Archangel Diamond on Russia What Tim Haddon Has to Say The following is an interview with Archangel Diamond'sChief Operating Officer Timothy Haddon that appeared in InfoMine publicationon February 18, 2000. The interview was conducted by Chris Thompson, Editorof InfoMine's News and Investment Sections. Reprinted with permission. Thank you to Chris Thompson and InfoMine. InfoMine can be found at www.infomine.com. Tim Haddon is a member of the Board of Directors of the Russian-AmericanChamber of Commerce®. Q: I have been following your company's progress for a couple ofyears and have been intrigued by your company's work in Russia - most especiallythe current status and future prospects for the Verkhotina diamond prospect.I understand that the Grib diamond pipe ranks as one of the ten top undevelopedpipes in the world today. I would like to offer you the opportunity of sharingwith our readers some of the company's aims and objectives for the New Year. A: You're correct. The Grib pipe is considered as being one ofthe world's top ten undeveloped pipes. Our prime aim this year is the sameas it was last year, that is to place the mining license into a Russianstock company that's jointly owned by ourselves and our partners. Currently,the license is 100% in our partner's name. As part of our original agreementthe license was supposed to be placed into a jointly owned company. We thinkthat we are very close to achieving this. Once achieved we'll commence afull feasibility study on the project. Q: How would you rate the company's level of knowledge with regardsto doing business in Russia? A: Excellent. We have a very good minority Russian partner, IBME,who's Russian and speaks fluent Russian with an office in Moscow. We havea staff of 20 people who have 20 years experience in Russia, doing businessin Russia. Q: Let's move on now and discuss your company's management. Has managementhad any past successes in the industry? A: Yes, I think so. I was personally involved in the initial publicoffering of Amax Gold back in 1987. I put the company together and floatedit. I was also involved in the initial start up of First Dynasty Mines backin '95. I've spent 30 years in the industry. My CFO, Gary, was at one timePresident and CEO of Atlas. Q: What's management's current and diluted stake in Archangel? A: We currently own or have the rights to own about 3 millionshares. Which represent about 7% of the company's outstanding shares, ona fully diluted basis. Undiluted it works out to be about 5%. Q: How does the company currently promote itself? How does the companyplan to promote itself in the future? A: We have a seasoned IR professional working for us, namely JohnHaigh. He's had 40 years of experience in the industry and has one-on-onecontact with all of our major shareholders, institutional and individual.We also have a web site that we keep current. Recently, while we've beenhaving the dispute relating to the mining license, I haven't been on roadto promote the company. I've felt very strongly that we need to secure thelicense and place it in a position where we have absolute and firm controlover it. When that's achieved I'll start doing road shows and promotingthe company's asset base. Q: I understand that the company has had a bit of difficulty in securingownership of the Verkhotina mining and exploration license. For the benefitof our readers, what's the ownership history of the property? A: In 1993 our company entered into an agreement with a Russianstate owned exploration company called AGD. It was agreed that we wouldprovide funding and they would contribute technical expertise and hold thelicense. In 1993 foreigners weren't allowed to hold licenses. We jointlytended for a number of properties in the Archangel region and won two tenders,one being the Verkhotina license. The other one was called Windy Ridge.From '93 to '96 we explored both properties and dropped Windy Ridge as itdidn't host anything of prospective interest. In '96 we found a wonderfulpipe, a green field discovery, which turned into the Grib pipe. As part of our original 1993 agreement, when the Russian laws changed,our partner was obliged to transfer the license to a jointly owned publicstock company, the reason being that a public stock company has the bestlegally protected rights in Russia. Unfortunately, in '95 our partner wasprivatized, as were a number of other Russian companies, and the peoplethat took over AGD weren't what I would consider reputable businessmen.They haven't honored the contract and that's been the crux of our problem. We ceased funding the project in July '98 and went to Stockholm to askfor arbitration on our '93 contract. Arbitration rights in Stockholm werepart of the original contract. Subsequently, we reached an agreement inJuly last year whereby our partner indicated that it would transfer thelicense as per our original agreement. As of January of this year they haven'tdone this and we have re-instituted Stockholm arbitration proceedings. We're confident that we'll get it done. We're having constructive discussionswith AGD. It's just taking a long time and until that license is transferredwe won't be funding. So, that's the current state. Q: Thanks Tim. What seems to be the problem there? A: Quite simply, in Russia the playing field isn't level for foreignbusinessmen and Russian businessmen. Russian businessmen don't tend to obeyor even pay heed to the law. To give you an example, Russia has some stringentenvironmental, labor and tax laws, which foreigners have to abide by butRussians seem to ignore, or have the right to ignore. It doesn't make anysense. I think these guys thought that they could get 100% of the assetby playing hardball with us. I think that we, our company, have done a verygood job of protecting our rights. Q: Once these property tenure issues have been resolved how do youview the project as contributing to the company's goals and what other strategies,if any, do you see Archangel employing to realize its goals? Do you seeArchangel as being a one-mine company? A: At this time, yes. Let me explain why. Right now, the in situvalue of this mine is estimated at over $5 billion. That's an immense resourcefor a small cap Junior Canadian company, and we have 40% of it. So, todilute our management time, effort and cash on trying to grow the companyin other areas of the diamond business doesn't make sense. On the Verkhotinalicense we have some of the best prospective exploration ground in the world,as the pipes don't tend to occur by themselves but occur in clusters. So,our strategy is to secure the license and to go full steam ahead with afeasibility study on the Grib pipe as well as explore for other pipes onour property. We think