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By John Helmer

Sterlite Gold reveals $140 million payday from Russian-funded Georgian gold miner. It has been a mixed week for Georgia’s President Mikheil Saakashvili

On September 26 he took to the podium of the UN General Assembly in New York to accuse Russia of interfering in his country’s internal affairs, and acting in “reckless and dangerous” fashion. He was referring to the deaths of two Russian military men, shot dead by Georgian forces a week before, in what Saakashvili termed a “law enforcement operation”. Whether the deaths occurred on Georgian territory, or on the territory of the breakaway region of Abkhazia, isn’t clear.

On September 27,Irakli Okruashvili, a former Georgian defence minister under Saakashvili, who has started campaigning to replace him at next year’s elections, publicly accused the president of corruption, and of ordering him to arrange the deaths of political opponents. The next day, Okruashvili was arrested and charged with extortion, money laundering, abuse of power and negligence during his time as defence minister.

The same day, the Saakashvili family enjoyed a big pay-day.

Mineweb reported recently on an unusual transaction, in which the Georgian gold miner Madneuli outbid a number of bidders for the Zod gold licences and operations in Armenia, buying them from Sterlite Gold, a Canadian registered affiliate of Vedanta Resources: here.

Details of the transaction were first announced on August 17 in a terse statement by Sterlite. Sterlite, the company claimed, “has been advised of an agreement between its controlling shareholder, Vedanta Resources plc and GeoProMining Ltd. (”GeoProMining”), parent company of Georgian mining Joint Stock Company Madneuli, which may lead to an offer for the shares in Sterlite Gold.” The deal, according to the release, was that Vedanta “has entered into an agreement with GeoProMining to tender its Sterlite Gold shares at a price of US$0.3845 per common share in cash.”

GeoPromMining, a Tortola-registered entity, followed on September 27, the deadline for its offer, with a completion disclosure. It said it had acquired 253,526,305 Sterlite Gold shares, representing 95.6% of the stock outstanding. The sale and purchase price was $0.3845 per share. “GeoProMining intends to acquire the remaining Sterlite Gold common shares by means of a statutory compulsory acquisition…at the same price as the Offer price, and to de-list the shares from the Toronto Stock Exchange.” The offer value of the entire company amounts to $102 million.

Sterlite, and its owner Anil Agarwal, were saying goodbye to the only business it had, Zod, for a cash payment from Madneuli of $97.48 million. Ernst & Young had been conducting a silent auction of the asset for months, and this process had also revealed that Sterlite’s Armenian operations had loans outstanding and related debts of about $27 million. Settlement payments to resolve tax and other claims by the Armenian government, also reported in Mineweb, totalled $5 million; while there were miscellaneous obligations to mine contractors and equipment suppliers of about $5 million. Altogether, the takeover has, and will cost Madneuli/GeoProMining about $139 million.

There are subtleties revealed in the figuring of this transaction, which raise the question of why the Georgian miner would pay so much for assets in as much trouble as Mineweb has already chronicled: here.

Madneuli’s valuation is also controversial. It was privatized by the Georgian government for $35 million in 2005,and is currently owned by Timur Alasaniya. He is President Saakashvili’s uncle.

The privatization of the company, the leading gold and copper miner in Georgia, has since been called a steal by Saakashvili’s political critics and opponents. Financial details for Madneuli are difficult to come by.

Saakashvili’s critics claim the company netted $60 million in profit the year of the privatization. This number is doubtful; the sale figure is confirmed by the World Bank.

The gold resource attributed by one western source to the Madneuli deposit in southern Georgia is 350,435 oz. Silver, copper and other minerals are also mined at the deposit, which has been worked for 30 years. A gold resource estimate for the deposit published by Anglo Asian Mining indicates 23.5 tonnes (756,000 oz). When an Australian junior Bolnisi Gold worked in a joint venture with Madneuli, only to fall out with the company and abandon Georgia entirely, the Australians estimated indicated and inferred gold resources at a total of 780,000 oz. Before the conflict with Madneuli halted mining operations, and then forced Bolnisi’s exit in 2005, Bolnisi reports show aggregate production of 482,636 oz of gold between May 1, 1997 and December 12, 2005. Silver produced in the same period amounted to 248,725 oz. Bolnisi estimated its cash operating cost at $199/oz.

There is nothing comparable for production detail or financials from Madneuli; the company website discloses just two words, “under construction”. Georgian export data for the year 2005 indicate the maximum revenues Madneuli could have generated that year in shipments of copper ores and concentrates for $36.4 million, and gold for $34.7 million. Total suggested revenues for Madneuli, $70.70 million.

Bolnisi reported that its 50% stake in the joint venture with Madneuli earned gross profit from the sale of gold and silver in 2005 of $11.4 million, and positive cash flow from operating activities in the same period of $6.8 million.

This patchwork of data allows a maximum valuation of the company’s gold resources at half a billion dollars, but there is no telling what probability should be assigned to production value, or earnings. In terms of Ebitda, Madneuli appears to be in the double-digits, but no more. In terms of investor risk — after the Bolnisi affair — the discount for the company should be high.

When the general director of Madneuli, Geula Akobia, was interviewed in September 2006, he said his “main partners are German companies”. He also claimed:”I am very happy that United States is our strategic partner.” Missing entirely then, and also now, is the fact that Madneuli’s financing comes from Russia, and from Sergei Generalov’s Industrial Investors group in Moscow. It was Generalov, who, initially deposited the funds in escrow required by Sterlite and Vedanta to secure the transaction in August. It is Generalov who has supplied the $97.48 million cash payment, and will cover the additional financing requirements.

Two weeks after Sterlite’s sale to Madneuli was announced, Generalov was asked by Mineweb whether he had discussed the deal, and Saakashvili’s involvement in it, with the Kremlin, and whether he had received approval. Mineweb was told: “I can’t tell you either yes, nor no.” Generalov promised an announcement on September 14.

Nothing appeared on that day, however. In the meantime, First Deputy Prime Minister Sergei Ivanov, the former Russian defence minister, read the Mineweb report of Generalov’s financing of the Saakashvili family venture. Ivanov is a candidate to succeed President Vladimir Putin next March. He is also the senior government official in charge of the maritime sector, overseeing Generalov’s principal line of business, the Fesco shipping, ports and transport group.

If the Kremlin is considering what is to be done about Generalov bankrolling Saakashvili, it will be Ivanov who will report to the Security Council. And it is Ivanov who is best positioned to remind Generalov that he is putting the heavily leveraged Fesco group at potential risk.

Ivanov told Mineweb through a spokesman that he will make no public comment.

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