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Agarwal to lose major Armenian gold project?
John Helmer
16-NOV-05
[November 21, 2005]
MOSCOW (Mineweb.com) -- Anil Agarwal, the controlling shareholder
of London-based Vedanta Resources and Toronto-listed junior miner Sterlite Gold,
is likely to lose a major goldmine project in Armenia -- Sterlite's only working
asset. Agarwal's conflict with the Armenian government has already hurt the share
price of Sterlite, and puts into international play one of the potentially richest
of gold deposits in the Caucasus.
According to sources in Yerevan, the Armenian capital, an investigation by an
Armenian government commission reported this week on a series of problems with
Sterlite's management of the Zod mine. These include allegations that the Indian-managed
mining company has uncovered fresh reserves, as well as producing gold that it
did not reveal to the Armenian government.
Zod, located in the eastern corner of Armenia, close to the Azerbaijan border,
has been evaluated over more than a decade by Soviet geologists, Kilborn-SNC,
SRK, Snowden, and Micon. First identified in 1976, and prospected when Armenia
was part of the USSR, the mine project has also included substantial, high-grade
tailings from Soviet-era mining.
Mining rights for Zod (also known in Armenia as Sotk), and a second deposit known
as Meghradzor, were initially vested in the Ararat Gold Recovery Company (AGRC)
for 25 years each. Following the break-up of the Soviet Union and Armenia's independence,
Canadian mining entrepreneur Robert Friedland acquired the rights for a company
of his called First Dynasty Mines Armenia, in a joint venture with a local state-owned
mining enterprise. The state sold out, and full rights were sold in 2002 to Agarwal's
company, Sterlite Gold. Agarwal is reported as holding the titles of chairman
and director of Sterlite, whose principal office is in Mayfair, London. Sanjay
Dalmia is the CEO.
In 2002, the company says it produced 102,960 oz, primarily from tailings accumulated
at the Ararat processing plant. In 2003 output fell to just over 59,000 oz, as
the tailings dwindled, and costs rose for transporting the ore, mined at the
Zod pit, by railway to the processing plant, 235 kilometres away to the west,
on the Turkish border. The plant has the capacity to process about 1 million
tons of ore per annum, but the cost of transportation is prohibitive. According
to company releases, in the first quarter of this year, gold produced from tailings
and ore totaled 12,519 oz, a gain of 1% on the first quarter of 2004. However,
the costs of production outstripped revenues; and in an unaudited statement for
the quarter, Sterlite posted a loss of $2.5 million. The company blames the loss
on falling grades at the Zod mine, falling tonnages of tailings, and lower grades
in the tailings.
Substantial investment in a new mill at the mine site was promised by Sterlite,
and according to the company, it has been targeting a revival of production to
at least 160,000 oz per annum.
However, an investigative publication in Armenia called Hetq reported in September
that Sterlite is "preparing to shut down its operations there, according
to workers at the mines. The employees came to this conclusion when, a month
ago, the company started mining the largest deposit there, which, they say, is
extremely rich in ore, with more than 2-3 kilograms of gold in each scoop of
an excavator. Suspicions of a hurried exit by the company were further fueled
by the fact that the exposed deposits were covered with soil after the gold-rich
ore had been removed, leaving ore with a lower gold concentration behind. 'Nowhere
in the world is a deposit covered with soil and then left aside; that means that
the Indians are not going to exploit the closed deposits,' said one miner."
According to the report by Sara Petrosyan in Hetq, Sterlite had been disputing
with government agencies estimates of reserves at Zod for more than a year. An
inspection last year by government officials, the reporter claimed, had identified
additional reserves, disclosure of which Sterlite had allegedly withheld from
the government. At Zod, these amounted to 865 kg of gold, 3.3 metric tons of
silver, 0.9 tons of selenium, and 7.2 tons of tellurium. At Meghradzor, Sterlite
was accused of finding, but then concealing, additional reserves of 1.4 tons
of gold, 2.8 tons of silver and 3.4 tons of tellurium. The government then initiated
a prosecutor's inquiry, and after an initial round of court hearings, it was
agreed that the government and Sterlite would jointly conduct a new evaluation
this year.
According to Sterlite's website, at Zod "some significant inconsistencies
in geological data have been detected which indicates that both the tonnage and
grade of ore from this Phase II pit will be less than expected. As a result,
and in order to maintain overall gold production as high as possible, Sterlite
has been forced to deepen the pit faster than originally planned. Sterlite is
now embarking on a major diamond drilling program to prove up a major block of
inferred resources below and to the west of the current reserves. It is hoped
that these expected new reserves will form the basis for a major expansion into
a Phase III pit."
Sterlite reports that a 1998 study by Kilborn-SNC was followed by a review by
SRK in 2002. SRK cut the reserves estimate 4.3 million tons in the earlier feasibility
study to 2.1 million tons, and reduced the grade from 7.4 gms/ton to 5.9 gms/ton.
The stripping ratio was also reduced from 18.3 to 9.9. According to Sterlite, "at
an assumed gold rate of US$300 an ounce, and including current production from
Ararat, operating cash flow at the 160,000 ounces per year rate is expected to
average US$20.4 million per year for the first seven years." The project
is judged to have a life of 11 years.
Armenian sources told Mineweb that an extensive list of violations of Sterlite's
licence and mining agreements have been discussed in recent days with Sterlite.
They are so serious, and the disaffection between the government and the management
so great now, the sources claim the Armenian government has decided to terminate
the agreement with Sterlite.
Agarwal was unavailable when asked by Mineweb to respond to the Armenian
charges. Fiona Palmer, Agarwal's personal assistant at the London office of Vedanta,
told Mineweb that Agarwal is tied up all day in board meetings. Asked if the
Vedanta group is mounting a defence of their position in Armenia, or if Agarwal
is considering a sale of Sterlite's Armenian assets, she responded: "no comment."
Industry sources suggest that Vedanta shareholders, and possibly even Agarwal
himself, may have been kept in the dark about the extent of the problems in Armenia.
It is also unclear whether the Vedanta board may be preparing at its meeting
today to tell shareholders what it plans to do with Sterlite.
Sterlite's share price has been falling steadily since it peaked at 21 US cents
in August 2004. The public disclosure of the conflict with the Armenian government
in September sent the share price to this year's low of 3 cents. It is currently
trading at 4 cents, with a current market capitalization of between US$10 and
$11 million.
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