By John Helmer in Moscow
Alexei Mordashov, owner of the Russian Severstal steel and mining group, has lifted his takeover offer for High River Gold (HRG:CN) by 8 Canadian cents per share, after his earlier bids for the 43% minority shareholding failed at 18 cents and 22 cents. The new offer is 30 cents. If there are any takers, that would oblige Mordashov to reach into his pocket for C$84 million (US$77 million). The institutions holding roughly half of the minorities, and the smaller, individual shareholders, say that’s too little, too late.
The new offer was posted on Severstal’s website yesterday. Because HRG’s share price has been held in check by the previous offers, the new one lifted the price on a modest increase in trading to 30 cents. The range for HRG is between last year’s peak of $3.47 in February of 2008, and 4 cents last November. In the year to date, HRG has been restricted between 12 and 24 cents.
According to the latest announcement, the 30-cent proposal “represents a premium of 90% over the volume weighted average High River share price for the 60-trading day period preceding and including May 21, 2009, the last trading day prior to High River’s announcement that it was in discussions with Severstal regarding a possible transaction. It also represents a 7% premium to the closing High River share price on July 27, 2009 and a 36% premium over the volume weighted average High River share price for the period since May 21, 2009. The Board of High River (with Severstal nominees abstaining) unanimously recommends that High River shareholders accept the Increased Offer. Severstal further confirms that the Increased Offer is full and final and that the Increased Offer will not be extended beyond the revised closing date of August 10, 2009.”
Severstal and HRG spokesmen refuse to say how many shares have been tendered to the 18-cent offer of May 22, or the 22-cent offer of June 9. Market sources in Moscow and Toronto claim the number is very low. According to the new offer, “those High River shareholders who have tendered their Common Shares under the terms of the original offer will receive $0.30 per Common Share in cash and are not required to take any further steps to accept the Increased Offer.”
The Finam brokerage of Moscow told clients today: “in our opinion, Severstal’s new offer price looks quite fair.” Many of the minority shareholders, currently with about 43% of the shares, disagree.
Sprott Asset Management of Toronto, Firebird of New York, and two Moscow institutions, Alfa Group and Specialised Asset Management, are among the institutions resisting. One of the organizers of a blocking move by Canadian minority shareholders told Minesite he believes the new offer will fail: “There are approx. 648M HRG shares outstanding with the minority holding approximately 277M and Severstal holding the other approx. 371M Shares. I have collected 637 letters and e-mails to date identifying over 61,497,164 shares that will not be tendered at $.22. Out of this number, the holders of 53,457,843 shares have indicated that the average share price that they would consider tendering at is $1.44. In addition, it has been confirmed to me that a group of institutions with over 100M shares will not be tendering at $.22. These institutions have said that their minimum tender price would be $1. I am hoping these institutions will raise their minimum tender price due to the overall results. Therefore, with over 160M shares not tendering, it looks like we have been successful in getting the majority of the minority to support us. As long as minority shareholders stick together and do not tender to higher offers, this majority of minority will block any low priced amalgamation or ‘ plan of arrangement’ proposals that Severstal might put forth.”
Neither Severstal Resources, the mining division of Mordashov’s group, nor executives of HRG, will respond to questions.
Severstal’s financial reports to date indicate that a total of about $1.9 billion in debt matures this year, and must either be repaid or refinanced. In February already, the group repaid $325 million in Eurobond obligations; and must repay another $480 million by year’s end. In 2010 Severstal will have another $900 million in debt repayments. Then between 2010 and 2013, about $4 billion in debt will reportedly fall due.
Although Severstal, the third-ranked Russian steelmaker, has indicated confidence it has enough cash on hand, and current cashflow, to handle this year’s repayments, the Eurobond loan agreements which Severstal signed are putting pressure on Mordashov to remove losses from his current balance-sheet by selling loss-making North American steelmills and other assets. For the time being, says one London banker, there are no takers for the steelmills.
At the same time, the loan covenants imposed by the loans outstanding and Eurobonds sharply curtail Mordashov’s refinancing and restructuring options. The terms of covenants, which have been released, prohibit new borrowings or new acquisitions of $150 million or more. Were Mordashov to offer to pay for HRG shares at the institutional target of C$1 (92 US cents), he would be up for an outlay of US$255 million. The higher target set by the small stakeholders for their HRG shares would cost US$368 million. These numbers are bank-busters. According to the covenants, they would represent “a Material Adverse Effect”, and are bound to be nixed by Severstal’s lenders. The highest Mordashov can go, without triggering that, is 58 Canadian cents.
The spokesman for Mordashov and Severstal Resources was asked by Minesite to explain what impact the loan covenants may be having; why they still want to take HRG private; and at what price they believe this can be effected. The spokesman responded that they have reviewed the questions, and decided “not to comment.”
Moscow sources say the financial pressure is now so intense on Mordashov to restructure his group’s debts, and lower his debt to Ebitda ratio, in line with the covenants, he may consider selling out himself from High River Gold. All the Russian goldminers had looked at HRG before Severstal moved in last year. The more liquid of them are showing signs that they are reconsidering the target once more. “I believe Severstal is ready to sell,” says one well-known Russian goldminer, “but the buyer would have to acquire all the gold assets of Severstal Resources, including some which were very over-valued when Mordashov’s managers bought them. Some of those managers are no longer with the company.”