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By John Helmer in Moscow

Norilsk Nickel investigation of asset spinoff leads to questioning of shareholder intention

Mikhail Prokhorov’s holding company, Onexim, has officially confirmed that Mikhail Prokhorov will not proceed with the asset division agreement he signed on September 14 with former partner, Vladimir Potanin.

A statement issued to Mineweb by the holding’s chief executive, Dmitry Razumov, claims: “We made a proposal to Interros [Potanin’s holding company], but have not yet received an answer. The ball is in Interros’s court.” Referring to Russian press agency reports that Prokhorov had called off the deal after declaring force majeure is not explained by Razumov. Instead, his statement claims: “information on any force majeure on our side, preventing us from reaching an agreement with Interros, has nothing to do with reality.”

Mineweb reported a week ago that the deal had collapsed. A source close to the negotiations told Mineweb: “This was not a formal agreement. It was a protocol, in simple written form, not an agreement according to Russian legislation, though it may be so according to other countries.” Interros has told Mineweb it is not commenting on the terms that were and agreed and signed.

Moscow investment banks have begun to suspect that Prokhorov’s announcements may be conjuring tricks or negotiating ploys. Mikhail Stiskin of Troika Dialog, referring to the purported force majeure justification, reports today that “apparently, as the stock market entered into a phase of extreme volatility, asset valuation became a complicated task. Using February prices may not be reflective of the underling situation, which apparently explains Onexim Group’s unwillingness to abide by the agreement. Also, it was suggested that no agreement was reached with regard to Open Investments.”

Open Investments is a real estate holding shared between Prokhorov and Potanin, as well as publicly listed on the Russian stock market. Its market capitalization this week is $1.5 billion; but that is after a 66% drop in value from the start of the year. That loss of value is modest by contrast with the other listed Russian real estate groups.

Michael Kavanagh, metals analyst for Uralsib Bank in Moscow, interprets Prokhorov’s latest move against Potanin as pursuit of higher valuations. “Prokhorov,”he claims, “has not refused to split remaining assets at all; he just refused to do it right now.” But in what asset universe, and in what value future, is Prokhorov positioning himself for the final deal with Potanin? And is he aware of the value destruction his tactics are causing the assets he himself believes to be worth more than anyone in the market will pay?

Razumov’s response is limited: “The final division of all joint assets with Interros has been and remains a priority for Onexim. To speak of a definitive deal without a
decision on the fate of Open Investments is premature.”

Again according to Troika Dialog, the latest breakdown is a “negative development” because “the longstanding shareholder conflict has constrained the management’s capacity to run the company and has been increasingly perceived by the investment community as value destructive.”

Value destruction was once depicted by Hieronymous Bosch, the 15th century Dutch painter, who politely called his painting of the thimblerig game, “The Conjurer”. But the shell game, as this is better known today, is generally thought to be less a magical trick than a sleight of hand, practised for profit, illegally.

It is difficult to play the game with nickel and copper-bearing deposits already buried in ore formations far below ground-level. But Norilsk Nickel management has suspected that, as a consequence of the conflict between controlling shareholders Prokhorov and Potanin, Norilsk Nickel might have been conjured out of nine assets, whose future value is thought significant, but whose cost as exploration licences remains unknown.

A statement was issued by Norilsk Nickel on July 25, saying that it had commenced an investigation. “In connection with the information that appeared yesterday in mass media that Onexim Group intends to establish Intergeo company for the development of some deposits, MMC Norilsk Nickel is starting an internal investigation. The investigation will take place within the process of taking over the duties of Mr. M. Finsky, in order to clarify the legal grounds on which the deposits acquired within the framework of projects run by Mr. Finsky when he served at MMC Norilsk Nickel, are mentioned as the projects to be developed by Intergeo company.”

Nine mineral prospects or deposits are at stake: Ak-Sugsky; Arbinsky; Ijsko-Tagulsky; Isakovsky; Bolshoi Seyim; Orekitkansky; Togunassky; Uronajsky; and Chernogorskoye.

Apart from confirming their names and the investigation, which commenced two months ago, Norilsk Nickel will say nothing more. No result of the investigation has been disclosed.

