HRG Q3
Just sent out to database.
November 19, 2010 HRG Q3 2010 results
Obviously Q3 was a disappointment for HRG shareholders as we were expecting north of $50M in cash flow. The main contributors to the drop in profit and cash flow were the $13M reduction in revenue and a $5M swing in foreign exchange. The revenue drop was mostly due to a 6281oz drop in production at Irokinda and Zun-Holba (Buryatzoloto) and a 2673oz drop at Berezitovy. Although HRG costs were less in total, the lower production caused an increase in costs per oz. It is important to note that a 2nd mill has been installed at Berezitovy at the end of Q3. Here is a statement regarding the Outlook for this mine from the MD&A, “The new mill at Berezitovy should enable increased production and decrease per unit costs in 2011”. I expect we are already seeing an increase in production in Q4, subject to fine tuning of the new mill. In terms of increasing reserves at Irokinda and Zun-Holba, the results from the $23M drill program underway are now not expected until the first half of 2011.
On the good news side, working capital increased 36% to $205.3M from $150.9M in Q2 and the Royal Gold loan has been paid off after the end of Q3. Although there is an ongoing 2% royalty for Somita, the Q4 cash flow should be enhanced by the reduction in debt/interest payments. Unfortunately, the third party investments held as collateral by Royal Gold for the original loan has not been released yet. The MD&A states the following: “Somita withheld final payment due to the contractor for the processing plant of approximately US$1,600,000 and has made a claim against the contractor for repairs and losses. “ “The Company believes that the current collateral held by RGI is redundant considering the amount of the claim and is negotiating the terms of its release with RGI. Significant progress has been achieved in Q3 2010.” Although shareholders are frustrated that these investments have not been released, the positive from this is that, while restricted, the investments have risen dramatically in value. If you add the $125.5M in cash at end of Q3 to the current $111.5M value of these third party investments, HRG will have $215M ($237M minus $22M debt) to fund the Bissa mine development and HRG’s exploration programs internally.
HRG recently announced a continuance to the Yukon Territories from Ontario. I have checked with the lawyers regarding the impact in terms of takeover rules for minority shareholders. Minority shareholders are protected by the same majority of minority rules. Here are some comments regarding the move to the Yukon: “1. It is a modern statute based very much on the Federal CBCA which governs HRG now. 2. The squeeze out and appraisal process is currently very similar to the existing corporate statute governing HRG. There is a bill to amend the Yukon Business Corporations Act which if brought into force we are informed would be at least 6 months from now. The bill does not provide any less protection and may even provide more protection for minority. For the appraisal remedy to be utilized one must apply to the court in the Yukon. 4. Section 133(4) of the Yukon Business Corporations Act permits shareholder meetings to be held outside the Yukon if the articles so provide.” “ 6. The vote to continue out of the Federal Jurisdiction is 66 2/3% which obviously they [Severstal] will have. I don't believe there will be any restrictions on their right to vote on this matter. 7. A shareholder may dissent in connection with this [Continuance] proceeding in which case HRG is obliged to pay fair value for the shares.”
A point of concern for minority shareholders is the potential loss of the Prognoz Silver mine through the current bankruptcy process. The language used in the Q3 MD&A is as follows: ” In the fall of 2009, High River’s joint venture partner started a legal action in Moscow to declare Prognoz Silver LLC (“Prognoz Silver”) bankrupt. Prognoz Silver is 50% owned by High River and holds the mineral license for the Prognoz silver project. The primary creditor was Buryatzoloto who was owed approximately $18 million. In order to protect its interests, Buryatzoloto also filed to put Prognoz Silver into bankruptcy. The Russian courts chose to accept Buryatzoloto’s application and appointed an observer to oversee the affairs of Prognoz Silver. Under Russian law, in the event of a bankruptcy, the mineral license held by Prognoz Silver is supposed to be returned to the State. However, in practice there is some leeway and the observer may sell or transfer the license as part of the debt restructuring. The outcome of the bankruptcy proceedings is uncertain however, the Company expects that it may be able to participate in such proceedings. High River and Buryatzoloto will attempt to realize some value from the license. However, it may be necessary for High River to write off some or all of its investment.“ My comment on this is that minority shareholders are not looking to get ‘SOME’ value out of this license. We are looking to keep our 50%. As mentioned in my previous communications, it did not seem in the shareholders’ best interest to have Management risk the ownership of this license (10th largest silver deposit with world’s highest grades) on an outstanding debt of only $18M – regardless of who sued whom first. Silver has increased even more than gold in recent months and minority shareholders are counting on Prognoz to create serious value above and beyond the gold mines. If lost, we will be holding Management accountable for its actions as surely there were other options on the table at the time.
The Nord Gold IPO was delayed in the 4th quarter as per media reports. Some reports say it was delayed because the Severstal gold properties are considered problematic – the recent Crew Gold lawsuit supporting this theory. I am not sure how Severstal Management plans on settling these issues before a supposed Q1 IPO, but as we have suggested many times, promoting HRG, with its significant value contribution, is the best route to a successful IPO. The Investor Relations firm that I have hired has offered to arrange a ‘road show’ for HRG Management in Europe, however, to date, Management has declined to engage them.
Hopefully Q4 shows HRG back to producing 85Koz+ as in Q2. The average gold sale price was at $1248/oz for Q3. To Nov. 12, the average gold price for Q4 is C$1320/oz – a $72 increase. If we get back to Q2 production numbers in Q4, the cash flow would increase from $48M (Q2) to $54M (Q4) plus Royal Gold debt service savings, plus possibly higher Q4 gold prices. The Q3 hiccup should not discourage us minority shareholders as we are more than half way through Q4 already. Q4 and Q1 could give HRG a big boost. Although the article linked below mentions Severstal is still considering the IPO near term, we need to keep in mind, with or without IPO, HRG is one of the most undervalued gold producers out there with much latent value. HRG shareholders are a very determined bunch and the retail and institutional shareholders are holding out for fair play. Currently minority have 27.4% ownership and we only need just over 10% to block any take private transactions.
Olma Q3 HRG report – Target $1.97
https://freepdfhosting.com/0fcba69095.pdf
HRG Third Party Investments
https://freepdfhosting.com/af100970a6.pdf
HRG Q3 2010
https://finance.yahoo.com/news/High-River-Gold-Reports-Third-ccn-2508444295.html?x=0&.v=1
Moscow Times Article Severstal Q3 – mentions Nord Gold IPO
https://www.themoscowtimes.com/business/article/severstals-q3-profit-jumps-to-368m/423512.html
Disclosure: I own over 5M shares of HRG.
Chris Charlwood
Investor
Rainerc7@gmail.com
604-718-2668
https://www.stockhouse.com/Bullboards/SymbolList.aspx?s=HRG&t=LIST