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.
October 22, 2012 Nord’s offer for HRG (All numbers approximate)
To High River Gold Minority Shareholders,
Nord Gold has delivered its previously announced Insider Bid to try and take HRG private with an offer of $1.40/share in cash or an exchange of each HRG share for a .285 Nord share. The offer expires at 12:01 AM on November 27th, 2012. A few notable negatives to the offer regarding the share exchange option are that there will be no TSX listing of Nord Gold and if you accept the share exchange option it will be a deemed disposition of your HRG shares in 2012 for tax purposes.
There are 209M minority shares outstanding. We have received confirmation from shareholders that own approx. 84.7M shares (including funds controlled by Eric Sprott) that they will not tender (either for shares or cash) to the current offer from Nord Gold. Nord has lock-up agreements with minority shareholders holding 59.9M shares where they have agreed to the share exchange. Therefore, shareholders with 65M shares have not yet declared themselves. As with the last take-over attempt in 2009, I do expect some of these undeclared shareholders will side with us, but will likely not disclose until the tender due date. In other words, I expect our numbers to already be greater than 84.7M shares (40.44% of minority).
As expected, the valuation by Paradigm Capital (attached to offer in mail or available on SEDAR in take-over bid circular) supports Nord’s offer price - albeit on the low end of Paradigm’s range of $1.33 - $1.80/share. To remind you, Paradigm is the same firm that did a valuation for Severstal (Nord’s prior parent company) during their bid for HRG in 2009 where they stated that the offer price of $.22/share was fair. HRG’s share price was at $.90 a short time later. I expect we will hear from the Independent Directors of HRG shortly recommending that we accept Nord’s offer.
These are the same Independent Directors that have approved loans to Nord Gold from HRG for $159.9M over the last 18 months against HRG minority shareholders’ vigorous complaints. Part of these loan proceeds were used by Nord to purchase more HRG shares – again, against HRG minority shareholders’ vigorous complaints. In my opinion, Nord has been making all efforts since their involvement in HRG, starting at the end of 2008, to try and keep HRG’s share price as low as possible in order to buy our shares in this valuable Canadian company cheaply.
Most shareholders would have received a hard copy letter from me by mail in the 2nd half of September illustrating how I believed Nord’s proposed offer to be far below fair value. For those of you who did not receive it, you can view it in a link below. To repeat a few points from the letter, in the first half of 2012, HRG made up approx. 52% of Nord’s revenues & production, 69% of EBITDA, 273% of normalized cash flow and 150% of profit. At the end of Q2, HRG had $252M of liquid assets (loans to Nord, third party stocks and cash) and only $10M debt. Nord had $51M cash and $431M debt. Without HRG’s loans to Nord, Nord would have had a negative $115M cash balance at end of Q2.
Recently, Nord and HRG released their production numbers for Q3. For the first 9 months of the year, HRG made up 51% of Nord’s total production. I expect the Q3 financials (due November 15th for HRG and November 30th for Nord) will continue to show that HRG’s assets significantly outperform Nord’s non-HRG assets in terms of EBITDA, profit and cash flow.
In the most general terms, the Canadian take-over rules for an Insider Bid (lawyer’s explanation linked below) state that, in this first stage of the offer, as long as minority shareholders holding over 10% (approx. 20.96M) of the minority shares do not tender to Nord’s offer, then Nord cannot use the 90% rule to force a mandatory squeeze out transaction. As we have already received confirmation from those that hold 84.7M shares (40.44% of minority shares) that they will not tender to Nord’s offer - we have easily surpassed the first goal. IF YOU HAVE DETERMINED THAT YOU WILL NOT TENDER TO THIS OFFER, THEN YOU NEED TO DO NOTHING FURTHER BY THE OFFER EXPIRY DATE ON NOV. 27th.
