Nord's HRG offer still too low
VANCOUVER, BRITISH COLUMBIA–(Marketwire – July 27, 2012) –
Nord Gold last week announced that they intend to make a formal offer to buy out the minority shareholders of High River Gold. The Board of Directors of High River Gold have appointed a special committee of three independent Directors to review the offer (when it arrives), to study alternatives and to commission a 3rd party valuation of HRG to help respond to the offer. We are told that the formal offer will be mailed after the valuation has been completed. Minority shareholders will have 35 days to react. As we all know, the Directors have on many occasions over the last 18 months signed off on HRG loans to Nord Gold for almost $150M notwithstanding numerous complaints from HRG minority to Nord, the HRG Board as well as to the Ontario Securities Commission. Therefore, I fully expect the committee to come out and endorse the offer from Nord and to recommend HRG shareholders accept the offer in one of its forms. I also expect the valuation to come in around the offer price of $1.18B value (840M shares times $1.40).
The offer does not have a minimum tendering requirement. Therefore, whichever option is chosen, the shares tendered become Nord's shares. Nord has stated that if within 120 days of the original offer 90% of minority accept Nord's offer, Nord will then seek to acquire the last 10% through a compulsory acquisition transaction. If there is not 90% acceptance, Nord has said it may pursue a 'subsequent acquisition transaction (likely in the form of an amalgamation squeeze-out). The vote for the amalgamation squeeze out will be determined by those shareholders that either attend a special meeting or give their proxy. Those that neither attend the shareholder meeting nor give a proxy will not have their shares counted for the vote. In other words, if Nord does not get 90% of shareholders to tender in the first round of the offer (very likely they will not), then the outcome of the subsequent amalgamation squeeze-out will be determined by majority of minority. It intends to vote the shares acquired in the original offer Logic says that if on expiry of the offer, there are not sufficient acceptances to guarantee approval of a subsequent transaction; Nord will have to increase its offer.
To remind you of some financial comparisons of HRG vs. Nord Gold, for the year 2011, HRG made up 49% of production, 49% of revenues, 54% of EBITDA and 68% of profit. In Q1 2012, HRG made up 54% of Nord's production, 53% of revenues, 79% of EBITDA and 105% of profit. At the end of Q1, if Nord repaid the recent $150M in loans it took from HRG and HRG sold its third party stock (mostly Detour Gold); it would have $322M in cash with $11M debt. At the end of Q1, Nord had $433M debt and, without HRG's loans, would only have $21M in cash.
As you know by my communications over the last few years, I have worked hard to get Nord Gold to accept that HRG is worth a minimum 50% of Nord's total value. Several of the institutional minority shareholders also worked hard to get Nord to accept this. With this offer of .285 Nord share for each HRG share, Nord has acquiesced – as the offer translates to them offering 58% of Nord's value to HRG minority shareholders. To give you some reference points, the inverse of .285 is 3.5 HRG shares for 1 Nord share. In a Bloomberg article dated March 11, 2012http://www.bloomberg.com/news/2012-03-12/nordgold-to-invest-800-million-to-boost-output-reserves-in-four-years.html?cmpid=yhoo, Nord's CEO suggested a swap with HRG minority shareholders could get Nord's float to increase to 20%. This translates to a transaction where HRG minority would have received a 5 to 1 share swap, which would have worked out to less than 40% of Nord's value for HRG minority. I asked for a 3 to 1 share swap, which translates to .333 Nord share for each HRG share. This works out to HRG being worth 66% of Nord. My logic for this was assuming HRG is worth a minimum of 50% of Nord's value, then add on HRG minorities' 25% of HRG's liquidity position of $322M (end of Q1), plus estimated additional cash of $40M in Q2, you get to a 3 to 1 exchange ratio. Please see spreadsheet linked below for calculations.
The cash option of the offer at $1.40 is completely unacceptable to me and probably still values HRG at a half to a third of its real value. If you deduct the $322M cash (Q2 should result in even more cash) from the $1.176B offer, you get to a net $854M. Divide this by Q1 profit of $62M (4x annualized) and you get a 3.4 multiple. As Nord has little of its own cash, keeps borrowing HRG's cash and has a low market cap, it would need to dilute itself significantly in order to fund our desired $3-4 cash/share. Therefore, I don't expect they will increase their cash offer anywhere near acceptable levels.
Two of the funds that worked hard at getting us the 3.5 to 1 shares swap (.285) offer have decided to enter into the lock-up agreements referred to in the Nord press release. In addition, a larger shareholder group also locked-up part of its holdings. These were shareholders that were part of our 115M core majority of minority group. Eric Sprott confirmed to me on Tuesday that he has not locked-up and his funds and currently holds 31M shares. He has pledged his support to our resisting minority group as he sees Nord's offer as too low. Based on the above, the core HRG minority group has approx. 77M shares. However, this core minority shareholder group does not include the remaining minority shareholders out there that have never contacted me and/or those that bought their shares after our original share survey during the 2009 buy-out attempt. As of today, Nord has 60M shares locked-up. The race is on to get to 105M majority so we need to add 28M and Nord needs to add 45M. I have confidence HRG minority will succeed at obtaining majority again as it is an easy sell to convince shareholders that Nord's offer is too low. To start the campaign, I am requesting an updated HRG shareholder list in order to make contact with all shareholders.
