REPORT NO. 59/11
ON DETERMINATION OF
CAPITALIZATION AND CALCULATION OF POSSIBLE
DIVIDENDS OF JSC “LENZOLOTO”
Customer:
International Commercial Company
“Westway Alliance Corp.”
Performed by:
TOP-AUDIT AUDITING AND CONSULTANCY FIRM LLC
Valuation date – 01 July 2011
Moscow •2011
10 October 2011
Westway Alliance Corp.
Address: Commonwealth Trust Limited,
Drake Chambers, Tortola,
British Virgin Islands
Mr. Stanley Williams
RESOLUTIVE PART
OF REPORT 59/11 AS OF 10 OCT. 2011
ON DETERMINATION OF CAPITALIZATION AND CALCULATION OF POSSIBLE DIVIDENDS
OF JSC “LENZOLOTO”
Dear Mr. Williams,
Pursuant to Contract #11то49 as of 21 Sept. 2011 TOP-AUDIT AUDITING AND CONSULTANCY FIRM LLC (“the
Performer”) carried out the valuation of capitalization of JSC “Lenzoloto” (“the Company”) and calculation of possible
dividends for the period from 2004 to the 6 months of 2011.
The valuation was performed as of 01 July 2011 (“Valuation date”).
P URPOSE OF R ESEARCH
This analysis was performed following the assignment of the international commercial company “Westway Alliance
Corp.” (“the Client”) for the purpose of management decisions.
M ETHODOLOGY
The valuation was performed in accordance with the requirements of the Federal Law “On the Valuation Activity in the
Russian Federation” No. 135-FZ as of 29 July 1998, Federal Valuation Standards (FVS # 1, FVS # 2, FVS # 3) approved
by orders # 256,255,254 of the RF Ministry of Economic Development as of 20 July 2007 and taking into account the
requirements of International Valuation Standards (IVS).
P ERFORMED P ROCEDURES
In accordance with our understanding of the goals and objectives of the present research and experience with similar
projects the valuation work included the following procedures:
•
analysis of the current socio-economic development of the Russian Federation, identification of trends and
forecast of main macroeconomic indicators;
•
analysis of gold mining industry;
•
collection and analysis of information and documentation provided by the Customer;
•
analysis of main results of the Company’s operations on the basis of financial statements for 2001-2010 and 6
months of 2011;
•
calculation of the Company’s capitalization for two scenarios (“without the transfer of assets” and “with regard to
the transfer of assets”);
•
calculation of the Company’s net profit for two scenarios (“without the transfer of assets” and “with regard to the
transfer of assets”);
•
preparation of report on performed research.
R ESULTS OF VALUATION AND RESEARCH
Valuation results
Based on the accepted methodology and also taking into account all the assumptions, which are summarized in the present
Report, we have obtained the following values of capitalization and net profit of the Valuation object as of the Valuation date:
Scenario
Capitalization,
in mln. USD
Without regard to the transfer of assets
2,091
With regard to the transfer of assets
1,312
Scenario
Net profit attributable to 9.027% of shareholding of JSC
“Lenzoloto”
for the period from 2004 to the 6 months of 2011
(maximum amount of dividends),
in mln. USD
Without regard to the transfer of assets
53.17
With regard to the transfer of assets
40.15
Results of restructuring
The restructuring resulted in the situation when JSC “Lenzoloto” is the only open joint-stock company in Polyus Gold
Group with minority shareholders whose rights are adversely affected. It follows from the existing structure of Polyus
Gold Holding that even though Lenzoloto is almost wholly owned by CJSC “ZDK Lenzoloto”, there is a real risk of
ignoring the opinion of Lenzoloto’s minority shareholders since CJSC “Polyus” holds 64.08% interest in JSC “Lenzoloto”.
V ALUATION C ERTIFICATION
Based on all the available information related to the present valuation the undersigned certify herewith that
•
the statements of fact presented in the Report are true and accurate to the best of our knowledge;
•
the valuation was performed and the present Report was prepared in accordance with the requirements of the
RF Law “On Valuation Activities in the RF” as well as laws and regulations of the RF passed on the basis of it;
•
the Performer has performed analytical procedures, made conclusions and prepared this Report in compliance
with Federal Valuation Standards (FVS # 1, FVS # 2, FVS # 3) approved by orders # 256,255,254 of the RF
Ministry of Economic Development as of 20 July 2007 and taking into account the requirements of International
Valuation Standards (IVS);
•
the analytical procedures, conclusions and opinions given in the Report are fully and exclusively based on the
specified assumptions and limiting conditions and are our own professional analytical procedures, conclusions
and opinions;
•
we did not have any commercial interest in the business of the Company and the property valued and acted in
unbiased manner and without prejudice;
•
our compensation for completing this assignment is not contingent upon the amount of the reported value
opinion,
the
attainment
of
a
stipulated
result,
the
occurrence
of
any
event
after the Valuation Date including the use of this Report;
•
the present Report has been prepared in 2 copies delivered to the Client. The Report is stored by the Performer
in the electronic format and is not subject to copying.
3
1.
property and property rights, the liabilities and encumbrances which could take place at the Valuation date in
relation to the property and property rights of the Client, as well as for the analysis of the legal aspects of the
occurrence of such liabilities and encumbrances.
2.
