London Calling! July 23 2003

London Calling! July 23 2003

Penetrating Russia and Britain steppe by steppe (part 3)

The Kvaerner scandal

"London Calling" has already compared the entanglements of various Russian oligarchs to a Shakespearean tragi-comedy
(see London Calling July 8th 2003). But only over the last two weeks, more knives have been drawn, new heads set to roll.

Bizarre as it may seem, yet another British football team
may suffer from its involvement with a benefactor whose corporate operations are less than squeaky-clean. A month ago, the London soccer club of Chelsea was "rescued" by Russia's second biggest millionaire, Ramon Abramovich. Its neighbouring team in Wimbledon - famed more for affable litter-picking "wombles" than the prestige of its players - had been earlier baled out by the Norwegian Kjell Inge Rokke.

Now Rokke's company Aker-Kvaerner is mired in accusations of deceit and fraud - tempting comparison with the Bre-X scandal of the late 1990's. (This Canadian junior, you might recall, falsely claimed it had located the world's biggest untapped gold deposit in Kalimantan. Bre-X quickly became a by-word for criminal deception within the industry.)

Let's recap: Abramovich owns 50% of Rusal, Russia's biggest aluminium enterprise, and 92% of Sibneft, the country's third most important oil company. The Quiet Russian has been negotiating a merger with Yukos, to form the biggest outfit in the country and potentially the world's fourth most significant oil major. However, Yukos chief, Mikhail Khodorkovsky is embroiled in a political power struggle with Russian president, Vladimir Putin who's threatened him with charges of theft and tax evasion. Another Yukos official is accused of murder and Yukos head financier, Platon Lebedev, is under arrest for stealing state property and committing fraud.

Jacob's ladder?

Khodorkovsky may be in a fix back home but in Britain
he's got friends - notably Lord Jacob Rothschild, a scion of the archetypal merchant bank. Khodorkosky has just named Jacob the possible new head of Yukos. If confirmed, the succession is likely to advance Rothschild's role as a global mineral resources investor.

It would also mark the third major Anglo-Russian coup of the past few months, following BP's take over of Russia's TNK oil and Abramovich's heroic first season balling with the Chelsea blues.

A rate of knots

But a Rothschild-Yukos linkage won't mark the first time Khodorkovsky has tied a British knot. Back in the late nineties, under his tutelage Yukos had become the prime shareholder in Kvaerner. This is the Anglo-Norwegian shipping, engineering and construction conglomerate whose global reach on behalf of the mining industry was then almost unsurpassed. By 1999 Kvaerner also claimed to be the world's biggest ship builder.

Among Kvaerner's achievements between 1995 and 1999 were major roles in constructing Rio Tinto's Lihir mine, a US$181 million copper gold project in Mauritania and the Collahuasi copper mine in Chile. In 1998, it won a contract to rehabilitate Nonoc's filthy nickel refinery in the Phillippines, Inco's Manitoba copper smelter and the vastly pollutive Ilo copper smelter in Peru. The company even got the Governor of Alaska's "Award for Mine Reclamation Project of the year" in 2000, after reclaiming the Alaska-Jumeau mine.

Meeting its Trafalgar

In 1996, Kvaerner had taken over London -based Trafalgar House, best-known for its ownership of the Cunard line of luxury tubs, though also besmirched by close involvement with the former apartheid regime. Along with Trafalgar House came the remnants of Davy Corporation, once a force to be reckoned with in the field of mine engineering. Despite carrying heavy debt, Kvaerner considered it was on its way to becoming one of the world's five top construction companies. But it had massively over-reached: by 2001, the Anglo-Norwegian vessel was wrecking on the reefs. At this point , Khodorkovsky and Yukos put forward a financial rescue plan for Kvaerner, to be completed in 2004.

