Crystallex International

By John Helmer in Moscow

Sad to say, there is no magic in capitalism. If there were, it would have been
entertaining to watch how Polyus Gold, Russia's leading goldminer, suddenly
snapped a losing streak on Friday, and rocketed upward with a 4% share price
gain in Moscow (MICEX rouble exchange), 7% on the London Stock Exchange, and 8%
on the Frankfurt exchange. This came despite a 5% drop earlier the same week,
and forecasts from well-known brokerages and investment banks that the share
price might have another 5% to fall.

Say the magic word! Add a big puff of stage smoke! Bravo Maestro! The trick is a
marvel!

Now let's replay that more slowly. On Thursday (November 19) an announcement
from Polyus Gold said it "has been informed of the intention of companies
related to Onexim [read Mikhail Prokhorov] and Nafta Moskva [read Suleiman
Kerimov] to sell up to 5% in aggregate of shares in the charter capital of OJSC
Polyus Gold, in the form of shares and/or American Depositary Receipts." Five
percent makes 19 million shares.

This was followed that day by the sale of 556,000 shares, according to Yahoo
Finance data. For the trading week preceding, and including November 19, 2
million shares appear to have changed hands. Polyus Gold has 381 million on
issue, and Kerimov owns about 145 million of those. On Friday, November 20,
Moscow trading volume jumped to 705,000 shares. Bloomberg appears to show that
another 100,000 shares were traded in London.

The first announcement from Polyus Gold was very unusual by Moscow standards –
Russian companies usually don't refer to the transactions of their controlling
shareholders. In Polyus Gold's case, it has not yet announced publicly that
Kerimov's Nafta Moskva holding had bought about 37% of the company in
transactions that stretched from March to June of this year. During that period
— never mind the significance to public shareholders of the exit of founding
shareholder Vladimir Potanin — Polyus Gold was stonily silent.

Then on Friday, November 20 — another puff of stage smoke. Polyus Gold posted a
second announcement that "following relevant notification, it has been informed
that the sale of up to 5% of shares in OJSC Polyus Gold, in the form of shares
and/or American Depositary Receipts, announced on 19 November will not proceed
due to market conditions."

If anyone should understand "market conditions", it should be Prokhorov and
Kerimov, reputed to be two of the cleverest, most liquid, and least indebted of
the Russian oligarchs. Is it believable that they would fail to understand that
once they had signaled to the market that they were selling a large bloc of
stock, the price wouldn't fall? Doesn't an excess of supply over demand usually
cause a fall in price? Have Ballboy and Superboy lost the plot?

The average daily volume of turnover for the past three months for Polyus Gold
has been, according to Yahoo, 237,000 shares. In the week that included the day
of the first Polyus Gold disclosure, roughly 2 million shares were traded. So
there's obviously been smoke in the marketplace behind which something was
happening. But still not enough to hide the amount of shares Kerimov and
Prokhorov were reported by Polyus Gold to be disposing of.


But if there was no sign of 19 million shares changing hands, then is it
possible they were? The second Polyus Gold announcement indicates the price of
the shares for sale was too low for the sellers to proceed. But this begs the
question of why they thought of proceeding this way the day before. Did Superboy
and Ballboy both wake up on Thursday morning, and agree to something that didn't
seem such a good idea when they jumped out of bed 24 hours later?

Sources in a position to know explain they believe Kerimov and Prokhorov were
discussing a share sale for some time before last Thursday; they may be
obligated to do so, just as, before Potanin sold out to Kerimov, there were
option agreements to protect Potanin and Prokhorov from unilateral action by the
other. Just what Kerimov and Prokhorov have negotiated and agreed isn't clear.
Bank sources claim several bankers were offered a mandate to sell up to 10% of
the company's shares, and they understood that Prokhorov and Kerimov were
selling 5% apiece. These sources infer that both Prokhorov and Kerimov were
selling because they both want cash.

The public leak of the 10% selloff intention, which began circulating several
days before Polyus Gold made its first announcement, appears to have taken the
two sellers by surprise. At least one source has hinted that it was Kerimov, who
was wanting to sell, while it was Prokhorov who was considering buying. With
Polyus Gold shares in allied hands, he already controls about 40% of the
goldmining company. If he had suspected Kerimov of having decided to sell, and
to have little choice for the timing, then Prokhorov may have been buying in a
way that is not yet visible to the market – and at a discount to the market
price that it is in noone's interest, not Superboy's, not Ballboy's, to reveal.