Onexim spokesman Igor Petrov told Mineweb there is no mystery about the exploration assets – they belong to Intergeo, and Intergeo belongs to Onexim. The Onexim announcement of July 24 implied as much: “Mining and metal company Intergeo will conduct development of its own deposits of polymetallic ores, and also to render professional services to other participants in the market. “We start a unique project for the new Russia, assuming economic development of extensive territories and the creation practically from zero of the largest new Russian mining and metal company,” the general director of ONEXIM, Dmitry Razumov, has declared.””

The problem which Norilsk Nickel has wanted to investigate is how Prokhorov’s holding got hold of assets which Potanin had planned for development by Norilsk Nickel. For much of the past year, the two men have been trading charges and fighting over gold exploration assets and licences, which the Polyus chief executive, Evgeny Ivanov, had proposed to carve out of the jointly held goldminer, Polyus Gold. That move, opposed by independents on the Polyus Gold board, appeared to have been abandoned by the time Prokhorov and Potanin signed their September 14 protocol.

But the Intergeo asset transfer is a separate concern, and impacts on the future of Norilsk Nickel’s underlying capital value. Maxim Finsky was working at Norilsk Nickel in charge of asset acquisition when the nine assets were acquired. He held a senior post, deputy general director. Finsky was a school chum and long-time friend of Prokhorov’s, and he has worked closely with him for years.

A source familiar with the transactions, speaking with the guarantee of anonymity, told Mineweb that Finsky had been instructed to buy the exploration assets, paying money supplied by the Interros holding, when Potanin and Prokhorov controlled it together. The source added: “Originally the licenses were bought on the balance-sheet of companies in the Potanin-Prohorov structure with the future aim to pass them through to Norilsk Nickel. I don’t know how that was financed, who paid and what happened.” One thing is clear, more than one source confirms: the assets never reached Norilsk Nickel’s portfolio, as had been planned. Among other things, that has been confirmed by Norilsk Nickel’s internal inquiry.

The source said he believes Potanin and Prokhorov have agreed on dividing up the value of these assets. But that may have been in the September deal now repudiated by Prokhorov.

At Onexim, spokesman Petrov told Mineweb that Finsky joined the Onexim group on July 24 of this year. He is also general director of Intergeo. According to Petrov, Onexim is “now the 100% owner of Intergeo.” He was not able to say who was the previous owner of Intergeo, or from whom it had been purchased. The acquisition was made, Petrov said, in July 2008. He said he was not able to give a valuation of Intergeo’s assets. Asked if the assets were meant to be part of Norilsk Nickel, Petrov said: “No claims have been framed by Norilsk Nickel. Maxim Finsky has said publicly that he is ready to answer any Norilsk Nickel questions, but so far as I know, there have been no questions from the company.”

The source familiar with what happened claims that the Norilsk Nickel board of directors had approved the acquisition of the exploration assets through another company, on condition that the assets would be registered subsequently to Norilsk Nickel’s ownership. The implication is that the board approved Finsky’s use of Intergeo because it was understood that Intergeo would transfer the assets on to Norilsk Nickel, for whom Finsky was working at the time. When this didn’t happen, and when Finsky moved, along with Intergeo and the assets to Onexim, Norilsk Nickel raised its public alarm.

Those on Potanin’s and Prokhorov’s side, speaking off the record, acknowledge that Finsky founded Intergeo in 2007 with agreement from both Potanin and Prokhorov, using funds allocated by the two of them. Only now that they cannot agree on who owns them, Prokhorov claims them for Onexim.

A public release by Intergeo and Onexim, dated September 5, 2008, says the assets of the company are “concentrated in Siberia and North West Russia. According to internal projections, the deposits and resources of the company are estimated at more than 15 million tonnes of cooper, 9 million tonnes of nickel, 1 million tonnes of molybdenum, 750 tonnes of platinoids, and 90 million tonnes of titanium.” Assuming the commercial feasibility of mining and extracting this volume for sale, at current metal prices these assets are worth at least half a billion dollars.

Mineweb asked Finsky at Onexim’s offices in Moscow to clarify the terms, valuations, and ownership of Intergeo’s assets. Onexim responded that Finsky is “not here”, and referred questions for him to Onexim’s spokesmen, Petrov and Sergei Chernitsyn. Neither responded to the questions by publication time. Intergeo’s press statement reports a contact email, but to date there has been no response to the questions asked of Finsky.

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