By John Helmer in Moscow
As Ronald Reagan used to say, when stumped for words in the presidential debate against then President Jimmy Carter: There you go again!
When the Russian owners and managers of High River Gold announce they are launching bankruptcy action in the Russian courts against Prognoz Silver LLC, you ought to ask what is the calculation by Alexei Mordashov, the controlling shareholder of HRG and its parent, Severstal Gold? Is he planning another hostile takeover, as he attempted unsuccessfully against HRG’s minority shareholders last year? Is the true value of the Prognoz deposit about to disappear into anonymous hands, before reappearing at a new valuation on the asset ledger of Severstal Gold, before it goes to IPO?
Suspicion is aroused because the size of the debt that has triggered the legal action is – wait for it – Rb560,146,103.23. That is $18 million. And because sources close to both Prognoz and Severstal Gold say there is no doubt that the half-stake shareholders against whom the bankruptcy action has been launched, can afford to pay the claim.
|When one of the richest silver properties in the world, located in central Sakha, north of Yakutsk, is the object of a Moscow scrap over such a small pot of cash, what is the real game?|
According to High River Gold’s first disclosure on Prognoz, dated November 2006, the silver reserves at Prognoz are among the largest in Russia – 141 million ounces classified according to the Russian C2 category, with an additional 53 million oz of P1 resources. The grades published with those figures ranged from 708 grams per tonne to 876 g/t. These data were based on 89 diamond drill holes (17,805 metres) and 317 trenches (17,756 metres). This work had been done between 1987 and 2000, before HRG took over.
According to HRG’s initial announcement of June 21, 2006, the acquisition was made through HRG’s “85%-owned Russian subsidiary, OJSC Buryatzoloto (“Buryatzoloto”), through a subsidiary, has entered into an agreement to acquire a 50% equity interest in LLC Gazteck Industry (“Gazteck”), a private Russian company holding the licence for the high grade Prognoz Silver Project.” Gazteck, said the HRG announcement, “acquired this project in 2005 through a state auction and the license was issued in October 2005. The exploration-mining license, covering 56 square kilometres, is valid for 20 years and allows the holder to carry out all exploration and mining activities. Under the terms of the transaction, Buryatzoloto has acquired the interest and operatorship for a purchase price of US $7.3 million and settlement of certain Gazteck liabilities, bringing the cost of the transaction to US $22 million.”
HRG calculated that in paying this price, it was “effectively paying approximately US $0.31 per C2 reserve ounce of silver or US $0.23 per ounce including the P1 values”. An unidentified Russian bank was reported as financing the purchase. HRG also paid Micon International to evaluate the available data on Prognoz’s reserves. Micon reported back that “the historical estimates remain relevant today and that it is reasonable to rely on them as justification for a programme of compilation work and further exploration.”
HRG then said it was budgeting $15 million for a three-year programme of prospecting and proving, with the aim of lifting the resource estimate to between 275 million and 325 million ounces of silver.
But things kept getting better than hoped for. After the first year of new work at Prognoz, HRG announced that “a total of 190 samples from the first 35 drill holes were sent for check assaying to the IRGIREDMET Institute in Irkutsk. On average, the check assay results were 2% higher than the originally announced assay results obtained from JSC Yangeologia in Batagai.”
In September of 2007, new assays and drilling results were reported by HRG, confirming Prognoz to be “one of the largest and highest grade undeveloped silver projects in the world.” The new grades reported were 2,839.2 g/t in one assay; 9,339.4 g/t in another. Micon was engaged to produce an interim Canadian regulation-compliant reserve and resource estimate that autumn.
Then HRG announced it was on to such a good thing, it was considering spinning off the silver property for a separate listing. In a statement issued in October 2007, HRG said it was “leaning toward… the spinning out of the Prognoz Silver Project, especially if the spin-out vehicle were to hold 100% of the Project. While being an excellent asset on a stand-alone basis, the silver asset is noncore to High River and is currently ascribed little value by the market. If a pure silver vehicle were to be created, which held 100% of the Prognoz Project, it could add significant value to the High River shareholder.”
The initial results of Micon’s preparation of a reserve estimate, according to the Canadian National Instrument 43-101, were released in January 2008. The indicated resource was 71.5 million oz, with an inferred resource of another 39.2 million oz. Grades ranged between 551 g/t and 636 g/t. Since these calculations were based on drilling of only part of the silver veins known to be on the property, the projected additional silver resources amounted to 97 million to 194 million more ounces, Micon said.
This was good enough, HRG thought, to sell its stake in Prognoz at a price that was more than double the per-ounce value attributed to the deposit when it was first bought in 2006. At the time – May 28, 2008 — HRG’s share price on the Toronto exchange was C$2.55, and its market capitalization totaled C$2 billion.
Here is what HRG said it was proposing to do:
“The spin-out transaction consists of the vending of High River’s 50% indirect interest in Prognoz, together with the other 50% interest held by a private company, to Roscan Minerals Corporation (“Roscan”). The purchase price of Prognoz (100%) will be equal to $0.55 per ounce of silver outlined in the “updated” NI 43-101 resource estimate (or a NI 43-101 compliant resource estimate incorporating full year 2008 drill results), using a minimum cut-off grade of 50 g/t, to a maximum of 200 million ounces of silver (or $110 million). Roscan will also assume certain liabilities related to the 2007 and 2008 Prognoz exploration programmes. High River’s share of proceeds from the sale will be received in shares of Roscan; the private company will receive shares (9.9% post financing) and cash.