That still leaves unanswered the question of why either of them thought of the
idea of making an announcement of a public sale, and then, after the share moved
in the obvious direction, withdrew it.

In reporting Kerimov's initial acquisition of his Polyus Gold stake from
Potanin, the price he had to pay was reported in the market to be $1.3 billion.
The volume of his stake is also reported to be around 37%. A rough calculation –
divide $1.3 billion by 37% of 381 million shares — suggests that he paid Potanin
just over $9 per share (London Stock Exchange price basis). Potanin isn't
saying; Kerimov never says anything.

But the market price of Polyus Gold shares between April and mid-June, when the
transaction was completed, was around $25. The difference, in Kerimov's favour,
looks like a discount of 64%.

Superboy's powers are legendary, but Ballboy's skills at dribbling toward goal
are not negligible. If Prokhorov were buying this month, and Kerimov were the
seller – note the conditional — the former is likely to have asked for the same
discount Kerimov got from Potanin. That would represent a share price of just
$12 per share. For Kerimov, though, according to Prokhorov's calculation, that
would still give him a 33% gain in less than five months. Onexim and Nafta
Moskva, Prokhorov's and Kerimov's Moscow holding companies, are officially
refusing to comment.

Kerimov's personal spokesman in Moscow, Alexei Krasovsky, refuses to answer
substantive questions for him, claiming there is no obligation on Kerimov to
answer, and no right for the questions to be asked. Nafta Moskva, Kerimov's
Moscow holding, answers the telephone with more reliability than Kerimov's
parliamentary office. However, the spokesman limits his disclosure to a first
name, and to the refusal to clarify any of the terms or reasons for Kerimov's
sale of Polyus Gold shares.

In Lucerne, by contrast, Kerimov's business associates and the Swiss corporate
records archive are leaking like the proverbial

For institutional investors and Polyus Gold's minority shareholders, who hold
roughly 22% of the stock in the company, the following calculation is essential
for their future well-being, and maybe the company's as well. This free float
represents at today's market price about $5.2 billion in value, most of it owned
outside Russia. Russian press coverage of the on-off sale announcement has
suggested that the offer price was between $26 and $28 per share. On the news
that there would be no sale, this edged up to $30 on the Bloomberg chart ticker
(PLZL:LI). Since Polyus Gold first listed in 2006, it has never gone over $34 –
in March of 2008. The $32 price reached early this month, before the talk of
selloff started, is close to the historical peak.

Moscow brokerages aren't shy of telling their clients what big target prices
they will achieve if they follow buy recommendations. On September 28, when UBS
analyzed Polyus Gold's financial report for the first half the year and its
prospects for the second half, analyst Kirill Chuyko fixed his target at $30,
30% above the prevailing market price at the time. His report was out of date by
several weeks; he didn't mention Kerimov, and claimed instead "the core
shareholders of Polyus are Interros Group (Potanin) and Onexim (Prokhorov). A
Unicredit report the same day, written by Marat Gabitov, was more optimistic,
forecasting 44% upside for the share price. Michael Kavanagh of Uralsib Bank
projected no more than 34% upside. Troika Dialog was even more conservative,
predicting a target price for this quarter of $33.28.


It cannot matter whether Kerimov is negotiating privately with Prokhorov, or
aiming at a market sale, these numbers don't allow for much magic, unless the
sale is postponed – and for a long time. The signs last week were that one
shareholder, maybe two, didn't want to wait.

At $12 per share, Kerimov would gross $228 million from the selloff of 5% from
his shareholding. What he would net would depend on borrowing costs and
repayments for the Potanin deal, and whatever carve-up may be required with
Kerimov's silent partners and other creditors, if there are any. Assuming no
bank would have loaned more than half the buy-in transaction price, at an
interest rate of not less than 10%, Kerimov might be obliged to return at least
$60 million of the proceeds to his bankers. That would leave a balance of $168
million for himself, or to be shared with others. Perhaps the net proceeds for
Superboy would be around $100 million.

At $26 per share, Kerimov's 5% sale would earn almost $500 million. By the same
subtraction process, he might have realized over $220 million. If the logic
reported by Moscow gold sector analysts has been that the sale was arranged now,
in case the price of gold is approaching peak, and Polyus Gold's share price
too, then what purpose for the sellers was served by the first public
announcement by Polyus Gold? Would it not have been more prudent to wait for the
bidding to start, and either consummate the sale, or cancel it?

