Serebro-Dukat Wants Out of Mill Contract

Facing court and police action over alleged damage to an ore-processing mill, Serebro-Dukat, a subsidiary of Canadian firm Pan American Silver, says it wants the lease agreement for the mill to be declared invalid.

St. Petersburg firm Polimetall alleges staff of Serebro-Dukat stole and misappropriated materials worth about $10 million from the mill in the Far East region of Magadan. Polimetall has won a court case over the allegations, and its complaints this week led to a criminal case being launched against Serebro-Dukat. Annulling Serebro-Dukat's lease agreement might release the firm from the claims Polimetall is making.

Alleged damage to the mill and equipment has already been the subject of a court hearing in the Magadan region arbitration court, which ruled in July that Serebro-Dukat must pay 18 million rubles ($646,000) to a Polimetall subsidiary for liabilities connected with Serebro-Dukat's lease of the mill from March to December last year.

Serebro-Dukat's attorney, Sergei Yerokhov, said this week in a telephone interview that canceling Serebro-Dukat's lease agreement for the mill would be a preferable end to a grueling legal saga for his company.

Serebro-Dukat obtained a 20-year license for developing a silver mine located in the Far East region of Magadan in 1997. However, the foreign-owned company has been stonewalled since GK Dukat, a Polimetall subsidiary, won a controversial bankruptcy auction for the mill in November 1999.

Serebro-Dukat's Yerokhov said Tuesday in a telephone interview that Polimetall's complaints about the mill were aimed at removing Serebro-Dukat from the mine.

Polimetall spokesman Igor Makurin confirmed this by saying that the only solution Polimetall saw to the feud was for Pan American Silver to quit the country.

Kochukov said such a scenario was unlikely. Pan American Silver has invested about $35.8 million in the mine project, he said. The firm doesn't want to waste the money spent on the license, and a proposed plan building a new mill had been described as feasible by their bankers, he said.

The Canadian firm had bid the minimum $8.3 million at the auction for the mill. Pan American has since insisted that a lease agreement it signed with the mill's original owner, Dukatsky GOK, a bankrupt silver-mining company, should have allowed it to buy the mill at any time it chose for $9 million minus the sum of lease payments already made.

But after the mill went for $12 million to Polimetall, Serebro-Dukat was unable to win a court case over this claim.

Makurin said in a telephone interview that investment by the Canadians in the mill had been minimal. Rather than building a new factory as they had intended, the Canadians had brought in secondhand equipment, he said.

When a special court commission entered the premises in June to document the handing back of the leased property, it was revealed that some of it had been stolen or damaged, Makurin said.

Serebro-Dukat officials refused to sign the commission's findings, and this eventually led to the criminal investigation, he said.