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.
February 12, 2011
High River Gold Investors,
Severstal's Nord Gold was trying to get a $4-5B valuation (830,688,360 shares at US$4.70-$6.20/share) in its IPO. In a show of confidence in the future operations, they did not lower their IPO price range, but instead decided to postpone it. Nord owns 72.64% of High River Gold's 840,218,962 shares. HRG, a decades old Canadian company trading on the TSX (HRG.TO), has market cap of $932M. Based upon the information below, I believe HRG makes up 50% of Nord's value - yet it is only trading at 6.6 times annualized projected 2010 cash flow (extrapolating 9 months actual to full year) versus Nord Gold's IPO attempt at up to 22 times (same extrapolation). I am projecting HRG's Q4 cash flow to be $60M. If so, then HRG is actually trading at 3.9 times estimated annualized Q4 cash flow. I would hope that Nord now realizes that promoting the HRG story and stock price is fundamental to its next IPO attempt. Why risk another IPO delay?
The Nord Gold Prospectus presents consolidated data as a Group (including HRG), but when compared to HRG's info alone for the same periods, HRG's true significance is revealed. HRG makes up the following percentages of Nord Gold:
- 57% of Nord's gold production in 2010
- 37% & 35% of JORC Compliant Reserves and Resources respectively
- 64% of revenues 9 Months 2010 (9/30)
- 61% of cash flow from operations 9 Months 2010
- 102% of Net Income 9 Months 2010
- 69% of Normalized EBITDA 9 Months 2010
- 8% of net debt a 9/30/2010
- 77% of cash & equivalents at Sept.30, 2010
- 92% of Trading Securities (Third party stock) at Sept. 30, 2010
- 83% of liquidity at Sept. 30, 2010*
* Liquidity = cash & equivalents plus trading securities.
Per the Prospectus, Nord Gold is also investing heavily in HRG's properties this year. $178M or 61% of the 2011 Capital Expenditures budget of $290M is being spent on HRG properties - broken down as follows:
- 56% of exploration and evaluation.
- 91% of capital expenditure on expansion.
- 24% of 'other'(safety, facilities balancing, replacement of equipment).
Although HRG's Reserves & Resources only make up 37% and 35% respectively, HRG has been carrying out further research, exploration and/or drilling at its Irokinda, Zun-Holba, Prognoz and Bissa properties that will likely result in a significant increase in HRG's resource base. We are expecting exploration and drill results in H1 2011 for Irokinda and Zun-Holba - the two depleting mines. The comments in the Nord Gold Prospectus show confidence in these mines. Also, Bissa could have an additional 2M oz from further exploration and 50% owned Prognoz could have an additional 5M oz additional (gold equivalent). Linked below are highlights from the Nord Gold Prospectus that show Nord's confidence in the future of HRG's resources and mine production rates.
By deduction, the Nord Gold Prospectus shows that HRG produced 88.3k oz of gold in Q4 at an average sell price of $1382/oz - up from $1195/oz in Q2. There have been some cost increases over the 6 months since Q2 when HRG produced $48.8M cash flow on 87k oz of production. Therefore, I am estimating Q4 cash flow at $60M. If so, then, HRG is trading at 3.9 times annualized Q4 cash flow. We are expecting Q4 and year end results by March 31.
HRG has finally announced that Royal Gold has released HRG's third party stock as collateral for its loan. This means $109M worth of third party stock is now free to sell and add to HRG's cash position. With $125M cash at end of Q3, plus Q4 cash flow of $60M, plus $109M third party stock, minus $45M exploration costs ($178M/4 quarters), HRG should now have approximately $249M ($.30/share) in cash, equivalents and stocks.
With HRG's resource base likely expanding in 2011 coupled with the financial ratios at over 50% (above), I believe HRG makes up 50% of Nord Gold's value. If they try again and ultimately achieve $5B value in an IPO (or company sale), then HRG should be worth $2.5B or $2.98/share. Add to this the $.30/share in cash, equivalents & liquid stock and you get to $3.28/share. Since Nord - a Russian controlled entity - is the likely buyer of the HRG minority shares, there should be no share price discount for risk of them investing further in Russian assets they already control.
Another option to an LSE listing would be for HRG to buy Nord Gold. The TSX is known for raising significant funds for mining companies. If Phillip Baum, the new Chairman of Nord, was willing to get to know some of the Canadian institutional investors and brokerages, financings and research coverage would soon follow. Also, with the announced merger of the TSX and LSE, perhaps synergies would allow for easier dual listings. Of course, an HRG/Nord TSX proposal only works if HRG shareholders are given fair value to obtain their vote.
Nord Gold IPO delay
HRG/Nord Gold calculations
Excerpts Nord Gold Prospectus
HRG's Royal Gold collateral released
HRG's Third Party Stock
Prognoz 43-101 report
Disclaimer: All numbers approximate. Info from Nord Gold Prospectus may have been misunderstood resulting in calculation errors.
Disclosure: I own 5M shares of HRG.
Rainerc7@gmail.com - e-mail me to be added or taken off my communication list
www.stockhouse.com - ongoing forum for HRG investor communication
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