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By John Helmer in Moscow

Loose Canadian stock listing rules, a compliant exchange regulator, and rubber-stamp directors have made it easy for a Russian raider to attack minority shareholders of High River Gold (HRG:TX), and threaten them with dilution and delisting, unless they give in to a low-ball buyout offer. That is what minority shareholders of High River Gold are this week charging against the majority shareholder, Alexei Mordashov, and his Moscow-based Severstal Resources group. But because at least some of the institutional minority stakeholders are powerful Russians – maybe as powerful as Mordashov — the outcome of the tussle over HRG may be decided in Moscow, not Toronto.

So far, Mordashov has instructed his appointees Nikolai Zelensky, the chief executive of HRG, Alexei Khudyakov, the HRG board chairman, and Alexander Grubman, a newly appointed chief executive at Severstal Resources, to apply maximum pressure on the minorities to accept a buyout offer of 22 Canadian cents per HRG share. Mordashov has started with an estimated 57%; the minorities with 43%. The offer started on May 22 at 18 cents, and was raised to 22 cents on June 9. The deadline for acceptances is July 31. Two weeks later HRG issues its first-half financial results. The deadline for the purported review of delisting by the Toronto Stock Exchange is August 18.

Zelenskiy, Khudyakov, and Grubman, and the Canadian executives of HRG, have been ordered to say as little possible, while the pressure is on. The three Russians failed to appear at the annual general shareholder meeting of HRG in Toronto on June 30, but they refuse to say why. This week CFO Steven Poad and HRG’s vice president in charge of investor relations, Dan Hrushewsky — Canadians at the Toronto office of the goldminer — refused to answer Minesite’s questions about the boycott of the AGM, and about the delisting threat. An internal email between the Moscow headquarters of Severstal Resources and Toronto, leaked to Minesite, explains the no-response policy. “May be you know John Helmer,” reads the message from Severstal spokesman Sergei Loktionov to Zelensky. “[Helmer is a] critical blogger and author of articles in some newspapers… He is difficult. All his questions mean some catches.”

For the moment, Canadian shareholders have applied to the Toronto Stock Exchange with a lawyer’s letter, requesting that the exchange clarify whether it is behind the threat to delist the HRG shares, if the takeover offer fails. According to the letter from Bull, Housser & Tipper dated July 13, “a delisting review outstanding when all financial reporting is now up to date creates an undue influence on the minority shareholders to tender their shares in a coercive transaction.”

Eleanor Fritz, head of compliance and disclosure at the exchange, was asked “to confirm that [the Exchange] has in fact advised High River” in the language and intention which the management announced on June 18. In that posting on the HRG website, it was claimed that “the Corporation has also been advised by the Toronto Stock Exchange (the “TSX”) that its delisting review period has been extended to August 17, 2009 due to the pending take-over bid by Severstal and that in the absence of such take-over bid, the TSX would have determined to delist the Corporation’s securities due to its current financial condition. If the take-over bid is not successful or is otherwise terminated, or the take-over bid does not proceed on the expected timetable, the TSX reserves the right to immediately call a meeting of the Listings Committee to consider abridging the extension and whether to suspend trading in and delist the securities of the Corporation.”

Fritz has been asked in the latest letter to clarify whether “the TSX would prejudge the delisting decision in this way.” All the exchange said last November was: “TSX is reviewing the common shares (Symbol: HRG) and warrants (Symbol: HRG.WT) of the Company with respect to meeting the continued listing requirements. The Company has been granted 210 days in which to regain compliance with these requirements, pursuant to the Remedial Review Process.”

For more than a year now, the Toronto exchange has been promoting its services and listing advantages to Russian corporate executives. In January of 2008, for example, Raymond King, the business development manager for the exchange, announced a marketing drive in Moscow, saying “we are keen to explore the possibility of business development efforts in Russia in the near future.” With backing from Stephen Millar, the commercial minister at the Canadian Embassy, the TSX director of international business development, Janis Koyanagi, briefed a variety of potential Russian executives to draw them to listings on the TSX. Also participating in the effort was Greg Ferron, the TSX manager who “oversees our international efforts to increase awareness of our mining dominance.”

