RUSSIAN RESCUE, RUSSIAN ROULETTE

Gold Fields seen as glad to be exiting Venezuelan gold

Gold Fields' sale of its Venezuelan gold assets to Rusoro is a
profitable relief

Author: John Helmer
Posted: Sunday , 14 Oct 2007

Moscow -

There is a traditional Russian toast that can be roughly
translated: "May we have more pies and doughnuts, fewer black eyes
and bruises!"

After selling its loss-making Venezuelan gold assets at a profit to
Rusoro Mining last week, Gold Fields has publicly raised its glass to
toast the new buyers luck -- not least of all, because Rusoro is
making a great deal in public of its Russian connexions for solving
the black eyes and bruises Gold Fields desired to be rid of in
Venezuela.

Rusoro's Chief Executive Officer, and a principal shareholder, Andrei
Agapov, has claimed this year in the mining media that Rusoro enjoys
an advantage over other goldminers in Venezuela, because it is
majority owned by a Russian company. According to Agapov, Rusoro is
somehow the beneficiary of the relationship between Venezuelan
President Hugo Chavez and Russian President Vladimir Putin in
minerals and energy, and also in military equipment. Agapov is
quoted [by Resource Investor] as saying that Russia sees Venezuela as
a mirror image of itself in the early 1990s and has entered a series
of trade agreements to help the country's development.

The new President of Rusoro, George Salamis, a Canadian appointed on
September 4, has repeated the claim that Rusoro's Russian connexions
will enable it to have the advantage over South African Gold Fields
in getting government permits for water resources, and in solving
local labour discontent and union problems. "Because of the
experience we have in Venezuela, we feel we can resolve some of these
issues, " Salamis is quoted as saying [to Resource Investor] last
week.

Gold Fields has told Mineweb it has read the press claims about
Rusoro's Russian connexions, but cannot vouch for what it has read.
The only Russian connexions Gold Fields knows for certain are the
nationalities of Andrei Agapov and his father Vladimir, who control
the company from London and Caracas; and a handful of others on the
board of directors or the advisory board.

What is odd about these claims is that Gold Fields has its own direct
connexions in Moscow; most directly with Norilsk Nickel, and its co-
owners Vladimir Potanin and Mikhail Prokhorov. Artem Grigoryan, a
Russian with Russian political, intelligence and business connexions,
and an office in Moscow, sits on the Gold Fields board of directors;
he was first appointed when Norilsk Nickel bought a 20% stake in the
company from Anglo American in 2005. After Potanin and Prokhorov sold
out, Gold Fields decided to retain him as a non-executive director
because, as one executive explained at the time to Mineweb, he was
a "highly valued asset".

If officials of the Venezuelan government were susceptible to be
impressed, or influenced, by Russian connexions, it appears Gold
Fields deployed significantly more powerful ones than Rusoro.

Mineweb investigated the Russian claims of Rusoro last December, a
month after Rusoro first listed on the TSX Venture board in
Vancouver on November 9 (RML-TSXV). From a pre-listing share price of
less than one Canadian dollar, it jumped to a high of $4.50 on
November 27. It then commenced a steady decline which neither
Russian, nor Venezuelan, nor even Vancouver promoters have been able
to halt. The low since listing was $1.58 on August 16.

In the weeks that followed the listing, three assessments of the
company were published by market analysts -- one by James Winston on
November 16; one by Richard Reinhard on November 17, and one by
Laurence Roulston on November 22. All of them emphasized the
importance of Russian finance, political power, and mining
experience. Reinhard entitled his presentation "From Russia with
Love".

Winston led off with the claim that Rusoro's board chairman, Vladimir
Agapov, is a "very well connected Russian -- to both President Putin
in Moscow and President Chavez in Venezuela." Vladimir and his son
Andrei are reported by Winston to own "well over half the company."
Noting the political risk for American investors of pursuing
Venezuelan gold "so long as firebrand leftist and anti-American Hugo
Chavez is the President", Winston noted "what if this mining company
is owned by Russian?"

