High River Gold Mines Ltd HRIVF

Complaint

[ccharlwood]

	Reply Attention of:	Grant Weaver
	Direct Phone:	604.641.4827
	E-mail:	[e-mail]
	Our File:	04-2056
	Date:	April 24, 2009

 

 

British Columbia Securities Commission 701 West Georgia Street P.O. Box 10142 Pacific Centre Vancouver, B.C. V7Y 1L2 Attention: Brenda Leong, Executive Director [e-mail]	Ontario Securities Commission 20 Queen Street West, Suite 1903 Toronto, Ontario M5H 3S8 Attention: Peggy Dowdall-Logie, Executive Director [e-mail]
Toronto Stock Exchange 130 King Street West P.O. Box 450 Toronto, Ontario M5X 1J2 Attention: Eleanor Fritz, Director of Compliance and Disclosure [e-mail]	High River Gold Mines Ltd. 155 University Avenue, Suite 1700 Toronto, Ontario M5H 3B7 Attention: Nikolay Zelensky, President & CEO Attention: Alexey Khudyakov, Chairman of the Board of Directors [e-mail]

 

Dear Sirs/Mesdames:

 

Re:	High River Gold Mines Ltd. and Subsidiaries (“High River”)

 

We are the lawyers for a concerned shareholder of High River.  Our client’s concern arises from three main issues:

Ø      a highly dilutive share issuance resulting in a change of control in November 2008 completed without shareholder approval and without required financial information being disclosed to the market;

Ø      lack of up to date financial information; and

Ø      the governance issues related to the fact that OAO Severstal (“Severstal”) is now the controlling shareholder, the main creditor of the parent company High River and has a majority of its nominees on the board.

These issues will be discussed in turn along with their relevant facts which are gathered from the public disclosure documents of High River and the specific shareholder concerns in regard to those issues.

 

Highly Dilutive Share Issuance

We note the following facts:

Ø      On August 1, 2008 High River had announced a strategic investment transaction with an indirect wholly-owned subsidiary of the Alfa Group Consortium.  High River was to issue up to 160 million common shares at $1.79 per share by means of a non-brokered private placement for proceeds of up to approximately $286.4 million.  On August 26, 2008, High River announced that the transaction was terminated. 

Ø      On November 20, 2008, High River announced that it was carrying out a non-brokered private placement of 282,288,515 common shares and 40,674,540 warrants of the Corporation, each Warrant entitling the holder thereof to acquire one Common Share at an exercise price of CDN $0.64 until September 29, 2013.  Lybica Holding B.V., an affiliate of ZAO Severstal Resources, the mining division of Severstal purchased the Common Shares for a price of approximately CDN $.020 per Common Share, the Warrants being issued as partial consideration for the purchase price of the Common Shares, for total aggregate gross proceeds to High River of CDN $56,367,000 (“Private Placement”).

Ø      Severstal owned 9.9% of the outstanding Common Shares and after completion of the Private Placement, Severstal held approximately 53.0% of the outstanding Common Shares.

Ø      High River relied upon exemptions from the security holder approval requirements of the TSX in Subsection 604(e) of the TSX Company Manual, available in cases of financial hardship to override the usual shareholder approval requirements which would apply to the Private Placement.  From what we have been able to determine from the public disclosure documents, High River did not comply with the requirement in Subsection 604(e) that it issue a press release at least five business days in advance of the closing of the transaction disclosing the material terms of the transaction.  Instead High River issued its press release the day the transaction was entered into.

The foregoing facts raise the following concerns:

The investment transaction that was subsequently terminated with Alfa Group would have resulted in proceeds of up to approximately $286.4 million at a share price of $1.79.  It is regrettable that a mere three months later, the Board of Directors accepted the Private Placement with proceeds of CDN $56.4 million and a share price of CDN $0.20 and which resulted in a change of control.  It is noteworthy that a previous senior officer of Alfa Bank has now been appointed Chairman of the Board of High River. 

Our client is concerned that while High River was able to rely on the TSX exemption subsection 604(e), it did not fully comply with the requirements under that subsection by issuing a pre-cleared press release five business days before the closing of the transaction.  This raises serious concerns about the proper treatment of High River’s shareholders and the application of the TSX policies and its role in providing proper oversight.  Without the advanced notice of the transaction the shareholders were unable to bring to the attention of the regulators any concerns they may have had.  What was the financial imperative which required the transaction to be completed without the 5 day press release requirement?  Furthermore, it is unclear what specific information was disclosed to the TSX evidencing financial hardship and thus allowing High River to rely upon the exemption in Subsection 604(e).

Our client is also concerned that Severstal did not fully comply with its disclosure obligations under National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.  Its November 20, 2009 press release failed to disclose, among other things, its purpose in effecting the Private Placement including the future intention of Severstal and any joint actors to acquire ownership of, or control over, additional High River securities.  While this information was subsequently included in an early warning report filed on November 25, 2009, this is another example of failure to provide the High River shareholders with timely disclosure regarding this transaction mandated by regulatory policy.

 

Lack of Up-to-Date Financial Information

The following facts gathered from public disclosure documents are indicative of concerns regarding lack of up-to-date financial information:

Ø      On November 16, 2008 High River announced that it would be filing late its interim financial statements for the nine month period ended September 30, 2008 due to concerns raised by the board of directors regarding the reliability of financial information that High River received from its 85% owned subsidiary, OJSC Buryatzoloto.  On December 18, 2008 High River reported those financial results.

