Severstal Ups Offer For High River By 36%

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

The enhanced offer represents a premium of 90% 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 the 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 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 serving as 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.

In mid-July, High River said it was still in breach of certain covenants under the loan agreements with Severstal and another lender, Royal Gold (RGL-T, RGLD-Q). And while neither Royal Gold nor Severstal has taken action against the company for the breach, they reserve their right to do so.

As for the near-term debt burden, total short-term debt comes to US$75 million and on top of that accounts payable are at US$20 million.

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

While Taparko in Burkina Faso operated at a slightly higher capacity in the second quarter than in the first, High River says vibration levels at the plant remain above acceptable levels. That means less productivity at the mill.

At Berezitovy in Russia, a six-day shutdown in April and an eight-day shutdown in May cut into production. The shutdowns came so repairs could be made to the semi-autogenous grinding (SAG) mill lifters, pumps, conveyors, and the ball mill motor. While the mill is operational, throughput is below design capacity, requiring a bypass of a portion of the tailings slurry past the disk filter plant into a wet tailings storage facility, the company says.

“Since its inception, they (High River) 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 High River’s 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.

Taparko and Berezitovy were responsible for the bulk of the 79,997 oz. of gold High River produced in the second quarter.

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.”

In mid-July, High River announced that it would lose its chief financial officer as Steven Poad resigned “to pursue other business interests.”

News of his departure comes after a string of resignations from management. In early spring, the company’s president and chief executive David Mosher, its chairman Terrence Lyons and director John Crow all resigned from their positions. Poad will be replaced by High River’s treasurer Andrei Maslov.

At presstime, High River shares traded at 30¢ each. The company has a 52-week trading range of 4¢- $1.64 and has 649 million shares outstanding.