Severstal ups offer for High River Gold by 36%

Russia’s Severstal is inflating its cash offer for financially troubled High River Gold (HRG-T) to 30¢ a share from 22¢ and has extended the deadline for acceptance to Aug. 10.

The enhanced offer represents a 90% premium over High River’s volume weighted average share price for the 60-day trading period prior to and including May 21, the last trading day before High River’s announcement that it was in discussions with Severstal regarding a possible transaction.

It also represents a 7% premium to High River’s closing share price on July 27 and a 36% premium over its volume weighted average share price for the period since May 21.

High River’s board has unanimously recommended the new offer to its shareholders.

Shareholders who have tendered their shares under the terms of the original offer will receive 30¢ per share in cash and are not required to take any further steps to accept the increased offer.

Severstal has ambitions to become a mid-tier gold producer and became a shareholder in High River — which owns three producing gold mines in Russia and one in Burkina Faso — in November 2008.

“We’ve been looking at different opportunities to grow our business and there are [only] a limited number of existing gold assets in the former Soviet Union,” Nikolai Zelensky, chief executive of Severstal’s gold division, told The Northern Miner in an interview several weeks before news of the revised offer was announced.

“What was special about High River is that it was basically in a difficult financial position and it came up for sale…The assets are decent but the balance sheet is very, very challenging.”

From the first half of 2008 Severstal had to support the company twice through private placements and the assumption of standard bank debt; Severstal provided guarantees and became not only the shareholder but the creditor as well.

Indeed Zelensky is currently High River’s acting chief executive and is a member of its board.

As of June 30, High River’s total consolidated debt outstanding was estimated at US$103.9 million — with US$27 million of that being owed to Severstal.

Some of the biggest challenges at High River, Zelensky explained, are the operational issues at two of its gold mines.

“Since its inception they have a well documented list of production issues and I think we will focus on them,” Zelensky added. “We need to get the mill circuits up and running smoothly.”

Two of its mills were constructed from refurbished equipment purchased in Nevada, he noted. At its Taparko gold mine in Burkina Faso, productivity is about 25% below design capacity due to vibration of the ball mill, he explained, and the mill at the Berezitovy gold mine is not operating well in the cold weather conditions of the Russian Far East.

“We need to look at longer term solutions that may require capital injections,” he said.

Ultimately, Zelensky said, Severstal’s offer is fair value for High River and the transaction is a good one for both companies.

“We think we will be able to use our balance sheet to resolve the financial distress situation and will provide some cushion for the assets to streamline their operations,” he said. “It will take time and when they are on the balance sheet of a larger company with no financial distress we can remedy their problems one by one.”

At presstime High River was trading at 30¢ a share. The company has a 52-week trading range of 4¢-$1.64 per share and has 649.2 million shares outstanding.