We now have the latest update from Chris Charlwood which is not only interesting but it also calls for some action on your part.
To all Minority Shareholders of HRG,
By my calculations, upon closing of the $57M financing with Troika (via Polenica Investments, announced 10/27/09), HRG is essentially debt free on a net basis ('net' being debt minus cash & 3rd party shares). At the end of Q2, HRG stated their debt position was $135M. Deducting cash at that time, debt was $112M. If on Nov. 13 HRG reports $26M in positive cash flow from operations for Q3 (an approx. average of the 1st two quarters) then debt is down to $86M. With this $57M financing, it brings the debt down to $29M. The shares HRG owns in third party companies including Detour Gold are worth approx. $50M based on current market prices. Hence, HRG has more than enough cash and shares now to cover all debts as they come due plus fund the exploration program at Buryatzoloto and for general corporate purposes. When the debt is cleared, the company looks like it will be producing over $100M/yr in free cash flow from operations.
With Friday's closing price at $.39, HRG's current market cap sits at (an extremely low) approx. 3 times cash flow from operations. HRG's peer group of West African and Russian mid-tier public gold companies (Polymetal, Randgold Resources, Petropavlovsk - formally Peter Hambro Mining, Golden Star Resources, Red Back Mining, Semafo Inc., Highland Gold) is trading at an average of approx. 19.3 times Q2 Operating Cash flow on an annualized basis. If HRG were trading at this average multiple, the share price would be C$2.95. HRG was trading at $3.40 early last year. The minimal 5% discount to market price and zero warrants negotiated in this financing may suggest a floor in share value at $.38.
There are several other aspects of this financing. It provides cash to keep all facilities with Nomos Bank and Royal Gold current. With the Severstal debt being retired with some of the proceeds, it takes away the risk of them calling in their loans due to breached covenants. It is interesting to note that rather than Severstal increasing its shareholdings by converting its debt, this transaction reduces its ownership from over 61% to just over 50%. Upon closing of this financing, HRG will have approx. 798.9M shares outstanding. Severstal owns approx. 400.7M shares (50.16%). Minority will own approx. 398.2M shares (49.84%) including Troika and approx. 248.2M shares (31.06%) excluding Troika.
The disappointing aspect of this financing is that minority shareholders communicated to HRG management that they would be interested in participating in a Rights Offering to prevent dilution. It seems like these requests have been ignored by HRG management in favor of a financing with Troika. Herein lies the main concern. Troika has arranged and consulted on many financings and other transactions for Severstal in the past. Although Troika may have sold off part of this financing to its investors, they may choose to use influence to have these shares tendered to or voted with Severstal in a future minority buyout transaction. If Troika were a related party they would not be permitted by Securities Commission's policies to vote as part of the minority on the transaction. Policies of the Securities Commission will require in most circumstances a valuation and a majority of the minority vote in an amalgamation proposal. The valuation can be challenged by the minority. Almost 90% of minority holding approx. 248.2M shares did not tender to Severstal's previous attempt to take HRG private at $.30. Those holding approx. 165M shares indicated in writing that they would only tender at an average price of $1.41. If Severstal decides to make another minority buyout bid in the $.60 range, they will be up against a heavy resistance campaign from current minority shareholders. The good news is that excluding Troika votes, the remaining minority still own more than the 199.1M shares required (over 50% of minority) to block any amalgamation attempt.
A group of institutional shareholders have written to the TSX to ask that a rights issue should be brought to all shareholders and this transaction cancelled. At the very least, they believe that these shares, due to "related party status" should be deemed "non-voting" in any further buyout transaction attempt by Severstal. If this potential state of affairs also troubles you, I suggest that you write to the TSX and the Ontario Securities Commission expressing your concerns and putting them on notice that in any subsequent transaction this issue will come to a head. Visit this website for OSC https://web1.osc.gov.on.ca/en/ContactUs/ct_cat-form.jsp and e-mail TSX at firstname.lastname@example.org. Time is of the essence.
If you have not done so, please send me an e-mail to my address below if you would like to be included in future communications. Communication amongst us will become important if there is an amalgamation attempt.
Q2, 2009 Financials
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