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By John Helmer in Moscow

Mahmoud Thiam, the US investment banker who has served for the past year as Guinea’s Minister of Mining, Energy and Hydraulics, has been reappointed to his post, according to an official government announcement from Conakry, the Guinean capital, late last night.

Thiam won the support of Captain Moussa Dadis Camara, the Guinean head of state, who is recuperating from an assassination attempt in December; and from the Defence Minister and acting head of state, General Sekouba Konate.

Thiam’s reappointment follows a bitter month-long campaign by United Company Rusal, the Russian aluminium monopoly and Russia’s largest corporate debtor, to lobby for Thiam’s ouster, after a new Guinean prime minister, Jean-Marie Dore, was picked by Camara, Konate, and Guinean opposition leaders to govern until new presidential elections later this year. Thiam’s new portfolio covers mining and geology; energy has been assigned separately.

The Rusal campaign in Guinea was led by a former Russian intelligence officer named Victor Boyarkin, whom Rusal’s Moscow headquarters confirms to be a senior company employee. Before Dore was sworn in on January 26, Rusal and its public relations agent in London, Jon Simmons of Financial Dynamics , had promoted the claim that Thiam had lost the confidence of the Guinean authorities. A Rusal statement of January 25 announced that Thiam “is no longer a Guinean government official and therefore does not represent the Guinean government”.

This was in reaction to a letter from Thiam officially warning the Hong Kong Stock Exchange, Rusal’s bankers and lawyers, and the investment markets in Hong Kong and Paris that the Guinean government is preparing multi-billion dollar court claims against Rusal for violation of its bauxite mining and alumina refining concessions in the country. Last September, a Conakry court ruled in favour of the government to revoke the Friguia concession agreement with Rusal of 2006. The Friguia agreement covers production of both bauxite and alumina. Rusal holds three concessions in Guinea altogether; the other two are the Kindia bauxite mine, and the Dian-Dian bauxite deposit, which is not yet in production.

The timing of Thiam’s Hong Kong letter was significant, because Rusal was preparing to sell shares on the Hong Kong Exchange between December 31 and January 27. The share sale prospectus did not put a value on the potential asset or revenue loss, dismissing the Guinean legal proceedings and claims on the ground that “that the RG courts lack jurisdiction over the dispute, as the relevant agreement governing the share sale contains a valid and enforceable arbitration clause, according to which all relevant disputes are to be resolved by arbitration in Paris.”

According to the company: “RUSAL purchased Friguia in full compliance with Guinean legislation and we consider the plant to be our legitimate property.”

Rusal data, published in the prospectus, identifies the Friguia concession’s bauxite ore reserves (proved and probable) at 115 million tonnes; they make 30% of Rusal’s global aggregate.

While Thiam continued at his post after Dore’s appointment, forged documents were circulated, making it appear that he was being sought for arrest in warrants issued by the local Guinean authorities. A Dow Jones report of February 3 said: ”The warrants, seen by Dow Jones Newswires and which date back to Jan. 14, purport to have originated from a judicial court in the country’s capital, Conakry. But court officials told Dow Jones Newswires Wednesday the documents are on false headed paper and that their signatories don’t exist.”

Thiam told Business Day the fakes were obvious. “Besides my last name, there wasn’t a single correct fact. The official stamps were wrong. If Rusal was behind this second claim, it is disturbing how incompetent the campaign has been, and it raises questions about the suitability of whoever was behind the falsehoods and forgeries to run a business.”

This was not the first time Rusal tactics in Conakry have run into trouble. In November 2003, Justice Sir Raymond Jack of the UK High Court in London issued a ruling against a Rusal subsidiary in Guinea for contract breaches and financial liabilities. In the published judgement, Jack found that, in relation to Rusal’s Guinean adversary, a company called Tekron, black propaganda and lobbying tactics had been used. “It is apparent from these matters that under threat of litigation in London Rusal have done what they can to blacken the names of Tekron and its principals in Guinea. On the evidence before me, they have not only failed but have secured indirect evidence that the Government considers that Tekron have behaved properly in its relations with the government.” One of the Rusal executives who gave testimony in the case, which was criticised by Justice Jack, was Pavel Ovchinnikov.

Ovchinnikov, now head of Rusal’s alumina division, accompanied by Boyarkin, flew into Conakry over the weekend. They met Prime Minister Dore on Monday. By then, however, it was too late for Rusal to block Thiam’s reappointment. Last week, sources close to Rusal were reported to be boasting in government circles in Guinea and in Paris that the campaign to remove Thiam from his post had succeeded. At the same time, a well-known foreign businessman in Conakry was reported to have threatened Thiam for what he called an illegal nationalization campaign against Rusal.

