The valuation of HRG according to Morgan Stanley - a travelogue
Over the last little while we have been wondering what HRG is valued according to its peers and as a percentage of Nordgold. We knew that this would be a monumental task and require a lot of work. Fortunately, Nordgold has just paid Morgan Stanley to perform this research for us. From it we can determine the price of HRG.
Calculation via expected production
I can go through the calculations, however, on page 46 one can quickly calculate that HRG will produce approximately 50% of Nordgold’s EBIDTA annually and until 2015. Using this quick approach HRG can be valued at 50% Nordgold.
Valuation using Reserves and Production
On page 3, all of the mines are listed along with the reserves and resources they contain. Afterward a value is placed on these reserves which must be weighted to include extra value for production ounces. I added a conservative value of Prognoz of 34M to the HRG assets to arrive at a figure of 1.91B. This number is almost 50% of the total value of 3.86B. Due to the fact that Bissa assets will soon increase substantially because they will be moved to production and due to the fact that over 3M ounces will soon be added into production at Berzivoty, there is a strong case that HRG’s assets could be anywhere from 55% to 60% of Nordgold using this method of measurement. Again we will use 50% as a base case.
Capex costs
On page 46 all future capex costs for all mine sites are shown until 2015. Again if you take the time to add up all expenditures, HRG’s capex is about 50% of the total. This is an important calculation because it indicates that HRG should not be penalized any amount for the large capex program to bring Bissa into production.
HRG valuation --- High River Gold = ½ Nordgold assets + 500M
In the page 3 valuation, the entire Nordgold enterprise is valued at 3.86B. Afterward this figure is reduced because of outstanding debt, HRG minority shareholders and Detour Gold assets. These are only deficits against the Nordgold and High River Gold shareholders should not be penalized by this. High River Gold has a balance sheet with assets close to $300M instead of $250M in debt. This calculation clearly shows then that HRG should already be 50% of the 3.86B + an additional amount for the cash and assets on hand which can amount to $300M. As a result HRG is determined by Morgan Stanley to be equal to 3.86B (total Nordgold enterprise)/2 + 300M (HRG cash and investments) = 1.93B + 300M = ½ Nordgold Market Cap +500M. The 300M of cash assets belonging to HRG grows to 500M becomes half of the Nordgold Market Cap is 1.7B which is 200M less than 1.9B which is half of Nordgolds enterprise value.
Future Nordgold and High River Gold Projections
Morgan Stanley predicts a base case scenario for Nordgold within 18 months (page 2) along with an evaluation within its peer group (page 12). The current Market Cap of Nordgold is 2.46B which provides a Market Cap for HRG of 1.79B according to Morgan Stanley’s calculations which indicate that HRG is Nordgold/2 + 500M. This works out to $2.16/share of HRG. At a base calculation, Nordgold was valued at 3.44B with a corresponding sp of HRG of $2.77. The Bull case for Nordgold provided a MC of 4.74B corresponding to a sp of $3.59 for HRG. See table below
| | Market Cap | MC/2+$500M | HRG sp | | current | 2.458 | 1.729 | 2.16125 | | base | 3.4412 | 2.2206 | 2.77575 | | bull | 4.74394 | 2.87197 | 3.5899625 | | | | |
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On page 12 Nordgold was compared to its peer group and Morgan Stanley suggested that a market cap of $4.4B to $5.9B was warranted at current conditions.
We likely all agree that HRG are the best assets within the Nordgold portfolio. If they were promoted and developed properly and appropriate future value is placed on Prognoz then we all would agree that HRG should be currently valued using the highest projections against its peers and even these figures could be seen as conservative. Comparing HRG to its peers then produces a value of $3.45B (5.9/2 + 0.5) with a share price of $4.31.
Connclusion
Thanks Morgan Stanley for finally giving us the calculation of HRG by an independent investment broker. I trust the management of Nordgold that they would hire a truly professional investment firm that would fairly assess the true worth of Nordgold and High River Gold.
I conclude from this research that Nordgold must soon eagerly offer minority shareholders $4.31 since this is the current market value of HRG without any premium and we anticipate that the management of Nordgold will want to demonstrate that they will build trust for all future minority shareholders.
PS – according to these calculations, HRG is currently provides 70% of the value of Nordgold. Even at the bull case scenario, HRG still composes 60% of the Nordgold Market Cap.
359M shares of Nordgold and HRG should receive at minimum 60% of them = 215M shares.
Number of HRG shares = 800M therefore according to Morgan Stanley, HRG minority shareholders should be given Nordgold shares at a rate of 1 Nordgold share for every 3.7 shares of HRG.
Nova