Minority Shareholders Win Through In The Battle Over The Future Shape Of High River Gold
By John Helmer in Moscow
minesite.com
After confronting the combined forces of the minority shareholders in High River Gold (HRG:CN) for six months, and losing, Alexei Mordashov has dispatched 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’s website disclose that Dan Hrushewsky, Vice President, Investor Relations, resigned on September 15th “to pursue other business interests.” On September 21st, chief executive Nikolai Zelenskiy resigned from his post. As he went out the door, HRG announced it wished “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 two months Mordashov took his controlling stake. He too was thanked for “his service as director.”
Hrushewsky, though, exited without published thanks, as if Mordashov was holding him to blame for the failure of the minority share buyback strategy, which came to nothing last month. Although many HRG shareholders believe Hrushewsky does not deserve to be made the scapegoat of a strategy that wasn’t his idea, he nonetheless declined to respond to questions.
Mordashov’s Severstal, the third-ranked Russian steelmaker, has been struggling for a year with the loss-making 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.
Back in August 2008 High River announced a strategic tie-up with a subsidiary of Alfa. But due to a subsequent deterioration in market conditions, the transaction was cancelled. Against that background, it’s worth noting that between February and September of 2008, HRG’s share price plummeted from C$3.50 to C46 cents. Accumulated debt was $189 million. And the failure of the Alfa plan meant that US$286 million in promised financing had vanished.
So, in some ways it was a relief when, in November, Mordashov’s Severstal announced it had bought a 43 per cent stake in HRG for US$45 million. Severstal had already previously acquired a 9.9 per cent stake. With this 53 per cent majority, Mordashov sent in Zelenskiy to restructure the company's operations and financial position. This involved repaying some debts, and securing improved terms from banks, which include Nomos (Moscow), Unicredit, and Standard Bank (London).
Then, after a spate of bad news, Severstal announced in May that would buy out the minority shareholders for C18 cents per share. On 9th June, the offer was raised to C22 cents. On 28th July, the offer went up to C30 cents. The deadline for acceptances was also extended to 10th August.
The upshot of all that was that 28.9 million shares were tendered, amounting to 4.5 per cent of the issue. That gave Mordashov a total stake of 61.7 per cent. The resisting minorities had hung on to 39.3 per cent. So, Mordashov had failed in his bid to delist the company or take the company private. Over the month that followed, the HRG share price jumped by 46 per cent to C46 cents, before settling back, on very little trading volume.
A report by Chris Charlwood, one of the organizers of the Canadian resistance effort, went out on the internet last week. It complimented Severstal on “doing a good job of turning this company around”. After this precedent-setting display of the power of the internet to wage share-price warfare, the HRG minorities should look to the rising gold price and improving liquidity for the company to deliver a substantial re-rating, reckons Charlwood.
“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… 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.” |