In an email, King cautioned that as “a publicly traded entity”, the Exchange “no longer can take on a regulatory role.”

A Canadian source, who holds HRG shares and called the TSX offices in Toronto directly to question what the Exchange has actually said, or is doing about the purported delisting review, told Minesite he was told the exchange is “under no obligation” to respond.

Shareholders in Canada report receiving telephone calls from a securities marketer asking whether they intend to sell to Mordashov, and reminding them of the delisting if they do not. HRG management have been asked to say if these calls have been arranged with the company’s foreknowledge. Poad and Hrushewsky refuse to reply.

David Kaiser has identified himself as the spokesman for Severstal and Severstal Resources in Canada; he’s an agent of the Fleishman-Hillard firm in Toronto. He was asked by Minesite to say how many shares have been tendered to Mordashov’s offer? What will Severstal do next if the offer fails for lack of acceptances? And whether his principals believe it to be lawful in the current circumstances for HRG to de-list? Kaiser replied: “We remain committed to a high standard of corporate governance, and the process has been independent… with regards to the TSX delisting – it is important to understand that High River Gold is currently under review by Toronto Stock Exchange for delisting, and has been advised by TSX that in the absence of the offer, HRG would have been delisted from the TSX due to its current financial situation…No additional information regarding the offer was discussed at the High River Gold AGM.”

So far it has been the Canadian minority shareholders who have been doing most of the organizing of opposition to Mordashov’s takeover, using internet bulletin comments to rally shareholders and gather evidence. According to one, delisting by the TSX would not be lawful in the present circumstances. According to another shareholder, one of HRG’s independent directors has acknowledged this, and added that he does not believe Mordashov’s intention is to make good on his threat. “The question is,” a third shareholder told Minesite, “is the financial condition of HRG improving? The answer is YES, in Q1 they made money, were cash-flow positive, paid down debt. Q2 will be 100% better year-over-year. I highly doubt the TSX would de-list HRG especially now that the prospects are improving. NORTEL is still listed on the TSX and they are BANKRPUT!”

An investment banker who is following the HRG takeover campaign closely said that another option for Mordashov, if the 22-cent offer is rejected, would be to issue new shares, and attempt to dilute the existing stakeholders. This could be done by the Mordashov-controlled board, without approval from the minorities, if the new issue represents less than 25% of HRG’s current market capitalization. Some shareholders have told Minesite they would welcome the opportunity to subscribe to a new issue.

“Severstal has a couple of more cards to play,” claims one of the opposing minorities. “They can convert the debt, or inject more capital (as they did in early June), both will balloon the share float and will increase the percentage owned by Severstal until they can invoke the ‘squeeze out’ rule allowed by the Canadian regulators.” He charges that the Ontario Securities Commission is not acting as an effective regulator in this situation. He claims the Canadian opposition is well-funded, as well as angry enough, to issue a class-action lawsuit against HRG and Severstal.

Two other shareholder forces appear to be in the running. According to the Canadians, they have heard rumours that someone is quietly buying up small lots of shares of HRG on the speculation that Mordashov will be defeated, and will abandon his takeover campaign. This, the speculation goes, will release HRG’s share price to climb sharply upwards towards its peers.

The second force comprises Russian investors with connections as potentially powerful as Mordashov. One of them is associated with a figure who is well-known in the Kremlin and the Russian metals sector. For the time being, this group is denying that it is preparing to mobilize its influence, and requesting anonymity.

Another is the Alfa group of companies, controlled by Mikhail Fridman. Attempts to get this group to comment on the HRG contest have been unavailing. A year ago, in July of 2008, Alfa made a bid to acquire a 32% stake of HRG at an offer price of $1.79 per share. An announcement by HRG on August 1, 2008, indicated the deal, to be implemented in several stages over five months, would have made available to HRG $286.4 million.

The global crash then intervened; HRG’s share price plummeted by 57% during the month of August; Alfa faced troubles at home; and Mordashov stepped in. What has not been confirmed, but is believed by credible Moscow sources, is that although Alfa’s offer for HRG lapsed, it still retains a shareholding in HRG which it has no intention of giving up at Mordashov’s price, or through delisting or dilution.

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