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By John Helmer in Moscow

If Alexei Mordashov (right figure), owner of the Severstal steelmaking and mining group, has genuinely decided to let the stock markets lift the share value of High River Gold (ticker HRG:CN), then delaying the public release of the company’s financials and blaming the auditor are a funny way of going about it.

But then according to insiders at Severstal Resources – the mining division which owns the majority stake in HRG – Mordashov is preoccupied at the moment with another problem. That is the resistance he and his men are facing, but failed to anticipate, for their attempt at taking over another goldmining property, Crew Gold, owned until recently by Jens Ulltveit-Moe (Tweety, left figure). With Crew, Mordashov is at risk of getting stuck up the high river without his paddle.

According to last week’s company announcement, HRG “will be filing its audited financial statements, management’s discussion and analysis, annual information form and related CEO and CFO certifications for the year ended December 31, 2009 late.” The international auditor KPNG is at fault, HRG says, noting that although “appointed in November 2009, [KPMG] has not finished the audit by March 31, 2010.” Why KPMG couldn’t do its job in five months isn’t explained. HRG’s credibility doesn’t improve with the rider to its announcement that the auditor needs just two weeks more. According to the HRG release, “the Annual Filings will be filed prior to April 15, 2010. As a result of the delay in filing, High River will be requesting that the Ontario Securities Commission and other Canadian securities regulatory authorities issue a temporary management cease trade order (“MCTO”) that prohibits certain directors and officers of the Company from trading in securities of High River for so long as the Annual Filings are not filed.”

For most of last year, Mordashov attempted to persuade or pressure minority shareholders in HRG into selling out to a series of low-ball offers he had tabled. Bad news was released on HRG’s debts, mining operations, and production, in order to put the share price under pressure. But the minorities — mostly Canadian institutions and retail investors – resisted, arguing that Mordashov was artificially holding HRG’s value down to lower his takeover price.

The goal in that game was to prepare a new goldmining vehicle, OOO Severstal Gold, with low-priced assets like HRG, and then make a new initial public offering (IPO), most likely in the London market, in a bid to double or triple the value of the shares above Mordashov’s buying price. HRG was one target, with mines in southeastern Siberia and Burkina Faso. Crew Gold, the Norwegian and Canadian listed miner, was a second; Crew’s operating mine is in Guinea, and it has exploration and development properties in Greenland, Philippines, Canada, Ghana, and Norway.

When Mordashov first started out with Russian goldmining assets, before he bought into HRG, his associates persuaded him to pay premium prices. In October 2007, €300 million ($437 million) was handed over to Moscow investment company Arlan for projects now deemed to be worth a fraction of that value. Another $325 million was spent in 2007 and 2008 to acquire what was left of the projects belonging to AIM-listed Celtic Resources. Again, too much. At the time, Mordashov thought the over-spending would be recouped quickly when his IPO was buoyed by the gold price.

The 2008 crash made Mordashov suddenly more frugal, not least of all because his profligacy in buying European and North American steelmills was tipping the entire group into insolvency with more than $7 billion in debt; at the end of 2009, net debt was reported at $4.3 billion. The goldmining IPO remained the objective, but adding more tangible and valuable gold reserves and operating mines was required for the IPO – and a low price was all Mordashov could afford. HRG and Crew were thus picked by Mordashov as birds of a feather — disabled and devalued by a combination of operating, technical, and financial factors that opened for Mordashov his discount-priced entry, and his future arbitrage.

Last December, Mordashov’s subordinates were hinting broadly at this stratagem. Severstal “may hold” an IPO for the goldmines in late 2010 or early 2011, reported Bloomberg, referring to a company plant identified as “people who declined to be identified.” The stock market for the placement had not been selected, “the people said”. Then late in February, Nikolai Zelensky, the chief executive of Severstal Resources, said: “We will consider acquisitions in those regions where we operate already, which are Russia, Kazakhstan and West Africa.” Only he didn’t want to be tied down to what the boss intended to do with them. According to press reports, Zelensky said Severstal hadn’t decided whether or when to sell shares of the gold unit in an IPO. “We aren’t preparing for an IPO. What we could list some day is a holding company which owns all stakes in gold producers that Severstal currently owns. We may buy out one or two large minority holders of High River but plan no tender offer for all of the holders.”

Severstal Resources spokesman Sergei Loktionov will not say if the 150 million shares (23%) of HRG purchased by Troika Dialog last October have been bought for Mordashov this month, when the lock-up period for the shares expired. If they were, Severstal would now hold about 73% of HRG. Troika Dialog’s spokesman, Polina Novoselova, said her house isn’t saying what it has done with the HRG shares either.

