By John Helmer, Moscow
In American legend, Johnny Appleseed is the epitome of self-sacrificing kindness and charity to his fellow man. But he didn’t exactly give away his apple seeds. Johnny was a professional nurseryman – he gave seeds to friends and neighbours for planting in nurseries. The concessionaires and stakeholders then sold the trees and apples for commerce; Johnny kept the land. When he died in 1845, he was reputed to have accumulated an estate of more than 1,200 acres, not counting titles to land he’d forgotten about or lost. When the apple business went bust, Johnny stayed rich; his stakeholders weren’t so fortunate.
It’s probably Appleseed altruism that has motivated Alexexi Mordashov (left, right), owner of the Nord Gold group of goldmining companies, including Toronto-listed High River Gold (HRG), to take millions of dollars out of the latter, and lend them at interest to the former. But according to a formal complaint, filed recently by Canadian shareholders of HRG to the Yukon Securities Office, these loans are a form of cash-stripping, which is damaging the value of HRG and its share price.
Too, Mordashov has devised the terms of this week’s proposed exchange of his Severstal shares for his Nord Gold shares with the Appleseed model in mind. But then yesterday, after the stakeholders were first informed of the deal, they reacted with less than charity, cutting the Severstal share price by almost 6% on Wednesday, and cutting another 3% today. At the same time, HRG went up by almost 4%, because its value in the new Nord Gold structure will be bigger than Mordashov has allowed it to be in the old one. Heeeeeeere’s Johnny!
An international metals analyst calls the new Nord Gold share listing in Moscow a move by Mordashov to capitalize on gullibility. “Emerging market investors don’t fully trust him. Before buying, they look to specialist gold investors to commit. Only then are they willing to buy at the same valuation.”
Naturally, Mordashov puts a higher value on himself than others do; and he can’t make the same profit as he used to, when he sold overpriced coal assets, which he’d borrowed from Severstal to pay for, and then sold back at a high premium. That’s not the Appleseed way, not any longer.
When Mordashov attempted to sell Nord Gold shares in an initial public offering (IPO) in London at the start of this year, he was aiming for a target share price of between $4.77 and $6.20, valuing Nord Gold at around $5 billion; the price of gold was around $1,500 per ounce at the time, and rising. Still, there were no takers. Today, with gold at over $1,740 per oz, Moscow investment bank reports are warning that Nord Gold is worth 40% less — between $3 billion and $3.5 billion.
The complex swap of Severstal for Nord Gold shares proposed this week by Mordashov appears, according to one of the swap formulae, to put a valuation on the new Nord Gold structure of $2.7 billion; that’s if 100% of Nord Gold shares are swapped for 19.14% of Severstal’s shares (with the remainder of shares in the exchange to be cancelled). If Severstal shares continue to drop, so too will Nord Gold’s value until it comes to rest between $2 billion and $7 billion — at a discount below Polyus Gold and Polymetal, and above Petropavlovsk and Highland Gold.
According to the ever-optimistic Renaissance Capital analyst Boris Krasnojenov, “the deal may help to crystallize the value of Severstal’s core business units.” That isn’t saying anything. He concedes, as did Severstal briefers at a presentation to analysts late yesterday, that there are risks weighing on the target valuation and share price. For example, the company is likely to fall short of its gold production target for this year and next; and it faces incalculable costs and penalties as negotiations over the terms of its goldmine in the Republic of Guinea drag on .
At best, Krasnojenov believes the new Nord Gold can be valued at a multiple of enterprise value (EV) to earnings (Ebitda) of 6 to 7. Mordashov was hoping the market would be kinder to him. Another analyst is blunt: “Specialists won’t commit anywhere near the targeted range of 8 to10 EV/Ebitda. That’s because the reserve life of the company’s mines is short. So they realized this, and they are now trying to confirm through JORC-audited resource statements a longer life of mine [JORC stands for the international standard for counting reserves in the ground, the Australian Joint Ore Reserves Committee]. This takes several years to be convincing, if the gold is really there.” By moving from the London market to Moscow, the source believes, “this indicates that they [Mordashov] have given up on higher JORC-audited reserves and are trying to IPO in a market where investors don’t know how to value gold assets, and where volume of money, not asset value, does the deciding. That’s Hong Kong, Moscow.”
