Guy Norton in London -

Just a month before the planned creation of a new gold giant on the London Stock Exchange (LSE) in August, the authorities in Kazakhstan have thrown a spanner in the works with the announcement of a fraud probe into the activities of the former management of KazakhGold and the cancellation of a planned share sale.

The news came just weeks before LSE-listed KazakhGold was supposed to finalize a reverse takeover of its Russian parent company Polyus Gold in mid-August that would have created a $10.8bn group, the largest pure gold miner on the London bourse.

The back-story to the move is seen as dissatisfaction with the price at which Polyus Gold acquired its stake, following the Kazakh government's decision to waive its pre-emptive right to buy up shares. In December 2008, Polyus Gold originally valued a 50.1% stake in KazakhGold at $746m, but by the time the terms were finally agreed in August 2009 the global economic crisis had taken its toll on the value of the transaction to the extent the stake was pitched at just $269m.

In a statement, Kazakhstan's Ministry of Industry and New Technologies (Mint) retracted its approval of a share transfer in 2009 and ruled out the sale of additional shares that would have facilitated the reverse takeover whereby KazakhGold with a market cap of around $300m would have taken over Polyus Gold, which is valued at least 30 times higher. "Due to newly discovered information regarding violations of the law on mineral resources during the purchase of the stake in KazakhGold by the Russian company Polyus Gold, the competent authority has cancelled the previously taken decisions to allow the sale of KazakhGold shares," the ministry said.

The Kazakh government's Agency for Competition later announced that it would also revoke its approval of Polyus Gold's acquisition of the majority stake in KazakhGold.

Commenting on the government's moves, Mikhail Stiskin, metals and mining analyst at Russian investment bank Troika Dialog, notes that the details regarding Polyus Gold and KazakhGold are becoming increasingly contradictory and perplexing. "The relationship between the Russian company and the Kazakh authorities appears to have been damaged, possibly by the legal suit brought by Polyus Gold against the Assaubayev family, former KazakhGold shareholders. The escalating conflict could, regrettably, have a detrimental effect on the franchises of both companies," says Stiskin.

Polyus Gold, owned by billionaires Mikhail Prokhorov and Suleiman Kerimov, launched a $450m court action in June against Gold Lion Holdings, KazakhGold's former controlling shareholder controlled by the Assaubayev family, who have strongly refuted allegations that the former management misappropriated funds or misstated results.

Although the government action has the potential to derail the merger, Evgeny Ivanov, KazakhGold's chief executive officer and general director of Polyus Gold, initially applauded news of the fraud probe: "We welcome the readiness of the relevant Kazakhstan authorities and ministries to investigate the activities of former management. We believe that prompt resolution of these matters... will enhance Kazakhstan's status as an attractive country for foreign investment."

Despite the short-term uncertainties, Ivanov remains confident that the planned merger will eventually secure the necessary regulatory approval and that the merged company, which will be renamed Polyus Gold International and be incorporated in the UK, will join the FTSE 100 index of leading companies on the London bourse once all listing requirements have been met. Ivanov says that securing a London listing will help Polyus attract a wider following of investors than is possible through its global depositary receipts issuance and should also ease its task of raising around $1bn to fund further production growth. Amid speculation that some of KazakhGold's operating licenses might be revoked in the wake of the fraud probe, Ivanov insists that Polyus Gold would vigorously defend is interests in court.

Reasserting control

In recent years, the Kazakh authorities have proved increasingly keen to assert their economic interests over the country's vast natural resource wealth so as to boost revenues to support government spending. From August onwards, for example, the country will tax oil exports at $20 per tonne, according to state-run newspaper Kazakhstanskaya Pravda. Kazakhstan hopes to raise KZT60bn tenge ($410m) from the export levy this year and roughly KZT177bn in 2011. The extra tax revenue will help to mitigate the country's growing budget deficit, which the government expects to hit KZT803.7bn, or 4.6% of GDP this year, up from KZT492.7bn in 2009. For their part, oil and gas producers operating in Kazakhstan have insisted their contracts' stability clauses exempt them from tax changes, including the introduction of any new export levy.

As well as increasing the tax burden on oil producers, the Kazakh government has also sought to increase its direct interest in major natural resource projects, such as when it took a stake in 2008 in Kashagan, the world's fifth-largest oilfield, citing cost overruns and production delays.

In July, the Oil and Gas Ministry revoked the license on the development of the Shagyrly-Shomyshty gas deposit, one of the largest in the country, from US company Caspian Gas over unpaid debts. And Max Petroleum informed that the government had decided to terminate the company's subsoil use licence for the Astrakhanskiy block in West Kazakhstan after it failed to comply with work obligations.

Meanwhile, the financial police in Kazakhstan has announced a criminal investigation into activities at the Tengiz oilfield, where Chevron is a major stakeholder, alleging that the owners produced KZT212bn more in oil than they were entitled to. The Tengiz shareholders say the charges are unjustified.

Both the new export levy and the Tengiz crime probe are seen as a precursor to Kazakhstan looking to muscle in on the super-giant Karachaganak oil and natural gasfield, currently owned by a consortium of foreign shareholders, including BG Group and Italy's Eni with 32.5% each, alongside Chevron (20%) and Russia's Lukoil (15%).