The Story of Marubeni-Kazatomprom Deal. Part 5.

We are continuing the story of how, in 2006-2007, two foreign investors arrived in the Kazakh uranium extraction industry – Japan’s Marubeni Corporation and offshore Swinton Investment and Finance S.A. registered in the British Virgin Islands.

We have described the events of 2006-2007 in our previous publications that can be found below:

And now let us jump forward to July 2009.

By that time, Mukhtar Dzhakishev had been fired from the post of NAK Kazatomprom’s President and arrested by the NSC officials. And his deputies – vice presidents of the national company Dmitry Parfenov, Askar Kasabekov and Malkhaz Tsotsoria – had been subjected to involuntary isolation in safehouses as witnesses.

You will recall that our previous article titled «The Story of Marubeni/Kazatomprom Deal. Part 4» ends as follows (quoting):

“Now, Mukhtar Dzhakishev’s arrest and the appointment of Vladimir Shkolnik the President of NAK Kazatomprom resulted in Marubeni Corporation managers finding themselves completely dumbfounded. For, the workplace problems that they, on the whole, understood and took for granted overlapped with the other challenges that they found incomprehensible.

For instance, they had to communicate with the new NAK Kazatomprom representatives who, to their great surprise, knew nothing about the scheme employed for the sale of the Kyzylkum LLP and Baiken LLP shares. Also, they had absolutely no idea who was behind the Swinton Investment and Finance S.A. and Glendale International Investment LTD offshore companies.

And then, the Japanese investors back pedaled investing their own funds in the uranium extraction projects as well as crediting these projects via Japan’s bank. For, as a result of Japanese investors’ actions, the successful completion of the investment projects was called into question which means their own fate was called into question, too”.

Now then, the topic of funding the projects involving foreign investors, namely Marubeni Corporation and Swinton Investment and Finance S.A., has been discussed at length in Kazakhstan, at the NAK Kazatomprom headquarters and in Japan as well.

The texts of the minutes of these meetings contain hundreds and hundreds of pages.

We are not to relate all these texts (let alone comment on them) since it will be of no interest to the general reader. So, we will start with the meeting of July 7, 2009.

It began ten minutes past ten a.m. in the conference hall of the Kazatomprom headquarters and ended at eleven. Since the translation of the minutes has not been conducted officially and the scan we have in our possession is of a poor quality, we apologize for possible mistakes (not ours) in the names and the surnames of the participants. We present all the titles and the names the way they are written in the document.

As far as we understood, the national company (hereinafter KAP) was represented by “Yashin, Dinara and one other person” and Marubeni Corporation (hereinafter MC) was represented by  «Фуджи, Такадама, Игорь, Шима”.

Yashin is most likely Yashin Sergey Alekseyevich who, at that moment, was holding the post of deputy Chairman of the KAP Management Board.

Below we present the complete minutes of the meeting since this text shows a number of interesting things and is very informative as well (text in bold by 

Фуджи: Thank for your time. As for your request, today we will explain why the Japanese investors do not have the obligation related to providing additional funding.

Yashin: Do you have the contract with you?

Фуджи:  We have the contract and we will explain based on the contract. However, in view of the confidentiality agreement, we have not discussed this issue with any other party except KAP. I am not sure if we can discuss this issue right now in the presence of the members of Kyzylkum/Baiken-U (the members of the KK/BU management boards were present at the start of the meeting).

Yashin: Then it would be better of only KAP was present (at this point, the members of KK and BU leave the meeting).

Фуджи: Let me explain. The structure of the investment is shown on this diagram. As you know, we own only 50% of the Energy Asia Limited shares. The rest is owned by Glendale. We have been informed that this company is controlled by KAP and this was the basis for holding the negotiations.

Yashin: What kind of companies are Swinton and Glendale? What do you know about them, even unofficially?

Фуджи: We know nothing about them. Even Tsotsoria has explained nothing. Continuing my thought, Marubeni purchased 100% of the Energy Asia Holding Limited in the beginning but now they are owned by a consortium of Japanese companies. Marubeni owned 30%, Toshiba 22.5%, Chubu Electric 10%, Tohoku 5%, Kyushu 2.5% (Yashin writes down the figures).

Фуджи: Now I will explain the contracts. There are three very important contracts – the Guarantee Agreement, the Shareholders’ Agreement and the Sale/Purchase Agreement. According to the Guarantee Agreement, the guarantee is granted in relation to the Shareholders’ Agreement and the Sale/Purchase Agreement. The Sale/Purchase Agreement is a contract between Marubeni and Swinton according to which Marubeni has purchased 20% of the Kyzylkum shares and 47.5% of the Baiken shares having paid US$540 mln via a single payment.

Yashin: Who is this Michael Wolf signing on behalf of Swinton?

Фуджи: He only came to sign the contract and we do not know who he is.

Фуджи:  Then there is the Shareholders’ Agreement in which it is clearly stated that the Japanese side (ЕАХЛ) has no obligations regarding the funding if EAL receives a funding request. 

Yashin: Does this mean that Glendale is responsible for providing additional funding?

