Article by John Helmer in Moscow
posted on Dec 30, 2009 07:59PM
Building Shareholder Wealth Through Gold Production Growth
By John Helmer in Moscow
According to Edgar Rice Burroughs, Nemone, Queen of the City of Gold, was one of those notorious Hollywood types – too beautiful, not enough brains, and a perverse streak that enjoyed making people suffer. Tarzan gets help from his pet lion, and together they despatch the worst Nemone sends after them. Nemone is a sore loser, and seeing no purpose in life without getting her own way, she kills herself.
Alexei Mordashov is smarter than Nemone, but he is a sore loser nonetheless. After confronting the combined forces of the minority shareholders in High River Gold (ticker HRG:CN) for six months, and losing, he’s despatched in the space of a single week the chief executive of the company, the head of investor relations, and a member of the HRG board.
Brief notices on the company website disclose that Dan Hrushewsky, Vice President, Investor Relations, resigned on September 15 “to pursue other business interests.” On September 21, the chief executive Nikolai Zelenskiy resigned from his post, and also the HRG board. As he went out the door, HRG announced it “wishes to thank Mr Zelenskiy for his service.” Two days later, Stephen Polakoff resigned “due to the demands of his other business interests.” Polakoff, an American attorney working in Moscow, was appointed to the board by Mordashov a year ago. He too was thanked for “his service as director.”
Hrushewsky exited without published thanks, as if Mordashov holds him to blame for the failure of the minority share buyback strategy, which came to nothing last month. Although HRG shareholders believe Hrushewsky does not deserve to be made the scapegoat of a strategy that wasn’t his idea, he declined to respond to questions.
Mordashov is the third-ranked Russian steelmaker, who has been struggling for a year with the lossmaking consequences of a two-year splurge on North American steelmills and Russian goldmines. HRG was acquired late in 2008, after a bidding match with the mining arm of the Alfa group, owned by Russian rivals Mikhail Fridman and Alexei Kuzmichev.
According to a company statement, “on August 1, 2008, High River announced a strategic investment transaction with an indirect wholly-owned subsidiary of the Alfa Group Consortium (“Alfa”). Due to a subsequent deterioration in market conditions the transaction was cancelled.” Between February and September of 2008, the share price plummeted from C$3.50 to 46 Canadian cents. Accumulated debt was $189 million. The failure of the Alfa plan meant that $286 million in promised financing had vanished.
In November, Mordashov’s Severstal announced it had bought a 43% stake in HRG for US$45 million; this added to the 9.9% stake it had already acquired. With a 53% majority, Mordashov sent in Zelenskiy to restructure the company’s operations and financial position, repaying some debts, and securing improved terms from banks, which include Nomos (Moscow), Unicredit, and Standard Bank (London). After a spate of bad news, and more movement out the company door, Severstal announced in May that would buy out the minority shareholders for 18 Canadian cents per share. On June 9, the offer was raised to 22 cents. On July 28, the offer went up to 30 cents. The deadline for acceptances was also extended to August 10.
The upshot was that 28.9 million shares were tendered, or 4.5% of the issue. That gave Mordashov a total stake of 61.7%. The resisting minorities had hung on to 39.3%. Mordashov had failed in his bid to delist the company or take it company private. Over the month that followed, the HRG share price jumped to 46 cents, up 46%, before settling basck on very little trading volume.
A report by Chris Charlwood, one of the organizers of the Canadian resistance effort, went out on the investor internet last week, complimenting Severstal on “doing a good job of turning this company around.” After a precedent-setting display of the power of the internet to wage share-price warfare more effectively than conventional investor relations methods, the HRG minorities should look to the rising gold price and improving liquidity for the company to produce a takeoff in HRG’s market value, Charlwood advises.
“If HRG continues to pay down its debt at the same rate as it did in Q2 2009 (C$30M from cash flow), then HRG could be nearly debt free in June 2010. If Severstal converts its debt of US$27M, then the company could be nearly debt free in March 2010. These timelines would be lengthened by any new capital investments and shortened by any sale of equity. In addition, HRG still owns approximately $45M in 3rd party public company investments and Severstal owns $.64 warrants of HRG that if exercised will provide $26M cash to the company.”
“HRG now has a very strong investor base setting the stage for the next move up in the stock price with any good news. Minority investors are hopeful that the recent management shakeup at HRG is the beginning of a new strategy to maximizing shareholder value. HRG could restructure some of its debt to lower servicing costs and raise a bit of capital to make final repairs to its mills. If it succeeds in doing both over the next few months, then the future looks even brighter for the company.”
And here’s the parting wave: “High River Gold’s (HRG) peer group of West African & Russian mid-tier public gold companies is trading at an average of approx. 15.2 times Q2 Operating Cash flow on an annualized basis. If HRG were trading at this average multiple, the share price would be C$2.33.”
The Queen of the City of Gold is dead — long live the King!