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.
To HRG Shareholders/Potential Investors,
HRG released its Q4 and year end results last week and following are some important data points:
1) Gold revenues 2010 of $435.61M , Q4 of $123.3M ($493M annualized).
2) Cash flow 2010 of $155.9M , Q4 of $49.3M ($197.2M annualized).
3) Net income 2010 of $114.9M, Q4 of $22.3M ($89.2M annualized).
4) 2010 notable expenses – Mine Amortization & Depletion $60.7M, Exploration $15.5M
5) Gold production 2010 of 329.9K oz, Q4 of 87.9K oz. (351.6k oz annualized).
6) Liquid Assets of $263.5M ($153.9M cash and $109.6M third party stock).
7) Debt (& interest) of $25.2M
8) Liquid Assets net of debt - $238.3M
9) CIM Classified gold reserves (Proven & Probable) of 3.75M oz, CIM Classified gold resources (Measured and Indicated) 5.1M oz and Inferred of .7M oz. Silver resources of 103M oz (Measured & Indicated) and 102M oz of Inferred. HRG owns 50% of the silver property Prognoz. 50% in gold equivalent = 2.8M oz (@ 73 to 1)
10) Proven operational management team.
1) 2M oz of additional gold at Bissa.
2) 50% of 363M oz of additional silver at Prognoz (4.9M oz gold equivalent).
3) Severstal is built in buyer of minority shares.
4) Gold likely to trade at $1500-$1600 oz in 2011.
5) Zun-Holba and Irokinda mine lives likely to be extended.
HRG is trading at 3.7 times Q4 cash flow (net of liquid assets and debt). 840M shares @ $1.14= $958M market cap - $238.3M net liquid assets / $197M annualized cash flow).
It has been two years since we minority shareholders realized that Severstal (which had just made a controlling investment in HRG), was strategizing to buy us out. The signal for us was the string of extremely negative press releases put out by HRG management (Severstal employees). Our hunch was correct. The first proposal came in at $.18/share. 90% of us knew the underlying value of the business and did not tender our shares. It’s now 2 years later and the above results prove our point. Today, many of us remain invested with full resolve to see the fair value of this company. What is the fair value? Anyone would be hard pressed to find another gold producer that trades at HRG’s low cash flow multiple. By any comparisons, HRG should be trading at double to triple the current price. If Prognoz value is released, then even that would be conservative.
Those that invest now or remain invested will be rewarded. At some point, Severstal/Nord Gold will have to realize its value on its 72.64% ownership in HRG. Q1 results will come out on May 15th. If production remains the same as Q4, we will see $51M of cash flow (avg. gold price up $25 from Q4) - but we may get surprised with increased production from the second ball mill at Berezitovy. In the Nord Gold prospectus, Management said they spent $9.8M in the first 9 months of 2010 on drilling and exploration works at Irokinda and Zun-Holba. They also stated that they are “planning to invest US$23.2 million in 2011 on modernisation of the underground site within exploration projects and US$14.9 million on purchasing new production equipment and other mine fixed assets." As Irokinda and Zun-Holba mines are running low on gold, we look forward to the drill results due by the end of June.
Also, we look forward to a resolution between the battling parties that own Prognoz 50/50. Prognoz is ranked as the world’s 10th largest silver property but actually ranks first in grade at up to 704 g/ton. We hope that these 50/50 owners can come to some equitable agreement soon. They did have an agreement that fell through in 2008. Although shareholders at the time did not like the proposed structure, I would think something like the following would make sense in today’s market:
1) HRG could spin out its 50% holding in Prognoz into a new Canadian listed Pubco.
2) Pubco would then issue an equal number of shares to other party to gain 100% ownership.
3) Each party would elect 4 Board members.
4) Pubco should then secure a large financing with a third party who gets 3 Board seats.
5) The Board then hires a management team that does not work for either party.
Such a transaction will immediately unlock the value of Prognoz for all parties. This would leave HRG as a pure play gold producer and give Pubco the ability to get started with development of the Prognoz property.
In terms of unlocking HRG’s value - if and when Severstal decides to do so – the following actions would build investor confidence:
1) Hire an IR company.
2) Put out more detailed news releases on financials comparing quarters and years.
3) Give guidance as to future productions levels and resource growth.
4) Hold investor conference calls.
5) Meet with analysts in Canada and Europe to start coverage on HRG.
6) Attend mining shows and make presentations.
Based on recent low trading volume, there are very few sellers of this stock. Any significant demand should help us eclipse the $1.50 high.
HRG Q4 and 2010 results
Prognoz potential – pages 4 & 6 of “The Summary”
Interesting excerpts from 2010 year end Financials and Annual Information Form
HRG’s Third Party Investments
Investor – own 5M shares of HRG
Rainerc7@gmail.com – to be added or removed from this e-mail list.
www.stockhouse.com – ongoing HRG investor communication
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