In the course of the analysis the Client provided us with the information in written, oral and electronic form as to
the Company’s structure, operations and financial performance. During the analysis and the preparation of the
Report we based ourselves on the reliability of this information.
3.
We did not perform examination or compilation of the provided cash flow data in accordance with the
International Standards on Auditing. Moreover, actual results generally differ from prediction estimates since real
events and circumstances often do not meet expectations. Such differences can be significant.
4.
Our Report is based on the assumption of the Company’s compliance with all the effective federal, regional and
local laws and regulations on land, nature protection and other similar laws and regulations, unless otherwise
qualified.
5.
Neither the Performer, nor any of the members of staff have financial interest in the evaluated Company. The fee
payable to us does not depend on the results of the valuation reflected in the Report.
6.
Neither the Performer, nor any of the signatories to the Report cannot be called to give evidence or to participate
in litigation in relation to the Report if this is not stipulated by specific preliminary agreements or a court ruling.
7.
The valuation results given in the Report are not intended to reflect the value of the Company’s share capital,
they reflect the approximate and potential values of capitalization and profit under the adopted scenario
conditions. The obtained results are not intended to remain unchanged at any date different from the Valuation
date which is stated in the present Report. The changes in the market can cause significant changes of the
obtained results as compared to the recommendation as of the Valuation date.
We believe that during the decision-making in relation to the Company’s shares the persons listed in p. 1 of the present
limitations will not be guided solely by the results of our work and will only use them within the framework of common
analysis. Thus, our work will not substitute other research, analytical procedures and valuations which are to be
performed in the process of business decision-making in relation to the Company’s share capital.
C LOSING R EM ARKS
We were happy to have the opportunity to provide the business valuation and research services to the international
commercial company “Westway Alliance Corp.”. If you have any questions or need additional information, please contact
us at +7 (495) 363-2848.
Best regards,
____________________________________
R.М. Lerner
Board Chairman
TOP-AUDIT AUDITING AND CONSULTANCY FIRM LLC
4
Сontents
1
General information ..................................................................................................................6
1.1
VALUATION ASSIGNMENT ...........................................................................................................6
1.2
INFORMATION ABOUT THE CLIENT ..................................................................................................6
1.3
INFORMATION ABOUT THE PERFORMER AND VALUERS ............................................................................6
2
Terms and Definitions. Limitations. Standards. Procedures.............................................................7
2.1
TERMS AND DEFINITIONS ...........................................................................................................7
2.2
USED VALUATION STANDARDS .....................................................................................................7
2.3
LIMITATIONS, ASSUMPTIONS AND LIMITS OF APPLICATION OF OBTAINED RESULTS ..........................................7
2.4
SEQUENCE OF PROCEDURES ........................................................................................................8
3
Macroeconomic Overview...........................................................................................................9
4
Brief Sector Review................................................................................................................. 15
4.1
WORLD GOLD MARKET ....................................................................................................... 15
4.2
BRIEF DESCRIPTION OF GOLD MINING INDUSTRY IN RUSSIA.................................................. 26
4.3
GOLD DEPOSITS IN IRKUTSK REGION ........................................................................................... 27
4.4
CLASSIFICATION OF RESERVES AND RESOURCES
5
(RUSSIAN AND INTERNATIONAL) ................................. 28
The Company’s Profile ............................................................................................................. 30
5.1
DESCRIPTION OF THE REGION THE COMPANY IS LOCATED IN .................................................................. 30
5.2
COMPANY’S PROFILE ......................................................................................................... 33
5.3
DESCRIPTION OF THE COMPANY’S BUSINESS ....................................................................... 38
5.4
DESCRIPTION OF THE MAJOR RISKS RELATED TO THE COMPANY’S ACTIVITIES ......................... 39
6
VALUATION OF THE COMPANY’S CAPITALIZATION ...................................................................... 42
6.1
METHOD OF ANALYSIS ....................................................................................................... 42
6.2
SELECTION OF MULTIPLIERS .............................................................................................. 43
6.3
CALCULATION OF CAPITALIZATION USING THE FINANCIAL MULTIPLIERS METHOD .................... 43
6.4
CALCULATION OF CAPITALIZATION USING THE INDUSTRY MULTIPLIERS METHOD ..................... 54
7
CALCULATION OF PROBABLE DIVIDEND AMOUNT ....................................................................... 56
8
RESTRUCTURING OF THE COMPANY.......................................................................................... 58
9
SIGNIFICANCE OF SUKHOI LOG DEPOSIT .................................................................................. 67
10
CONCLUSION ...................................................................................................................... 70
11
APPENDIX A. Sources of information ...................................................................................... 71
12
APPENDIX B. CERTIFICATES OF MEMBERSHIP IN SELF-REGULATORY ORGANIZATIONS................ 72
13
APPENDIX C. COPIES OF INSURANCE POLICIES....................................................................... 74
5
1
GENERAL INFORMATION
1.1
VALUATION ASSIGNMENT
Valuation object
JSC “Lenzoloto”
Basis for valuation
Contract No.11то49 as of 21 Sept. 2011
Par value of share
Par value of ordinary share – RR 1
Par value of preference share – RR 1
Valued rights
Ownership right
Objective of valuation
Calculation of capitalization of ОАО Lenzoloto and net operating profit for two scenarios:
With regard to the transfer of assets to Polyus Gold Group
Without regard to the transfer of assets to Polyus Gold Group
Purpose of valuation
Management decision-making
Report date
10 October 2011
Valuation period
21 September – 10 October 2011
Research (valuation) date
01 July 2011
1.2
INFORM ATION ABOUT THE CLIENT
Name
International commercial company “Westway Alliance Corp.”
