Old deals in risky countries continue to haunt junior resour Old deals in risky countries continue to haunt junior resource sector
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Peter Koven | May 8, 2015 | Last Updated: May 11 2:00 PM ET
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An international tribunal ordered Mongolia to pay about $100 million to Khan last month as compensation for having canceled its licenses to mine the Dornod uranium project in 2009 and instead granting the rights to Russia's ARMZ.
Handout/ Khan ResourcesAn international tribunal ordered Mongolia to pay about $100 million to Khan last month as compensation for having canceled its licenses to mine the Dornod uranium project in 2009 and instead granting the rights to Russia's ARMZ.
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Given recent headlines, it is hard to imagine that Khan Resources Inc. was ever in an enviable position. But in early 2010, it really was.
The tiny Toronto-based exploration company, which owned a uranium deposit in Mongolia, was the target of a bidding war between massive, state-owned entities from China and Russia that were chasing foreign uranium reserves. It was exactly the sort of scenario that shareholders dreamed of when Khan went public in 2006. The company appeared to have overcome nationalization concerns in Mongolia and set up a decent outcome for shareholders.
“I don’t know if they’ll be fighting over us. But it has the makings of one trying to outbid the other,” then-chief executive Martin Quick predicted.
Of course, that isn’t what happened. Instead of engaging in a market-driven takeover battle, the Russians appeared to apply political pressure behind the scenes, forcing Khan off the uranium project without paying its investors a dime.
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The case ended up in international arbitration, with Khan actually winning a US$100-million award. Mongolia, an extremely poor country, signaled it would challenge the decision. The situation turned tragic when Khan chairman Jim Doak travelled to Ulanbaataar last month to negotiate a settlement and died of what is believed to be natural causes.
The Khan situation highlights the extreme risks junior resource companies take when they venture into emerging and volatile markets, where business is not conducted in the ways Westerners are familiar with.
Or rather, that they used to take. These sorts of investments have largely vanished in recent years, because capital has become scarce for junior companies. They are lucky if they can raise a million dollars to explore in Canada, never mind Mongolia or Kyrgyzstan.
But last decade, it was a completely different story. Commodity prices were soaring, investors were piling cash into start-up resource plays, and the companies themselves were scouring the globe for new places to explore. Quite naturally, they got interested in developing countries that were under-explored because of turbulent political situations.
The results of these investments were mixed, to say the least. A handful of companies made a fortune, most lost money, and some experienced a bit of both worlds. Take Vancouver-based First Quantum Minerals Ltd., which built a big copper business in the Democratic Republic of Congo, had it wrongly expropriated, and was later paid US$1.25 billion to drop its lawsuits and walk away.
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The backlash from some of these old investments has popped up in recent weeks. Both Khan and Stans Energy Corp. have made headlines for their international arbitration battles, which are last-ditch efforts to recover money for shareholders after assets were expropriated. Meanwhile, Vancouver mining kingpin Frank Giustra has come under fire for his lucrative adventures in Kazakhstan and Colombia with former U.S. President Bill Clinton.
When it comes to cracking emerging markets, Giustra had more success last decade than just about anyone. He was able to negotiate deals with the Kazakh and Colombian governments to get his hands on some of their best concessions. He vended those projects into shell companies and turned them into multibillion-dollar giants in a short period of time, to the amazement of some onlookers.
And there are allegations that he had a lot of help. According to an explosive book released this week called Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich, Giustra leveraged his friendship with Bill Clinton to build relationships with Third World leaders and secure these deals. Around the same time, he pledged more than US$100 million to the Clinton family’s charitable foundation through their joint sustainable growth initiative. He also provided Bill Clinton the use of his private plane.
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“My sense is that in a place like Kazakhstan, you’ve got to have strong political ties to protect your interests. And that’s the role that Clinton plays [for Giustra],” Clinton Cash author Peter Schweizer said in an interview.
“There’s no question Clinton has provided a source of political capital that has been hugely beneficial for him.”
