Brazil’s richest man denies gold smuggling, fixing tender

Vancouver – Shares of companies partially owned by Brazil’s richest man, Eike Batista, continued to take a beating on the markets after Brazil’s federal police raided his Rio de Janeiro home and offices, July 11, as part of its “Operation Midas Touch”. On the day of the raids Batista’s OGX Petroleo e Gas Participacoes, MPX Energia and MMX Mineracao e Metalicos (XMM-T) lost US$3.3 billion in total market value. Since that day MMX has dropped $5.50 to $26.00 at presstime on the TSX.

The raids stemmed from federal police allegations that MMX, of which Batista is the major shareholder, smuggled gold and unfairly influenced the acquisition of the Amapa railroad the key transportation link between what was then Batista’s Amapa iron-ore mine and the port of Santana at the mouth of the Amazon. MMX won the tender in January, 2006 and Batista subsequently sold the mine and railroad to Anglo American (AAL-L) for US$5.5 billion earlier this year.

Anglo American said in a press release that most of the conditions of that contract have been “fulfilled or waived”.

Although federal police have yet to lay charges, Batista has ramped up an aggressive damage control campaign, holding a July 14 conference call to counter the allegations.

“This is a gigantic mistake,” Batista said.

As a show of force Batista brought a slew of top dogs with him to the call: Fracisco Gros, vice-chairman of OGX, Marcelo Faber Torres, chief financial officer of OGX, Rodolfo Landim, OGX’s chief executive officer, Eduardo Karrer, MPX’s chief executive officer, Joaquim Martino, chief executive officer at MMX and finally Paulo Gouvea, legal affairs officer at EBX, who spoke at length during the pow-wow.

Batista opened up the conversation saying he went through the allegations with Brazil’s former minister of justice and chief of federal police, Marcio Tomaz Bastos, and that they found them to be “totally unfounded.”

On the count of gold smuggling, Batista suggested the federal police got their companies mixed-up when they raided Mineracao Pedra Branco do Ampari‘s (MPBA) offices looking for connections between him and the alleged gold smuggling. Unfortunately for the police, Batista no longer owns MPBA. He sold it to Wheaton River Minerals in 2004 (which Goldcorp (G-T, GG-N) acquired in 2005) at a time when it was still an exploration project.

Marilia Botelho, MMX’s investor relations manager, said in an interview that the federal police have subsequently admitted to Brazilian press they made a mistake. She said when police showed up at MPBA thinking it was a Batista company, employees informed officers that he had not owned the company for four years.

As Gouvea put it, “We never produced any gram of goldso any allegation of gold smuggling is completely unfounded.” Batista added that the goldmine is adjacent to the Amapa iron-ore mine which he recently sold to Anglo American. “So, I’m not trying to excuse the mistake that was done, but I understand how these things add up, you know? There is a saying in Brazil, ‘if you add a story to a little bit of another story, the end result is a disaster’. That is exactly what happened here.”

As for the allegations of fraud related to winning the Amapa railroad, Gouvea said the police are investigating supposed influence of its MMX executives on tender rules over the privatization of the Amapa railroad.

The Amapa railroad is crucial to moving iron-ore from the Amapa mine to port. In a statement released July 22, MMX said that it first took over management of the railroad running at a R$300,000 (Brazilian reais) monthly deficit as part of an emergency 6-month contract from the State of Amapa in 2005. After the six months were up, the railroad went up for bidding.

When it did Gouvea said the only reason MMX won the tender was that none of the seven other companies which expressed interest in the railroad posted a US$1.6 million bid bond. MMX subsequently got it for the minimum tender price of R$814,000 and a commitment to invest R$41 million in the first two years.

Gouvea said, “This tender, when it was made, was twice challenged at courts and both lawsuits were completely dismissed, which only underlines the invalidity and the transparency and the legality of the whole procedure.” Batista added, “On top of it, Tuesday of last week (July 8), the railway concession was legally audited by the state attorneys and in Amapa was transferred to Anglo American.”

Although federal police have made documents pertaining to the allegations available to MMX, Marelho said that since MMX’s lawyers were currently working on resolving the ongoing investigation, she could not disclose any details.

She added that the investigation could take as much as 2 or 3 months, “until police make up their minds about whether to lay charges or not.”

Federal police did not respond to interview requests.

Gouvea said the worst case scenario is that the investigation leads to formal criminal charges against individuals at the company and that it drags on for a number of years in the courts. As for Anglo American, he said Batista had given the company indemnity against losses.

In a press release Anglo American said, “As the transaction moves toward completion and as part of its pre-completion exercises, Anglo American will be assessing information concerning the investigation, which the selling shareholders have agreed to provide on an expedited basis.”

Batista said he did not view the investigation as a breach of contract between MMX and Anglo American.

“I think that after this,” Batista concluded, “I am not only going to be audited by all our auditors that audit us today, but I am going to be the most audited guy in Brazil, including (by) the federal police.”