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
November 19, 2011
Even though HRG management decided to withhold selling 22k oz of gold in Q3, HRG still managed to produce a $41.3M profit.
I have extracted what I believe to be the most important excerpts from HRG’s Q3 MD&A below with my comments after each excerpt. Nord Gold (and subsequently HRG) decided to stockpile gold in Q3 rather than sell it at the lower gold prices. Nord made this decision in order to sell the stockpiled gold in Q4 at higher prices. This will result in a more profitable Q4 and full year for both Nord Gold and HRG. This seems like a prudent move by Nord and points to them likely announcing a Nord Gold spinoff after the year end results are released March 31st. In effect, withholding sales accomplishes two goals for them: increased year end valuation for Nord Gold and optically worse Q3 numbers for HRG. This gives Nord another 4-5 months in which to try and accumulate more HRG shares at these low prices. In addition, Nord Gold has increased its borrowings from HRG in Q3 to a total of $62M.
“Buryatzoloto mines, Russia
The exploration program, aimed at increasing the life of Irokinda and Zun-Holba mines, commenced in 2010 and continued in Q3 2011. During the 9 months of 2011 the Company completed approximately 103,000 m of drilling. High River has been negotiating with engineering consultants the possibility of preparing the National Instrument 43-101 (NI 43-101) compliant resource and reserve estimates for Buryatzoloto based on the available exploration data. It is, however, difficult to estimate whether a technical report compliant with the NI 43-101 could be prepared as no geological models have been developed previously for Buryatzoloto. Further, there is no explicit mechanism of converting the reserves and resources which are compliant with Russian state standards into the NI 43-101 compliant resource and reserve estimates. It was anticipated that these negotiations would have been finalized and the technical report would have been prepared in 2011. However, the negotiations are still ongoing. Currently it is too soon to predict the results of the work of engineering consultants and whether such results would prove the additional NI 43-101 compliant reserves and resources for Buryatzoloto.”
This seems like a very odd explanation as to why we have not seen any results from the tens of millions of dollars spent on drilling programs at Zun-Holba and Irokinda. I am not sure why a gold mining company would need to negotiate with a consulting firm on how to carry out their work. I would expect they need to approve extra costs to conduct geological modelling. I also question why they did not start this process starting in 2010 when they surely knew this was an issue. These excuses result in convenient delays for announcing significant increases in resources for HRG – thereby giving time for Nord to attempt to increase its stake in HRG cheaply.
The Company’s consolidated net gold revenue for Q3 2011 increased to $111.5 million from $100.76 million in Q3 2010. An increase in the gold price was the main growth factor. Gold sales volume was lower than production due to the Company’s intention to maximize revenue for the whole year. Therefore, part of the gold sales was transferred to Q4 2011 to benefit from higher gold price. The average realized price was US$1,644 per ounce compared to US$1,248 per ounce in Q3 2010.”
Had HRG sold all of the 91k oz of gold produced in Q3 (vs. the 69k oz), the total revenues would have been approx. $36M higher for a quarterly record of approx. $150M. The profit, EBITDA and cash flow numbers accordingly would have also broken HRG’s records. Although the quarter was disappointing, we look forward to what should be extremely positive Q4 and year end results on March 31.
“Related Party Transactions
As at the end of Q3 2011, cash placed by Buryatzoloto and Berezitovy on deposits with Metallurgical Commercial Bank (which is related to Severstal group) amounted to approximately US$50.9 million and US$15.3 million respectively (as at the end of Q2 2011 – approximately US$104.2 million and US$27.1 million). During the period, net withdrawal of cash from deposits with Metallurgical Commercial Bank totalled US$53.3 million for Buryatzoloto and US$11.8 million for Berezitovy.
In 2011, Buryatzoloto and Berezitovy provided 6.0% and 6.25% interest bearing secured loans to affiliates of Nord Gold with the amounts outstanding as at the end of Q3 2011 being approximately US$51,4 million and US$10.4 million respectively (2010 – $7.6 million). Total receivables from Nordgold group and Severstal group is US$0.7 million and payables US$1.1 million (2010 – US$0.4 million in payables).”