that action will create significant shareholder value. Q: I understand that De Beers has been involved in evaluating theGrib pipe, from an economic point of view. What are these economics andhow do they compare with current commercial operations of a similar scale? A: Yes, our major shareholder is TASK, a private company ownedby the Oppenheimer family. It's for this reason that we've been able toaccess the significant diamond experience of De Beers. They did the technicaldue diligence before TASK came in and have subsequently done an update onall data up to the end of 1999. So, we have what we consider to be a significantamount of data. Now, over to answering the second part of your questionabout how the property compares against others. To give you an example thatyour readers would relate to, the Dia Met property, (I'm talking about DiaMet's share and Archangel's share of their particular properties) we'vegot about 39 million tonnes of kimberlite whilst Dia Met has about 19 milliontonnes. The average value of our diamonds is about $80.00 per carat, theirsis about $84.00. They have a higher grade. The gross in situ equity valueof their deposit is about $2.0 billion while ours is about $2.5 billion,to the companies themselves. Their market cap is about $700 million whileours is about $32 million. These figures illustrate the discount being appliedto our company because of the license dispute issue, and the Russian discount.We're very comparable with Dia Met. Q: Has De Beers shown any interest in the project from an operationalor joint venture standpoint? A: Not really, in the sense that they don't have any ownership.I think they would love to operate it if they could. But it's currentlyowned by TASK and until we get our license transferred to our jointly ownedstock company that issue hasn't been raised. Q: We've seen some recent changes in Russian policy relating to theexporting of Platinum Group Metals and Base Metals. Have these changes affectedRussian diamond production and supply and if so what affect will these changeshave on the economics of the project? I'm a little intrigued to see if thepolitical changes have or will have an affect on Russian diamond supply. A: Firstly, let's address the issue of political change. We viewthe appointment of Putin as acting President, very favorably. We think thathe's serious about trying to level the playing field and is trying to bringparity for foreign investors and local Russian businessmen, by which heis going to make the judicial system work in a much more even-handed manner.This is essential if they are going to attract foreign investment. One ofthe main platforms that's currently being exposed by Putin is the absoluteneed to have foreign investment to start to raise the living standard andget the economy of Russia going again. Secondly, diamonds are currently produced by Alrosa, which is effectivelya Russian monopoly and produce exclusively out of Siberia. They have anextremely high level of knowledge of the diamond industry and are very goodoperators. Our area in the NW District is a brand new area that hasn't beenmined yet. The current policy of the Russian government has been to allowcompanies to mine provided that they are at least 50% Russian owned. Wemeet that criteria, so we don't see any problems in that sense. We thinkthat the diamond mining in Russia is going to expand significantly. Theycurrently produce over 20% of the world's diamonds and that's likely toincrease due to the development of the Archangel region's diamonds. Q: We've recently seen the introduction of Canadian diamonds ontothe world market accompanied by a certain amount of supply side change fordiamonds. What's Archangel's feel for the future of the international diamondindustry and its major players? A: I think we'll see some fundamental changes. I think you'reaware that De Beers is currently doing an internal evaluation of itselfand the industry. They've recognized that there are significant new playerscoming into the game, particularly Canada with BHP operating at Ekati, andwith Rio Tinto about to get started, if they can get their permit for theDiavik project. You also have the Australians producing and Angola and SierraLeon will produce, if they become politically stable. So, I think you'llsee a more competitive stance by all parties in the diamond business. Lowcost producers will win at the end of the day. One of the nice things aboutour pipe is that it's likely to be a low cost producer. Q: There's no doubt that current uncertainties surrounding Archangel'sRussian operations have depressed the company's share price. Have you gotany comments about the company's current market capitalization? A: I go back to the comparison I've made with Dia Met. Archangelis a company that has an asset value in the ground with an equal carat value.Their market cap is $700 million and ours is $32 million. There's a hugediscount being applied due to our licensing problems. So I think we're significantlyundervalued. Q: The market has been made increasingly aware of Pan American Silver'spredicament in Russia. Have you anything to add? A: I'll go back to the point I made earlier. You're going to havepeople doing crazy things and unlawful activities until the Russian governmentmakes Russian businessmen and foreign investors operate on the same playingfield. I don't know whether the Pan American situation is unlawful or notbut it's symptomatic of a number of negative experiences that Western businessmenhave had in Russia. That's why I'm encouraged with the new administration. When Putin iselected, and I assume he will be elected, I think you are going to see somepretty active government intervention in trying to bring a good sense ofbusiness practice to Russia. It's not going to happen quickly, but it certainlywill happen. Putin has said that himself. Q: A final question, to clarify where Archangel stands with regardsto negotiations. Have you got any idea when we might see some positive newsfrom Archangel with regards to a resolution to the tenure problems? A: I've given up trying to give people dates. All I can tell youis that we're working diligently to protect our investor's rights and increaseshareholder value. The first thing we have to do is get the license. I couldhave it in the next 3 weeks; it could be 3 months. But we are working onall fronts constructively, with our partners to get it done as quickly aspossible. The Russian-American Chamber of Commerce® is a nonprofit,nonpartisan organization acting to promote American business interests inthe Russian marketplace. The Russian-American Chamber of Commerce® Last Updated: May 30, 2000. Copyright the Russian-American Chamber of Commerce® 1995-2000. All rightsreserved.