We noticed a very interesting development late last week when there was a very late after-hours press release announcing what would generally be considered a normal transaction of shares in a thinly traded micro-cap mining company called Atico Mining. This tiny company is producing gold and copper from an underground mine in Colombia at a relatively low cost.
Fast forward to the press release (which can be read in its entirety here [11]) stating that Frontdeal is acquiring the 10.9M shares and 4.45M warrants Aterra Investments was holding in Atico Mining at a fixed price of 57 Canadian dollar cents. This sounds like just another boring announcement, but we dug a bit deeper into this story and discovered some remarkable things.
First of all, the owner of both Frontdeal and Aterra is the same person [12] as both companies seem to be controlled by Alexei Mordashov. Does that name sound familiar? It should, as he’s the CEO of Severstal and has recently done some interesting deals in the gold space with NordGold (which is a spinoff from Severstal). On top of that, he’s an economist [13] so his knowledge of the financial sector and situation should be at a sophisticated level. So why would someone move his shares in a mining company from company A (which he controls) to company B (which he controls as well)?
Alexei Mordashov, CEO of Severstal. Source [14]
It might be very helpful to know that Frontdeal (the acquirer) is registered in Cyprus, which, as you know, is the favorite offshore spot for Russians to store a large chunk of their net worth. Aterra Investments however, is still registered in Russia (but operates through a subsidiary on the British Virgin Islands). This leads to a remarkable conclusion as it sure looks like Mordashov is starting to move his hard assets out of Russia by putting them in an offshore company. What’s even more remarkable is that the transaction won’t happen in Canadian Dollars, nor US Dollars and not even in Euro’s, but in Russian Rubles. The agreement calls for a payment in Russian Rubles equivalent to the value of C$0.57 at the time of closing (so the volatility of the Russian Ruble has been dealt with).
The central point in this press release isn’t a change of ownership in shares of Atico Mining, but Mordashov being effectively moving his Rubles from an offshore account in Cyprus and converting those Rubles into liquid hard assets. This could be the first step with many more to follow as Aterra also owns a sizeable stake in Silver Bear Resources which (for now) owns a large silver project in Russia and some smaller investments in non-precious metals deals.
The capital flight out of Russia is still ongoing and according to the data of the Russian Central Bank, the total amount of capital outflow is expected to be $128B in 2014 [15] (well that was the estimate in November, and the final number will very likely be higher than 128 billion dollar) and probably $50-75B in 2015. It won’t just the oil price which will hurt Russia, but the increased perceived risk of doing business in the country. The Russian Ruble had crashed earlier this winter but seems to have stabilized now at an USD/RUB exchange rate of 50-55 and an EUR/RUB rate of 60-65 (see next image), and the sudden depreciation of the Ruble might very well have been caused by several high net worth individuals and company’s withdrawing their cash from the country by converting the Russian Rubles into other currencies (probably the Swiss Franc as there was a sudden boost in the CHF index when the Ruble was crashing).
The EUR/RUB exchange rate. Source [16]
The pieces of the puzzle are starting to fall into place and this Frontdeal-Aterra deal could definitely be seen as just one of the pieces of evidence of an ongoing capital flight out of Russia whereby a rich Russian oligarch (who’s an economist!) prefers to keep his hard assets abroad in Cyprus instead of at a subsidiary of a Moscow-registered investment fund. The capital flight will be centering around investing in 'safer' currencies and in hard assets with gold still being one of the most appealing asset classes.
Source [17]
Just to give you an idea how horrible the crash of the Ruble was; in just 7 weeks time (!!), the gold price in Ruble increased by a stunning 70%. That's right, 70%. Who owns gold, safeguards his purchasing power whilst the average Russian citizen will have to adapt its consumption rate to 'the new normal'.
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