The Russian Embassy in Conakry reportedly played a supportive role, according to Guinean government sources, by insinuating that, unless Thiam were removed, the government to government relationship between Guinea and Russia would be in jeopardy. The official position of the Foreign Ministry in Moscow was issued last October, when spokesman Andrei Nesterenko said there is no linkage between Rusal’s problems in Guinea and the Russian government’s political stance towards Guinea. Commenting that “like the diplomatic establishments of other countries, the Russian Foreign Ministry supports Russian business abroad,” Nesterenko cautioned this does not mean that the Foreign Ministry will get involved in commercial disputes involving Rusal and the Guinean authorities.

Boyarkin’s campaign appears to have backfired badly, for Thiam has already despatched a 45-day compliance notice, warning Rusal that it faces the revocation of the second of its assets in the Guinean republic, the Dian-Dian bauxite mining concession. The government is charging Rusal with failure to honour the use-or-lose conditions of the government’s deposit agreement. Dian-Dian is one of the largest unmined bauxite reserves in the world. According to Rusal, it has measured bauxite resources totalling 402 million tonnes, or two-thirds of Rusal’s entire bauxite total.

Rusal’s third Guinean asset, the Kindia bauxite mine, is being investigated by the US and UK-based consulting firm, Alex Stewart International, for suspected accounting, customs and tax fraud. Kindia produced 3.2 million tonnes of bauxite in 2008 for the Rusal group. Together with Friguia, which produced 2 million tonnes of bauxite, the Guinean mines now under revocation threat account for 27% of Rusal’s total bauxite supplies. Counting bauxite reserves the Guinean concessions represent three out of every four tonnes of bauxite which Rusal hopes to mine in future.

Rusal told bankers and investors during the Hong Kong IPO presentations that it may buy bauxite and alumina from alternative country sources and from the spot market. However, the cost price of these supplies may be significantly higher, and the impact on Rusal’s profit margin for finished aluminium, significantly greater, if the Guinean assets are lost to the Russian group.

It is already clear that the bank creditors to Rusal, as well as those watching the share listing, are well aware of the impact on Rusal’s asset value, and thus on the share price, of the Guinea moves to revoke, first the Friguia concession (about $1 billion is the Guinean audit estimate); then Dian-Dian ($1 billion); and finally the fraud claims relating to Kindia (another $1 billion). At Rusal’s present share value, with a market capitalization of $18 billion, the Guinean assets represent about 16% of the company’s valuation.

Latest trading of Rusal shares of the Hong Kong Exchange indicate the share price is down from its listing price of HK$10.80 by 22%. A meeting with Thiam has been requested by Deripaska.

To the south, in West Africa, Rusal’s position in Nigeria is also under financial and legal pressure. A federal Nigerian court proceeding continues to consider its ruling on claims by a Nigerian-American group that it was illegally pushed out of the bidding for privatization of Nigeria’s aluminium smelter by the Rusal group. A decision by the court is expected in two months’ time. If the Nigerian court fails to rule, the US courts have agreed to renew their hearing of the claim.

The Rusal-owned asset is known as the Aluminium Smelter Company of Nigeria (ALSCON). Pursuing Rusal in a federal US court, and then by that court’s order, in the federal Nigerian law courts, is a California-based Nigerian-American group called Bancorp Financial Investment Group (BFIG), headed by Reuben Jaja.

Rusal has repeatedly denied BFIG’s charges, and has reported victory in a US appeals court ruling, rejecting BFIG’s claim for US jurisdiction. The text of the US ruling, however, bears re-reading, because it makes the dismissal of BFIG’s suit temporary and conditional – so long as Rusal agrees to having the Nigerian federal court adjudicate the case. That condition was reaffirmed by the US appeals court last November. Rusal had earlier signed its consent on April 25, 2007.

Rusal Consent

BFIG v Rusal

In Nigeria, the arrival in April 2007 of the new presidential administration of Umuru Musa Yar’Adua, led to reviews of details of privatization agreements signed by the former government, headed by President Olusegun Obasanjo. The US Embassy in Nigeria also told the Yar’Adua government that it was backing Jaja and the BFIG litigation to overturn Rusal’s takeover.

The core of BFIG’s case, Jaja says, is that Rusal conditioned its takeover bid with a series of demands that were illegal under Nigeria’s privatization law, but were granted to enable Rusal to take over the plant without making the required payments to the government; relieved Rusal of the obligation to pay ALSCON’s debts, mostly for electricity; required the government to pay for dredging the river used to ship raw materials and products in and out of the plant; fixed the supply of gas to the plant at a concessional price; and allowed Rusal to export the metal free of tariffs.