Фуджи: Exactly. However, Glendale is a dummy company with no financial resources. KAP has guaranteed the terms of the Shareholders’ Agreement that stipulates that Glendale is obligated to provide additional funding and KAP has provided a guarantee in the amount of approximately US$400 mln in accordance with [the Guarantee Agreement]. I will explain the nuances and why the said agreement was granted.

Yashin: Yes, please.

Фуджи: In order for us to purchase 20% of Kyzylkum and 47.5% Baiken-U, KAP demanded that we pay US$540 mln in cash via a single payment. At that time, the Kharassan mine was an undeveloped desert (if not a greet field) and the terms of the payment were [not very adequate] considering the uranium chare price rate at the time.  

The figure of US$540 mln was determined based on the business-plans stipulating that 5000 ton would be produced in 2014. Also, the preliminary terms for the business-plans, the work parameters and the prices for the materials were optimistic. Kyzylkym wad supposed to start selling uranium in 2007 and Baiken-U in 2008. The scheme of the investments that I have just outlined was approved.

Yashin: Approving the scheme was the condition demanded by KAP…

Фуджи: Yes, it was. We asked KAP to change it since the structure of the scheme was too complicated for the Japanese tax system and it was difficult for us to accept it considering that the identity of our partner was unknown, but KAP refused.  

The reason why we, after all, decided to accept the KAP terms was the Guarantee Agreement that provided that the Japanese (shareholders) were under no obligation to provide additional funding. In other words, the fact that we were not obligated to provide additional funding served as the condition upon which we agreed to pay US$540 mln and it is all related. Other Japanese companies are involved [in the projects] with the same kind of understanding. This is the whole truth about the deal between the Japanese [and the Kazakh parties].

Yashin (taken aback): Well, that’s new. I honestly don’t know what to say. However, Kyzylkum and Baiken-U are important projects. It is also important to maintain relationships with the Japanese companies. On the other hand, we must think about how to meet our obligations. It’s doubtful that we have this kind of structure with EAL. 

We will handle the matter as far as we are concerned but it will take time. Even if we do have these problems, we still have to join forces and think how to obtain the funds.

Фуджи: The projects are important to us, too. We will cooperate in order for them to be successful. However, we need you to fulfill your obligations.

Yashin: We are considering making changes to the agreements. Since we believe that the projects are important. However, we need the Japanese parties to help us as far as it is possible. We hope that you will cooperate with us via these two ways. (1) By concluding agreements with Japanese banks to provide funding like it was done before, and (2) by selling uranium in advance with the KAP warranty.

Фуджи: We will be glad to cooperate and give you our complete support. As for point (2), the Japanese power companies had been considering such a possibility prior to the incident but now they are not.

Yashin: KAP must secure a uranium deposit. (1) it is harder than (2) and I believe that [selling uranium] must be simpler.

Фуджи: I do not understand why are you saying this?

Yashin: We will draw a document and show you. 

Фуджи: The reason why the Japanese companies stopped considering the possibility [to sell uranium in advance] is because the situation was no longer stable which follows from the fact that the director responsible for financial matters had not yet been appointed and the Kyzylkum/Baiken-U investigations are still going on. 

In order for the Japanese to cooperate, we must first see that KAP has corrected the system and the Kazakh government supports our uranium share and that it can confirm that everything has gone back to normal.

Yashin: We do not know when the investigations are going to be over but they are going to go on for some time. I suspect that the situation will not return to the pre-incident state 100% and the influence [of the incident] will continue to exist to some extent. However, I believe that [the Japanese parties] will be convinced of our ability to show that KAP does have uranium and some of it has been saved.

I do not want this to have any influence on the Japanese-Kazakh relationship. It is an emergency situation which KAP has never encountered in the past and we will consider the option [to keep uranium] while risking to sustain losses because we value our relationship with Japan.

Yashin: We are taking the necessary steps in relation to Kyzylkum and Baiken-U. We are considering the option of supporting them via purchasing from them uranium in advance in order to provide resources for urgent needs. It should cover the needs for the next 3-4 months. We need to use option (1) or (2). We are also providing technical support and the situation is starting to improve. 

Yashin: Uranium One has refused to provide any [additional] funding. They have also laid out difficult conditions for revising the schedule of the loan payments [closing JBIC deals]. I will be glad to visit Japan and explain points (1) and (2) in order to ask for support [of the Japanese shareholders] if necessary.   

Фуджи: Finally, I would like to clarify one thing – I have heard that [you] could provide 1.5 bln Kazakh tenge without the С-К approval if you will get the funding?  

Yashin: That is correct.

Фуджи: In this case, we can make an arrangement with JBIC to obtain their approval of the funding provision, is it what KAP wants from us?

Yashin: It would be wonderful”.

To sum up everything above: the text shows that the representatives of Marubeni Corporation knew absolutely nothing about who was standing behind their business-partners and were forced to cooperate with them acting under the pressure of the former Kazatomprom top-executives among whom Malkhaz Tsotsoria had played quite an important part.

To be continued


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