High River Gold (HRG.TO) updateI have sent the communication below out to the HRG database. Much of the content was contributed by some of shareholders that post here. Thanks for reporting back from the AGM.
July 14, 2010 All numbers approximate.
HRG AGM
Following the recent AGM on June 30th, certain shareholders reported back (in writing) some positive information conveyed by Management. Management does not expect any further dilutive transactions in the near term and it expects higher gold production in 2010 over 2009. The debt covenant issues with Royal Gold should be resolved in the next 30 days which would free up the [$74M] third party stock HRG holds in other companies [mostly in Detour Gold]. The production tests have been met, but a clause states there can be no legal action. Currently, there is a dispute over a supplier payment for faulty equipment. In addition, it is reported that management stated that drilling is underway at Irokinda and Zun-Holba and they are hopeful to extend the mine lives 5 years or more. The Bissa feasibility study may be ready in Q3 and is expected to be positive. If so, then Management hopes to start building Bissa early next year. Also, Management is reported to have said that HRG’s other 35 permits in Burkina Faso are very prospective and better than what they have in Russia. The CEOacknowledged visibility problems in the marketplace for HRG, but hopes the market will revalue the company properly based on increased profitability, resource profile, and cash flow. Overall, those shareholders attending the AGM said Management was very direct and seemed to have a positive outlook.
Q2 Prediction
HRG produced $40M in cash flow in Q4 2009. I am using Q4 as a comparison instead of Q1 because in Q1 Berezitovy experienced mill and crusher problems resulting in cash flow to drop to $31M. It is likely that we will be back to Q4 production levels in Q2. Since the average gold price is up $97 since Q4, this should generate an extra $7-8m in revenues. Also, costs are likely down from Q4 - as they were in Q1. Therefore, I suggest HRG may produce $45-50M in cash flow from operations in Q2.
HRG Valuation
In Q1, HRG contributed 63% of Severstal Gold’s total production. Severstal representatives have been quoted in the press stating that Severstal Gold should be valued similarly to OAO Polymetal - which trades at a market cap of $5.3B. Therefore, using this valuation, HRG should be trading at a market cap of $3.3B or $4.18/share – 5.3 times the current $.80 price. At the recent AGM, Igor Klimanov, CEO of HRG, was reported as saying that HRG’s share price rose 500% in 2009 and he hopes to see it rise another 500% in 2010. This statement seems consistent with the Polymetal statement as a 500% increase from the current price gets us near the same levels. If the annualized cash flow of $180M + is achieved in Q2, then HRG is currently trading at 3.6 times cash flow. This is dramatically lower than its group of peers. In a market cap vs production comparison of Semafo (SMF.TO) and HRG, Semafo’s market cap is $1.83B on 68K oz of production in Q2 compared to HRG’s market cap of $639M on production of 77k oz in Q1 (likely back to 85-90k in Q2).
Severstal Gold IPO
The press reports on a possible Severstal Gold IPO are becoming more frequent with the latest reports being that they are in discussion with investment banks for the IPO to be done later this year. In another sign, Severstal recently moved its 36% stake in Crew Gold (CRU.TO) into Severstal Gold. If the reports are true, then I believe Severstal will need to start promoting HRG this fall to get its values in line with IPO valuations. Several shareholders, including myself, have suggested to HRG management to seek out research coverage from credible banks to help in the effort. I see the next upward pressure on the HRG share price to start mid – August (after Q2 is announced) followed by more upward pressure in the fall. Currently, there are only approx. 800,000 shares for sale between $.80 and $1.50.
Troika Transaction
As expected, Severstal purchased the 150M Troika shares for $.75/share that were issued last year in a private placement. Currently, there are 799M shares outstanding with Severstal owning 550M or 69% and minority owning 249M or 31%. If Severstal were to exercise its 40M warrants (at $.64), their ownership position would jump to 70.3% and bring the total outstanding shares to 839M. Under securities policies and laws, a majority of the minority shareholder vote would be required in any minority squeeze out transaction. Accordingly, Severstal would not be able to vote its share in connection with such a transaction (including the shares purchased from Troika).
Prognoz Silver asset
The values stated above are entirely related to gold production and resources and do not include any value for Prognoz and its silver assets. Investors are looking forward to the Prognoz assets contributing value to HRG in future. In fact, it would make sense one day to spin off Prognoz by issuing 1 for 1 shares to HRG shareholders and to run it as a stand-alone silver company. The Prognoz silver deposit , in the remote Yakutia area, has 102M oz indicated and 103M oz inferred at 704g/t (as per the 43-101 report prepared by Micon International in June 2008). The conceptual resource potential of 16 additional mineralized zones which have been explored (but not included in the resource estimate) shows a range of 161-369M oz with grades of 775g/t. I believe this size ranks Prognoz in the top 10 silver properties in the world with the highest grades. Recently, HRG put out news that its subsidiary, Buryatzoloto, forced Prognoz into bankruptcy via the Moscow courts. On the surface, it looks like HRG shareholders may benefit from this bankruptcy by getting an increased share of Prognoz or the $18M owed from the 50% Prognoz partner (for exploration expenses). However, as revealed by the CEO at the AGM, there is also a small chance that HRG loses its 50% stake in Prognoz through such a bankruptcy. The question is why risk losing such a valuable asset to collect on a relatively small amount – especially if Buryatzoloto has a judgement in its favour to collect the $18M. The HRG Board of Directors will need to exercise its fiduciary duty to make sure that this property is not lost to a third party in bankruptcy proceedings or auction. Related to this topic, Bill Lewis, the author of the 43-101 report from Micon in June 2008, stated to me by telephone on July 6th that they completed an updated Prognoz report in July of 2009. Unless I am mistaken, I do not believe this latest report has been released to the public and may be considered ‘material’ information for the Russian bankruptcy court and for HRG shareholders. I have asked HRG’s CEO, (via e-mail on July 7) why this report has not been released yet, but have not heard back.
Prognoz report June 2008
https://www.hrg.ca/i/pdf/TechRpt_Micon_Prognoz_080627.pdf
New HRG presentation from AGM
https://www.hrg.ca/i/pdf/Presentation.pdf
Chris Charlwood
Retail Investor
Rainerc7@gmail.com
604-718-2668
604-718-2638 f