Silver Bear shares tumble

Shares of Silver Bear Resources (TSX: SBR) dropped after two major Russian shareholders announced that they are converting promissory notes at a sharp discount to the junior’s share price.

Inflection Management Corp., an investment company owned by Russian businessman Sergey Kolesnikov, and A.B. Aterra Resources, owned by Russian billionaire Alexey Mordashov, informed the markets in separate press releases on Aug. 30 that they were converting their 15% convertible promissory notes due Dec. 31 at 4.5¢ per share.

Shares of Silver Bear, which is building a mine at its Mangazeisky silver project, 400 km north of Yakutsk in Russia’s Far East, fell 9.4% to 24¢ on Aug. 30. The junior’s shares dropped another 16.7% to 20¢ on Aug. 31 and a further 15% on Sept. 5 to 17¢. At press time, Silver Bear was trading at 17¢ per share within a 52-week range of 15¢ (Sept. 1) to 49¢ (Feb. 24).

In its notice of conversion, Inflection said it was exercising its right to convert its $13.5 million principal amount and all of the $3.5 million accrued and unpaid interest into ordinary shares of Silver Bear at the conversion price of 4.5¢ per share.

A.B. Aterra, in another press release, said it was exercising its right to convert its entire $4.5-million principal amount and all of the $1.2 million accrued and unpaid interest into ordinary shares of Silver Bear at the same conversion price.

After the conversion, Silver Bear will have 668.05 million ordinary shares outstanding. Of those, Inflection will own 419.8 million shares, or 62.8%, while A.B. Aterra will own 166.6 million shares, or 24.9%.

Before the conversion, and as of the first quarter of 2017, Silver Bear had 162.9 million issued and outstanding shares (171.90 million, fully diluted). Of those, Inflection held 41.2 million, and A.B. Aterra, 40.5 million.

Silver Bear completed a restructuring of its outstanding debt with its two lenders in December 2015 and issued a consolidated $18-million convertible note. The junior’s share price at the time was 2.5¢ and the exercise price was fixed at 4.5¢, or a 150% premium. Since then, the company’s share price increased tenfold.

In a research note in January, Andrei Kroupnik of Hannam & Partners in London pointed out that the possible conversion of the notes would mean “Aterra and Inflection’s combined ownership would consequently increase to 85.6% and reduce the free float of the stock, as well as dilute the minority shareholders.”

Workers outside a dormitory at Silver Bear Resources’ Mangazeisky silver property in Russia’s Far East, 400 km north of Yakutsk. Credit: Silver Bear Resources.

But he also pointed out that Silver Bear announced in November 2016 that it had entered into negotiations with Aterra and Inflection to mitigate dilution by restructuring and refinancing the outstanding convertible note.

“At the time of writing,” Kroupnik continued, “the outcome of this refinancing is not known, however, we were assured in our conversations with the main shareholders that it would be significantly less dilutive, and both Aterra and Inflection have no interest in such a large stake in Silver Bear.”

Graham Hill, Silver Bear’s president and CEO, defended the financing.

“Aterra and Inflection provided financing at a time when no one else would, and has provided the company the opportunity to advance the project for all its shareholders,” he wrote in an emailed response to questions from The Northern Miner.

“It is important to understand and put into context the environment and timing when the company entered into the convertible note financings with the major shareholders, which was in October 2015, November 2015, and was restructured in December 2015,” he said. “During the fourth quarter of 2015, the company’s average share price was 2¢, with a resultant market capitalization of approximately $3 million.”

Hill noted that due to its depressed market cap, Silver Bear was notified by the TSX on Dec. 17, 2015 that it was reviewing the company’s eligibility for continued listing on the stock exchange. “These factors — combined with the increased risk associated with operating in Russia due to the Western sanctions — caused a perfect storm for the company when seeking financing.

“It was a period of very high risk for potential Silver Bear investors and the company is exceedingly grateful to both Aterra and Inflection for their support at that crucial time … both major shareholders provided the convertible note financing, with a conversion price that was at a premium to the company’s then current share price. As well, these financers were all subject to shareholder approval, and the company did obtain overwhelming approval from its minority and disinterested shareholders.”

Hill also noted that the fourth quarter 2015 notes provided financing for the construction material and payment for long-lead items for the project’s construction and development in 2016. As a result of the financing, Silver Bear “was able to accomplish a great deal in 2016,” such as upgrading the quality of its indicated mineral resources, completing a feasibility study and a later updated study, and advancing construction at the site. (In June, the company said 72% was complete.)

“We understand that the major shareholders’ decision to convert will cause a dilution to all shareholders, including Aterra and Inflection,” he said. “However, it should be considered that the transaction has dramatically reduced the company’s outstanding debt — resulting in a healthier balance sheet — as well as improved the company’s cash flows in preparation for production.”

Hill says that Silver Bear management and its major shareholders “committed a great deal of time into the negotiations to undertake a restructuring of the convertible notes and accompanying financing, with the goal to bring in additional investors to the table,” and were successful in extending the convertible note maturity date “in anticipation of a potential restructuring.” However, it could not negotiate a better conversion price.

Workers trenching at the Vertikalny silver deposit on Silver Bear Resources’ Mangazeisky silver property, 400 km north of Yakutsk in Russia’s Far East. Credit: Silver Bear Resources.

“After extensive negotiations between Silver Bear, interested parties and major shareholders, it was decided that the options available did not fully satisfy the criteria of all parties,” Hill said in a second email when asked about the company’s efforts to strike a better deal. “It should be added that although the conversion has been completed by the major shareholders, it opens up exciting, new conventional opportunities for restructuring the company’s capital structure. This in turn should bring more benefits for all shareholders.”

Aterra’s Mordashov, who Bloomberg calls Russia’s richest man, is the main shareholder of Russian steel giant Severstal. In January, Bloomberg reported that Mordashov’s fortune stood at US$17.4 billion.

In 2012, Mordashov consolidated gold-mining assets owned by Severstal into Nord Gold. Nord Gold has a 55% stake in Columbus Gold’s (TSX: CGT; US-OTC: CBGDF) Montagne d’Or project in French Guiana. In May 2015, Nord Gold took a majority stake in Northquest, which owned the Pistol Bay gold project in the Arctic, and completed the acquisition of all of the junior’s shares in October 2016. In March 2013, Nordgold completed the acquisition of all of the shares it didn’t already own of High River Gold Mines, which held two underground mines — Zun-Holba and Irokinda — in Russia’s Lake Baikal region. High River also had three open-pit gold mines: Berezitovy in Russia, and Taparko-Bouroum and Bissa in Burkina Faso.