Location
Legal address: Commonwealth Trust Limited, Drake Chambers, Tortola, British Virgin Islands
1.3
INFORM ATION ABOUT THE PERFORMER AND VALUERS
Name
Top-Audit Auditing and Consultancy Firm LLC
Location of the Performer and
Valuer
Legal address: 73, Volokolamskoye Shosse, Moscow, 125424
Postal address: 54, B. Ordynka Str., bldg. 2, Moscow, 119017
OGRN (Primary State
Registration Number)
1027739441553 as of 23 Oct. 2002
INN (Taxpayer Identification
Number)/ KPP (Industrial
Enterprises Classifier)
7733059640 / 773301001
Bank details
Settlement account 40702810900000000213 with СB “SDM-Bank”, Moscow
c/a 30101810600000000685, RCBIC 044583685
Valuer
Elman V. Arzumanov. Duration of work in valuations – 17 years. Labor relations with Top-Audit
Auditing and Consultancy Firm LLC. Member of Self-Regulatory Interregional Association of Valuers
(membership certificate #1636 as of 25 Jan. 2008. Address: 72, Leningradsky Prosp., bldg. 4,
Entrance 2, 4th Floor, office 2404, Moscow, 125315. The valuer’s civil liability insured with OOO
Socium Insurance Company (Insurance Policy PОО # 377-0551-09-111 as of 16 Sept. 2011). The
documents confirming professional knowledge in valuations are as follows:
Diploma PP # 438959. Issued by the Interregional Institute of Professional Development and
Retraining of Executives and Specialists of the Plekhanov Russian Academy of Economics on 17
June 2002.
Certificate # 0809/2008 of Professional Development. Valuation Program delivered by the Institute
of Professional Appraisals
Details of additional insurance of
the Performer’s liability
The Performer’s civil liability has been insured with OOO Socium Insurance Company (Insurance
Policy PОО #377-0559-11-110 as of 10 Nov. 2010)
6
2 TERMS AND DEFINITIONS. LIMITATIONS. STANDARDS. PROCEDURES
2.1
TERMS AND DEFINITIONS
The following main terms and definitions are used in this Report:
Market value is the most likely price at which the valuation object can be alienated as of valuation time in the open
market in the competitive environment, when transacting parties act reasonably possessing all required information, and
the transaction value is not affected by any extraordinary circumstances (Federal Law “On Valuation Activities in the RF”
#135-FZ as of 29.07.98, Federal Valuation Standard (FVS #2)).
Market value is the estimated amount for which a property should exchange on the date of valuation between a willing
buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently, and without compulsion (International Valuation Standard IVS # 1 adopted by International
Valuation Standards Committee.
Capitalization of the company is the market value of all shares of this joint-stock company. It is calculated as the sum of
market capitalization of shares of the joint-stock company.
Dividends are part of the profit of the joint-stock company or another business entity distributed among its shareholders
and members, taking into account the amount of shares of a corresponding type they hold.
EV (EnterpriseValue) is the value of all invested capital of the company.
EBITDA is Earnings Before Interest, Tax, Depreciation and Amortization.
EBIT is Earnings Before Interest, Tax.
S (Sales), Revenue is income from the sale of goods, work and services.
P (Price), MCap (Market Capitalization).
2.2
USED VALUATION STANDARDS
The Valuer used and satisfied the following standards when determining the market value of the Valuation object:
§
Federal Valuation Standards (FVS # 1, FVS # 2, FVS # 3) approved by orders # 256,255,254 of the RF Ministry
of Economic Development as of 20 July 2007. The standards are mandatory for the practitioners of valuation
activities, and they set the necessary approaches and requirements for the valuation and types of value of the
Valuation object while authorizing requirements for the valuation report;
§
2.3
International Valuation Standards adopted by International Valuation Standards Committee.
LIMITATIONS,
RESULTS
1.
ASSUMPTIONS
AND
LIMITS
OF
APPLICATION
OF
OBTAINED
The Performer does not assume the responsibility for the completeness of the accounts of property and
property rights, the liabilities and encumbrances which could take place at the Valuation date in relation to the
property and property rights of the Client, as well as for the analysis of the legal aspects of occurrence of such
liabilities and encumbrances.
2.
During the analysis and the preparation of the Report the valuers based themselves on the Client’s
conscientiousness in providing the information and documentation and on the reliability of all the legal, financial
and technical information, as well as the authenticity of the documents provided by the Client.
3.
The Report is based on the assumption of the owner’s compliance with all the effective federal, regional and
local laws and regulations on the valued assets, unless otherwise qualified. The assets analyzed in the course
of valuation are expected to be managed in an efficient and competent manner.
4.
The Performer is based on the fact that the appropriate procedure of receiving all the permits necessary for the
use of analyzed assets has been complied with and the conditions necessary for the non-cancellation of
7
permits are now being and will be complied with in future. The valuers’ responsibility does not include
certification of compliance with the conditions of permits.
5.
