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« What’s a Company’s Gold Worth? | Main | Why I Hope Gold Falls to $1,000 »

HIGH RIVER GOLD (HRG.TO) – should trade 4-5 times current price.

HRG Logo 31 July 2009.JPG

In the mail bag this morning is this update sent to us by Chris Charlwood who is doing a fantastic job on keeping us all in loop with HRG.

        (All numbers below are approximate and in C$)


High River Gold (HRG.TO) is a very established Canadian un-hedged gold mining company. It generated $33M in positive cash flow from operation in Q3 2009 and is expected to generate $45M in Q4 due to the increase in gold prices. At the current $.75 share price it is trading at 4.5 times annualized Q3 cash flow and 3.4 times annualized Q4 projected cash flow. It’s gold mining peers are trading at an average of 18.1 times Q3 cash flow. If HRG were trading at this average multiple on Q3 and projected Q4 cash flow, the share price would be C$2.99 and $4.08 respectively. HRG was trading at $3.50 in 2008. For yearend 2009, the company should have enough liquid assets to cover off all debts with a surplus of $50M. One of Russia’s largest steel companies, Severstal, is the majority shareholder and has done a good job of turning this business around. During 2009, it was Severstal’s intention to buy out minority shareholders. Clearly, there is the potential for a significant short term return if Severstal makes another offer. However, if  no buyout offer materializes, there remains an even more significant upside of 4-5 times the current  price if HRG reaches the cash flow multiples of its peers. These price predictions exclude any value generated from the Prognoz silver deposit – one of the world’s largest and highest grade. Olma Investment Firm recently put a $2.48 target price on HRG
Financial Performance first 9 months 2009 
1)     $263M revenues vs. $123M in first 9 month of 2008 – a 114% increase
2)     increase in Gold production to 241,781 from 133,130 in first 9 months of 2008 – an 82% increase.
3)     $86M positive cash flow from operations – an increase of 12 times over first 9 months last year. (HRG projected Q4 cash flow at $180M annualized).
4)     $67M of debt paid down to a balance of $121M at end of Q3. At 2009 year end, HRG likely had a $50M surplus in liquid assets after allowing for all debts.
5)     $18.5 million in working capital at end of Q3, up from a $42.1 million deficit at 2008 yearend.
6)     25% and 38% decrease in Q3 direct mining costs (cost per ounce produced) compared to Q2 2009 and Q3 2008, respectively.
11) HRG says 300,000 oz to be  produced in 2009
12) Bankable Bissa feasibility study to be completed in 2010 with goal to advance resource to multi-million oz level.
13) Prognoz value not reflected in price. It is ranked # 10 Silver deposit in world with highest grades in the world.             
14) Many analysts predict gold prices to trade in the $1200-1300/oz range in 2010. This could increase 2010 cash flow from operations by $88-127M.
15) Low entry price at $.75 with Q4 expected cash flow multiple at 3.4 times with peers trading at 18.1 times.
16) There may be asset write-ups in 2010 once reserves are increased from new exploration and drilling programs.
Debt coverage & Surplus
Based on the Q3 numbers and the completion of the Troika investment, HRG has a significant surplus after allowing for all debts. At the end of Q3 the total debt was $121M plus $23M in payables for a total of $144M. To counter this, there was $39M in cash (and equivalents), plus $53M in third party stock investments (at latest share prices) plus $57M investment from Troika - bringing the total to $149M. If HRG produces gold at the same rate as in Q3, the Q4 cash flow is expected to have improved by $12M to $45M -  due to $141.57/oz  increase in gold prices (Q3 gold price avg. 960.07, Q4 price avg. $1101.64). If so, HRG will have a surplus of $50M on a net basis at year end 2009.
HRG’s Peer Comparison
HRG’s peer group of mid-tier public gold companies (Randgold Resources, Northgate Minerals, Centerra Gold, Golden Star Resources, Red Back Mining, Eldorado Gold, Semafo Inc., Gammon Gold, New Gold Inc., Alamos Gold, Aurizon Mines, Jaguar Mining) is trading at an average of approx. 18.1 times Q3 Operating Cash flow on an annualized basis. If HRG were trading at this average multiple on Q3 and projected Q4 cash flow, the share price would be C$2.99 and $4.08 respectively.  HRG was trading at $3.50 in 2008.
2010 Cash flow

The average price of gold was $972.34 in 2009. In Q3 2009, HRG achieved $388/oz in cash flow from operations. If the gold price moves to an average of $1200-1300/oz in 2010, then HRG would likely increase its cash flow by $88M - $127M.
There are  approx. 799.2M shares outstanding. Severstal owns approx. 400.7M shares (50.1%). Minority own approx. 398.5M of which institutions own approximately 270M shares. Troika is the largest institutional holder followed by Sprott Asset Management. Eric Sprott has confirmed that he believes HRG’s shares are worth $2 minimum currently.
National Post Article
Olma Investment Research Report ($2.48 target price)  
Note: If you are distributing any info from the Olma report to your subscribers, please include the disclaimer located at bottom of Olma report.
HRG Global Peer Group Comparison & Third Party Investments
Prognoz Silver Deposit rankings:
High River Gold:          
HRG Q3 2009 press release:  
HRG 2008 yr end press release:          
HRG Q3 2008 press release:        
I am a retail investor who has been very active in HRG and I own 5.5M shares.
I have gathered the above information from the above sources and others on the internet. Please do your own research to confirm the findings. Please do not rely in this information solely to make your investment decision.
If you received this communication by e-mail, you are already on the communication list. If not and you would like to be on the list, please e-mail to my address below.
Chris Charlwood
Retail Investor
604-718-2668 office
604-718-2638 fax

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Reader Comments (4)

With Severstal at over 50% I see a big risk sign. Much like Jobs and Pixar. Majority owner can do what they wish.

Any comments on Severstal controlling interest?

February 4, 2010 | Unregistered CommenterBC

As good as it feels to be a part of the minority movement that is standing up to Severstal I have stated and continue to state that w/out Sprott you are totally correct. With Sprott on board and refusing to sell under 1 dollar it is a game changer. They have and continue to play hardball. The fact is they require the profit from their gold mining sector to stay afloat, their steel sector is in financial shambles...they need HRG to perform as much, even more so than the minority shareholders. The fact is their takeover bid failed and now they are in a position they have to operate at it's full potential. While they are a private company,...they are still indeed a company, no one runs a company to lose money, they are kicking themselves behind closed doors for the bad judgement thus far...I believe we are seeing the beginning of better treatment, and better logic in their partnership.

February 5, 2010 | Unregistered CommenterVincent

This was posted on and is relevant to the previous post.... Prod, your analysis is perfect, although Severstal has made and keeps making their intentions clear. They want us out of there. The key is that the funds will NOT sell and dont have to no matter what...even if their is a squeezeout. its court time then, and very easy to proove worth using comparisons in front of a court of law. There is already a report out there giving a 2.50 target. I am sure if the funds hire a broker in Canada for an independent evaluation, they will get the same. Severstal will then have to pony up 2.50 per share. Hang in there. Bought 50k more at .67. No liquidity yesterday. ie: no sellers, low volume.

February 5, 2010 | Unregistered CommenterVincent

My thought is perhaps something like this:

(A) Severstal can stack the board and management how they want by vote of 50% of shares.

(B) The board and management can enter into a JV with someone Severstal likes or can buy, sell, swap or encumber assets. I am thinking along the lines of GG a while back.

This would permit Severstal to drain the company and leave a shell for the shareholders.


February 5, 2010 | Unregistered CommenterBC

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