Altogether, it has been estimated that the value of these concessions turned out to be greater than the amount the government had agreed to accept from Rusal for the takeover. It is also unclear, according to BFIG, what money Rusal has actually paid.

Independently, a report to the Nigerian President’s Office has reviewed Rusal’s takeover of ALSCON, and recommended cancellation of the privatization. This has not been implemented, however. Most recently, the Nigerian House of Representatives has ordered tighter enforcement of privatization agreements, including the ALSCON agreement. This has resulted in an order to Rusal to return $120 million in Nigerian government cash which it received, but failed to spend on dredging the river approaches to the ALSCON plant.

Nigerian press reports of the parliamentary hearing in Abuja last week of the House Committee on Privatization and Commercialization quoted testimony by local officials that three years have elapsed since the dredging project funds were received by Rusal. According to Allwell Ibeh of the federal privatization bureau, “we [BPE] do not agree with them that they have spent $300 million on the modernization of ALSCON, including the dredging of Imo River channel. They could have done that without our consent when they are still in possession of the Federal Government $120 million.” A statement on Rusal’s website acknowledges that “the terms of the [ALSCON] deal include the dredging of the Imo River necessary to create the transport infrastructure. RUSAL plans to allocate more than USD 150 million over three years to refurbish ALSCON and turn it into a state-of-the art facility.” The Nigerian press reports a Rusal official as saying the company is not to blame for the delay.

There is no reference in Rusal’s recent share prospectus to liability for the Nigerian government claims. According to the Rusal share prospectus, there “is an opportunity for expansion of the ALSCON smelter,” which Rusal rates at a design capacity of 193,000 tonnes per annum. But production of metal at ALSCON, according to tables in the prospectus, is negligible – zero in 2006 and 2007, 9 tonnes in 2008, and 2 tonnes in the first half of 2009. According to a Nigerian press report of February 10, Rusal has now agreed to repay the $120 million.

But the prospectus suggests this may be disallowed by the terms of Rusal’s debt agreements with its banks, and deferred until Rusal sells at least half its stake in the project. Rusal told its share-buyers in Hong Kong (page 113 of the prospectus) that “ALSCON is currently a loss-generating asset and is not expected to become profitable until a capital investment program has been completed with the smelter reaching its full capacity of 197 thousand tonnes per annum. A feasibility study for internal investment approval was completed in September 2008. The program requires an investment of approximately US$298 million over the period of 2009-2011, of which US$76 million had been spent as of 30 June 2009. The debt restructuring agreements generally prohibit the Group from incurring capital expenditure in relation to this program through the end of the override period but permit the Group to fund the program on a project finance (non-recourse) basis or through certain equity investments in the project. The Group is currently considering a disposal of 50% of its interest in ALSCON to a strategic investor.”

One other source of bauxite for the Rusal group, and also trouble retaining its international production chain intact, is Rusal’s bauxite reserves in the South American Republic of Guyana. Rusal claims bauxite ore reserves of its Guyana subsidiary, Bauxite Company de Guyana Incorporated (BCGI), amount to 5.6 million tonnes, with another 45 million tonnes in measured or indicated resources. These represent a small fraction of the group’s global total, and of its Guinea bauxite reserves. Production of bauxite at BCGI was 1.2 million tonnes in 2006, 1.9 million tonnes in 2007, and 1.6 million tonnes in 2008. In the first half of 2009, output was 700,000 tonnes. These numbers represent between 8% and 11% of Rusal’s global bauxite production in that period.

Guyana’s government retains a 10% shareholding in BCGI and must review Rusal’s licences before they expire in 2013. Feasibility studies for a new mine to replace the one Rusal is close to working out are “currently on hold”, Rusal admits. Assurances that the government in Georgetown isn’t about to challenge Rusal’s performance or contract compliance were passed by the Guyanese President, Bharrat Jagdeo, to Russia’s President Dmitry Medvedev at a Kremlin meeting early this month. Deripaska attended the meeting. According to the Moscow newspaper Kommersant, in December Rusal suspended the operation of its bauxite mine in Guyana because of a month-long conflict with local trade unions over wages, job and production cuts. The Rusal prospectus acknowledged: “Commencing on 22 November 2009, BCGI has been experiencing a strike that has led to temporary suspension of production (through 7 December 2009).”

Medvedev is reported by the Kremlin website as telling Jagdeo “we have taken a strategic decision: we will actively develop our relations with Latin America, the Caribbean countries. We believe it is very important from the standpoint of the balance of forces and interests in the world. This simply helps the development of economic, social, educational processes, by the way, and addressing a range of global challenges such as climate. I know that you too are interested in this issue.”

Rusal was reported by Kommersant at the same time as saying that “the incident in Guyana has been exhausted. The company operates in normal mode.”

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