The valuation results given in the Report are not intended to reflect the value of the Company’s share capital,
they reflect the approximate and potential values of capitalization and profit under the adopted scenario
conditions. The obtained results are not intended to remain unchanged at any date different from the Valuation
date which is stated in the present Report. The changes in the market can cause significant changes of the
obtained results as compared to the recommendation as of the Valuation date.
6.
The Valuation Report is designed exclusively for the purpose indicated herein and cannot be used for any other
purposes.
7.
2.4
The Report constitutes independent judgment which can be considered by the Client.
SEQUENCE OF PROCEDURES
The conduct of research involved the following stages:
1. receipt of preliminary information from the Client;
2. conclusion of valuation contract with the Client;
3. ascertainment of quantitative and qualitative characteristics of the valuation object;
4. analysis of the market in which the valuation object operates;
5. determining and taking into account the limiting conditions and assumptions, consideration of the possibility of use
of different approaches and valuation methods;
6. choice of approaches and valuation methods;
7. examination of business of the valuation object using different techniques within the framework of applied
approaches;
8. summarization of results;
9. preparation and delivery of the Valuation Report to the Client.
8
6
VALUATION OF THE COMPANY’S CAPITALIZATION
Calculation of OJSC Lenzoloto capitalization was performed according to the two scenarios:
1. Without regard to the transfer of assets
2. With regard to the transfer of assets
In the first scenario the Company is considered as functioning without regard to the transfer of assets to Polyus Gold, i.e.
within the structure which existed in the first 6 months of 2004.
In the second scenario the current performance and structure of the Company are considered.
The calculation was performed using the two methods:
§
The method which uses foreign and Russian companies as equivalents for calculation; and
§
Thre method which uses only one company as equivalent, which at the valuation date was the parent company for
OJSC Lenzoloto, i.e. Polyus Gold.
6.1
METHOD OF ANALYSIS
The valuation of the company’s capitalization is performed using comparative approach.
Comparative approach is based on the analysis of purchase and sale of comparable objects as well as selling price for
equivalent property objects.
The stages of calculation comprise the selection of comparable equivalents and analysis of price indicators for the compared
objects with the purpose of bringing the latter to a common basis (purchase conditions of the valuation object).
The selection of equivalents is performed according to the following criteria:
§
Industry similarity;
§
Comparability of the equivalent company and appraised enterprise in terms of size, scope of activity and other
indicators;
§
Availability of reliable information on the terms of transaction: the size and price of the sold shareholding (interest
in the share capital); and
§
Access to financial reports of the potentially equivalent company and to the information on its operating and
business activities.
Comparative approach comprises the following major methods:
§
Capital market method;
§
Transactions method;
§
Industry ratios method; and
§
Retrospective transactions method.
Transactions method is based on the analysis of the purchase prices of similar enterprises in whole or their controlling
interest. This determines the most favorable application sphere for this method of enterprise or controlling interest
valuation.
Capital market method is based on the share price at which similar companies are traded on a stock exchange. The data
on comparable enterprises, if appropriate adjustments are used, can serve as benchmarks for determining the value of
the appraised enterprise. The advantage of this method is in the use of factual information and not forecast data which are
somewhat uncertain.
The implementation of this method requires reliable and detailed financial and market information on the group of
comparable enterprises and the appraised enterprise. The selection of comparable enterprises is performed on the basis
of analysis of similar enterprises in terms of industry, products, product (service) diversification, life cycle, geography, size,
business strategy, financial indicators (profitability, growth rates etc.). The method determines the level of minority interest
value.
Generally, the application technology of the capital market method and transactions method is virtually the same; the
42
difference is only in the type of source information.
Industry ratios method is used for benchmark estimate of the company value and is based on the assumption that the
value of the appraised business equals certain number ratio (calculated or generally accepted for a specific industry or
type of enterprise) multiplied by a financial indicator of the company activity. Industry ratios are calculated on the basis of
long-term statistical observations of the enterprise’s selling price and its key operating and financial indicators.
Retrospective transactions analysis method is based on the calculation of the market value on the basis of the results of
previous transactions in shares of the appraised enterprise.
In the present report, we have used the methods of the Company capitalization valuation, which are based on the
application of financial and industry multipliers.
6.2
SELECTION OF MULTIPLIERS
We have selected indicators used for the calculation of multipliers, which clearly showed the correlation of the company’s
value to its attractiveness for the potential owner.
In our opinion, it is reasonable to use the following multipliers as price multipliers:
Financial multipliers:
§
The widely used ratio of the market value of invested capital of the companies to the company earnings before tax,
4
interest and depreciation: Enterprise Value /Earnings Before Interest, Tax, Depreciation and Amortization
(EV/EBITDA). The use of the market value of invested capital is related to the fact that the company proceeds are
formed with invested capital and are the source of income both for the shareholders and for creditors, as well as
the source of tax payments. Moreover this enables us to take into account the difference in debt and free cash of
the appraised company and its equivalents;
§
The widely used ratio of the market value of invested capital of the companies to the company earnings before tax
5
and interest: Enterprise Value /Earnings Before Interest, Tax(EV/EBIT). The use of the market value of invested
capital is related to the fact that the company proceeds are formed with invested capital and are the source of
income both for the shareholders and for creditors, as well as the source of tax payments. Moreover this enables
us to take into account the difference in debt and free cash of the appraised company and its equivalents;
§
The market value of invested capital of the companies to sales volume (proceeds from sale of goods, work,
services): Enterprise Value/Sales (EV/S);
§
The Company’s capitalization to sales: Price/Sales (P/S) as one of the most widely used “income-based” financial
multipliers;
§
The Company’s capitalization to earnings: Price/Earnings (P/E) as one of the most widely used “income-based”
financial multipliers.
