Halyk Finance - Government gets involved in KazakhGold case - July 14 2010

On July 12, Kazakhstan’s Ministry of Industry and New Technologies annulled its approval of the acquisition of KazakhGold (Bloomberg ticker: KZG LI) by Russia-based Polyus Gold (PLZL RX) and prohibited KazakhGold to issue new shares. The Ministry cited the “newly discovered circumstances related to the underpricing of KazakhGold by Polyus Gold” as a reason for the decision. Under Kazakhstani law, the Government has preemptive rights in a sale of any natural resources at a price agreed upon between a buyer and a seller. At the time of the transaction, the government waived its right. A fact of misrepresentation of the actual price enables the Government to annul the sale. It is not completely clear whether the government decision applies to the recent issue of additional equity, the 2009 acquisition of KazakhGold by PLZL, or both. Likewise, the government did not indicate whether it intends to exercise its preemptive rights now or have Polyus return the acquired shares to their previous owner.

If the acquisition is cancelled, it will have a negative impact on the equity of both Polyus and KazakhGold. However, we do not believe this scenario will be allowed to develop. From here on, we expect the company to pursue both an open public relations campaign against the government decision and a behind-the-scenes effort to negotiate a compromise. We anticipate the government to back off from its July 12 ruling and the transaction between Polyus and KazakhGold to proceed.

Taking into account the existence of a range of regulatory tools in government’s arsenal that can make PLZL’s future in Kazakhstan difficult, we do not believe that Polyus will play hardball. We believe that PLZL principal shareholders, Russian billionaires Mikhail Prokhorov and Suleiman Kerimov, may be reluctant to use their connections, especially at this early stage. However, this may be inevitable if the government of Kazakhstan persists. With KazakhGold EGM less than two weeks away, Polyus Gold is now likely to be engaged in an active behind-the-scenes campaign to have the government of Kazakhstan reinstate the waivers, we believe. The second scenario is likely to be tied to a settlement with the previous principal shareholders which may involve adjustments to the size of the claim.