Sergei Loktionov, spokesman for Nord Gold, was asked what reason his company and control shareholder have for selecting Moscow this time, not London. He responded with the company’s announcement which says: “The transaction reflects a desire among our shareholders for Severstal to focus on its core strengths while also providing an opportunity for them to retain an interest in an established pure-play gold producer. The proposed separation will allow both Severstal and Nordgold to benefit from more focused operations and to continue to enjoy their market leading positions in the future, while providing shareholders more flexibility with their investment strategies.” Loktionov declined to explain why Nord Gold is opting to stay clear of London. According to the release, by the time the share swap is completed, the free float in Nord Gold will be not less than 5% but not more than 17.6%, which is the free float of Severstal as it is currently structured. And that may be Mordashov’s catch: with few Nord Gold shares trading in the market, it will be easier to push up towards a target share price, before it is advantageous to go back to the London Stock Exchange and meet the much larger free-float requirement for listing.
Is this a process in which the markets trust Mordashov not to play zero-sum games between his own profit and that of independent shareholders? According to the Severstal announcement, “the board of directors of Severstal has received fairness opinions from each of Citi and Deutsche Bank as to the fairness, from a financial point of view, of the exchange ratio to Severstal as of 29 November 2011.”
That Citi’s opinion, and Deutsche Bank’s, aren’t persuasive is suggested by the campaign Canadian minority shareholders in HRG have been waging to stop Mordashov manipulating that company’s financial condition. At immediate issue for the Canadians are two disclosures in the third-quarter company reports. One of them is that Mordashov ordered HRG to stockpile gold it had mined, not sell it. The volume was 22,000 oz. This turns out to be a wager on the fourth-quarter price going higher than the third quarter one. But it is also one way of making HRG’s profit at least $36 million lower than it might have been, in order – if the gold price holds up – for the new Nord Gold to appear more profitable at year’s end. Heeeeeeere’s Johnny!
The second disclosure which the HRG minorities are objecting to is a series of related party transactions, in which cash from two Russian mining companies which are part of HRG, Buryatzoloto and Berezitovy, was withdrawn from a Mordashov bank called Metallurgical Commercial, and loaned to Nord Gold. The latter received thereby $61.8 million in HRG loans at 6% to 6.25% interest. The loan advances to Nord Gold from HRG had been $30 million at the end of the second quarter, so the credit amount has been doubled since July.
The Canadian shareholders have circulated papers among themselves arguing that Mordashov is robbing the HRG till and share price, in order to buy up more HRG shares now and boost the value of Nord Gold shares later. The minorities also complain that Mordashov is holding back the proving to JORC standard of new gold resources in the HRG mine portfolio. According to the company documentation, “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.”
Either this delay means that Mordashov suspects the new JORC-audited numbers will be much better than has been revealed to date; if so, he is intentionally holding down the HRG share price while he buys up more shares. Or else Mordashov is convinced the new numbers won’t be an improvement on the present ones, and wants to keep the market in the dark because it is bad for the Nord Gold valuation.
Chris Charlwood, who speaks for a number of the Canadian minorities, has lodged a formal letter of complaint at these tactics to the Yukon Securities Office, the Canadian regulator in the territory where HRG is registered. In asking for enforcement of the Yukon Business Corporations Act on corporate governance, fiduciary duty, and conflict of interest, Charlwood says: “The Yukon Business Corporations Act states that the Board of Directors must vote for the benefit of HRG and shareholders. This means all shareholders, not just the majority shareholder. The real issue here is that while Nord is borrowing these funds, at the same time, it is buying blocks of shares of HRG at an intrinsically low value. In essence, they are borrowing HRG’s money to finance their increased ownership in HRG. I say they are buying at an intrinsically low value because HRG is trading at 5 times cash flow net of liquid assets. It is trading this low because Nord controls HRG’s Board of Directors and Management, thereby controlling information flow to the public.”
Sergei Loktionov, Nord Gold’s spokesman, was asked to respond to the criticism. He says: “[the HRG] loans were granted on market terms, and in full accordance with the rules and fiscal policy of HRG. The decision on granting loans was approved by the Board of Directors of HRG. For HRG and its shareholders it is more profitable than holding the funds on the bank accounts of the company.”