No evidence of Agapov senior's influence with the Kremlin, or
political reputation, has been found in Moscow. A spokesman for the
Venezuelan Embassy in Moscow said economic officials there know
nothing of Rusoro or the Agapov group.

Experienced Russian mining sources told Mineweb that the Agapovs are
unknown in Russian gold mining. A source who knows Andrei Agapov told
Mineweb that there had been social connexions between him and
Prokhorov of Norilsk Nickel, but nothing more -- and nothing current.

In December, Andrei Agapov told Mineweb "our family is the first
Russian investor in Venezuela." He noted that he does not have "much
mining experience myself", while father Vladimir "was into oil
exploration." He acknowledged that "Prokhorov knows us well on a
social basis." But Rusoro "is not big enough" for Prokhorov to be
interested to fund, he conceded. He estimated that his group had
invested in Venezuela "$70 million -- maybe a little bit more."
Rusoro was purchased as a private company, he added, in 2002, when
there had been "no exploration, an old mill, and gold was at $300."

If the Russians backing Rusoro's public flotation in North America
were the insurers of its impressive reputation and political risk
cover in Caracas, where did the Russian money come from? Agapov
junior explained that he had been the founding owner of MFC
Securities, a modest Moscow brokerage identified in the Russian press
archive as having a small annual revenue -- too small to generate the
size of the Venezuelan investment that has been reported. Agapov told
Mineweb that MFC "is not involved in trading, with very few
institutional [clients]. It services high net-worth individuals". MFC
and Andrei Agapov appear to be represented on the Rusoro board of
directors through Peter Hediger, managing director of MFC Merchant
Bank S.A. of Switzerland.

The other Russian who appears to be at least as important in Rusoro's
financial history is Dmitry Ushakov, who is currently listed as a
board director.

According to Rusoro's spokesman last December "Mr. Ushakov was the
chief executive officer of Norilsk Nickel from 1999 to 2002. He is
currently on the board of directors of Interros, a company which in
turn owns Norilsk Nickel and Polyus Gold." Rusoro's website currently
says that Ushakov is "is a director of Interros."

This isn't correct. According to Norilsk Nickel, Ushakov was never an
executive of Norilsk Nickel. According to a Russian mining source,
who knows him, Ushakov was a friend of Prokhorov's from their time
together at university. Like a good many others in that friendship
circle, when Prokhorov and Potanin took over Norilsk Nickel and
vested shareholding control in the Interros group, Ushakov was
engaged. He was assigned the agribusiness interests to manage, but
this proved to be troublesome, according to a Moscow source who knows
what happened. Ushakov grew personally wealthy, but he was viewed by
Potanin as Prokhorov's man. When he was on the Interros board, he was
there as Prokhorov's representative.

Since January, however, Prokhorov and Potanin have had a serious
falling-out, and Potanin has cleared the Interros holding and Norilsk
Nickel boards of as many Prokhorov placemen as possible. The current
Interros board does not list Ushakov.

Ushakov has told Mineweb through his Moscow assistant that "had never
been an executive of Norilsk Nickel, but he was member of the board.
In the Rusoro project," Ushakov says he "plays a role of Vladimir
Agapov's consultant."

The two Agapovs and Ushakov are the only Russians on the Rusoro
board, or in the senior management, with an apparent equity stake in
the company. Four more Russians have been named to an advisory board

On September 11, Rusoro announced that "the Company has granted
incentive stock options to directors, officers, employees and
consultants to purchase up to an aggregate of 6,495,000 common shares
exercisable for 10 years at a price of $2.12 per share." Among the
option holders disclosed last December, one was the Canadian PR
company and corporate spokesman engaged to promote Rusoro's stock,
Vanguard Shareholder Solutions of Vancouver. Rusoro and Vanguard
disclosures indicate that Vanguard was engaged by Rusoro for a
combination of a monthly cash retainer and stock options.