Fight to the debt

It was a "white knight" move, mainly intended to hold off a bid from Kvaerner's second most influential shareholder, flamboyant Norwegian-born, self-made, US fishing billionaire and head of Aker Marine, Kjell Inge Rokke. (Nothing if not multifaceted these cross-border oligarchs). But the ploy failed and, early last year, Rokke took effective (50%) control of Kvaerner which was redubbed Aker-Kvaerner.

Kvaerner: cannons across the bows in Asia

Indigenous Filipinos and Filipinas have bad memories of Kvaerner. It proved indispensable to Crew Development Corp, a Canadian-Norwegian-South African outfit, when it carried out a full feasibility study for a nickel mine on the island of Mindoro between 1999 and 2000. Crew's colourful defence of the project's submarine tailings disposal (STD) proposal triggered accusations that it was being highly economical with the truth. The company wrongly claimed there was no effective ban on the technology in the USA and Canada.

It's not clear how far Kvaerner led Crew by the nose, although it certainly prescribed a potentially hazardous slurry pipeline and relatively untried high pressure acid-leaching technology as well as the oceanic dumping of wastes. Following massive opposition by Mindorans, backed by an Anglo-Norwegian campaign, in July 2001 the Philippine government cancelled the largest part of Crew's MPA (Mineral Production Agreement). The project doesn't seem to have much chance of proceeding

In early 2002 Rokke appointed fellow Norwegian, Helge Lund, to turn Aker-Kvaerner around. Last week, however, Lund was presiding over what may be the worst disaster for its reputation that the company's yet faced. It's been ordered to cough up US138 million in punitive damages after a Nevada court ruled that it delivered a bogus bankable feasibility study (followed by a construction contract) for the Tonopah copper mine, owned by Australia's Equatorial Mining.

"Complete and catastrophic failure"

Kvaerner was invited into Tonopah in 1996, partly because of its supposed experience in copper heap leaching. But Equatorial considered the mine had been "a complete and catastrophic failure". Once the plant was commissioned, copper recoveries were only "a fraction" of what Kvaerner's American division had predicted. Declared the Australian company in a report to shareholders: "Kvaerner's representations in the feasibility study had been, from the beginning, inaccurate, incomplete, unsubstantiated and misleading,"

The Nevada court said Kvaerner had never carried out the tests it claimed while the leaching process it recommended "could not, does not, and cannot" produce the required grade. According to Mineweb, Kvaerner employees also *admitted that the PLS grade used in the feasibility study had literally been a thumb-suck - it was the result of assumptions rather than modelling or testing." Equally damning, the senior technician employed by Kvaerner "was aware of Tonopah's likely failure but…no warning was given to Equatorial".

Kvaerner says it will appeal the Nevada ruling; of course it would. Nor may this seem quite the "Bre-X-type scam" for the new millennium. However, Bre-X was a minnow pretending to be a pike. In contrast Kvaerner had built up a prestigious reputation as a "great white" among whales. The harder they steam, the deeper they can sink.

Maybe it's time to get Kvaerner finally beached.

Sources: (Kjell Inge Rokke and Wimbledon FC): Financial Times November 22 2001; (update on Yukos): FT 8/7/03, 15/7/0, 17/7/03: (Rothschild connection with Yukos): Evening Standard (London) 15/7/03; (Rokke takeover of Kvaerner): FT November 22, 2001; (Rokke's control of Kvaerner) : FT September 25, 2002; February 26 2002; (Kvaerner as world's biggest ship builder): FT April 14 1999; (Lihir and Mauritania projects): Mining Magazine, February 1998; (Collahuasi): Mining Journal November 24 2000; (Trafalgar House acquisition): FT June 25 1995 ; (Alaska Jumeau award): MJ November 24 2000; (Inco link): MJ July 2 199 (Crew/ MPA cancellation): Mining Journal July 20 2001; (Crew's claims on STD): correspondence between Nostromo Research, Piplinks and Norwatch, Oslo-London, June 1999; Kvaerner spanked $137m for copper feasibility 'fraud", Mineweb, July 18 2003