Mysterious Azerbaijan miner strikes gold in state treasury

Mysterious Azerbaijan miner strikes gold in state treasury
RFE/RL and the Panama Papers have linked Aimroc to President Ilham Aliyev's daughters.
By bne IntelliNews May 30, 2016

Azerbaijan might be best known for its black gold, but the country's gold industry has also attracted significant interest in the last decade, as prices for the commodity rose and surveys revealed higher and higher reserves in the country's northern and western regions.

But the growth of the neophyte sector, which only began producing in 2009, has been hampered by corruption and nepotism, as recent events surrounding the second largest gold miner in the country show.

Azerbaijan's President Ilham Aliyev decided on May 25 that the state should buy the Aimroc mining company, which multiple investigations have indicated belongs to his own family.

The mysterious decision came after Aimroc failed to develop a mine estimated to hold 40 tonnes of gold in Chovdar, western Azerbaijan, wasting more than $230mn in the process, before disappearing altogether in 2014.

Rushing for gold

Azerbaijan's golden breakthrough came in 1997, when its then-leader Heydar Aliyev, the current president's late father, replicated the production sharing agreements (PSA) it had employed in the oil and gas sector for gold mines.

The beneficiary of the first such agreement was Delaware-based RV Investments, which later set up a joint venture with the Azerbaijani government called Anglo Asian Mining. Owned by Iranian-American citizen Reza Vaziri, Anglo Asian Mining took 12 years to produce its first ounce of gold, as it worked to raise financing by listing on the London Stock Exchange, and applied for and received environmental, mining and other permits.

Fast-forward a decade to 2006, and the rapid increase in gold prices had apparently piqued others' interest in Azerbaijani gold. A series of ostensibly British companies – Londex Resources, Willy & Meyris, Fargate Mining Corporation and Globex International - which were owned by offshores incorporated in Panama and the Seychelles, were granted six mining licenses under the name Aimroc in December 2006.

Baku was much more generous towards Aimroc than it had been with Anglo Asian Mining, granting the former a 70% share over the mines and retaining a minority 30% one. In comparison, Anglo Asian Mining was only granted a minority 49% share in the mines it developed, with the government retaining the commanding stake.

No official tender had been organised for the mining projects awarded to Aimroc, and there was little public debate about it – with the exception of a parliamentary session in which some MPs asked the government to scrap the deal because it contravened national interests, but they were overruled.

It was not until 2012, the year when Aimroc began production at its first mine, that an investigation by Radio Free Europe/ Radio Liberty (RFE/RL) shed light on the secrecy surrounding the company, its negotiations with the Azerbaijani government and the favourable conditions it had received. RFE's findings, later corroborated by the Panama Papers document leak, disentangled the company's complicated ownership structure and traced Aimroc's ownership back to offshore companies controlled by first daughters Leyla and Arzu.

The first gold mine produced some two tonnes of gold ore between December 2012 and April 2014. Meanwhile the company invested upwards of $230mn in developing the Chovdar mine in western Azerbaijan, before it closed abruptly, leaving workers out of a job and the mining project hanging.

The company vanished without a trace: its website was taken down, telephones were disconnected, management disappeared, and its offices and mine were cordoned off.

An interview with Carl Caumartin, Aimroc's CEO between 2008 and 2011, by the Organised Crime and Corruption Reporting Project (OCCRP) provides some insights into what happened. Caumartin, who left the company in 2011 after disagreeing with the owners over the direction in which the mine was going, emphasised that "they [the owners] were obviously not mining people".

The seasoned mining executive described Aimroc as a "mining subsidiary part of a large private holding" on his Linkedin profile - the first lady of Azerbaijan and her family own a large business conglomerate called Pasha Holding, which does not list any mining operations on its website.

He put the Aimroc flop down to inexperience, greed and haste. “There is a certain naivety [...] there that they can be very successful in retail, financial, and in other areas – transportation, hotels [sectors in which Pasha Holding is active] – and they assume that just because they made a fortune in other sectors, going into mining can be just as easy,” Caumartin told OCCRP, adding that Aimroc’s owners lacked focus and were scrambling to acquire several properties instead of developing the ones already in their portfolio when he took over the management.

Making profit in mining takes time, focus and investment, which is why most mining companies, such as Anglo Asian Mining, are listed on capital markets so that they can tap investors interested in long-term returns.

Instead of a public listing, which would require a high degree of transparency, Aimroc and its owners chose to borrow from a bank. Majority shareholder Globex International alone borrowed some $146mn by end-2012, according to OCCRP, part of which came from "massive loans" from Xalq and Pasha banks, owned by the first family.

Despite producing some $30mn worth of gold by 2014, the company closed down shop in April 2014 as it could no longer finance its operations. The decision was going to be temporary, Aimroc's former CEO Arda Arkun wrote to staff in an email on June 27, 2014, until the company recovered "access to funding". But secretly, the wheels had been put in motion to sell Aimroc.

No trace

Two years of volatile gold prices later, Aimroc's search for new owners appears to have been unsuccessful. This scenario is the only plausible explanation for why the president asked the government to bail out the failed mining company.

The decree asks the country's central bank and economy and finance ministries to prepare proposals for financing Aimroc's takeover by state-owned Azerigold company by August. The amount that Baku will pay for the miner has not been disclosed.

To add insult to injury, Azerbaijan has been struggling to meet its budget obligations this year, as it is grappling with the effects of an economic recession brought about by low oil and gas prices. Overall investment in the economy declined by an astounding 31% y/y to AZN4.3bn in January-April.

Baku is in no position to make dubious investments from public funds at the moment, particularly one that appears designed to reimburse the president's relatives for their mismanaged investment in a gold mine, which was financed using money that likely also came from the state's coffers and politically connected banks.

In addition to the Azerbaijani state, the losers in the Aimroc fiasco are the 300-odd workers at the mine, who have staged two protests and marches in front of the parliament, government and presidential buildings in Baku this year to ask for their salaries. The miners, most of whom come from an impoverished village in the vicinity of the mine, claim that they have not been paid for two years.

No one in Baku seems to have answers for them about Aimroc's whereabouts and how to recover their salaries.

"We can't do anything, we can only advise you to go to court," MPs reportedly told protesters in January.