Ø      On March 31, 2009 High River announced that it would be filing late its audited financial statements, management’s discussion and analysis, annual information form and related CEO and CFO certifications for the year ended December 31, 2008 (the “Annual Filings”) due to concerns regarding production numbers received by High River from its 99% owned subsidiary, Berezitovy Rudnik LLC (“Berezitovy”).  As of today’s date, High River has yet to file its Annual Filings or its Q4, 2008 filings.

Ø      The Q3 financials under the section 2008 Gold Production Guidance indicate that Berezitovy makes up approximately 18.8% of High River’s gold production.  Prior to the declaration of Commercial Production on October 1, 2008, Berezitovy produced approximately 28,000 attributable gold ounces in 2008.  As stated in the Q3 financials, total gold production at Berezitovy for 2008 was expected to total approximately 40,000 attributable gold ounces. 

It is troubling that the highly dilutive Private Placement was approved in November by the Board and the TSX at a time when High River was not in a position to make the required financial disclosures, specifically the Q3 financial statements, to its public shareholders and as far as we know to the TSX.  Severstal clearly had the benefit of having enough information to make the decision about investing at a time when the public shareholders were being denied their right to regular financial disclosures.  It raises a question  whether Severstal purchased the shares with knowledge of undisclosed material information. 

At the present time, the December 31, 2008 Q4 and annual statements are not yet published due to concerns about information related to a different subsidiary than the subsidiary that delayed the Q3 financial statements being filed.  Since we believe that financial information related to these subsidiaries was disclosed in the past, a suspicion is raised that this lack of disclosure is being made for strategic reasons.  Furthermore, the stated reason the Q4 financials and the Annual filings are late is a concern over Berezitovy’s production numbers.  As disclosed in the Q3 financial statements, there was approximately 28,000 ounces produced up to the end of the third quarter from Berezitovy, with guidance given for production for the year being approximately 40,000 ounces.  This means the missing information is for the fourth quarter which is a small fraction of High River’s total gold production.  It is disturbing that the year end results are withheld due to the absence of a relatively small portion of the total production figures.

 

Governance Issues

Ø      The closing of the Private Placement was conditional on four Severstal affiliated individuals being appointed to the Board of Directors of High River, including one individual appointed as Chief Executive Officer.

Ø      On November 21, 2008 the TSX imposed a 210 day period for High River to demonstrate to the TSX that it meets the continued listing requirements.

Ø      On March 30, 2009 High River announced that the ability of High River to continue as a going concern is dependent on, among other things, the results of ongoing discussions with the Company’s lenders, ongoing accommodations from the Company’s trade creditors and obtaining additional financing.

Ø      On April 20, 2009 High River announced that Standard Bank assigned the credit agreement dated July 6, 2007 between Standard Bank, High River, High River Gold Mines (West Africa) Ltd. and Jilbey Burkina SARL, and assigned the credit agreement dated as of April 19, 2007 between Standard Bank, Societe des Mines de Taparko SA (known as Somita) and High River to Severstal as of April 17, 2009.  Both of these credit agreements are currently in default and continue to be in default following this assignment.  The aggregate amount outstanding under these two credit agreements is approximately US$27 million.

The fact that material transactions, namely the Private Placement and the purchase of the Standard Bank debt, have been completed at a time when the required financial information has not been disclosed to the market place and perhaps not to the regulators in a timely way has resulted in Severstal having a controlling position as a shareholder and a dominant position as a creditor, all to the possible disadvantage of the minority shareholders since there is no way to verify that Severstal paid proper value for its investment.

Severstal has also been placed in a dominant position on High River’s Board of Directors.  It is disconcerting that the board of High River was substantially reconfigured as a result of the Private Placement without shareholder approval.  The Ontario Securities Commission in a significant decision released on January 23, 2009 regarding the Lundin Mining Corporation noted that the right of shareholders to vote on the composition of the board of directors is a fundamental governance right.  That fundamental governance right was denied to the minority shareholders of High River.

It is clear that High River is in a vulnerable state due to its debt position which is now controlled by Severstal.  Nevertheless this corporate group has a number of producing gold mines, which should provide value; yet, adequate financial information has not been provided to the market such that the market can properly assess the value.  There is a serious risk that if a transaction is proposed to the shareholders, it will not be at fair value and may be coersive.  Furthermore, through Severstal’s position as a creditor, Severstal stands to potentially acquire assets of High River through a realization which poses a high risk that the shareholders will not receive fair value.

Our client believes that the situation with the Company bears further review by the regulators and close scrutiny of its ongoing operations and any proposed transactions.  Our client requests that you review the file and provide your comments as soon as possible.    While we cannot be sure of the next steps which Severstal has in mind for High River, we expect the Toronto Stock Exchange and the Securities Commission to be vigilant in this matter to ensure that the legitimate interests of the minority shareholders are protected and the majority shareholder not be permitted to advance abusive transactions.  Given the lack of disclosure and the fact that a majority of the directors of High River are nominees of the majority shareholder, there is an opportunity for abuse which must be watched carefully.  Should any further transaction be proposed by Severstal to the shareholders, we expect that you will require that proper financial information be provided to the market and, in the case of any related party transactions that valuation requirements will be adhered to as provided for in the relevant regulations and policies. 

Thank you for your time and consideration in this matter.  I look forward to hearing from you at the earliest possible date. 

 

 

Yours truly,

 

Bull, Housser & Tupper LLP

 

 

 

Grant Weaver

 

GKW/evb/1900475.04