Alrosa chief reported to be in talks for gold mining prospects in Caucasus war zone.

Author: John Helmer 
Posted: Tuesday , 24 Apr 2007 
MOSCOW -

A tussle of superpower dimension may be looming as a major Russian mining figure, Sergei Vybornov, newly appointed chief executive of Alrosa, prepares a joint gold mining investment project with officials of the Azerbaijan Government. This follows an Azeri press report of a meeting inBaku, the Azeri capital, called by local officials with representatives ofAlrosa,Russia's state owned diamond mining company which has been diversifying into gold, oil, and other minerals.

The report fromBakuremains unconfirmed. It is also unclear whether Vybornov, who has publicly announced his ambition to pursue gold mining acquisitions in the Caucasus, is the initiator of a gambit into Azerbaijan; whether the Azeris are attempting to embroil Alrosa in their conflict with Armenia; or whether the Russians are applying an indirect form of pressure on the Armenians. The gold assets lie squarely in the middle of this Caucasian chalk circle.

The deposits identified in a news report from Baku are (in current Azeri spelling) Gedabek, Gosha, and Ordubad, which are located in western Azerbaijan; and Soutely, Gyzilburakh, and Vejnali, located in Nagorno-Karabakh, a territory claimed by both Armenia and Azerbaijan, and controlled for more than a decade by the Armenian army. A map, published in the annual report for 2006 of Anglo Asian Mining Plc, refers to this area as "occupied territories". And there's the double rub.

First of all, there is no foreseeable prospect ofAzerbaijannegotiating a peaceful change of Armenian rule of Nagorno-Karabakh; and no chance whatever of a military option. Although Australian and other gold mining companies have long sought concessions for gold believed to lie in territories stretching eastward and northward fromTurkeyinto theCaucasus, and although Soviet geologists were convinced the area holds significant gold deposits, no geologist, no outsider, is safe between the two warring armies. And that includes Russians.

For some time now, it has dawned on Russian mining companies that their competition for the easily available gold assets at home has driven up their price, and left only a handful of companies in contention for the remainder. Even with cash to burn, this contention can be deterring. Consequently, Russian miners have turned their attention to the gold that had been prospected by Soviet geologists, lying handily across frontiers in Russian-speaking territories of the formerSoviet Union, where costs and methods of acquisition ought to give Russian bidders an advantage over foreign miners.

It is thus no accident that inUzbekistan,Kyrgyzstan, andArmeniamining companies like Newmont, Oxus Gold, and Sterlite, the Vedanta affiliate, are being ousted, and their places taken by partnerships of locals with Russian capital. InAzerbaijan, with a weak dynastic succession, powerful military forces on three of its borders (Armenia,Turkey, andIran), and US political and financial inducements, Russian leverage in the mining and metals sector has been relatively weak. But there are signs Azeri officials are increasingly disappointed with the US government, and consequently with Anglo Asian; they may want to add Russian miner support to international legal claims they have pending, in order to retrieve gold assets which, according to officials in Baku, the Armenians are already developing. However, a move in this direction by Russian gold mining interests risks the wrath of both the Armenian and the Russian governments.

There's another rub. According to Anglo Asian, it holds the licences for all six prospects, which it terms "contract areas". In April 2005, the company says it signed a production sharing agreement (PSA) with the Azerbaijan Government on dividing up the cash proceeds when the prospecting gives way to operational mines. Anglo Asian was listed on the AIM in July 2005 (ticker AAZ:LN), and it reports a presidential endorsement in the form of a site visit to Gedabek, the most advanced of the mine sites last November, by Azerbaijan's President Ilham Aliyev.

The controlling shareholder of Anglo Asian is an Iranian American named Reza Vaziri, who holds 29% of the 99 million Anglo Asian shares on issue. He's formed an alliance with John Sununu, a formerUSSenator of Lebanese extraction, and White House chief of staff in the presidency of George Bush senior; Sununu holds almost 10% of the shares.

In addition, a minister in the last Tory cabinet, Tim Eggar, is on the Anglo Asian board, with options to acquire 743,748 shares. Eggar is also chairman of the Anglo-Azeri Society inLondon. A counterpart in Washington, the US-Azerbaijan Chamber of Commerce, has been led by Vaziri and severalUSoil men. Resource Capital Fund, a smallUSinvestor, is recorded as holding a 6% stake in Anglo Asian, and is represented on the board by Ross Bhappu, a Newmont veteran. On appearances, Anglo Asian's capital makes it politically Anglo-American, with clout.