“As part of the transaction, Roscan will be completing a marketed financing led by GMP Securities L.P. and Jacob & Company Securities Inc. Post financing, High River will be the largest shareholder of Roscan, with an expected ownership interest of approximately 30% to 40%.”
A month later, after HRG shareholders objected that the deal was going too cheaply, HRG announced it was cancelling the Roscan transaction. That was on June 25, 2008. The next day, HRG announced fresh Canada-compliant reserve data.. Now Prognoz’s indicated resource was 102 million oz at a grade of 704 g/t; the inferred resource was 103 million at 659 g/t. The lode had just jumped 31% and 163%, respectively. The potential but as yet uncounted resource of several other veins on the property was 369 million oz, grading at 776 g/t, HRG added.
This was so good, HRG tried to buy the 50% of Prognoz it didn’t own. The holders of this half stake have been identified by sources close to them as managers of Buryatzoloto who did not move on to HRG, when it acquired the mine; they are unconnected to Mordashov or Severstal. The offer was to give them HRG shares amounting to 9.9% of the capital, and for HRG to accept $16 million in debt for prospecting and exploration works that had accumulated unpaid. The shares were worth C$223 million at the time. Converting these currencies, the offer was worth US$232 million as of July 31, 2008.
On its own, HRG couldn’t afford the acquisition, but the HRG board was at the time considering a financial rescue with Alfa Bank’s mining group in Moscow, worth C$286 million for a 32% stake in HRG. The acquisition by Alfa’s United Gold Company included 100% of the Prognoz project, which Alfa reported as “a very important development as it will provide the Company with a high profile project that, with the funding in place, can be aggressively moved towards development and turn the Company into a major silver producer.”
But this wasn’t to be. The global crash of commodity prices, company revenues, share prices, and the flow of credit struck the Alfa group, undermining the confidence of its shareholders and turning their attention away from mining. They withdrew their offer for HRG, and the latter rumbled towards the solvency precipice on its own. By the time it was rescued by Mordashov’s group, the Prognoz acquisition had been abandoned. On December 4, 2008, HRG made the formal announcement. “The parties” – which now included Mordashov’s men who were aiming at minimizing the price of their HRG takeover – “were unable to agree to mutually satisfactory terms for the extension of the agreement”, HRG said.
HRG doesn’t mention Prognoz again until June 9, 2010, when it disclosed the bankruptcy move. In fact, Mordashov had authorized the legal proceedings against the Prognoz company almost nine months earlier. Negotiations between Mordashov, Severstal Gold, and the Prognoz shareholders had been actively canvassing several options from even earlier.
In essence, these were a continuation of the original deal between HRG and Prognoz to buy out the half-stake shareholders. But in the middle of his campaign to compel the HRG minorities to accept a share price buyout at one-third of the 2008 share value, Mordashov was in no mood to pay the original Prognoz offer price of $232 million. Also, on account of Mordashov’s problem with the debts of his steel group, there is doubt he had the cash to pay that offer, or that his bankers would lend him more.
|Bankruptcy in the Russian courts is often the means that raiders take to seize control of assets without paying market value, and when concerted resistance by asset owners proves to be inconvenient. Since the Prognoz half-stake shareholders believe their stake is worth at least $232 million in mid-2008 terms, when silver was fetching about $19 per ounce, it’s hardly surprising that Mordashov might
find it attractive to take them out for just $18 million; especially because the spot price for silver at the moment is just over $19/oz.
According to the prompt from Mordashov, HRG says this month: “The commencement of the [bankruptcy] procedures [against Prognoz] will result in the preservation of Prognoz Silver LLC’s assets, an analysis of its financial condition, the preparation of the list of creditors and the holding of the first creditors’ meeting. It is anticipated that the bankruptcy procedures may last at least seven months and may permit Buryatzoloto to collect or restructure the indebtedness of Prognoz.”
Another way of expressing this is that Mordashov is giving the hold-out Prognoz shareholders time to decide whether to pay up the $18 million debt, or lose their asset altogether. The Prognoz holdouts have learned a lesson or two from the successful resistance of the Canadian minorities at HRG against Mordashov last year. They say they will be happy to negotiate a sale of their shares to Severstal Gold or HRG, but at full market value, plus the takeover premium — $250 million. The offer, they think, is a modest one, if the value of the additional Prognoz shares and reserves can be counted when Mordashov tries putting the entire Severstal Gold portfolio on the market in its initial public offering later this year.
But Russian courts can be death traps for the unwary, sources close to the contest warn. They express concern that if Mordashov as the principal creditor gains control of the appointment of the court bankruptcy administrator, there will be scope for a backroom deal, in which the Prognoz half-stake may disappear into a private vehicle at one price, only to reappear later under HRG or Severstal control at a higher one. Who will profit in between? The sources say they have their suspicions.
Severstal Gold and HRG have been invited to clarify whether they continue to negotiate a buyout of the Prognoz property, and if so, at what price. They declined to reply.