However, it is likely that Nord will then attempt a subsequent amalgamation or plan of arrangement squeeze-out transaction (2nd stage). If Nord holds 90% or more of the outstanding HRG shares on the date the transaction is agreed to and HRG shareholders are provided with an appraisal remedy entitling them to demand the fair value of the shares, the only HRG shareholder approval required will be a special resolution of a 66 2/3% majority. Nord will be able to vote all of its shares in favour of the resolution. However if HRG holds less than 90%, in addition, the approval of the majority of the HRG minority will be required. If Nord wants to vote the shares that were tendered in the bid (including the 59.9M shares already locked-up) as part of the minority, they will need to complete this subsequent transaction within 120 days of the expiry of the original offer. A special shareholder’s meeting will be called and only those shares voted in person or by proxy will count towards the vote.
THEREFORE, IF ON THE DATE OF ANNOUNCEMENT OF A SUBSEQUENT AMALGAMATION SQUEEZE OUT TRANSACTION (2ND STAGE), NORD HOLDS LESS THAN 90% OF THE OUTSTANDING HRG SHARES, WE WILL NEED TO BE PROACTIVE AND HAVE OVER 50% (MAJORITY OF MINORITY) VOTE AGAINST (EITHER IN PERSON OR BY PROXY).
The surest way to know we will win this vote is to get confirmation from over 50% of all outstanding minority shares now (approx. 104.8M shares) that they will not tender and will vote against. Therefore, we need to collect another 20.1M shares in order to block all of Nord’s efforts to buy us out. I am fairly confident that we can accomplish this goal by Dec. 18, the earliest time they can call a special shareholders meeting (with 21 days required notice).
As a precautionary measure, if for some reason Nord wins the vote for a subsequent squeeze out transaction, REGISTERED HRG shareholders will have a right to dissent and have the fair value of your shares determined by a court. This means you still hand over your shares to HRG (in Trust for Nord), but a court decides on what fair value is for them. To make sure you are a REGISTERED shareholder, you need to call your broker and confirm or ask them to change your status from NOBO or OBO shareholders (means only our brokerages, not public, see your identity) to become a Registered shareholder. This will have you showing up on the HRG corporate registry of shareholders and entitle you to dissent. I suggest you do this by Nov. 27th.
To give you an idea of what may happen to HRG’s stock price if Nord fails again in its quest to take HRG private; I think it is important to look at the history of Nord/Severstal’s failed attempt in 2009. Severstal, (Nord’s parent company prior to the spin-off) on May 19, 2009, gave its first expression of interest to buy HRG minority shareholders at $.18/share. On June 25, 2009 Severstal mailed its offer at $.22/share and on July 18, 2009 Severstal increased its offer to $.30/share. On August 11, 2009, when Severstal announced it had only received just over 10% of minority shares in the offer, HRG’s shares had risen to $.36/share. By January 4, 2010 - 5 months later - HRG’s stock had climbed to $.90/share – triple the offer price. This could well happen again – both Nord increasing its offer price during the process and HRG’s share price going for a run after Nord’s offer is defeated. I think this is especially possible when you consider the comparison report linked below showing Junior Gold Producers trading at an average 22.3 P/E (2012E) and Mid-Cap Gold Producers trading at an average 25.4 P/E (2012E) vs. HRG at a 7.2 P/E (2012E). Nord’s offer is less than a third of the average.
By way of this letter, I am asking those of you minority shareholders, especially funds and institutions, that have not already sent in your share counts (since Nord’s July 18th original announcement date), please do so by e-mail. If we demonstrate to Nord that we have majority of minority as a group, it could pressure Nord to finally make a fair offer.
If you have contacted me (or Jordan) since July 18th with your share counts, there is no need to do so again. As usual, I will keep all information confidential.
Link to my previous letter mailed hard copy to all shareholders
Link to the take-over rules as stated by my lawyer
Link to P/E comparison of gold producers
HRG shareholder – Disclosure: I own 4.4M shares.
For the record we are still holding our shares and have not sold any of HRGs stock and we are supportive of Chris's efforts. However, its your cash and your investment and you must make your investment decisions.
Have a good one.
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