Archangel fails to meet escrow deadline (October 23, 2008)

First the good news: A Russian foreign investment review commission chaired by former president Vladimir Putin has granted its conditional consent for Archangel Diamond (AAD-V, ADMOF-O) to acquire a 49.99% equity stake in the Verkhotina diamond project, about 60 km south of the Arctic Circle.

Now the bad news: The approval failed to come in time to meet the Canadian junior’s escrow deadline for a US$172.4 million private placement of subscription receipts. Archangel was unable to get an extension on the deadline so it must return each subscription-receipt holders’ escrowed funds plus any accrued interest.

The Russian Federal Anti-Monopoly Service or FAS notified Archangel that it had given the company its conditional approval for the proposed equity stake. But the approval, nor the specific conditions associated with it, did not come in time to meet the company’s Oct. 17 escrow deadline.

The news sent Archangel’s share price falling 20 to 30 per share at the closing bell on Oct. 20.

At press-time, the share price had climbed back to 25 per share.

Over the last year, the company has traded at between 21 and $2 per share.

“We’re meeting with our financial advisors to determine what other options are available for financing,” Jocelyn Fraser, a media spokeswoman for the company told The Northern Miner. “We have a standby credit facility of US$115 million, a loan that was offered by De Beers, so in the short-term we can draw on that.”

DeBeers owns a 58% stake in Archangel.

Archangel’s share price has veered all over the place since April when it reached a high of $2 per share after winning a decade-long legal dispute over ownership of the Verkhotina diamond exploration project in northwestern Russia.

Under the deal, Archangel would acquire a 49.99% stake in AGD, the holder of the Verkhotina licence, and Lukoil would retain the remaining interest. Archangel would have to contribute an initial cash payment of US$100 million to Lukoil and two deferred cash payments of US$75 million upon a decision to build a mine and an additional US$50 million at the start of commercial production.

At the time Archangel arranged its private placement in June, the stock was trading at between $1.30 and $1.40 per share. News on Oct. 10, however, that the company had received approval on taking an equity stake in the project conditional on undisclosed terms involving local diamond processing, drove the stock down to 20 a share.

Worries that the Russian government intends to attach high-priced diamond cutting conditions to the approval is likely responsible for the recent plunge in Archangel’s share price.

The Grib pipe on the Verkhotina licence contains an indicated resource of about 39.5 million tonnes of kimberlite down to 618 metres at an average grade of 127 carats per hundred tonnes. The inferred mineral resource of 62.7 million tonnes of kimberlite down to 774 metres has an average grade of 39 carats per hundred tonnes. About 65% of the resource is classified as indicated.

Beneath the estimated indicated and inferred resources, however, an additional potential mineral deposit has been estimated to contain 6.8 to 12.9 million carats to a depth of 1,050 metres.