Industry multipliers:
§
The Company’s capitalization to Resources: Price (MCap)/Resourse (MCap/R);
§
The Company’s capitalization to gold mining rate: Price (MCap)/Mining (MCap/M).
6.3
CALCULATION OF CAPIT ALIZATION USING THE FINANCIAL MULTIPLIERS METHOD
4
Enterprise value or market value of invested capital is the value of invested capital, which equals here capitalization plus long-term debt
(including debt which is paid off in the current year) minus liquid funds.
5
Enterprise value or market value of invested capital is the value of invested capital, which equals here capitalization plus long-term debt
(including debt which is paid off in the current year) minus liquid funds.
43
8
RESTRUCTURING OF THE COMPANY
“Lenzoloto” is engaged in development of placer deposits in the Russian Federation. The main owner of “Lenzoloto” is
OJSC “Polyus Gold”. As at the valuation date, CJSC “Polyus” - a wholly owned subsidiary of OJSC “Polyus Gold” - is the
majority shareholder having a 64.08% interest in the Company (83.62% of ordinary shares). Before the end of 2004,
“Lenzoloto” comprised the enterprises that extracted placer gold, the enterprises that developed hardrock gold deposits,
and service companies. However, subsequently the enterprises that developed hardrock gold and service companies
went to the newly established holding company LZRK LLC (Lenskaya Gold Mining Company), while all the mining
partnerships that developed placer deposits remained on the balance-sheet of OJSC “Lenzoloto”.
In 2009, “Polyus” Group became an international company. Currently its assets are located in 4 countries of the world –
the Russian Federation, Kazakhstan, Kyrgyzstan, and Romania. The Company is the largest gold producer in the Russian
Federation and one of the largest metal producers in Kazakhstan, also ranking as one of the largest world’s gold mining
companies in terms of production volume and mineral resources base.
In the Russian Federation the Company extracts gold, and it is also engaged in geological prospecting in 5 regions:
§ Krasnoyarsk Territory;
§ Irkutsk Region;
§ Republic of Sakha (Yakutia);
§ Magadan Region;
§ Amur Region.
In its turn, “Lenzoloto” constitutes a holding structure which comprises gold mining subsidiaries (CJSC) –
Nadezhdinskoye, Svetly, Dalnyaya Taiga, Lensib, Marakan, Sevzoto, Charazoto, Nedra Bodaibo and Lenskaya GPK. In
st
the 1 quarter of 2006, the Company restructured its business assets – all the subsidiaries were united into the whollyowned subsidiary of “Lenzoloto”, i.e. “Lenzoloto” gold mining company (CJSC “ZDK Lenzoloto”).
8.1.1 History of restructuring
In 2003, the structures of “Interros” acquired the controlling block in OJSC “Lenzoloto” (more than 50%) which manages
all the projects for the extraction of gold from placer deposits in the Irkutsk Region and owns the largest capacities for
placer gold mining in Russia. But the main reason why “Interros” was interested in “Lenzoloto” was the desire to obtain
control over the significant part of infrastructure of the Sukhoi Log gold deposit with reserves of more than 1,000 tons.
Major Russian and foreign companies had been fighting for that deposit for more than ten years but the experts noted that
58
it was “Nornickel” (“Interros”) who had a high chance to obtain a license for development of the deposit.
Figure 8-1. Structure of OJSC “Lenzoloto” before the transfer of assets (the first half of 2004)
In spring 2004, the controlling block of “Lenzoloto”’s shares was passed on the books of a subsidiary of “Norilsk Nickel” CJSC “Polyus” - which, in turn, is a wholly owned subsidiary of OJSC “Polyus Gold”. It was the moment when the process
of “restructuring” of OJSC “Lenzoloto”’s assets started.
In autumn 2004, CJSC “Polyus” established the subsidiary Lenskaya Gold Mining Company LLC (LZRK) in which it
controls more than 99.99%. It is the company to which “Lenzoloto”’s capital assets were transferred.
Figure 8-2. Structure of CJSC “Polyus” and OJSC “Lenzoloto” (end of 2004)
59
At the end of December 2004 there was an extraordinary meeting of shareholders where the shareholders of “Lenzoloto”
approved the sale of shares of Lenskaya Gold Mining Company and interests of “Lenzoloto”’s subsidiaries who held the
enterprise’s capital infrastructure assets – CJSC “GRK Sukhoi Log” (100%), CJSC “Vitimenergo” (99.97%), “Lengeo” LLC
(100%), “Lenzolotodortrans” LLC (100%), “Vitimservice” LLC (100%) and “Vitimbaikal” LLC (75%).
