De Beers has agreed to sell its controlling stake in Archangel Diamond Corporation (ADC) to a North American investment fund which aims to intensify the litigation campaign in the US and Europe against LUKoil and Archangelskgeoldobycha (AGD), the two Russian companies charged with raiding the Grib diamond pipe.



At a board session on Friday, a bid by De Beers to call in a $10 million loan, and put ADC into liquidation, was topped by an offer to repay the loan, ADC’s remaining creditors, and conserve the company and its minority shareholders. Had the liquidation plan gone ahead, the latter would have lost everything.



ADC has yet to make an announcement, identifying who has made the offer which the board has accepted, or the terms.



It is believed the offer comes from a lawyer-managed US fund, which is well-known as an investor in high-value litigations, with a strong record of winning large settlements for the cases it has taken on.



At this point, the fund appears to be paying about $14 million to clear ADC’s debts, and committing itself to a litigation budget of another $10 million, in order to pursue claims against the Russians of $4.8 billion; this sum includes $30 million in ADC’s direct investment in the exploration and testing of the Grib diamond pipe; $400 million in lost profits according to ADC’s 40% stake in the halted diamond mining venture; $800 million in profits lost from other diamond pipes within the Verkhotina-area exploration and mining license; and $3.6 billion in triple punitive damages under the Colorado state racketeering statute.



The most recent De Beers valuation of the Grib diamond pipe, based on early 2008 diamond prices, puts the project’s mineable value between $8 and $10 billion.



De Beers told PolishedPrices: “ADC has reported its failure to reach agreement with Firebird Master Global Fund and Cencan on appropriate financing terms. Subsequently, Cencan has requested repayment of all amounts outstanding to it. This follows the decision by the minority shareholders, and other investors, late last year to withdraw funding to finance the transaction with LUKoil in regard to the Verkhotina diamond project, as certain conditions precedent had not been fulfilled.”



De Beers owns 58% of ADC through the wholly owned subsidiary Cencan S.A., which has outstanding to ADC a loan of about $9.95 million. That comprises loan principal of $8.8 million, plus fees and interest owing to De Beers. They were reported to be $1.3 million at September 30 last. The deadline for the loan was fixed at April 30, 2009. On May 12, ADC announced that Cencan had demanded repayment “within three business days.”



The company also conceded that had “exhausted all financing options and does not expect to be able to raise the funds to repay Cencan by this deadline.”



Asked a fortnight later, on May 29, what the status was of De Beers’s bid to put ADC in liquidation, Lynette Gould, De Beers’ senior spokesperson, said: “Cencan has given careful consideration to its shareholding in ADC, and has put forward a proposal to ADC's board whereby Cencan would provide limited interim funding for a restructuring of ADC that will address, in part, ADC's inability to settle with its creditors, the largest of which is Cencan. This proposal requires approval from the appropriate authorities and would be subject to Cencan’s conditions. Through this process, if successful, ADC will become 100% owned by Cencan.”

This stops short of clarifying De Beers’s intention, which sources familiar with ADC’s position say amounted to a plan to liquidate the company, and abandon its legal claims to its share in the Russian diamond project.



ADC’s financial reports indicate that during the first nine months of 2008, it spent $3.9 million on legal fees. But much of this was spent, not on litigating the claims against LUKoil and AGD, but on supporting the joint venture agreement, which

LUKoil and De Beers signed in April of 2008. That provided the Grib diamond pipe project with the go-ahead on the basis that De Beers would pay LUKoil $225 million in three installments; and the Russian government would approve the 49% foreign stake in the venture, as required by the special restrictions on foreign ownership of Russian diamond mines in the Russian statutes. When the latter authorization failed to materialize, the joint venture collapsed in January of this year.



Although minority shareholders have been seeking regulator response in Toronto and Denver to complaints of faulty disclosure by ADC, they have been taken by surprise by the De Beers move to bankrupt ADC through calling in the Cencan loan. This plan drew a fierce protest from a long-time independent board member and minority shareholder, Clive Hartz, a West Australian entrepreneur.



Hartz resigned in protest, and ADC issued a brief announcement of his exit on May 20. Hartz has been incommunicado in a remote part of Western Australia, and unable to respond to follow-up questions.



As Hartz went out the door, ADC issued a statement hinting at the bankruptcy to come. “Archangel Diamond Corporation announces that it has approved the commencement of discussions with Cencan S.A., ADC’s majority shareholder, concerning a proposal from Cencan to provide financing support to ADC by way of a re-structuring of ADC under the provisions of the Bankruptcy and Insolvency Act (the “BIA”). Pursuant to such proposal, ADC would appoint a trustee to assist with its submissions to regulators and its discussions with Cencan and any other party that may make an alternative financing proposal.”



The statement also appeared to leave the door through which Hartz had disappeared slightly ajar for a new bidder to enter. According to ADC’s statement, the company “is continuing to seek alternative proposals from any other interested parties. The Corporation confirms that there are no insolvency proceedings against it as of the date of the news release…”



This statement makes it appear that ADC and De Beers had already been negotiating to sell the Cencan debt and allow a share buy-in by a new investor. But if that were so, there was no word on what offers De Beers had considered before May 20; and if it had rejected them, what its reasons might have been. The impression was that as of May 20, no one had come in with any offer to warrant De Beers to pull back its bankruptcy scheme.



Nine days later, on May 29, an offer did materialize that was too good for ADC for De Beers to refuse. If the due diligence confirms the picture of ADC’s prospects which the litigation fund has already formed, then within days, ADC will have a new owner – and a new attack strategy, and a new budget.