IPO News

/30 January 2007/The Financial Times/

When William Shakespeare was in short pants, one of the dramas that reportedly inspired him to pursue the playwright's craft was called "The Longer Thou Livest, The More Fool Thou Art."

Now Shakepeare is acknowledged, at least among the English, as the world's greatest maker of words. Suleiman Kerimov, who is out of short pants himself, and is a well-known Russian proprietor, is becoming famous for his wordlessness. But the title of the old play might be the sub-title for the initial public offering (IPO) Kerimov and his associates are promoting this week in London.

The attempted IPO of Russia's second gold miner, Polymetal, may have run into serious difficulty, as the company's public relations advisor Financial Dynamics, appears to have attempted to black out disclosure of investment risks and hedge-book losses, and restrict the circulation of the company's prospectus.

Even more dramatically, the prospectus reveals, for the first time, the possibility that there are two other stakeholders, who may together own 75%, the controlling interest in Polymetal, leaving Kerimov with just 25%. Concealment of who these stakeholders has to be an embarrassment for Financial Dynamics, because one of them is suspected by the former owners of Polymetal to be another client of Financial Dynamics.

Polymetal's investment prospectus, dated January 24, runs to more than 500 pages, and was drafted by Merrill Lynch in London. The auditor identified is PriceWaterhouseCoopers. The London offices of two US law firms, Skadden Arps and Cleary Gottleib, provided the legal advice. The Cardiff office of SRK, the well-known South African mining consultants, is reported as accepting responsibility for the mining expert report included in the prospectus.

FD, a London PR firm, was appointed by the principal shareholder of Polymetal to speak for the company during the share sale attempt, which began with a roadshow in Moscow last Thursday, and moves to London for presentations this week.

On the eve of the Moscow presentations, a report was placed in the Russian wire service Interfax, claiming that the apparent owner of Polymetal, Kerimov, had ended his three-month absence from Russia for recuperation from burns following a car accident in France last November. No photograph, voice tape, or other physical evidence of Kerimov's appearance in Moscow, has been presented.

The prospectus acknowledges publicly what has been privately known for months -- the risk of default, bankruptcy, or financial collapse of Polymetal if apparent owner Kerimov cannot sustain the company's current debt position, or its capital borrowing requirements.

The financial reports indicate that Polymetal has short and long-term debts of $384.8 million; shareholder equity totals just $178.6 million. The capital expenditure requirement for development of Polymetal's gold and silver deposits is listed in the prospectus as $166.9 million. The reason for Polymetal's paltry profits -- in 2005, $18 million on revenues of $239 million; in the first nine months of 2006, $50 million on $224 million -- is also revealed. As a condition of its existing loans from ABN Amro and other banks, the mining company has committed for forward sale its gold and silver production at prices that appear to be well below market price. The prospectus reveals that 41% of its total gold sales were fixed in 2005 by the banks at an average of $393.60 per ounce.

In public statements to date, Polymetal sources have said they hope to strike a valuation of around $2.4 billion, and by selling 35% of the issued shares, raise proceeds of about $800 million. The $2.4 billion target was endorsed in calculations by Rensissance Capital analyst Rob Edwards on January 10. He suggested that Polymetal's value multiple should be the same as Russia's leading gold miner, Polyus, and he applied a common 5% discount to both.

Polymetal executives have told Mineweb the share sale proceeds will be divided 50/50, and the company's share apportioned to clear the outstanding debt. But Russian media reports suggest that Kerimov wants 60% of the take.

It is noteworthy that the prospectus offers no price target or pricing range. To achieve the targets aired publicly to date would require an individual share price of $8.72. The absence of a target at this stage, and other reports from inside Merrill Lynch's offices in London, suggest considerable nervousness.

With good reason, it now appears.

"Any event or circumstance," records the prospectus at page 21, "affecting Mr. Kerimov as a natural person, such as divorce, incapacity or death, may have an impact on the control over, and ownership of his interest in, the Company, or may lead to a change of control of the Company." This is an unprecedented concession.

Kerimov's placement of his get-well notice in the Russian press last week included the report that his wife had remained by his bedside during his recovery in burns clinics in France and Belgium, and greatly assisted in his recuperation. Accordingly -- to confound reports of another Russian woman in the Ferrari when Kerimov lost control of it last November -- divorce appears not to be a likelihood at this time.

Firuza Kerimov is identified in a Moscow newspaper as Kerimov's wife of approximately 20 years; she is also reported as the founder, or co-founder, if FK Capital. Through this company, the prospectus concedes, the buyout of Polymetal from the ICT group of Alexander and Vitaly Nesis was done in late 2005.

The reference in the Merrill Lynch text is an unprecedented one in Russian corporate flotations, suggesting that Kerimov's real stake is shared, perhaps equally, with his wife, and that if the latter were to opt out of the marriage, she could force a disposal sale.

What is obvious is that Kerimov himself refuses to say a word in public to confirm his capacity, or his arrangement with his wife. What is less clear from the section in the prospectus entitled "Principal and Selling Shareholder" is who else, in addition to Mrs Kerimov, might have an interest in Polymetal's fate, and in the cash potential shareholders are being invited to pony up. According to the text, at page 140, the selling shareholder with 275 million Polymetal shares (100%) is Nafta Moskva (Cyprus) Limited. It was incorporated on March 20, 2006, and thus appears to have been incorporated after Kerimov bought Polymetal.

Kerimov's purchase transaction, according to the Polymetal recital, began in November 2005, when he bought 50% of the gold miner's shares through Nafta Moskva in Moscow, or FK Capital in Moscow, which are inter-locking, and controlled by Mr and Mrs Kerimov. If they are co-owners, then Suleiman Kerimov holds just 50% of Polymetal through the front companies.

