Valuation/JournalistThanks to Glorieux and Production05 for posting some comparable production and market cap numbers. I recently did my own analysis (below) and sent it to National Post and a foreign journalist. The more press any of you can get on showing HRG's true near term value, the better. We need to remember that the investor group on this Stockhouse Board only make up less than 6% of non-Severstal shares.Therefore, the only chance we have of fighting Severstal's bid is getting the message out to the other minority shareholders (not members of this Board) via the press. We need press showing HRG's true near term value so that other minority don't tender to a low offer. Also, if any of you are members of other investment Boards, please spread the word that way
Sent to Journalist
"I see that you do quite detailed research into cash flows and values for your articles. Here are some numbers regarding HRG’s near term potential. HRG, in its most recent quarter, had $29M of cashflow. The $22M loss on foreign exchange plus the $8M amortization is what brought net profit down to $1M. If Berezitovy and Burkino Faso mines were running at capacity instead of (faulty equipment related) mill rates of 65% and 68% respectively, then there would have been an additional C$10.87M in cashflow. I arrive at this by extrapolating the existing oz produced at the 2 mines up to full capacity. The mines would have produced an extra 10,500 oz at each facility for a total of 21,000 oz per quarter. I got to $10.87M extra cashflow using the $926 sale price/oz less $430/oz and $386/oz costs respectively.
If foreign exchange losses are reduced through hedging and mills are fixed, HRG could produce up to C$32M in PROFIT/quarter (plus or minus depending on hedging success). At that rate, the total debt of C$175M would be paid out in 18 months. I have been told that some other operating gold mine companies can trade up to 7-10 times PROFIT. This would put the value of HRG at $896M - $1.28B ($1.49 - $2.13/share). HRG used to trade in the $2s and $3s.The multiple of cashflow figures would need more research as I do not have any comparables at this time.
I would also encourage more research into the debt default issue that HRG (Severstal) is using to justify a low buyout bid. Some improvements (outlined above) in cashflow for Q2 should be able to handle the debt payments due. Much of the debt payments due are either to be made to Severstal or guaranteed to third parties by Severstal (as per 2008 yr end Canadian SEDAR filings). Therefore, Severstal has it in its power to renegotiate most of this debt if need be – hence the conflict of interest by the Board to enhance shareholder value. The Severstal debt (purchased from Standard Bank in March) pmts are not due until 2010. HRG owns C$38M of Detour Gold shares which they could sell to retire the secured Royal Gold debt of US$27M. Royal Gold debt not in default for lack of payment, but instead for clauses regarding minimum 90% mill run rates. The only debt that may be in payment default is Nomos bank debt. I would expect HRG Board could negotiate extensions with Nomos for increased fees and or interest payments – especially in light of significant financial improvement of recent quarter.
In terms of Severstal strategy, it perplexes me that with Severstal’s other financial problems, they would not make an effort to promote the HRG story with re-negotiated debt terms, a small private placement and Outlook on the huge potential of HRG. I believe with a few announcements they could take this stock to $1 and increase the value of their investment by 5 times. NovaGold (NG.TO) was successful in refinancing recently and stock went up 9 times. Severstal could use the public HRG vehicle to raise capital in Canada and keep it a pure play gold stock (gold doing very well) rather than taking HRG private and blending results in with poor performing steel business. Also, the HRG vehicle could be used to merge their other gold operations at some point."