Personal thoughts/ideas – debt situationOne more post and then I promise to slow down again.
1) IMO, how pathetic would management have to be to mess up this small $15.5M US payment, due in May/June?
$15.5M US payment required - $7.4 US cash at May 11th - $2.0 US likely from increase in gold price in 2nd half of Q2 = $6.1M shortfall
The $6.1M shortfall should easily be covered off from Q2 profits. We know that Q1 generated at least $15M in FREE funds/cash ($1M net profit + $14M depreciation – a non-cash item that gets reported against net profits), never mind the $19M in foreign exchange loss (a non-operating charge, which may not be that high in subsequent quarters, especially with the US dollar falling back down closer to expected levels effective in Q2). We also know that general productivity and efficiency of our mines is getting better with each passing quarter.
Failing all of that, how incompetent does this management have to be if after knowing about this payment all this time, they can’t even put together a simple debt deal or line of credit for a measly $6.1M US to make up the difference? Like I said before, the 3 month benchmark LIBOR rate has come down from 4.8% to .6% – the credit market has totally loosened up for gold producers, especially ones with HRG’s size (goodness, the gold price is pushing $1,000 US and HRG is a 300,000 ounce producer).
2) If Severstal demands their $27M US debt payment - I listened in on a Royal Gold conference call late last year to hear them discuss their view on Taparko. The Royal Gold CEO said that their Taparko debt (now only $27M US) has priority rights over any other lender for the Taparko collateral package (Detour shares, Bissa property and Taparko operation). Of course, I don’t have in-depth knowledge of the debt covenant details or of the legalities relating to this situation. However, if Royal Gold’s statement is true, isn’t Severstal left with somewhat limited options. Help me out here as I apply basic logic. If Severstal demands payment of their $27M US from HRG then aren’t their options somewhat limited without access to the collateral? I don’t understand what they can force HRG to do if HRG doesn’t immediately have the money and if Royal Gold hasn’t made the same demand. I mean, basic logic would dictate that Severstal cannot touch Detour, Bissa and Taparko because Royal Gold holds first priority claim (I assume that is the main reason Royal Gold continues to refuse forbearance).
I suppose Severstal can always try to strike a deal with the so-called independent HRG committee to convert their $27M US into HRG common (voting) shares. However, wouldn’t that (share) transaction be too large thus requiring a vote from minority stakeholders? If so, it would naturally be shot down easily during the voting process, right? I suppose Severstal could try to cut a deal to have only some of the debt converted to shares. Off the top of my head, I don’t recall what the number would be to avoid a minority shareholder voting process.
3) If Royal Gold demands their $27M US debt payment – Royal Gold has refused to provide forbearance every step of the way, thus preventing us from eliminating the entire Taparko debt situation, in my view. The Royal Gold debt is only $27M US, yet I conservatively value the Taparko collateral package at $152M US. If Royal Gold calls for payment of their $27M US then isn’t that the best case scenario for us, given what I have just stated? Again, I don’t have the details of the debt covenants and I don’t know the detailed legalities of the situation, but I will continue to use basic logic. Again, help me out here. If Royal Gold initiates payment demand, doesn’t that automatically put the collateral package (Detour, Bissa and Taparko operation) in play???? Although Royal Gold will maintain their first priority collection rights on the proceeds of sale (or the properties themselves if they cannot be sold), don’t they automatically lose their (NO TOUCH) stranglehold rights to the properties/assets? Doesn’t their move automatically open the door for us to quickly sell the Detour shares to settle their debt within a reasonable demand period???? And then, perform a subsequent retirement on the $27M US owed to Severstal?
4) If HRG aggressively forces the Taparko situation to the courts – the West African assets and debts are held in a separate legal company (although it’s a subsidiary of HRG). Again, I don’t know the legalities of how this all works. However, (assuming that HRG management all of a sudden, miraculously, decides to proactively force the issue for shareholders) is it possible for HRG to initiate a controlled bankruptcy for the West African subsidiary only?? I mean, no other parts of the company gets pushed into bankruptcy (so hopefully it wouldn’t inpact debt covenants for the Russian mines) – just the West African legal subsidiary that houses everything related to Taparko. The goal here is to have the court appoint someone to help us deal with the situation. The count appointed person should then force Royal Gold to loosen their stranglehold on the collateral assets in order for us to sell them to pay off the debts. The court will control the assets and funds to ensure the lenders are paid first, and also negotiate payment arrangements between all the relevant parties. There would be no difference operationally, as it would be business as usual. Again, we should walk away from this in fine shape as our Taparko debt is only $54M US while I value our Taparko collateral assets at greater than $152M US (and increasing). It might take as much as 4 – 6 months to bring our West African subsidiary out of bankruptcy, but we will emerge in great shape in West African, and debt free. Our shares will certainly be valued way more than $.18 at that stage. Again, I just don’t know if it’s possible to push only a legal subsidiary into bankruptcy without pulling the entire company into it, but it makes sense logically due to West Africa being a separate legal entity (even financial reporting is completely separate).
5) Personally I’m not too concerned with a TSX listing, if Severstal wants to threaten us with that. We will just end up on the TSX Venture. I mean, we are way past shame. Also, we have already lost many of the institutional investors that are required to invest in TSX companies only (and not the venture). We lost a lot of them when we got booted from the TSX Indexes last year.
Note: Again, these are my thoughts, opinions and ideas for discussion purposes only. I cannot provide legal or investment advice to anyone. These are all complex and sensitive subject matters. One should perform their on DD before making their own decisions on such matters.