At the same time, the prospectus reveals, "an unrelated party purchased a 50% beneficial interest in Polymetal's share capital through an affiliate of Nafta Moskva (Cyprus) Limited." Since the latter did not legally materialize for another five months, it is unclear what was happening, or who the "unrelated party" was, participating in the acquisition. If the "unrelated party" owned 50%, and Mrs Kerimov a half-share of the balance, then Suleiman Kerimov turns out to be the proprietor of just 25%.

It is also unclear what happened when the unidentified affiliate of Nafta Moskva Cyprus "repurchased such beneficial interest on 19 April 2006." Was the "unrelated party" cashing out at this point, or was he converting a "direct" stake into an indirect one, through a trusteeship vested in the newly created Cyprus front company?

According to the prospectus, "Mr Kerimov indirectly beneficially owns 99.5% of the Company's Ordinary Shares." However, the wording implies he does so with his wife's share, and that he may do so through a trustee arrangement with the "unrelated party". At the time of the deal in 2005, Polymetal sources, and one of the sellers, told Mineweb they believed Oleg Deripaska, owner of Russian Aluminium (Rusal), was involved with Kerimov. The fresh disclosure adds substance to the supposition.

If Kerimov's real interest amounts to just 25% of Polymetal, then his attempt to take up to 60% of the proceeds of the IPO might constitute an exit payment for him and his wife, allowing the "unrelated party" to re-emerge. Deripaska and Kerimov will say nothing on this.

The prospectus is coy in its seeming denial. "To the Company's knowledge, there are no arrangements in place, the operation of which may at a subsequent date result in a change of control of the Company" (page 140).

This is misleading. For there is no doubt the Polymetal management, led by Vitaly Nesis, are in no position to know what arrangements Kerimov may have made, either in pillow-talk with his wife; or in trusteeship with Deripaska, or with any other "unrelated party". No-one in the management claims to have heard from, or seen Kerimov since the November accident. Before then, Polymetal's former owners and management acknowledged their suspicion that Kerimov was acting with someone else -- probably Deripaska they thought. Since then, they have told Mineweb, they don't know. That is all the prospectus is telling investors, too.

There is every reason why Deripaska would prefer to conceal his role at this stage, if he is the "unrelated party". In the past, he has publicly confirmed an interest on the part of his holding company in competing for Sukhoi Log, Russia's 33-million oz gold lode in the Irkutsk region. But right now Deripaska depends on Kremlin permission to let him form a monopoly of the bauxite and aluminium production assets of Russia. That monopoly is also being reviewed by the European Commission and other regulators in countries affected.

Deripaska is also in several litigations in the UK High Court and US federal court challenging his ownership of assets in Russia, Tajikistan, and Nigeria. He needs to resolve those claims before trying his hand at an IPO of the Rusal merger. An early test of his reputation in London in the Polymetal case might not be advantageous.

Basic Element, Deripaskas holding company in Moscow, was asked to amplify on his gold mining interests, and avoid Russia entirely. Instead, a spokesman for Deripaska told Mineweb that the focus on gold to date is in Mongolia. Why gold at all? He responded: "The wide choice of metals will allow [Basic Element] to diversify its cashflows, and to lower risks."

If Deripaska is silent partner with 50% of Polymetal, then he may have a very limited interest in seeing the company develop any of its proposed mining ventures -- save for Sukhoi Log, which isn't likely to be offered by the Kremlin for at least another year. In the meantime, does Deripaska or the "unrelated party" have a financial interest in funding the new debt required by Polymetal to exploit its expanded reserves?

Deripaska's Rusal is represented in London by Jon Simmons of Financial Dynamics. But neither he, nor Michael Guerin, FD's Moscow station chief, would agree to say if the "unrelated party" owning 50% of Polymetal is Deripaska. They were also asked to "clarify why you, your firm, or those associated with it, in the employ of Mr Oleg Deripaska and his interests, should not withdraw from your representation of Polymetal on the ground that you, your firm or its associates appear to have a conflict of interest with respect to the concealed 'unrelated party'." FD refused to reply.

"A change of control from the Company's controlling shareholder could lead to an event of default", cautions Merrill Lynch. The warning is far from theoretical. In notes to its consolidated financial statements for 2005, issued last October, Polymetal conceded that as of October 20 there had been "covenants breaches" in a loan agreement with principal lender, Standard Bank London. According to the report, "no default note pursuant to the loan agreement was received", but that Polymetal "was in the process of negotiating" for a waiver. The small print of the latest prospectus reveals that eight weeks later, ABM Amro bought out Standard Bank's loan. The new ABN terms, the prospectus reports, set "covenants regarding ratios calculated on the basis of the Company's debt, interest expense, EBITDA, net worth and sales under its export contracts".

What has not been so clear before is that Polymetal's IPO is an attempt to lift the burden of these covenants from the company, and oblige new shareholders to shoulder the risk -- without any of the security the banks have thought prudent to impose.

For the first time, the international gold mining community has been informed that the heavily indebted Russian silver and gold miner is losing heavily on its precious metal trading operations because of forward sales and hedge-book contracts currently held by Polymetal's bankers. This was not revealed before by Moscow brokers' reports, and the brokerages and analysts may not have known that if there is an upside in the precious metal prices for Polymetal's output, that will go straight into the banks' coffers.

According to a Moscow newspaper report, Polymetal has shorted itself by more than $120 million in the forward silver and gold contracts that have secured its loans.