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By John Helmer in Moscow

The Russian government agency responsible for negotiating the terms of DeBeers’s new Grib diamond mine project in the Arkhangelsk region of northwestern Russia has agreed to extend a deal deadline, which fell on November 15.

At that point, and in the week that followed, De Beers and its affiliate Archangel Diamond Corporation (ADC), have continued talks with the Federal Antimonopoly Service (FAS) in Moscow on terms for domestic cutting and polishing of the project’s mined rough. These terms, in a vaguely worded “ancillary agreement”, are the precondition for the Russian government’s approval of the joint venture between DeBeers and LUKoil, which respectively own ADC and Arkhangelskgeoldobycha (AGD), the project operators. Prime Minister Vladimir Putin chaired the Control Commission for Foreign Investment, which gave its conditional approval, on October 10.

Putin then delayed signing the protocol of the meeting for a fortnight, before ADC acknowledged receiving it, along with the draft of the approval conditions. FAS told PolishedPrices.com that November 15 was the deadline by which DeBeers should reply and agree, or allow the approval, and the deal, to lapse. Tom Beardmore-Grey, ADC’s chief executive and a DeBeers veteran, refuses to answer questions, as speculation grows that the senior management of DeBeers in London has become so diffident about its long-term Russian prospects, and so reluctant to commit to new project conditions, it is considering the option of abandoning the Grib project altogether.

According to Svetlana Levchenko, who heads the FAS department responsible for reviewing foreign investment in strategic Russian resources, the FAS is “continuing negotiations with De Beers.” She noted, however, that “during the negotiations they do not disclose any information to the press”. She declined to say when or if a new deadline for deal approval has been fixed.

LUKoil, which is the majority partner in the joint venture, and which will receive a first-tranche payment of $100 million, once the government fully authorizes the project, is vague on its involvement in the negotiations, and on its outcome. Vagit Alekperov, the controlling shareholder and chief executive of LUKoil, said a week ago he expects the deal to be finalized by the year of the year. LUKoil was the target of US litigation by DeBeers over alleged fraud and contract violations in the Grib project until Alekperov and Nicky Oppenheimer signed their joint venture pact in April.

ADC has issued a detailed summary of the terms of that pact, which include $100 million in down-payment, when and if the transaction closes; $75 million when LUKoil and ADC agree to go ahead with the construction of a diamond mine at the Grib Pipe and AGD gives its accord to mine; and $50 million when commercial diamond production starts. It is estimated by the Russians that the mine go-ahead is unlikely before 2011; or commercial production by 2015.

The agreement with LUKoil also provides that De Beers will hold a 49.99% stake, and LUKoil the rest. De Beers will act as technical consultant to the project, retained by the project operator, AGD, the LUKoil owned geological company and license holder. The payment and equity arrangements indicate a total valuation of the asset at present at $450.1 million.

While beneficiation conditions are standard throughout the diamond-mining world, FAS is negotiating without input from the Arkhangelsk region, where the mine will operate; and without the Russian Association of Diamond Manufacturers, which represents the manufacturing enterprises in the Russian market. It is unclear also whether the cost of beneficiation is to fall proportionally on the joint venture partners, or solely on De Beers and ADC. LUKoil’s uninvolvement suggests that, once DeBeers has eliminated the litigation threat, Alekperov may still be contemplating the sale of his stake from the project. If that were to occur, and DeBeers goes through its first payment and funding for the feasibility study of the project, it is poorly positioned to survive.

On November 17, the uncertainty led to a halt to trading of ADC shares on the Toronto stock exchange. An announcement followed that day by ADC, which omitted to refer to the November 15 deadline, but acknowledged that talks were continuing on the ancillary agreement. “There can be no assurance that Archangel and FAS will be able to reach agreement on a final version of the ancillary agreement and there can be no assurance that one party would not unilaterally decide at any time to
treat such discussions as at an end,” read the ADC announcement.

Trading in the share was resumed on November 18. Since April, when the LUKoil deal was announced, the share price has fallen from C$2.00 to 20 cents on October 30. It is currently at 45 cents.

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