Just weeks before the planned creation of a new gold company on the London Stock Exchange this month, the authorities in Kazakhstan’s capital, Astana, threw a spanner in the works with the announcement of an investigation into the activities of the former management of KazakhGold and the cancellation of a planned share sale.
The news came just weeks before LSE-listed KazakhGold was supposed to finalize a reverse takeover – whereby KazakhGold with a market capitalization of about $300 million would have taken over its Russian parent company Polyus Gold, which is valued at least 30 times higher – in mid-August to create a $10.8 billion group and the largest pure gold miner on the London bourse.
The background to the move is seen as dissatisfaction with the price at which Polyus Gold acquired its stake, following the Kazakh government’s decision to waive its pre-emptive right to buy up shares. Originally, in December 2008, Polyus Gold valued a 50.1% stake in KazakhGold at $746 million, but by the time the terms were finally agreed in August 2009 in the wake of the global economic slowdown, the value of the transaction was pitched at just $269 million.
In a statement Kazakhstan’s ministry of industry and new technologies (Mint) retracted its approval of a share transfer in 2009 and ruled out the sale of additional shares that would have facilitated the reverse takeover.
Cancelled decisions
The statement read: “Due to newly discovered information regarding violations of the law on mineral resources during the purchase of the stake in KazakhGold by the Russian company Polyus Gold, the competent authority has cancelled the previously taken decisions to allow the sale of KazakhGold shares.”
The Kazakh government’s Agency for Competition later announced that it would also revoke its approval of Polyus Gold’s acquisition of its majority stake in KazakhGold.
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“The details regarding Polyus Gold and KazakhGold are becoming more and more contradictory and perplexing” Mikhail Stiskin, Troika Dialog |
Commenting on the government’s moves, Mikhail Stiskin, metals and mining analyst at Russian investment bank Troika Dialog in Moscow, says: “The details regarding Polyus Gold and KazakhGold are becoming more and more contradictory and perplexing. The relationship between the Russian company and the Kazakh authorities appears to have been damaged, possibly by the legal suit brought by Polyus Gold against the Assaubayev family, former KazakhGold shareholders. The escalating conflict could, regrettably, have a detrimental effect on the franchises of both companies.”
Polyus Gold, controlled by billionaires Mikhail Prokhorov and Suleiman Kerimov, launched a $450 million court action in June against Gold Lion Holdings, KazakhGold’s former controlling shareholder run by the Assaubayev family, who have strongly rebutted allegations that the former management misappropriated funds or mis-stated results.
Although the government action has the potential to derail the merger, Evgeny Ivanov, KazakhGold’s chief executive and general director of Polyus Gold, initially applauded news of the investigation. “We welcome the readiness of the relevant Kazakhstan authorities and ministries to investigate the activities of former management. We believe that prompt resolution of these matters… will enhance Kazakhstan’s status as an attractive country for foreign investment.”
Despite the short-term uncertainties Ivanov remains confident that the planned merger will eventually secure the necessary regulatory approval and that the merged company, which will be renamed Polyus Gold International and be incorporated in the UK, will join the FTSE 100 index of leading companies on the London bourse once all listing requirements have been met. Ivanov says that securing a London listing will help Polyus to attract a wider following of investors than is possible through its global depositary receipts issuance and should also ease its task of raising about $1 billion to fund further production growth. Speculation that some of KazakhGold’s operating licences might be revoked in the wake of the probe prompted Ivanov to say that Polyus Gold would vigorously defend its interests in court.
Natural resources
In recent years the Kazakh authorities have proved increasingly keen to assert their economic interests over the country’s vast natural resource wealth so as to boost revenues to support government spending. From August onwards, for example, the country will tax oil exports at $20 a tonne, according to state-run newspaper Kazakhstanskaya Pravda.
Kazakhstan hopes to raise KT60 billion ($410 million) from the export levy this year and roughly KT177 billion in 2011. The extra tax revenue will help to mitigate the country’s growing budget deficit, which the government expects to hit KT803.7 billion (4.6% of GDP) this year, from KT492.7 billion in 2009. For their part, oil and gas producers operating in Kazakhstan have insisted that their contracts’ stability clauses exempt them from tax changes, including the introduction of any new export levy.
As well as increasing the tax burden on oil producers the Kazakh government has sought to increase its direct interest in important natural resource projects, such as when it took a stake in 2008 in Kashagan, the world’s fifth-largest oilfield, citing cost overruns and production delays.
Investigation
Meanwhile, the financial police in Kazakhstan have announced an investigation into activities at the Tengiz oilfield, where Chevron is a big stakeholder, alleging that the owners produced oil worth KT212 billion more than they were entitled to. The Tengiz shareholders say the charges are unjustified.
Both the new export levy and the probe are seen as a precursor to Kazakhstan looking to muscle in on the Karachaganak oil and natural gas field, owned by a consortium of foreign shareholders, including BG Group and Italy’s ENI with 32.5% each, alongside Chevron (20%) and Russia’s Lukoil (15%).