After that the structure of OJSC “Lenzoloto” started to look as follows:
Figure 8-3. Structure of CJSC “Polyus” and OJSC “Lenzoloto” (first half of 2005)
60
Placer gold mining companies remained on the books of OJSC “Lenzoloto”. That reduced the attractiveness of
investments in that company’s shares because of decrease in its reserves. Management of CJSC “Polyus” assured that
the assets will be no longer siphoned off. In addition, they voiced the production plans for OJSC “Lenzoloto” which
specified the volume of 290,000 ounces (9,006 kg) a year during the period from 2005 to 2010. However, despite that
announcement the assets continued to be transferred.
During six months OJSC “Lenzoloto” entered into a number of transactions to sell the above assets to Lenskaya Gold
Mining Company LLC. Essentially, it was a reshuffling of assets as a result of which CJSC “Polyus” increased its interest
in the mentioned companies for, in fact, a token price. Whilst “Polyus” owned only a part of the mentioned assets through
its 56% interest in “Lenzoloto”, 100% of assets became theirs after resale. As a result of that transaction, the most
interesting ore projects of “Lenzoloto” and, most importantly, the infrastructure for the development of the Sukhoi Log
deposit fell under the direct control of “Polyus”.
In 2005, CJSC “ZDK Lenzoloto” was founded following the decision of OJSC “Lenzoloto”’s Board of Directors. The
interests and shares in the remaining enterprises - CJSC “Nadezhdinskoye”, CJSC “Svetly”, CJSC “Marakan”, CJSC
“Dalnyaya Taiga”, CJSC “Lensib”, CJSC “Sevzoto”, CJSC “Charazoto”, “Perspective” LLC, “Lenzolotoproject” LLC, “VDM”
LLC and fixed assets of OJSC “Lenzoloto” – were contributed to the share capital of CJSC “ZDK Lenzoloto”.
The reason of all those “intra-corporate changes” is fairly simple – the requirements of stock market (investment
61
community) to disclose information are much lower for closed joint-stock companies than for open joint-stock companies.
Therefore, the restructuring can be “easily” conducted from the perspective of asset transfer, and while the minority
shareholders take time to understand the reason of such capitalization plunge, the limitation period will expire.
However, the consequences appeared to be so large that it was impossible to conceal them. The point is that after the
“restructuring” of assets conducted by “Polyus Gold” the reserves of OJSC “Lenzoloto” fell from 200 tо 65 tons, and there
was a dramatic reduction in the company’s capitalization. That was unnatural since gold prices showed a steady growth
for the last several years.
Figure 8-4. Structure of CJSC “Polyus” and OJSC “Lenzoloto” (2006)
By the beginning of 2010, as a result of stage-by-stage transfer of assets and creation of new companies, the structure of
“Polyus Gold” group and OJSC “Lenzoloto” inside started to look as follows (see fig. 12-5).
62
Figure 8-5. Information on the composition of “Polyus” Group as of 31 December 2009
Figure 8-6. Information on the composition of “Polyus” Group as of 31 December 2010
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8.1.2 Results of restructuring
Hence, CJSC “Polyus” restructured its gold assets in the north of the Irkutsk Region by sharing placer gold and hardrock
gold mining between its two subsidiaries. The placer gold mines went to “Lenzoloto” holding, while Lenskaya Gold Mining
Company LLC (LZRK LLC) developed the hardrock gold deposits in the region. In the opinion of the analysts, the
objective of the restructuring was a spin-off of a more efficient gold mining business and its transfer directly to “Polyus”.
Similarity of structures of OJSC “Polyus Gold” and OJSC “Lenzoloto”
As a result, the current structure of OJSC “Lenzoloto” is similar to that of OJSC “Polyus Gold”, with a “layer” in the form of CJSC
“ZDK Lenzoloto” and “Polyus”, respectively.
In accordance with this structure, OJSC “Polyus Gold” holds, through its wholly-owned subsidiary CJSC “Polyus”, 64.08% of
shares of OJSC “Lenzoloto” who, in its turn, owns 94.21% of shares of CJSC “ZDK Lenzoloto” where all the placer gold mining
assets are concentrated. Essentially, OJSC “Lenzoloto” became a management company whose profit is formed from
management fees and leased out assets. All the profit from gold mining is formed at the level of the subsidiary CJSC “ZDK
Lenzoloto”.
Hence, owing to the existing structure, general director of CJSC “Polyus” can sell the company’s assets at doorbusting prices
without receiving consent from minority shareholders.
Shareholder’s rights in OJSC “Lenzoloto”
The restructuring resulted in a situation where JSC “Lenzoloto” is the only open joint-stock company in Polyus Gold Group with
minority shareholders whose rights were adversely affected. It follows from the existing structure of Polyus Gold Holding that
even though Lenzoloto is almost wholly owned by CJSC “ZDK Lenzoloto”, there is a real risk of ignoring the opinion of
Lenzoloto’s minority shareholders since CJSC “Polyus” holds a 64.08% interest in JSC “Lenzoloto”.
JSC “Lenzoloto” can become “unwanted” in the existing holding structure. In addition, as a result of restructuring JSC
“Lenzoloto” was deprived of control over its core strategic asset CJSC “Sukhoi Log Mining Company”. At the end of 2005 an
extraordinary shareholders’ meeting approved a transaction between “Lenzoloto” and its main shareholder “Polyus Gold” to
transfer 100% of “ZDK Lenzoloto”’s share capital to “Polyus”. Though this decision has not been implemented so far and
“Lenzoloto” owns 94.21% of its mining subsidiary’s shares, this fact constitutes a potential risk for the minority shareholders of
OJSC “Lenzoloto”.