At some time after listing -- no dated announcement of the news can
be found on Rusoro's website -- the company added an advisory board
comprising three Russian geologists, and one employee of the Ministry
of Foreign Affairs in Moscow; the last of these, Yury Maltsev, may
have intelligence connexions.

From the latest financial statements posted on the Rusoro website, as
of June 30, 2007, just over 8 million stock options were outstanding,
with a weighted average exercise price of $2.86, making total value
in hand of $22.9 million. There is no telling whether the advisory
board members are compensated as consultants to the company with
share options. As of June 30, Rusoro reports that it has $55.4
million in cash; it has accumulated a $64.4 million development
deficit; and it ran a $3.4 million loss for the first half of this
year. At the same time a year ago, Rusoro's reported loss was $9.9
million.

Reinhard of Growth Stocks Weekly, one of the initial promoters of the
idea that Rusoro's Russian connexions would add value to the stock,
has now issued a new encomium: "This transaction [with Gold Fields]
quickly positions Rusoro as an intermediate gold producer. With a
proven ability to operate effectively in Venezuela, Rusoro should be
able to unlock further value from these Venezuelan assets. This
transaction also puts them well ahead of other potential operators as
THE regional consolidator, with one of the world's premier gold
companies as its largest single shareholder and $50 million in cash
to advance their quest. Gold Fields obviously believes Rusoro will
succeed where they found frustration."

Gold Fields doesn't go so far, neither in public nor in private. Ian
Cockerill, Chief Executive Officer of Gold Fields said in a corporate
announcement of the sale to Rusoro: "Additional capital investment
is required to realise the full potential of the Choco 10 gold mine.
However, after careful consideration we have concluded that, given
the current environment, this investment is better made by others,
with Gold Fields retaining exposure to the upside inherent in the
assets."

The last Gold Fields operational report indicates that the problems
at the Choco mine, which is among the assets sold to Rusoro, include
inadequate water supply -- which depends on government permits that
have not been issued -- rising costs, falling grades, changing ore
types, and miner strikes. In the past year, output was 54,000 oz;
cost was $523/oz, 39% higher than than any other Gold Fields
operation, where the average cost was $377/oz. Choco was also a
lossmaker to the tune of almost $5 million:

http://www.goldfields.co.za/reports/...
co_gold_mine.asp

Salamis of Rusoro told Resource Investor last week that Rusoro had
the clout -- read Russian connexions again -- to overcome these
problems. Gold Fields ran into problems in the country when it could
not obtain permits to access nearby water resources, Salamis told the
North American publication -- an issue he sees Rusoro resolving
quickly. "That was Gold Fields' single biggest impediment," he said.

Gold Fields is much too happy with the sale to look the gift horse in
the mouth. Gold Fields is "delighted with the transaction," a
Johannesburg source told Mineweb. "If they can do better than us in
Venezuela, good luck to them." Don't miss that conditional.

The sale terms are that Rusoro will pay Gold Fields $150 million in
cash; accept $30 million in a convertible vendor loan; plus tend 140
million Rusoro shares (worth $308 million last Friday, after the deal
announcement), in exchange for Choco and the rest of Gold Fields'
Venezuelan assets.

Financially, Gold Fields will not be writing down asset value. In its
next report, when the terms of the purchase by Rusoro are accounted
for, Gold Fields will report that it turned a profit on its total
investment.

But if Gold Fields' Russian connexions have proved unavailing in
Venezuela, why should Rusoro's prove any different? Or is the tale of
Russian connexions intended more for sharebuyers outside Venezuela,
not the Chavez government in Caracas?

In March, the purported Russian connexion surfaced in a different
guise, and for a slightly different purpose, on the Canadian market,
suggesting that Canadians believe in the tale -- even if no-one else
does. At that time, the rumour of big-pocketed Russian buying
interest was floated around the Bank of Montreal (BMO) to boost
Crystallex shares. The published claim was that Crystallex was the
target of takeover by Polyus Gold, the leading Russian gold miner
owned by -- guess who? -- Potanin and Prokhorov. Polyus immediately
told Mineweb it had nothing whatever to do with Rusoro, and no
interest in bidding for Crystallex. A Polyus source hinted that it
believed the rumour had been planted in Canada to hype Crystallex's
share price.

