Polyus Gold, Russia’s largest gold miner, is poised to complete a reverse takeover of its subsidiary KazakhGold (KZG) to gain a listing in London, having put to bed a bitter conflict that prevented the deal going through last year.

The combined company will be the largest gold miner on the London market by production and will consider applying for a premium listing, allowing it to seek inclusion in the key FTSE indices, Polyus said late last week. But the firm's strategy is not without its risks.

The deal, which was first proposed in 2010 but has been delayed by a feud with the original owners of KazakhGold and opposition from the Kazakh government, is worth $13.1bn and is due to be completed by July 25. Each Polyus share will be equal to 17.14 KazakhGold GDRs, while each Polyus ADR will equate to 8.57 GDRs of KazakhGold.

Current shareholders of Polyus Gold will hold 96.4 per cent of the share capital in the joint company, which is to be called Polyus Gold International. Russian tycoons Mikhail Prokhorov and Suleiman Kerimov together control 73 per cent of Polyus and have already undertaken to tender their shares in the deal.

If the merger goes through, it would result in a change of domicile for the Russian company, meaning the firm would be dropped from the MSCI Russia index. Polyus’ management is targeting inclusion in a FTSE index, but analysts at Troika Dialog said this is a risky strategy:

…We fear that Polyus Gold will lose its precious MSCI membership. Its membership in FTSE remains a dubious initiative, as there remains little appetite for Russian risk among UK-focused investors. This point is perfectly showcased by the uproar caused by the ENRC BoD reshuffle. We also suspect that Polyus Gold could use its UK-domiciled equity for cross-border M&A, which could hardly be value accretive.

Polyus bought a majority stake in KazakhGold from Kazakhstan’s well-connected Assaubayev family for $269m in 2009, but less than a year later the Russian firm sought legal action against the Kazakhs for inflating gold production figures, violating the contract and embezzling company funds. The legal action was later dropped and Polyus agreed a $509m deal to sell KazakhGold's production assets to the Assaubayevs.

This deal was delayed in March when the Assaubayevs failed to find sufficient funds to finance the transaction and was renegotiated under revised terms in April.

Polyus will certainly be glad to see the end to the feud but HSBC analysts said in a recent note it could have a lasting effect on the company’s public image as it seeks to merge with a global major to create the second largest gold miner globally.

We believe a merger with a major international player would work well in Polyus’ favor…

…a union with Polyus is much harder to justify by most of the “qualified” players, however. Large, undeveloped assets like Natalka going forward with doubts from the market, the controversial reversal of the KazakhGold acquisition, and overall perceived Russian risk would dissuade most players, in our view, from participating in a merger. While disclosure and regularity of market updates have improved, we believe the company is still far behind its international peer group in terms of access to data and information.

Polyus will host a conference call at 14.30pm GMT on Monday where it will describe the company's plans in further detail.

To join the conference call dial:
United States: 1- (800) 230-1092
International: 1 - (612) 288-0340
Conference ID #: 208234

See also:
Polyus Gold targets world No. 2 spot - FT Tilt
Russia’s top gold miner eyes global merger and London listing - FT Tilt
Russia’s Polyus Gold closer (perhaps) to KazakhGold sale - FT Tilt
Russia’s Polyus held against its will in Kazakhstan - FT Tilt