Should “ZDK Lenzoloto” be transferred to “Polyus” the latter will be likely to pay a fair price for this asset, and Lenzoloto’s
minority shareholders should receive a significant compensation amount in this case. This, for example, can be done in
the following ways:
Ø 1st way – swap of JSC “Lenzoloto”’s shares for OJSC “Polyus Gold”’s shares at fair swap ratios (which is
logical due to the transfer of profit centre from “Lenzoloto” to “Polyus Gold” during restructuring);
Ø 2 way – repurchase of shares held by minority shareholders again at a fair price.
nd
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Share swap through determination of swap ratios should be based on the market valuation of shares just the same way
as repurchase of shares. According to the joint-stock company law, this should be done through the valuation of shares of
JSC “Lenzoloto” and OJSC “Polyus Gold” by an independent valuer.
When joint-stock companies are reorganized through merger, the attention is centered on the companies’ share capital
since single share issue and other procedures related to the necessity of share repurchase become a critical element. It is
necessary to create the proper conditions for the exercise of shareholders’ rights, i.e., ensure the fair share swap, in order
not to impinge upon the interests of shareholders, primarily, minority shareholders. (The process of business consolidation
suggests that there is obviously the main owner while the share of remaining shareholders in the company is less
significant).
From the economic perspective, it is important to ensure the preservation of share values for the shareholders of acquired
companies, i.e. approximate the value of their block of shares in the acquired companies to the value of expected block of
20
Swap ratio — The ratio in which an acquiring company will offer its own shares in exchange for the target company's
shares during a merger or acquisition.
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shares in the merged company. From the legal perspective, it is necessary to ensure that the whole bundle of
shareholder’s rights be exercised.
If the legal aspect is more or less understandable (though the legal evaluation of equivalence of rights of different shares
is necessary, this is reflected in the estimated value), the economic aspect has much more subjectivity in it, even though it
should be reduced to the minimum by way of the valuation law (the Federal Law “On the Valuation Activity in the Russian
Federation” (No. 135-FZ) and Federal Valuation Standards (FVS No. 1 - FVS No. 3)). To some extent these regulations
govern the procedure of business valuation which serves as a basis for the exercise of shareholders’ economic rights.
Single share issue can be viewed as a kind of merger which gives the following advantages to the company’s related
parties:
− business structure becomes more understandable, transparent and simple;
− business processes become integrated;
− ownership becomes more protected;
− cash flows and commodity flows are consolidated within one legal entity;
− there is a possibility of application of tax optimizations;
− boost of the company’s investment appeal;
− open up of access to capital markets at more beneficial terms and conditions;
− centralization of management and strategic decision-making including investment decisions;
− raising liquidity of share market of the consolidated company;
− strengthening of the company’s business reputation;
− opportunity to use shares as equity swap, and a number of other advantages.
One should note that the weaknesses of the single share issue include the complexity of this process, possible
unfavorable change of the ownership structure of the consolidated company, and high costs.
The potential business consolidation actions of “Polyus Gold” (repurchase of shares), being generally accepted in the
civilized world, would send a clear signal to investors that management of the Holding is loyal to minority shareholders
and meets their interests and that there is no “back door’ reshuffling of assets.
Since the majority shareholders of “Polyus Gold” declare their desire for the company capitalization growth, such signal is
even more important for the minority shareholders of “Polyus Gold” itself to confirm those declarations.
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9
SIGNIFICANCE OF SUKHOI LOG DEPOSIT
9.1.1 General information about the deposit
The Sukhoi Log deposit is located in the central part of the Lensky gold mining area 137 km away from Bodaibo and 20
km northward from the Village of Kropotkin. It belongs to the group of reserve deposits and is considered to be the largest
vein gold deposit in Russia. A third of overall undistributed hardrock gold reserves in the Siberian Federal District falls on
that deposit. Currently it is one of the largest deposits in terms of the volume of ore.
Fig. 9-1. Location of deposit
In terms of infrastructure, the area is rather poorly developed due to its remoteness from transportation, power and
industrial facilities in the south of Siberia. At the same time, it is the main placer gold developing area in Siberia – placer
gold development which began yet in the mid-XIX century and is still going on. The main traffic artery of the area is the
motor road which stretches 220 km from the railway station Taximmo (Baikal-Amur Mainline) to Bodaibo City and is
accessible all year round.
The mining conditions of the Sukhoi Log deposit which is located in the permafrost zone and whose depth reaches 250270 meters are good for open-pit mining.
According to the latest estimate (Ministry of Natural Resources), commercial gold reserves in the Sukhoi Log deposit
amount to 1,952.9 tons. Non-commercial gold reserves are estimated at 798.8 tons. In addition, prognostic resources
of gold are estimated at 205 tons.
The total volume of the Sukhoi Log deposit (reserves plus resources) amounts to 2,956.4 tons of gold and 1,541 tons of
silver. In current prices, value of the mentioned reserves is around US$115 bln.
Investments in the development of the deposit were assessed at RR 47.6 bln., including RR 38.5 bln. into industrial
construction and RR 4.7 bln. into external infrastructure.