The North American media publicity at the time also included the
claim that Polyus had engaged a BMO unit -- either BMO Nesbitt Burns
or BMO Capital Markets -- to advise on possible foreign gold asset
acquisitions. This turned out to be something BMO refused to confirm.
If Vanguard was involved, it refused to say if it had any link to
Crystallex. Six months later, Polyus has acquired no foreign gold
asset, and Crystallex is still without its mining permits.

The announcement of Rusoro's acquisition from Gold Fields was
assessed by the end of last Friday's share trading when RML lost
8.33% on the day, one of the sharpest single-day falls in Rusoro's
history; by contrast, GFI gained 1.3% on the day. If Russian
connexions don't appear to be convincing in Vancouver, or Caracas,
what of Rusoro's Venezuelan connexions?

Until September 4, Mario Szotlender was President and CEO of the
company, and its most prominent Venezuelan shareholder. Last
December, he spoke optimistically to Mineweb about his plans for the
company. In May, there was a promotional note about Szotlender in The
Market Traders, a publication issuing from Tucker, Georgia, written
by Malcolm Bucholtz. According to Bucholtz, Szotlender had managed
the merger between Mena Resources, a small operating gold miner in
Venezuela, which he controlled, with Rusoro, whose control he shared
with the Agapovs.

Bucholtz was impressed by the new combination; he didn't mention the
Russian connexion at all. As for the fear that "leftist wing-nut
dictator Hugo Chavez has thrown into the markets... this is where I
see a very lucrative contrarian investing opportunity." Bucholtz went
on to assure his investor audience that "Rusoro's share price is not
reflecting reality because of the Hugo Chavez fear factor. I have
done a lot of reading and research into Mr. Chavez and his
background. And you know something - I am perfectly comfortable with
him. All he wants is to improve the lot in life for the poorer folk
in the rural areas of Venezuela."

What Bucholtz didn't know in May was that the only significant
Venezuelan in Rusoro was about to do a bunk. On September 4, Rusoro
issued the following announcement, confirming that Szotlender had
been replaced by Salamis. "The Company," reads the website
posting, "would like to thank outgoing President Mario Szotlender for
his diligence and service since the Company's inception and wishes
him the very best in his future endeavors."

Archive searches indicate that Szotlender, who has told Mineweb he
commutes between Venezuela and Canada, reveal that he has left
Rusoro, but not Venezuela, where he lives; nor the Latin American
gold sector. One of his listed directorships is Radius Gold, another
Vancouver TSX listed junior. Radius describes exploration properties
in Nicaragua, Guatemala, Ecuador, Mexico, and Peru, "with a steady
stream of new discoveries in the pipeline". Its share price
trajectory has been in the opposite direction from Rusoro's -- up.

To return then to Rusoro -- how does a company with almost no
operating experience, having lost its Venezuelan founder and source
of local significance, reverse a declining share price?

First, it hires a Spanish-speaking executive with experience in
Venezuela, to substitute for Szotlender. On September 27, Rusoro
announced that it was engaging Omar Salas, a Canadian, to the
position of Chief Financial Officer "effective immediately. Mr. Salas
brings many years of financial expertise in the mining industry to
the Company's executive management team. Mr. Salas has previously
held several senior finance oriented positions in the industry, most
recently as Director of Finance for Glencairn Gold Corporation. He
also brings direct experience in Venezuela as he was formerly the
Financial Controller for Placer Dome's operations in the country. Mr.
Salas, a fluent Spanish speaker, has over 30 years of experience
directing financial operations on several major development projects
in the resource industry, in addition to leading M&A due diligence
mandates on various projects in Latin America and Africa."

A fortnight later, Rusoro made its deal with Gold Fields.

http://www.mineweb.net/mineweb/view/...