As a back-up plan, I have been told by a class action lawyer that there is a case to be made that a court would hear an argument for a minority shareholder oppression suit. In researching the remedies of such cases, they include the judge having the power to remove all Nord Directors from HRG's Board, reversing some of the past financings, repayment of HRG loans etc.
Where does this all leave us? Nord's proposed offer is, in my view, much too low. I believe they would need to come up to $3 minimum as a cash offer and the share exchange offer needs to come up significantly. HRG's Q2 results are out on August 15th and these will only re-enforce our expectation of a higher offer as they will likely show HRG's cash position has increased. Also, the 3 year drill program results for Buryatzoloto are expected in Q3. I remind you that in the CPR Report on the Assets of Nord Gold for Burkina Faso, Guinea, Kazakhstan and the Russian Federation (pp. 413 & 442), which was presented shortly after the Nord Gold prospectus was distributed, it states that Buryatzoloto has a potential increase of 3.4M oz in the P1 (inferred equivalent) category. Lastly, the other 50% partner in Prognoz, Polar Silver, completed 117 drill holes in 2008 and has a 43-101 report from July 2009 that shows Prognoz Silver resources at 293M oz of sliver, not 205M oz that HRG disclosed in its 2008 43-101 report (a 43% increase). Also, in Baker Steel's 2011 December annual report (Baker is an investor in Polar Silver) it states "A NI 43-101 compliant preliminary economic assessment was completed by Micon in February 2012. This indicates potential for a mine producing an average of 13 million ounces of silver per annum over a 16 year mine life". Lastly, HRG's Bissa mine is expected to come on stream early next year and this is expected to add 100k oz of production in 2013 and grow to 200K oz p.a. Bissa should bring HRG's total production up to the 450K oz range in 2013. These expected changes to HRG's resource base and production will only add to HRG minorities' expectation of value as time goes on.
In considering the cash offer as opposed to the share exchange, unless Nord increases its cash offer to a minimum $3/share, in my view, the share exchange is the best option for upside potential. I feel that if Nord is successful in acquiring HRG, Nord will succeed at getting their price up double to triple over the next 12- 18 months. Mordashov is motivated and I see little risk that he will try and take Nord private again after all the effort he has made to get it public. I have spoken to an institution that is one of Nord's largest shareholders and they are of the view that increasing Nord's float from 10% to 23% should bring in significant institutional buying (currently not happening due to the small float). If Nord's float increases to 23%, then Mordashov only needs to sell a few more percentage points to have Nord meet the 25% threshold of a main listing on the LSE. This should bring in additional institutional buying. Another key milestone for gold mining companies is to achieve 1M oz of production a year and those that do, end up with higher valuations. Nord is expected to reach that milestone in 2013. If we become Nord shareholders, we benefit from HRG's 60+% contribution to the financial metrics and will partake in a proposed dividend policy of 25% of net profits (supposedly projected at a 2-3% return).
In conclusion, if Nord agrees to up its offer to .333 Nord share for each HRG share (3 HRG for 1 Nord or 66% of Nord's value), I will be tendering my shares to the share exchange offer. In my opinion, if you remove the emotion of past poor minority shareholder treatment, it does makes business sense to me to ride Nord's shares up. A doubling of Nord's price from $5 to $10 is the equivalent of HRG at $2.80. A tripling is the equivalent of $4.20. Nord can easily justify more than double its current price when comparing itself to its peers. One point on LSE stock trading; it is expensive to do so from Canada as a retail investor. One quote I received was $400/trade with a minimum $5,000 order. This will be a deterrent for those shareholders that might otherwise tender to the share exchange offer. I will strongly suggest to Nord to reconsider its position on a dual TSX listing. I think it will help them increase the share exchange take-up and provide Nord with increased exposure in Canada – where a great number of the world's mining companies are listed.
If you believe the current Nord offer is too low and own over 100,000 shares, please e-mail me at [email protected] and give me your name, share count, and e-mail address. If you own less than 100,000 shares, please e-mail Jordan at [email protected]. Jordan has offered to help collect for smaller shareholders in order to free up my time to focus on other aspects of this campaign. Please be assured that both Jordan and I will keep your information strictly confidential. I have kept your identities and shares counts confidential for over 3 years now, including those of institutions.
Nord/HRG share swap calculations
Disclosure: I own 4.5M shares. I sold 500K shares earlier in the year with the plans to buy them back.