According to Charles Hancock, owner and head of Anglo-Suisse Capital Ltd., his company advised Vaziri in a chain of ttransactions which transformed Vaziri's RV Investment Group into Ottoman Mining, and then into Anglo Asian, before its AIM debut. Hancock told Mineweb his company is now entirely separate from Anglo Asian. Emails and calls to listed telephone numbers for Anglo Asian inEnglandwere not answered.

Also according to Anglo Asian documents, the company invested last year about $12 million in drilling and proving the Gedabek concession, and shipping a second-hand ore-processing mill fromAustraliato Gedabek. The company is expecting to start mine construction in a few months' time this year. An SRK resource estimate, commissioned by Anglo Asian, reports substantial indicated resources of gold, copper and silver. Starting soon, the company has told the market, "the project is expected to produce gold at an annual rate of between 55,000 oz and 70,000 oz. Capital costs should not exceed $25 million and cash operating costs are expected to be less than $275 per oz. The mine will produce copper and silver as by-products." As of December 31, last year, Anglo Asian reports an audited loss for the 12-month period of $4.4 million.

None of this has been able to staunch the haemorrhaging of Anglo Asian's stock price. From a high of 67.5 pence a year ago this month, the share hit a low of 15 pence in mid-October, and has been almost flat since then. The current bid/ask range is between 17p and 19p.

What then to make of the Russian move? According to a recentBakupublication, senior government officials inBakuwant to invite Alrosa to invest in the mining of Kedabek. Two ministers are named in the report as promoting Alrosa's entry into the Azeri goldmining sector - Heydar Babayev, the Minister of Economic Development, and the Minister of Natural Resources, Hussein Bagirov. The report also claims that Alrosa has already signaled that it is prepared to invest up to $100 million in a mine at Kedabek. Bagirov is quoted as saying that "the cost price of extraction of one ounce of gold from the Kedabek deposit is one of the lowest in the world. This is a deposit of the open-pit type. Production is located at the surface, and subterranean mining construction is not required. This makes the mining of the deposit very cost effective."

The report cites local sources inBakuas saying that government ministers are expecting the arrival of Alrosa's chief executive Vybornov to sign a plan for a joint venture company comprising Alrosa and an Azeri representation "on equal footing". The Azeri side is also reported as encouraging Alrosa to undertake exploration of prospective gold areas in the Nagorno-Karabakh region.

Exactly where the Azeris want Alrosa to invest in gold exploration and mining is difficult to establish. According to a year-old report in Caspian Business News (CBN), officials of the Ministry of Natural Resources inBakuhave been encouraging alluvial production of gold at several deposits located in westernAzerbaijan, including the Azeri-controlled region of Nakhichevan, which is divided from the main Azeri territory by two Armenian frontiers, and the Nagorno-Karabakh area. The CBN report of February 2006 claims the Chovdar deposit could produce up to 130,000 oz of gold per annum.

The prospects, CBN quotes Shahbeddin Musayev, the chief of Geological Survey Service inBaku, as saying, "are economically feasible and we have begun negotiations with companies fromRussia,Canada,Great Britainand other countries for their study and development of these deposits. By our estimations, Chovdar is one of the largest deposits of gold in theSouthern Caucasus." He estimated an investment requirement of about $70 million to prove the deposits for commercial exploitation. In 2005-2006, according to Musayev, an initial pilot sample of 17 oz was mined and assayed from the area.

According to Musayev, initial rights to exploration of Soutely, Gyzilburakh, and Vejnali were assigned at Vazniri a decade ago, but the armed conflict has prevented him, and Anglo Asian, from proceeding. Azeri officials claim the deposits in Nagorno-Karabakh contain gold reserves of 4 million oz. Since Vazniri and Anglo Asian appear to have a virtual monopoly over gold mining inAzerbaijan, the Azeris have been looking to them, and theirUSgovernment connexions, to pursue an international legal claim for recovery either from the Armenians, or from any international companies found to be working the deposits under Armenian military protection. The Azeris claim that the award of the licence to mine Zod by Sterlite Gold is an unlawful abrogation of Azeri rights.

Officials at the Azerbaijan Embassy inMoscowtold Mineweb they would not respond to questions about the reported Alrosa interest, nor about the reported negotiations. For an urgent reply, the Embassy spokesman said, it is necessary to file a written request; in which case, he added, "the answers might be ready in a week's time, but definitely not quicker than that."

Vybornov's spokesman Andrei Polyakov told Mineweb he could not comment, while Vybornov is travelling away fromMoscowthis week.

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