Zelensky of Severstal Resources has suggested that, if Severstal Gold does try for an IPO, it should be valued on a par with Polymetal, the second of Russia’s goldminers, which, when Zelensky made his remarks, was priced at $9.80, for a market capitalization of $3.9 billion. Today Polymetal is at $10.50 and $4.2 billion. For Mordashov to reach so far and so high, he badly needs HRG, Crew Gold, and more. According to the latest report from Severstal, the goldmines it owns produced 534,000 ounces in 2009, “making our gold business the second largest Russian gold producer”. That number is well ahead of Polymetal’s gold output in 2009 of 311,000 ounces. But it doesn’t count 17.3 million ozs of silver also produced last year by Polymetal; this silver is equivalent to 267,306 ozs of gold. Adding the two together, Polymetal stays ahead of HRG by 44,306 ozs. Notwithstanding, Severstal’s gold sales are a powerful driver, generating one dollar of earnings for every four by the entire group — $236 million of $844 million in Ebitda for 2009 (28%).

Canadian market sources say they are angry that with all the good news coming for HRG, Mordashov is unaccountably delaying once again. But HRG has released an unaudited summary of operating highlights for last year. These show gold production up by 52% to 336,366 oz, and cash cost per ounce down by 21% to $505/oz. Revenues for the company’s gold sales came in at $363 million for 2009 – double the $180.8 million achieved in 2008. Cashflow from operations has been steadily growing, quarter to quarter. Cash and equivalents at the end of last year totaling C$82.1 million covered almost all of HRG’s current debt of C$84 million; but if gains on market investments are counted, HRG had a net surplus of C$62 million by year’s end. Counting that, plus another C$40 million of cash surplus expected in the first quarter of this year, means that HRG is more than solvent – it is now flush enough to fund all its mine production enhancements, plus exploration of licence areas for new reserves.

And yet, at the current share price of 73 Canadian cents, HRG’s share price chart has been flat for several weeks, and down since January. The market cap is C$583 million – far below Zelensky’s target.

According to a Severstal insider, the IPO deadline set by Mordashov is the end of this year. So he and his men must hurry. Their problem with Crew Gold is that someone else spotted the same opportunity, and bought into the company with the intention of capitalizing on the upside, just as Mordashov thought of doing.

That man is Frank Giustra, owner of the Endeavour Financial group (right image). A statement by Crew Gold indicates that he had bought 37.9% of the company’s shares from the secondary market on or by January 28. The seller appears to have been Crew Gold’s controlling shareholder at the time, Ulltveit-Moe (Tweety).

Inside Mordashov’s headquarters, sources report that his men have been ordered to battle stations with the aim of repelling Giustra’s (Gutsy) attempt to take Crew Gold for himself, or prevent him from blocking Mordashov from doing so. Publicly, all Mordashov will say is in the announcement of March 29 from Crew Gold that there has been a “requisition [sic] for a special meeting of shareholders from Bluecone Limited of Limassol, Cyprus [the Mordashov vehicle] The requisition states that the business of the meeting is to remove the existing directors of the Corporation and elect up to ten persons to be proposed by Bluecone Limited. The Board of Directors of Crew is evaluating the requisition and its obligations in response to it.”

Severstal sources have told the Moscow business press and the Oslo Stock Exchange that it currently holds 26.9% of Crew Gold, and has the support for a new election of board directors from shareholders holding another 23.53%. Noone is clear who these shareholders are, or how they were counted. Severstal has also reportedly filed an objection to the Securities Commission of British Columbia – the Canadian regulator for Crew Gold – to the buying of shares by Endeavour without the latter making a mandatory offer to minorities.

According to Severstal and other evidence, Mordashov had started buying into Crew Gold, probably from Tweety, and probably before Gutsy made his move in January. But the Russian stake at that point was just 4%. On February 2, Severstal issued a release announcing the purchase of another 15.71%, making 19.79% in all. Between then and now, the stake grew by another 7%. Severstal’s Bluecone unit tabled its offer to buy out the Crew minorities on February 25, offering a 7% premium price of 1.10 kroner per share ($1.84).

According to the latest shareholder data, Endeavour was also buying in parallel, adding another 3%. INK Research, the Canadian market monitor, reports that as of March 26, Endeavour held 41.1%; Bluecone 26.6%. Then followed Pendragon Capital with common shares and convertible debentures amounting to 12.1%; Ganhara Capital with 2.2%; and finally Tweety with just under 1% of shares and options. Another 17% of Crew Gold’s shares remain unreported. Tweety had apparently convinced Mordashov to start buying him out, and then Gutsy to rescue the company and Tweety’s shares from the Russian. Gutsy appears to have taken a page out of Mordashov’s playbook for HRG, and caught the Russians napping. Tweety managed to sing an alluring song to both, and sold out.

The effect on Crew Gold’s share price over the past three months has been predictably upward more than fourfold:

A Russian goldminer close to Severstal sums up the lessons: “Mordashov is surprised that, unlike the story at High River Gold, nobody at Crew wants a Russian, or needs him. Mordashov thought he had pulled off a big success at HRG. He became over-confident with Crew.”

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