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« Getting Real About Real Estate | Main | Gold Prices: On Days Like This »

Severstal Gold IPO imminent?

HRG Logo 31 July 2009.JPG

Always appreciated we now have an update from Chris Charlwood who has very kindly sent us this missive updating us on the current state of play over at High River Gold Mines Limited (HRG) which we hope that you find interesting and informative:

Although Severstal declines to comment on their Nord Gold IPO (name changed from Severstal Gold), the media reports are becoming very frequent with two more today (linked below). The $4-5B valuation claim is consistent and let’s keep in mind  that High River Gold  makes up 57% of the total Nord Gold production and over 31% of resources – with potentially more resources to come through the $23M drill program underway and a resolution to the Prognoz Silver dispute. I suspect that once these results are in, HRG will make up 50% of the total $4-5B value (putting HRG at $2.40 - $3/share).
In preparation for its IPO, Severstal yesterday announced it will buy out the rest of the Crew Gold shareholders for US$4.65/share by way of an amalgamation. Severstal gets to vote its 93% shareholdings on Dec. 2nd. This gets them comfortably by the 2/3rds  votes  required for the amalgamation to succeed.  In effect, this amalgamation squeeze-out transaction could be considered  ‘a Fait Accompli’ –subject to minority dissention rights.  As there are concerns that HRG shareholders may suffer a similar fate in future, I thought I would get legal clarification as to the rules - stated below. The bottom line is that HRG shareholders are in a safe position and as stated in my previous communication, I believe Severstal understands the HRG minority temperament and will not try for a buy-out prior to the IPO. The main difference in comparing the two situations is that Severstal owns 93% of Crew Gold and only 72% of HRG. The exemption kicks in at  90%. Severstal would need to purchase an additional 18% (142M) of the outstanding HRG shares to get to over 90%.  As long as more than 10% (84.3M shares) hold out and don't sell their shares, Severstal cannot succeed at an amalgamation squeeze-out transaction with HRG. Currently HRG minority hold over 27% (230M shares). The institutional shareholders likely own up to 90M shares and have said they won't sell until fair value. I know of up to another 28M of retail minority shares that are not likely sellers and am sure that other anonymous owners will add to these numbers.

Here is the quote from the lawyer regarding the rules:
“While majority of the minority approval is generally required for a related party transaction, there is an exemption if the related party beneficially owns 90% or more of the class of affected securities and a statutory appraisal remedy (or an appraisal remedy on terms substantially equivalent to the statutory remedy) is available to the minority shareholders.  A dissent right is an appraisal remedy and a dissent right will be available to the minority shareholders in an amalgamation or arrangement.  By the way, there is no equivalent exemption from the  formal valuation requirement for the amalgamation/arrangement transaction.”
Here is my layman`s explanation after a follow up phone call with my lawyer:
There are two sets of rules that could apply in take-over attempts: the amalgamation rules and the related party bid rules. In the related party bid rules, the majority of the minority (over 50%) need to actually tender their shares for a take private transaction to succeed (the related party cannot vote its shares). In the Business Act amalgamation rules, 2/3s of those turning up to vote at a special meeting need to vote in favour of  an amalgamation transaction (majority holder can vote its shares). As an amalgamation is often proposed by a related party then both sets of rules apply thereby making the majority of the minority rule the main protector for minority shareholders. However, with the current amalgamation proposal for Crew Gold, Severstal is relying on an exemption to the majority of minority rule as they own over 90%. Unfortunately for Crew Gold minority, they now need to choose to accept the offer or give notice to dissent. To dissent means to write a letter indicating dissention along with proof of their shares. They  will still need to tender their shares as part of this process, but have the right to hire their own valuator for Crew Gold and put it to a judge. Severstal will have its own valuation on Crew that support its bid at US$4.65. In the end a judge will decide what the real value is and what needs to be paid to the dissenting shareholders. The downside to this course of action is that the shareholders are without the shares and without the cash throughout the court proceedings.
In an unrelated topic, HRG recently announced the resignation of its CEO - Igor Klimanov. The press release stated that the Board would convene to replace him. Igor says he has been offered another job by Severstal. I suspect we may see him as part of the Nord Gold team. Either way, I think we can relax in knowing that Severstal management is running HRG as efficiently as usual. They have a capable team and HRG is too important a piece of the IPO for them to lose focus. It would not surprise me if the CEO positions of both HRG and Nord Gold would be filled by the same person eventually.
Please note that in the second article, I believe this statement got lost in translation; ``Severstal also increased its interest in High River Gold [CA:HRG] to 73% and will take full control over the company via an off-market transaction.`` I believe that like in previous articles, it meant to say that the recent  purchase of an additional 2.4% was an off-market transaction and got them to 72% ownership continuing their full control of HRG. I don't believe any other off-market transactions have increased their ownership beyond the 72%.                 
Chris Charlwood

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