madneuli group is lobbying in Yerevan for a swift deal, without tender, to take over AGRC’s position. Armenian sources say this is problematic, because of Madneulli’s controversial record, underground and on the surface, across Armenia’s northern border in Georgia.

Georgia has considerable gold mining potential, but domestic squabbling has limited the investment required to sustain a major mining venture. Countrywide reserves, announced by the Georgian State Geology Committee in 1995, and based on Soviet records, were 8 million oz of gold, and 48 million oz of silver.

Export figures for 2005 indicate that gold sales from Georgia totalled $34.7 million for the year; that was up 4% on the result for 2004. According to a report by London researcher Hardman & Co., issued in March 2007, “Georgia has never been explored under western standard mineral economics and is therefore considered highly prospective, especially for precious metals.” Soviet-era prospecting and geological surveys established with some precision where Georgia’s gold deposits are located, and the gap between the Soviet data and foreign proving has been cheap enough, and the promise of mineable reserves large enough, to attract junior miners with modest means, and stock market speculation.

The first of these juniors was Bolnisi Gold, an Australian listed and managed miner. Bolnisi refers to the southern Georgian region, where it worked; operationally, Bolnisi worked through Quartzite Ltd, a heap-leach producer, and Trans Georgian Resources (TGR), an explorer and prospector. Bolnisi’s public documentation indicates that between the start-up of gold production in 1997 and December 2005, the enterprise produced almost 483,000 oz of gold, and 249,000 oz of silver. Cash operating costs grew steadily higher, reaching $361/oz in 2005, but averaging $199 over the 8-year period. But there was trouble, and on December 12, 2005, Bolnisi announced, it had sold out its Georgian interests, and moved entirely to the goldfields of Mexico, and a copper venture in Queensland.

Madneuli was Bolnisi’s Georgian partner, and a discreet account of the falling-out between the two appears in Bolnisi’s report to shareholders for FY 2000. “Towards the end of the year ended 30 June 2000, a representative of the Georgian partner in Quartzite, JSC Madneuli, made a number of unfounded claims about the Company’s operations and against the Company’s representatives in Georgia. The claims are not unusual for the business climate within Georgia; however, the allegations escalated into a dispute which had a severe impact on the Company’s activities in Georgia.”

Bolnisi evacuated its expatriate managers; prospecting stopped; gold output plummeted; cost of production rocketed. In 1997, Bolnisi had said its indicated and inferred gold resource amounted to 780,000 oz. In 2000 an extra million tonnes of ore was identified with a grade of 1.9 g/t for gold, 2.2 g/t for silver. Bolnisi’s dispute with the Georgians was partially resolved, and production resumed, but at a much higher cost. This, Bolnisi discloses, was because “ore continued to be sourced from low grade stockpiles [while] access to higher grade material [was] still being denied by our Georgian partners.”

Public records and media reports from Georgia don’t mince words about Madneuli. In 2004, several executives were arrested, one of them in Switzerland, on warrants from the Georgian prosecutors alleging tax evasion.
In 2005, the government arranged the privatization of its 97% stake in Madneuli, triggering recriminations from the parliamentary opposition to President Michael Saakashvili. They alleged that Saakashvili had arranged for his kin to take control of the company through a British Virgin Islands front company, Stanton Equities, which was financed in turn by the Moscow-based Industrial Investors group. Among the allegations aired in public in Tbilisi at the time was the sale price of $35 million (plus $16 million to cover debt obligations), for which Madneuli had been sold to an uncle of President Saakashvili; Madneuli’s operating profit for the year was alleged to be around $60 million. According to published remarks from Shalya Natelashvili, head of the Georgian Labour Party, “the president has played a card sharp and stolen the gold of the Georgian people, and now it has passed into the personal possession of his family.”

Armenian sources say their government is reluctant to show favour to Madneuli. There is a comparable concern to avoid showing interest in the Armenian gold contest on the part of Sergei Generalov, one of two controlling shareholders of Industrial Investors. Headquartered in Moscow, with partner Siman Povarenkin, Generalov, a former Russian energy minister, has been focusing primarily on building up a transportation conglomerate 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. Last month, he offered investors a new share issue to raise $200 million in fresh cash.

Part of this is for reducing his debts; part may be intended for the Armenian gold buy-out. But at an estimated $100 million to $120 million, which has been Vedanta’s price-tag, the sum is too large for Generalov to accept. Institutional Investors is hoping that the Armenian courts will make the assets cheaper to acquire by revoking AGRC’s licence, and evicting the Sterlite-Vedanta group without compensation, and debts still owed to the Armenian budget.

Generalov is a newcomer to the mining sector, and in Yerevan it is suspected that Zod is Povarenkin’s initiative. The Georgian media have been reporting other Georgian acquisitions he has made under the Industrial Investors’ flag. One is reportedly the Georgian vodka distillery, Ushba. For the record, Generalov and Industrial investors will say nothing at all about their links to Madneuli, or the bidding for Zod. However, sources close to them both have told Mineweb that Generalov and Povarenkin have approved financing Madneuli’s bid for Zod – if the Armenian government will agree to a discount price.

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