After spending about US$16.5 million to explore the Verkhotina diamond licence near the White Sea in northwestern Russia,
In early 1994, the Denver-based company entered into a joint-venture agreement with AGD that allowed it to earn a 40% interest in the licence to explore, develop and mine Verkhotina. In May of that year, Archangel and partner AGD formed Almazny Bereg, a joint-stock company that was to hold the Verkhotina license.
The troubles started in the second quarter of 1998, when Archangel stopped exploration payments to the joint venture after AGD failed to transfer title to Verkhotina as stipulated in the agreement. Despite years of political and legal efforts, AGD has yet to transfer the licence to AB, which is 40% owned by Archangel Diamond.
The Denver-based junior took its case to the Stockholm’s International Chamber of Commerce board of arbitration in May, claiming it had suffered substantial losses and damages resulting from repeated breaches of contract by AGD at Verkhotina.
AGD is expected to respond shortly, after which Archangel and AGD have one more chance to reply before the arbitration tribunal renders a decision. The tribunal may rule in Archangel’s favor, or it may end up in a protracted court battle, said Archangel spokesman John Haigh.
Archangel believes the battle is worth fighting because the Verkhotina property hosts an important diamond resource. The licence covers 400 sq. km northwest of the regional center of Archangel’sk, and includes the Grib pipe, the most advanced of many kimberlites on the property.
Grib contains 67 million recoverable carats over one millimetre in size. Exploration, which has continued unabated (despite Archangel suspending its exploration funding in 1998), has outlined 98 million tonnes to a depth of 500 metres, averaging 69 carats per 100 tonnes. Preliminary estimates peg the value of the diamonds at US$79 per carat. The Grib pipe is overlain by overburden averaging 66 metres in thickness.
In June of this year, Archangel’s problems were complicated by a takeover bid for AGD by LUKoil, a large Russian petroleum company. LUKoil already holds a 29% indirect stake in AGD and, through a complete takoever, hopes to secure access to AGD’s interest in 16 oil leases in the Barents Sea that have the potential for 2 billion barrels of oil.
LUKoil has stated that it has no interest in the diamond project, which opens the door for the possibility of a negotiated settlement between Archangel and LUKoil, if its bid for AGD is successful. However, the LUKoil takeover bid for AGD is controversial for other reasons. Officers of the Russian state-owned oil company, Rosneft, are balking at the sale of their 25.5% stake in AGD, though the Russian press recently stated Rosneft may consider auctioning its stake.
Because of these developments, Archangel’s position remains uncertain; it does not know when, or even if, the transaction will take place. It can only wait to see how events play out in the months ahead.
The Oppenheimer family of De Beers fame will be an interested observer, as the family holds a 40.97% interest in Archangel through Task Holdings.
On the financial front, Archangel has US$4.47 million in current assets, no long-term debt, and liabilities of US$2.53 million in accrued exploration expenses since 1998. For the six months ended June 30, the company reported a net loss of US$259,000 (or 1 per share), compared with a loss of US$326,000 (1 per share) for the corresponding period last year.
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