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By John Helmer in Moscow

O dear! Noddy can’t make the loop the loop. After his last adventure in the jungles of northeastern Guinea, Noddy found that he still owed so much money to his bankers, he wasn’t allowed to make big-ticket plane rides without their permission.

But if Alexei Mordashov (image) recently applied to JP Morgan, Morgan Stanley and Goldman Sachs to help him with C$112 million (US$108 million) to buy more shares of High River Gold (ticket HRG:CN), he probably explained that he would return the money very soon, when he and they sell the shares again at an initial public offering (IPO).

JP Morgan has been confirmed as the lead arranger for the IPO of Mordashov’s new goldmining company, Severstal Gold. Morgan Stanley and Goldman Sachs have been identified as candidates for support roles in the listing attempt. Timing is expected to be in the last quarter of this year – sooner if the gold price shows signs of retreating.

Canadian shareholders of HRG have been fighting Mordashov for more than a year now to prevent him keeping the share price of the company low, while he unsuccessfully sought to take 100% of the company, and buy them out at low-ball prices. Now that the IPO preparations are under way, the Canadian minorities remain hostage to Mordashov’s tactics for the valuation of their property. But for the time being, the two groups appear to be pulling in the same direction, with a target price which will be disclosed, once the prospectus is released, and Mordashov and JP Morgan reveal their valuation for Severstal Gold.

According to one shareholder source in Canada, “I doubt Severstal will make another offer to shareholders in the near future. I am very happy to remain a shareholder as things are finally starting to look very good. The pressure is now on them to get the HRG value up for their Severstal Gold IPO. I am hoping our interests are becoming aligned with Severstal, but still waiting for a significant sign that we are definitely aligned.”

HRG is trading this week at 78 Canadian cents, making a market capitalization of C$624 million (US$599 million). Mordashov’s 69% stake in this value is C$431 million (US$413 million).

This is how the share price has moved over the past two years:

The closure of the long anticipated transfer of HRG shares between Reuben Vardanyan and Mordashov – officially, between Troika Dialog’s Polenica Investments unit and Severstal Gold – has reinforced the floor under the current HRG price; it did not lift it significantly. Troika, controlled by Vardanyan, had bought 150 million HRG shares last October for 38 Canadian cents a share for a total of C$58 million. There was Canadian speculation at the time that this was a concert-party arrangement between Vardanyan and Mordashov to influence the outcome of Mordashov’s bid to buy out the resisting minorities. Mordashov’s men vigorously denied the allegations.

HRG filings for the sell-out indicate that Severstal Gold has paid C$112.5 million for the shares, at a price of 75 Canadian cents per share. That means a gain of 94% for Troika over just seven months. Mordashov may think he can afford to enrich Vardanyan this way, if the transaction increases the likelihood of a bigger value gain when the IPO is launched in a few months’ time.

What is less clear is how the heavily indebted Severstal group has been permitted by its bankers to pay out more than US$100 million for this new asset. In a release on January 20, Fitch said that with about $8 billion in total debt, “incurrence covenants for eurobonds remain at the existing level (debt/EBITDAR less than 3.5x) which limits Severstal’s ability to access new debt, except for specifically permitted instances including debt refinancing, until it complies with these covenants.”

On the financial data available, HRG makes up about two-thirds of the gold division revenues for Severstal Resources, out of which Severstal Gold has been created. There has been no announcement from Severstal Resources on what it plans to keep in the old shell, but it is presumed the mining assets that remain behind will be iron-ore and coal.

HRG’s latest financial report, issued on May 13, conceded that there had been operating problems at one of its two Russian mines, Berezitovy (a crusher breakdown), with the result that gold production was down there. At the same time, production at the other Russian mines (Zun-Holba and Irokinda) was stable, and growing at the Taparko-Baroum open-pit in Burkina Faso.

The financial results were positive. Revenues in the quarter were C$97.7 million, up 10% on the same period of 2009, though down 4% from the previous quarter. Mining costs were cut by 3%, year on year, to C$42 million. Net income was C$27.5 million, down 13% from the December period, but far above the C$900,000 figure of a year ago. Most significantly, the company’s debt – an albatross which Mordashov draped around HRG’s neck while trying to compel the minorities into selling short – has shrunk to $37.4 million, with the clearance of an obligation to Nomos Bank of Moscow in April. The company appears to be holding in cash and equivalents roughly double the value of its remaining debt.

