Celtic Resources - Mining The Mountain

Norilsk Nickel. Court invalidates asset transfer to Polyus subsidiary; Fitch assigns investment grade
The Arbitration Court of Yakutia declared invalid the transfer of fixed assets from OAO Aldanzoloto to OOO Aldanzoloto Mining Company at prices below fair value in 2003, Vedomosti wrote today citing an IG Russkiye Fondy press release. The mining business was subsequently acquired by Polyus.

In 2003, Aldanzoloto management conducted a series of transactions that effectively stripped the company of all assets including production assets and licenses, transferring them to the Aldanzoloto Mining Company, which was under its control. That company was then sold by IG Alrosa in a package deal along with 50% in Nezhdaninskoye (the core issue behind Celtic Resources saga) and the Kyuchyus license to Polyus for $285mn in September 2005.

Polyus Gold owns 99.2% of Aldanzoloto Mining Company, which has licenses and assets to develop Kuranakh gold deposit with reserves of 4.1mn oz of gold and 2004 output of 155,000oz. For comparison purposes, Aldanzoloto Mining Company has roughly the same resources base and output as High River Gold, which is a $250mn company. Clearly, the Polyus/IG Alrosa deal priced in the associated legal risks of both Nezhdaninskoye and Aldanzoloto Mining Company.

Aldanzoloto Mining Company representatives told Interfax they will challenge the ruling, but the legal baggage that Polyus has acquired from IG Alrosa may have a slight adverse effect on sentiment as Polyus begins its independent existence starting Jan. 1, 2006 when it is spun off from Norilsk Nickel.

In other news, Fitch assigned a BBB-/ stable senior unsecured rating to Norilsk Nickel (already rated at Ba2/BB+ by Moody's and S&P). This is the first-ever investment grade rating assigned to unsecured debt obligations of a Russian entity that is not government-controlled.

Our Norilsk Nickel recommendation is Buy with a target price of $110.