At the end of Q2 I lodged a complaint with the OSC and Yukon Securities Office (YSO) and with the HRG Board of Directors regarding HRG lending money to Nord and Severstal. The summary of the complaint was that it was not in the best interests of HRG and all shareholders to lend money to Nord and Severstal – especially considering Nord was buying blocks of shares of HRG at depressed prices in the same time frames. The complaint stated that the best interests of all shareholders would have been for HRG to use those funds and buy those shares itself to retire them. Clearly the Board of HRG has ignored the complaints as the borrowed amounts have increased from $30M to $62M during Q3. Presumably, these additional borrowings were used to cover shortfalls at their non-HRG properties as they withheld selling 21k oz from those properties for a total of $35M. These other properties contribute very little operating cash flow to Nord as compared to HRG. Both the YSO and the OSC have confirmed receipt of my complaints, however, they usually do not confirm whether they are investigating or what their findings are along the way.
The second ball mill and the second crushing unit at Berezitovy are expected to enable it to further increase production and decrease per unit costs in 2011 and following years. Installed in Q2 2011, the second crushing unit at Berezitovy, aimed at providing finer ore, showed lower than planned capacity and an engineering study is being conducted to define technical parameters of further crushing line improvements. Somita is expected to improve mining performance and continue its program aimed at increasing recovery rate. Buryatzoloto operates close to full capacity.”
Although there have been continued technical difficulties at some HRG mines, the above statement points to increased production at lower costs/oz for 2012-2013 once the issues are resolved.
“Uses of Liquidity
High River’s cash requirements over the next 12 months are primarily to:
service its debt obligations (approximately $12 million); continue mine-site exploration at Irokinda and Zun-Holba to replace mined-out reserves and extend the life of the mines; fund corporate administration and working capital; finance the Berezitovy mine expansion; finance Bissa development and mine construction; extensive exploration in Burkina Faso. The Bissa development will require significant funds to be invested in 2011-2012.”
The debt obligations mentioned above include paying off one $11.9M loan by year’s end. This leaves only one more $9.6M loan to pay in 2012 before company is debt free. Most of the rest of the ‘uses of liquidity’ are for investments in exploration and capital expenditures which ought to result in increased gold resources and production in the years ahead.
Had HRG not lent money to Nord Gold in Q3 and had it sold its entire gold inventory, HRG’s liquidity would have been over $300M – even after $44.5M in exploration and capital expenditures during Q3.
I expect the conflict between HRG management/Nord/Severstal and HRG minority will come to a head in Spring of 2012. Severstal is eager to spinoff Nord Gold and its predictably impressive year end will help increase the valuations. I suspect Nord will attempt to get a hold of a few more blocks of HRG shares between now and then. However, there are 7 groups of large HRG minority shareholders that control over 99M shares - well over the 10% required to prevent a squeeze out. In addition, there are smaller retail investors with 16M shares that are adamant about getting fair price. This gives us majority of minority votes. These shareholders that hold out the longest will see the highest price for their shares. Nord will have to choose between buying minority out at a fair price or spinning Nord off while keeping HRG public. Either way the minority holdouts will win. If Severstal successfully spins off Nord Gold, then we HRG shareholders will only benefit through increased exposure of a public Nord Gold, increased transparency in Nord financial reporting and arbitrage between Nord and HRG’s stock price. At that time I would expect that some analysts could find it worthwhile to run comparisons between HRG and Nord. This can only help put upwards pressure on HRG’s share price.
HRG Q3 press release
www.sedar.com (search public company High River Gold, select MDA&A reports. Free.
HRG shareholder, investor
So there you go.
For what its worth we continue to hold onto our shares in HRG, but as always do the work and make your own investment decisions, after all its your cash.
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