So what is the good news worth? According to a report of the quarterly results by Olma Investment Company of Moscow, HRG is “well on track to delivering production growth at competitive costs. We have updated our model to reflect better than anticipated production and SG&A cost controls. As a result we now expect 2010E EPS to reach C$0.11 and we set our TP to C$1.82/share.” At that target price, HRG is worth about C$1.5 billion; Mordashov’s share, C$1 billion.

How much more should Severstal Gold be worth?

An estimate by Alfa Bank last November, including the assets Mordashov had accumulated in his vehicle at the time, was US$1.6 billion. Severstal had paid €300 million (US$367 million) in October 2007 for Siberian gold assets belonging to investment company Arlan. Sector sources in Moscow say Mordashov’s subordinates paid too much; they no longer work for him. Severstal also overpaid, the sources claim, when it spent US$325 million in 2007 and 2008 to acquire and delist London-based gold miner Celtic Resources. When JP Morgan starts drafting the Severstal Gold prospectus, the bank is not going to be able to claim these assets have much future earning capacity, or contribute significantly to the target IPO valuation.

After failing to gain 100% of the HRG shares, in January of this year Mordashov thought he had found a similar takeover target struggling with operational problems, current losses, heavy debts, and pinched shareholders. So Mordashov launched his bid to acquire the Oslo and Toronto-listed Crew Gold. But he was beaten to the punch by a combination of the selling Norwegian shareholders and Endeavour Capital, a Canadian group owned by Frank Giustra. Giustra defeated Mordashov, and took control of Crew Gold. The two sides then flung mud at each other in the business media, and in applications to the British Columbia Securities Commission.

This week, on June 1, Mordashov made official peace with his rival, and Crew Gold announced that the company’s board had been reconstituted with 4 representatives, including Giustra, for Endeavour, 3 for Mordashov, and 2 others. One of these two, a Norwegian, is on the majority side; and the other, a Russian who used to work for Troika, with the Russians. Of the 9-man board, 5 votes are for Giustra. The company also quoted Nikolai Zelensky, Chief Executive Officer of Severstal’s gold division, as saying: “We are pleased to have reached an agreement with Endeavour and Crew that will result in each of Crew’s major shareholder groups being properly represented on the board.” Neil Woodyer, the Chief Executive Officer of Endeavour, is quoted as saying: “Endeavour and Severstal share a common goal of maximizing the value of our investments in Crew Gold and, as active shareholders, we both see operational efficiency at the LEFA Mine and the restart of Crew Gold’s exploration programs as key drivers for organic value growth.”

At Crew Gold’s current market cap of C$556 million (US$534 million), the 27% stake of Severstal Gold, if unchanged at IPO, would be worth C$150 million. That’s not much of a sweetener for the pot, even if Crew Gold’s proven and probable reserves (published in January of this year) are fully valued; these reserves, mostly in the Republic of Guinea, are 2.9 million and 3.9 million, respectively.

In announcing that they are smoking the peace pipe until IPO time, the Canadian and Russian shareholders in Crew Gold have omitted to discuss the claims against their goldmine concession agreement in Guinea, which are in dispute with the Guinean Mines Minister, Mahmoud Thiam. Putting a value on what Crew Gold, and thus Severstal Gold, may not lawfully own is a task JP Morgan and the lawyers will have to deal with, when Mordashov’s IPO prospectus is written.

Using the Olma valuation for HRG, counting HRG’s percentage contribution in production and reserves , discounting Mordashov’s Arlan and Celtic Resources assets, and restricting the worth of Crew Gold, IPO valuations for Severstal Gold may fall in the range between C$2 billion and C$4 billion (US$1.9-$3.8 billion). If Mordashov is planning to list and sell a 20% stake, his payday might be worth between US$384 million and US$760 million. Subtract what he’s just given Vardanyan for the Troika shares, and he pockets between US$276 million and US$652 million for an enterprise that has cost him less than three years of effort.

For the time being, Severstal Gold is declining to say whether it has issued the IPO mandate to JP Morgan, or the other US investment banks; when and where it plans to list the shares; and what valuation it places on the assets of the new company.

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