Severstal improves offer for High River Gold

High River Gold‘s (HRG-T, HRIVF-O) largest shareholder, Russian steelmaker Severstal, is sweetening its bid for the gold producer.

Last month Severstal expressed a non-binding interest in making a cash offer to High River Gold’s minority shareholders of 18 per share.

Today it has raised that offer to 22 per share — a 13% premium to High River Gold’s 20-day volume-weighted average trading price and a 33% premium to the 20-day volume-weighted average price ending May 21, the day before the announcement of Severstal’s first offer.

In addition, High River Gold reported today that Severstal will acquire through a private placement 59.02 million shares (about 10% of High River Gold’s currently outstanding shares) at a price of 18 per share for proceeds of about $10.6 million.

The money will go towards paying off a US$10 million debt by its 84.9%-owned subsidiary, Buryatzoloto on June 12. In the meantime, Severstal has also agreed to provide Buryatzolotoa with a short-term loan, repayable in ten days from the proceeds of the private placement. (Once the transaction is completed Severstal will own 57.3% of the company.)

“The company gets some additional financing to take us through the short-term,” Dan Hrushewsky, High River Gold’s vice president investor relations, says of the private placement. “There’s more debt, but we would hope to repay that through cash flow.”

High River Gold’s debt as of Apr. 30 stood at US$122 million but Hrushewsky said it was lower now since the company made some debt repayments in May and plans to do so again this month. Company debt “is less than US$122 million but we are producing cash now, we’ve got four mines operating,” he explained. “Everything is operating at reasonable capacity and utilization rates.”

Hrushewsky conceded that those rates could be higher but that the company was working on that. He estimates High River Gold will produce about 300,000 oz. gold this year on a 100% basis.

And that is what Severstal wants to get its hands on. The Russian steel giant has ambitions to become a mid-tier gold producer, Hrushewsky explains. Last year Severstal’s three producing gold mines in Russia and Kazakhstan produced about 180,000 oz. gold.

“We fit their need to be a mid-tier producer and would represent a big increase in their gold production,” he says.

Hrushewsky notes that Severstal came to High River Gold “with financial heft” (revenues of US$22 billion last year) and good management capability in the mining business. As a vertically integrated steel producer Severstal mines iron ore and coal, knows the mining business and has operating strengths in Russia and overseas.

Last year Severstal ranked as the number 2 flat steel producer in Russia and the number 3 flat steel producer in the U.S. and apart from those two countries has assets all over Europe including Italy, France, the United Kingdom, and the Ukraine, and in Africa.

As for the sweetened bid, Hrushewsky says it is up to minority shareholders but notes that based on a recent independent valuation of the company, a special committee of independent directors is recommending the bid.

High River Gold remained unchanged at 21 per share on a trading volume of 2.03 million shares.

The Toronto-headquartered company with properties in Burkina Faso and Russia has a 52-week trading range of 4-$1.90 per share.