According to the feasibility study of Sukhoi Log development, RR 2.5 bln. of one-time investment is necessary, the
payback period is 12 years after the receipt of license. The annual production level is expected to reach 32 mln. tons of
ore, or 60 tons of gold. The development of the deposit is expected to be divided into three stages – additional geological
survey and engineering (5 years), building of integrated plant (5 years), further development (30-40 years). It is envisioned
that at the first stage the reserves of categories С1 and С2 will increase due to the transfer of prognostic resources into
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reserves. At the second stage it is planned to build a mining and processing plant with the capacity of 50-60 tons of gold a
year.
According to the available information, in 2010 Federal Agency for Subsoil Usage is not planning to issue license to
Sukhoi Log because there is no developed infrastructure. Development of deposits of that type requires that infrastructure
be considerably developed, which is an obstacle to its preparation for the tender.
9.1.2 Deposit development
Sukhoi Log has a long history of bad investments. In 1995 the license for mining of Sukhoi Log was received by
“Lenzoloto” Holding – the largest gold mining company in the Irkutsk Region (which spent about US$100 mln. on
development of the deposit infrastructure in 1994−1997).
In the analysts’ opinion, it is impossible to develop Sukhoi Log without “Lenzoloto”. Even if some company receives the
mining license, Sukhoi Log will be dead though golden weight on the balance-sheet of the acquiring company without
“Lenzoloto”.
The point is that initially Sukhoi Log was a part of “Lenzoloto”. Practically, all work of the company was directed at the
development of that deposit, i.e. road building, power connection and geological survey.
At that time the Australian company “Star Technology Systems” was a major shareholder of the holding. In February 1997
“Lenzoloto” and “Star” signed an agreement envisaging the set up of the Sukhoi Log mining company with a share capital
of one entity – JSC “Lenzoloto”. At that time the Russian party was expected to ensure that the foreign investor receive
the priority right to acquire 49% of the formed company’s shares for US$200 mln. “Star”, in its turn, was expected to
withdraw from a number of the company’s founders and shareholders, organize short-term funding in the amount of
US$50 mln. within five banking days from the day of signing the contract and raise US$500 mln. of additional funds for the
development of the Sukhoi Log deposit. However, the Australians did not meet their obligations. After that the license for
development of the Sukhoi Log deposit was revoked while the share of “Star” was reduced to 6.5%. Later “Star
Technology Systems” withdrew from “Lenzoloto” by selling their shares to JSC “Sevzoloto” while “Lenzoloto” itself became
a part of “Polyus”.
The bad luck that befell the Australians reconfirms the impossibility to work at Sukhoi Log without “Lenzoloto”. In addition
to gold mining companies, “Lenzoloto” owns all the infrastructure around Sukhoi Log, the including power and road
network. In addition, the company also owns the western flank of Sukhoi Log – the Zapadnoye deposit with commercial
reserves of 13 tons (14% of “Lenzoloto”’s reserves), which makes it possible to start experimental extraction of gold right
now.
It is “Lenzoloto” that has been involved in the geological survey of the Sukhoi Log deposit for several decades in a row.
The Company has the most complete information on the deposit and is able to assess thoroughly the potential and
capabilities of any area of the Sukhoi Log deposit.
In 2003 the structures of “Interros” acquired a controlling block of OJSC “Lenzoloto”’s shares for US$150 mln at the
auction. It is the acquisition which enabled JSC “Polyus Gold” to become the favorite in a race for Sukhoi Log because
“Lenzoloto” owns all the infrastructure (roads, bridges, hydro power stations etc.) which is necessary for the deposit
development. In the environment of impassible taiga the developed infrastructure means a lot and has a very high price.
The acquisition of the “Sukhoi Log” Mining Company by “Polyus Gold” Group will enable the company to save around
US$300 mln. of capital investments due to the availability of developed infrastructure.
In 2006 the “Interros” holding made an attempt to sell “Lenzoloto” by transferring in advance the necessary assets for the
development of Sukhoi Log to a separate company. This is the way businessmen wanted to get rid of unattractive
“Lenzoloto”’s placer deposits and repay their expenditures on the purchase of the company in 2003.
However, the idea still remained unimplemented. In the process of preparation of the company for the transaction it
became clear that, in addition to “Lenzoloto”’s infrastructure assets that they managed to transfer, the company
possesses such resources like staff, geological survey data on the deposit etc. Absence of such resources makes the
development of the Sukhoi Log deposit rather difficult. Having considered the impossibility of transferring those assets
from the company it was decided not to sell “Lenzoloto”.
Today, in case “Sukhoi Log” Mining Company became owned by “Lenzoloto”, commercial reserves of the latter would be
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registered at the level of 2,000 tons, which would make the Company’s capitalization significantly higher, i.e. up to US$
10.1 bln. (if we make calculations using the industry multipliers as set out in Section 6.4 of this report (MCap / Resource =
157)). This is practically comparable with current capitalization of JSC “Polyus Gold”. However, this value of capitalization
is rather conditional because “Lenzoloto” does not currently hold any license for the development of the deposit.
9.1.3 Summary
Commercial reserves
Non-commercial reserves
Prognostic resources
Silver reserves
1,952.9 tons
798.8 tons
205 tons
1541 tons
Present value of gold and silver reserves
US$ 115 bln.
Development costs
US$ 2.5 bln.
Payback period
12 years
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