HRG Nord Gold spinoff
December 8, 2011
High River GoldShareholders,
Severstal announcedthe Nord Gold spinoff last week on November 29th - much sooner thanI had anticipated.I wrongly assumed that Severstal would wait for Nord toachieve its highest valuation, therefore after the Q4 and year end results. Theseresults would have included the revenues (at higher gold prices) from theheld-back gold inventory from Q3. Thecompletion timeline forthe spinoff is byend of January, subject to a minimumof5% ofNord’s capital (in the form of GDRs-global depository receipts) taken up by Severstal minority shareholders.Rayglow, Mordashov’s holding company, will take up any NordGDR’sthat Severstal minority shareholders do not subscribe forand ifthe minimum 5%float is not met,then he (Rayglow) will take Nord Gold private. I believe that Mordashov, eventhough he is offering Severstal’s minority an opportunity to invest, is hopingthat few take him up on it. There are certain qualification rules forsubscription that may exclude a number of investors. An article from Moscow (linked below) reports that some Severstalshareholders are very displeased with the spinoffoffer. I suppose the lower the value ofNord the better for Mordashov - if he ends upacquiring most of the shares.
Severstal is valuingNord Gold at US$2.6B or just over 19% ofSeverstal’s market cap on November 29th(see link below for calcs). In Severstal’s Q3financials, it states that they will account for the spinoffby deducting from equity the gold segmentasset value which is shown as $2.57B. The spinoff value isjust 52% ofthe high target$5B valuationSeverstal was shooting for in its attempted IPO in January ofthis year. HRG is trading at 4.8 times Q3earning (annualized, net of$290M liquidity)while Nord Gold is being valued at 10 times H1 earnings (annualized). The NYSE ArcaGold BUGS Index (HUI)is trading at 17 times earnings (which is“below a 5 yr average of 37 times earnings”).
Those Severstalshareholders that qualify, but do not do their homework and subscribe to thisNordspinoff offer,will lose out on upside value that isrightfully theirs. Technically, it is immaterialtoHRGshareholders who the final owner of Nord is as our shareholder rights remainthe same. However, ourpreference would be to have Nord Gold trade publicly asit gives us the ability to compare HRG numbers to Nord’s numbers on an ongoingbasis. Also, a public Nord Gold will get attention from analysts and investmentfunds exposing the underlying value thatHRGcontributes.
The Nord Prospectus for this offering andSeverstal’s Q3 financials continue to show how HRG’s assets are significantlyoutperforming Nord’s other assets. For instance, the prospectus shows for the 6 months through June2011, HRG’s mines had a profit of $137Mwhereas Nord’s other mines only had a profit of $22M.Severstal’s Q3 results show the gold segment had3 month’s revenues of$253Mvs. HRG’s $114M (45% of Nord) and 9 month’s YTD revenues of $797M vs.HRG’s $377M (47% of Nord). The performance disparity is highlighted whencomparing profit before taxes and financecosts. Nord shows $248M for 9months vs. HRG’s $168M (68% of Nord) and for3 months Nord shows $72M vs. HRG’s $52M (72% of Nord).
HRG has only $22M of debt,$150M cash,$62M short term loans out (to Nord)and $100M in third party stock(mostly in Detour Gold (DTG.TO).Ifyoubuy off on HRG being worthaminimum of 50% of Nord’s $2.6B spinoff value and add HRG”s $290Mnet liquidity, you get close to $1.6B or $1.90/share. As, Mordashov certainly hasvalued Nord low with this offering, this also makes $1.90/share low for HRG.Also, such valuation excludes any upside potential from unreported drill andexploration data at Zun-Holba, Irokinda and Prognoz, the 10thlargest silver deposit in the world. The prospectus reveals that 2010 &2011 exploration programs at the Zun-Holba and Irokinda properties show a potentialincrease in P1 gold resources of3.4M oz(P1 is same as Inferred Resource definition from CIM –Canadian Institute ofMining).
Anotherinteresting note in the Nord Prospectus is that the NordBoard of Directors plans on declaring dividends following admission ofthis spinoff.As HRG’ s cash flow and liquid assets areheavy contributors of cash flow, it lookslike HRG’s Boardwill either have tocontinue borrowing from HRG to make these payments or declaredividends toNord and HRG minority. If it is the former, then IexpectHRG minority objections to reacha fever pitch.
By end of January wewill see if Nord is public or private. By end of March, we will see HRG’s Q4and year end results.
We core HRG minority shareholders have majority ofminority of the votes and, therefore, control the outcomeof any attempted take-over and buyoutattempts. Although we are disappointed in the lack of promotion by HRGmanagement and, subsequently, HRG’sshare price, the balance sheet and intrinsic value improves each quarter. IfNord wants to buy us out, they will have to pay fair value no matter what theshare price is.
Nordseparation Press Release
https://www.severstal.com/eng/ir/disclosers/rns/document5536.phtml
InvestorsDispleased by Severstal
https://www.themoscowtimes.com/business/article/investors-displeased-by-severstal/449146.html
NordGold spin-off calculations
https://freepdfhosting.com/fc7e555efd.pdf
ChrisCharlwood
Investor,HRG shareholder
Rainerc7@gmail.com
604-718-2668