According to a report by UBS, there is market speculation that Kerimov and
Prokhorov, individually or jointly, may intend to sell more than the 5% stake
just confirmed by the Polyus Gold management. Gauging their intentions, and the
circumstances motivating such a decision, thus becomes a vital exercise for
minority shareholders of Polyus Gold holding almost one-quarter of the company.
They are represented by 2 directors of the 9-seat board; Prokhorov is chairman,
and controls 4 board votes; Kerimov controls another 3.

If the minorities were to be convinced that Kerimov is selling assets, then
Prokhorov's intervention to buy up Polyus Gold might act as a price stabilizer.
As a potential seller, Kerimov too has every interest in holding up the price
before he sells more shares. Gold may be the market's idea of a storehouse of
value, but silence from the controlling shareholders of Polyus Gold isn't golden
in that sense at all.

What then is happening in the Kerimov camp? Investigation of Swiss company
records shows there was big change inside the principal Kerimov holding last
year; several key subordinates were removed; the office was moved; and the name
of the holding company changed. Sources close to the process claim this was the
result of the falling value of Kerimov's investment in European bank shares,
cash calls by his European banks, and disgruntlement on Kerimov's part at the
promise and performance of the people who had worked for him.


Open Swiss sources reveal there are two Kerimov holdings, Swiru and Millennium.
A partial history of Swiru, first established as Swiru Trustee Ltd. in 1998, can
be found here:

http://www.edoceo.ch/en/swiru_holding_ag_CH15030020652.aspx

And here is the corresponding history of Millennium, which started out as
Millennium Group SA two years later:

nephew, Nariman Gadzhiev. When Studhalter was talking to Paris last week, he was
speaking for himself and the Studhalter group. As he did so, he corroborated a
recent French report that Kerimov may be under financial pressure from Credit
Suisse and the Steiner group. But if so, according to Studhalter, that has
nothing to do with him, his family business, or Swiru. Swiss sources add that if
there have been disagreements between Kerimov and the Studhalters, they have
been able to comport their differences. Philipp, for example, reappears on May
18, 2009, along with Gadzhiev, on a business mission for a very well-known
Moscow real estate magnate; the record is in a filing in the UK High Court. The
combination reflects what appears to be ongoing continuity between Kerimov's men
and the Studhalters.

Kerimov has also invested in the construction of a Lucerne hotel, apartment and
office complex known as Lakefront Center, which was developed by the Credit
Suisse Asset Management Group. In addition, more recently, Kerimov commissioned
from the Steiner group a substantial residence for himself, and for which there
is reported to be Credit Suisse financing.

The record for Millennium shows that it was established in October 2000 in
Fribourg for the purpose of acquiring assets and administering them, and was
dissolved the following year. It reappears as Millennium Group AG in Lucerne on
September 27, 2006. Alexander Studhalter appears as president, along with
Franziska, and Gadzhiev, and PriceWaterhouseCoopers as auditor. Real estate is
one of the businesses of the holding. In October 2007, Allen Vine, an American,
came on board. He was also known in Moscow as a Merrill Lynch banker, who
switched from giving advice to Nafta Moskva to running the latter as chief
executive.

There is a gap of nine months in the records until August 5, 2008, when
Franziska and Gadzhiev drop out, while Vine is designated chief executive, and
the two Studhalters, Alexander and Philipp, keep their signing power. Three
weeks later, on September 25, the company changes its legal and office address,
moving out of Lucerne city. On September 9, a Belgian, Markus Linder, is added
to the signing roll, along with a Swiss, Uwe Decher. Twelve weeks later,
Alexander Studhalter is dropped. On February 19, 2009, Decher is out, and Markus
Ehrismann is in. Three months later, on May 9, the company takes a new name – MG
International AG. Vine and Linder were reportedly the masterminds of Kerimov's
move into European banking stocks in 2008, starting with Fortis, the Belgian
house which collapsed as the year wore on.


Polyus Gold's minority shareholders have had years to polish their skills at
assessing the impact of oligarch behaviour on the price of their share. One
banker close to the goldmining company claims that "the fact that Kerimov is a
shareholder is not a problem for the market. It is far better than having
Potanin there. The market already understands Kerimov is a partial seller. He
has made three times his cash investment since April."

http://johnhelmer.net/?p=2240