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Giustra’s Kazakh dealings, which happened in 2005, became a source of controversy three years later, when a New York Times article linked his success in that country directly to Bill Clinton. But the release of Clinton Cash has put even more pressure on him by shining a light on more recent transactions.
In 2007, Giustra’s Kazakh assets were sold to a company called Uranium One Inc., which also obtained assets in the United States. Toronto-based Uranium One was later bought by Rosatom, a state-owned Russian nuclear firm. The result is that Russia gained control over roughly a fifth of America’s uranium production capacity.
While this was all public knowledge, Schweizer’s book described how Giustra and other people with ties to Uranium One donated money to the Clinton Foundation. The suggestion is that the donors wanted Hillary Clinton, Secretary of State at the time, to approve Rosatom’s takeover of the company. This caused the U.S. media to go berserk in the past couple of weeks.
Giustra has fiercely denied the allegations of influence peddling. In an interview with the National Post this week, he said he is the victim of a “vicious and agenda-driven” smear campaign by enemies of Hillary Clinton that want to keep her out of the White House. “It’s out of control. It’s a f—ing circus,” he said.
Wherever one stands on this issue, it is clear that Giustra’s approach to these high-risk countries worked a lot better than most of his mining and energy peers. He was able to forge relationships at the highest levels of government that served him well. Companies that just staked claims and followed the same playbook that they would in Canada were not nearly so successful.
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Just as important, Giustra was smart enough to get out of Kazakhstan early. He sold all his Uranium One shares in 2007, before investments in the “Stans” really started to backfire for Western resource companies and investors turned away from the region in droves.
Stans Energy is an example of a company that was not so fortunate. It is now caught up in precisely the sort of political havoc that Giustra managed to dodge.
The Toronto-based company acquired a licence for the Kutessay rare earth project in Kyrgyzstan in 2009. Rare earth prices soared over the next couple of years, and Stans Energy suddenly came under a lot of external pressure as its project drew interest form outsiders.
It all came to a head in 2012, when a Kyrgyz parliamentary committee said the company’s licence for the Kutessay project should be revoked. No logical reason was provided. Around the same time, a Chinese group with eyes on the project explicitly warned Stans Energy it would cause trouble. It wasn’t hard for Stans Energy to link the two events.
“It really became almost comical,” said David Vinokurov, Stans Energy’s vice-president of corporate development.
Similar to Khan, Stans Energy won a US$118-million arbitration award against Kyrgyzstan. But the company’s market value is less than $10 million today. There seems to be little optimism among investors that it will win all the legal battles and claim the award. Indeed, the battle took a negative turn on April 30 when a Moscow court ruled against the company. (Stans Energy has an advantage over most companies in international arbitration, because Kyrgyzstan owns stock in Canadian miner Centerra Gold Inc. that could easily be seized if the government refuses to pay. Stans Energy already got a court order that freezes 47 million Centerra shares.)
There’s no question Clinton has provided a source of political capital that has been hugely beneficial for him
If the experiences of companies such as Stans Energy and Khan have taught junior resource firms anything, it is that working at home in Canada and the U.S. has its advantages. It may be a little less sexy and a little tougher to find rich deposits. But once you find it, you know that you actually own it and it won’t get it taken away by shady characters and government agencies.
And these days, junior companies have little choice to stay home, even if they wanted to go abroad. Investors are still shell-shocked from the experiences of Khan and Stans Energy and others, and have almost no desire to finance greenfield exploration in the riskier parts of the world anymore.
“When we go to a conference, I’ve had investors who say, ‘Are you in North America?’ And if you’re not, they move on and they won’t even talk to you,” said Mark Kolebaba, CEO of Vancouver-based Adamera Minerals Corp., which only works in North America.
For those small resource companies that still have their eyes on some of the more volatile parts of the planet, Khan’s current CEO Grant Edey offered some simple advice: “Cover all your bases.”
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