What’s in a name – Ovoca Gold at risk of losing Russian silver mine

Irish-Russian junior Ovoca tries to stave off licence problem, which possibly is the precursor to asset raid.

 Author: John Helmer
Posted:  Wednesday , 30 May 2007

MOSCOW  - 

A less investor-friendly name for a gold and silver deposit would be difficult to find.

Goltsovoye, located in Russia 's fareastern region of Magadan, comes from the old Russian words for poor, naked, and beggarly. But the name may be worth less than its proximity, since it is geologically and geographically close by Dukat, the largest silver mine in Russia . That, in turn, suggests a nakedness of another sort - exposure to an asset raid by the owner of Dukat, the famously acquisitive Suleiman Kerimov, controlling shareholder of Polymetal.

 

Just 94 kilometres from Polymetal's Dukat property - itself grabbed several years ago by former Polymetal owner, Alexander Nesis, from Pan American Silver of Canada - Goltsovoye was reported this past February to hold measured resources of 15 million ounces of silver, and a total of measured, indicated and inferred resources, calculated according to JORC standards, of 78.2 million oz.  The Russian resource calculation for C1 and C2, also reported in February, is 74.3 million oz, with P1 resources estimated at another 22.6 million oz. With grades estimated to range from 602 grams/tonne to 1,293 g/t, averaging 934 g/t, the deposit claims to be "potentially world's highest grade silver mine".

The source of these calculations is Wardell Armstrong International (WAI), a Cornwall-based unit of the Wardell Armstrong group of the UK .

WAI's estimates make Goltsovoye worth developing - and worth raiding. And if a raid is under way, that would tend to confirm that, in addition to WAI, others believe the calculations. But if the calculations are not approved by the Russian government's State Committee on Reserves (GKZ), and are non-compliant with the license obligations, then the license holder lacks the legal bulwark with which to repel the raider.

According to statements from the federal mine licensing agency Rosprirodnadzor, the current owner of Goltsovoye, Ovoca Gold Plc is at risk of losing its licence for failure to mine according to the licensing agreement, and failure to get official approval for its reserve estimates from GKZ.

A brief news item, published last week on the Russian Business Consulting (RBC) wire, reported that the Russian prospecting association (Russian term is artel) Ajax, having held the Goltsovoye licence since 1993, has failed to honour its current licence obligations. Most particularly, compliance orders issued after a Rosprirodnadzor inspection in 2003 have not been met. According to the RBC report, there was a meeting in February with Magadan Governor Nikolai Dudov, the head of Ajax, identified as Sergei Salamatin , said that Ovoca has no intention of selling its stake in Ajax, or the Goltsovoye asset; and every intention of starting the mine by the fourth quarter of next year. He is reported as saying that $70 million is planned to be spent on the mine, and in the initial phase of development, almost 6 million oz of silver are to be produced per annum.

RBC, showing unusual precision, then reported that "experts notice that Ovoca Gold Plc, a company specialising exclusively in geological prospecting, does not possess experience of the exploitation of deposits particularly similar to Goltsovoye,  has not completed a project through to mining operations,  and has insufficient financial resources. For the last several financial years, the company shows pure loss, and finances its activity exclusively through share issues at the stock exchange. Its market capitalisation does not exceed $73 million."

The report also attacked the Goltsovoye project on environmental grounds, criticizing Ovoca for failing to discuss its water protection and waste treatment plan in a public hearing.

Oleg Mitvol, deputy chief of Rosprirodnadzor, was asked to clarify the RBC claims. He told Mineweb: "I have the inspection report for this artel Ajax . They do not mine anything, and more to the point - they do not comply with previous regulations. In 2003 they received an order for correcting violations - [these included] reserves [that] are not listed in GKZ; the inventory of reserves has not been fulfilled." According to Mitvol, "their main violations are that the mine works have not yet begun, although the mine should be at the project capacity by now; and the level of extraction was not confirmed."

"The license was granted in 1993,  and since then nothing was done on the mine. But the company has intentionally misled western investors. Our steps now will be to send documents to [the Ministry of Natural Resources'] commission on license withdrawal, and to manage an official check of the Magadan inspectors of Rosprirodnadzor, who have been covering all this for a long period of time."

For the time being, Ovoca is not responding publicly to the press report, or to the proceedings inside the Ministry of Natural Resources. On May 17, the company posted an "operational update", in which it reported "the successful completion of a routine scheduled license review." The statement also attached a multi-page summary of Rosprirodnadzor's findings in Russian, signed by the regional inspector and by the Ajax head Salamatin . This is dated April 28, and appears, at least in part, to be part of the documentation Mitvol is referring to.

The contradiction between what Mitvol says, and what Ovoca reports, is plain. Rosprirodnadzor, according to Ovoca, "has issued a detailed statement (Act #02n-07) on the status of the Goltsvoye license. The Federal Inspectorate has verified Ajax 's fulfillment and compliance of its current license obligations." Ovoca chief executive Leonid Skoptsov is quoted as adding that environmental studies being undertaken "with leading Russian scientific institutes" ensure "that mining activity at Goltsvoye will have a minimum impact on the surrounding area." He explicitly referred to problems of tailing seepage, lead by-product emissions, topography damage, and reclamation, which were the focus of the local criticism reported by RBC.

Skoptsov was asked by Mineweb what announcement to the market Ovoca intends to make with respect to Mitvol's statements relating to licence compliance at Goltsovoye? He replied that statements quoted from Ministry officials by Prime-Tass, another Russian news service make "a better answer than I can provide to you." According to this report, an investigation is under way at the ministry of the apparent contradiction. "There is a letter that there are infringements," Prime-Tass quotes the spokesman of the Ministry, Rinat Gizatullin, "and there is a certificate that infringements are not present. Now we understand that such situation could arise". According to the spokesman, Rosprirodnadzor had charged licence violations in a letter of May 10, directed to the Ministry's agency for sub-soil resources, Rosnedra. But the spokesman also confirmed the authenticity of the regional inspectors' report, published by Ovoca.

Gizatullin is implying that Mitvol has made a mistake. Mitvol told Mineweb there is a problem inside the inspection chain of command, and that this is now under investigation.

Ovoca is listed in Ireland , and headquartered in both Dublin and London . It controls   several subsidiaries, including Norplat, which is exploring for gold in northwestern Russia ; Klippin Gold, with Swedish prospects; Ovoca Resources; Lovozero Mining; and Black Fox Resources. Ajax (spelled this way in Russian reports, Ayax in Ovoca reports) has sold 74% to Ovoca, plus an option to acquire the balance within two years.

Skoptsov, who has come into Ovoca from business in the Russian machinery sector, as well as in oil and gas, declines to say if he suspects that Goltsovoye's licence troubles reflect a bid to revoke the licence, and put it up for sale again. If he and Ovoca's allies in Moscow and Magadan are right, the licence problems will be resolved.

The London market has been sceptical. There have been three sharp corrections in Ovoca's share price this year - at the start of January; then at the end of February; and the current decline, commencing in early April. It is hovering between 10 and 12 pence this week. Over the past 52 weeks, Ovoca's high was 14p this past April, and 6.5p in July of 2006. Current market cap is $71 million.

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