Barrick's last mis-hit in Russian gold gameBarrick's last mis-hit in Russian gold game
By: John Helmer
Posted: '23-SEP-05 10:00' GMT © Mineweb 1997-2004
MOSCOW (Mineweb.com) -- According to the rules of the North American game of baseball, when a batter faces the pitcher, should he make three strikes without hitting the ball, he is out of play.
In Russia, the big Canadian Barrick Gold has so far had two strikes. In appeal of the last one, and to head off the possibility of the fatal third, Barrick's CEO Greg Wilkins recently made a call on the umpire. That is to say, he arranged a luncheon meeting at the well-guarded marble pile between a brewery and a canal, that Norilsk Nickel co-owner Vladimir Potanin calls his office in Moscow.
From what transpired, it is clear to Wilkins's hosts that he is deeply troubled by Barrick's failure to secure the Sakharegion gold assets -- Nezhdaninskoye, Kuranakh, and Kyuchus -- which Invest Group Alrosa controlled until this month, and which they sold to the Norilsk Nickel gold unit, Polyus, for $285 million in cash. That deal beat a share-and-cash offer from Barrick, and ended almost a year of negotiating effort on the part of Wilkins and his men to establish a partnership with IG Alrosa. Call that Strike-2.
If Wilkins was thinking of appealing the call, it is odd that he went to Potanin. Although Potanin shares ownership of Norilsk Nickel, and hence of Polyus, with Mikhail Prokhorov, it is well-known in Moscow that Prokhorov, who is also CEO of Norilsk Nickel, was in charge of the IG Alrosa deal. Indeed, ever since Potanin and Prokhorov had a falling-out over the losses and Kremlin troubles Prokhorov caused with his March 2004 purchase of a Gold Fields stake, Potanin has made it clear that the gold account is Prokhorov's to risk and to manage. If there are losses, Potanin and he have agreed, then Prokhorov will compensate his partner.
Prokhorov has understandably felt under pressure -- the most painful pressure can be felt at the spot where public reputation meets private vanity -- to prove his mettle again in the gold sector. Having rid himself of the liabilities and slurs associated with his former strategist, Leonid Rozhetskin, and kicked his old playmate Maxim Finsky upstairs, where he can do no damage -- Prokhorov has encouraged Yevgeny Ivanov, the former head of the group's pocket bank, and now CEO of Polyus, to do ambitious things. One of them has been Ivanov's bid to take over Kinross, Barrick's Toronto rival, from CEO Tye Burt, which shows no prospect of success. A second was to outbid Barrick for the Sakha assets.
That one succeeded, firstly because it was swift; and secondly, according to the principle that a bird in the hand is better than two in the bush.
Barrick's valuation of the same properties appeared -- to Wilkins -- to be larger than Ivanov's, but only over a long time. During that time, Ivanov understood, much could go wrong to undermine the valuation, and hence the attractiveness of Barrick's bid. The mine could prove refractory in production; the gold price could go south; the representations made by Kevin Foo, managing director of Celtic Resources, part-owner of Nezhdaninskoye, could prove unreliable. Accordingly, Ivanov gambled that he could pull the rug from beneath both Barrick's offer, and Foo's claims, and take control of the assets.
If Barrick thought of appealing to the umpire, the latter might have inquired why Barrick believed Foo in the first place; what IG Alrosa had to say on the matter; and what Barrick's due diligence had revealed about the 30% stake in the Nezhdaninskoye goldmine -- worth an estimated $100 million -- which ought to have been part of the value of the Celtic shares Barrick had bought at 4 pounds apiece, but which Foo had lost to a series of Caribbean companies in a transaction Foo did not disclose to his board, or his shareholders, until recently.
For Wilkins, the batting score indicates that in January he paid almost $30 million for Celtic shares, whose value included $100 million in assets that mysteriously turn out not to be there. If the market had believed Foo's story, then the recent disclosure of Polyus's acquisition of a 50% stake for about $160 million ought to have sustained the price Barrick had paid for its Celtic shares. Instead, the price was cut in half.
This suggests the market, if not Barrick, does not believe that Celtic holds 50% of Nezhdaninskoye, but only 20%; and that Polyus almost certainly does control 80%, or will do so very shortly. All that leaves of Barrick's investment in Celtic is 20% of the Russian assets, and some paltry Kazakh assets besides, worth in total about $70 million.
The silence with which Barrick's shareholders have been treated by Wilkins over the outcome of his transaction is unlikely to be broken by disclosures of what the company's due diligence discovered and when; and of what Barrick intends to do regarding Celtic.
As a minority proprietor with two powerful Russian foes now, instead of one -- Norilsk Nickel and Alrosa -- Foo must now try to persuade someone that sparrow-sized though the bird may be that he still has in hand, there are still plumper fowls in the bush.
From that type of wishful hunting, let's return to the sporting field. In baseball, every batter knows not to flex too early at the pitcher's ball; good batters cut their risk of striking out by striking at the last possible moment. In Russia, Barrick hasn't learned this yet.
Its first strike-out occurred, following the transaction for Highland Gold in London in October 2003. In principle, Barrick agreed to pay $116 million for a stake of about 29% in the London-listed company, whose principal and sole producing asset was the Mnogovershinnoye goldmine in Magadan. On that occasion, the deal was reportedly done at great speed by Barrick's chairman Peter Munk. Barrick sources claimed at the time that Munk acted on representations about the value of Highland Gold which came, through an intermediary, from none other than Roman Abramovich.
As Mineweb reported in great detail at the time, Abramovich had been the secret seller of the Maiskoye goldmine project to Highland Gold one month earlier, in September of 2004. He had also been governor of Chukotka at the time the regional government was sweetening the Maiskoye purchase by granting licence concessions; and he had a special relationship with members of Highland's board. In short, if Barrick was to believe anyone about the value it was agreeable to paying for Highland Gold, Abramovich seemed to be the candidate, even if Barrick didn't know at the time how interested Abramovich was in the outcome.
By January of 2004, Barrick's due diligence persuaded the company management to slow down and cut its commitments to Highland Gold. This was expressed by Highland Gold in a revised deal announcement as Barrick's "preference [for] investing directly in deposits to be developed." Instead of acquiring a 29% stake, Barrick took nine months to acquire 20%. And instead of paying $116 million, it paid about $90 million in two tranches.
Barrick's diligence has been unconvincing to the market, however, and after Munk and Wilkins summoned up their courage to put more of their cash in the Highland Gold treasury, the price of Highland Gold shares steadily dwindled. It is now trading at historical lows of between GBP1.48 and 2.07. Barrick's losses have been between 10% and 36%.
Highland Gold's interim results for the first half of 2005 -- issued this week -- indicate that, despite booming gold prices, the company's revenues have dived on falling revenues, and profit in H1 2004 of $6.5 million has now turned into a loss of $6.9 million. The explanation given by the company is "lower production at [Mnogovershinnoye] caused by lower grades, recoveries and mill throughput volumes". Barrick isn't saying if its technical assessment and supervision of operations at Highland Gold over the past two years failed to detect these problems in advance. Call this Strike-1.
If Wilkins surprised his hosts around Potanin's luncheon-table by what he did not say, rather than by what he did, Barrick may still be hoping to make a deal for another Russian goldmine, with yet another Russian partner. The preliminary assessment from the sellers is that the Barrick offer is too low to be acceptable.
That may be a pitcher's ploy, of course. If you were a Russian goldmine owner facing a batter with Barrick's record, what would you be preparing to toss?