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By John Helmer, Moscow

It takes a Russian to know how to build a Potemkin village, and hide behind it. It takes Alexei Mordashov to answer questions through a telephone number that rings in Amsterdam only to be relayed to a Moscow office, where the person in charge hangs up the receiver. That’s a false front that doesn’t deserve Count Potemkin’s name tag.

Mordashov is the owner of Nord Gold, the struggling goldminer spun out of the Severstal steel group. Since July 18, Nord Gold has been tabling an offer to buy out the minority shareholders of Toronto-listed High River Gold (HRG), the richest of the assets in the Nord Gold portfolio. Tabling isn’t quite what has happened. That’s because there won’t be an official offer to buy the remaining HRG shares until a purportedly independent valuation of HRG is completed and the share price offer put into a circular. That is a paper which Mordashov is promising to despatch to the hold-out HRG shareholders sometime soon. For the July 18 proposal, and the reaction of the market, read this.

If the stock market believed Mordashov when he claimed his offer was a 17% premium over the prevailing value of HRG shares, the six-month trajectory of the HRG share price is unconvincing. On the one hand, the price has been holding within a cent or two of the C$1.40 per share proposal, with minimal stock turnover.

On the other hand, the shorters – those who believe the offer will be rejected and the share price will fall – have remained almost unchanged:

Symbol Report Date Volume Change % of Float
HRG – T 2012-09-15 555,687 13,187 0.07
HRG – T 2012-08-31 542,500 -135,572 0.06
HRG – T 2012-08-15 678,072 -87,943 0.08
HRG – T 2012-07-31 766,015 139,164 0.09
HRG – T 2012-07-15 626,851 10,790 0.07
HRG – T 2012-06-30 616,061 45,788 0.07

Over the same interval, Nord Gold’s share price has fallen by 21%. It is now 26% below its peak for this year in April.

Paradigm Capital is the valuer appointed by HRG. It has links to the law firm Norton Rose and to investment bank Morgan Stanley. Whether they obscure the arm, at length of which the valuation of HRG is supposed to be conducted, one thing is certain. Paradigm Capital did a valuation of HRG for an earlier buyout attempt by Mordashov in 2009. It concluded then that his offer at a much lower price was a fair one. Subsequently, the market has judged that to be mistaken. The minority shareholders holding out against Mordashov’s takeover tactics believe Paradigm has been chosen again because it’s a patsy.

The latest financial report from Nord Gold, issued a month ago, reveals that revenues have been falling, costs rising, and the bottom-line almost in the red. Sales revenues for the first half of this year came in at US$528.5 million, down 3% from the same period of 2011. Cash costs jumped from US$672 per ounce a year ago to US$832/oz now. Earnings (Ebitda) in the first half were down 19% to US$217.7 million. The net income for the half was US$65.3 million, down 50% year on year. The second-quarter results showed a collapse in bottom-line profit – just US$5.6 million, a plunge of 88% compared to the second quarter of 2011.

Nord Gold’s cash position was parlous: it reports US$50.5million of cash in hand, but US$430.9 million of total debt. Without HRG’s stronger balance-sheet, Nord Gold would have had a negative cash balance of US$115.5 million and a US$33 million loss for the first half.

To avoid showing this, Potemkin, I mean Mordashov has reached into the HRG pocket to lend its money to Nord Gold. This related-party loan amounts to $165.9 million. But the report notes attached to the financial releases are confusing. They indicate that Nord Gold has refinanced through a new credit from state-owned Sberbank $358.4 million in loans from the Severstal group; they were to enable the Nord Gold spinoff and start-up. But that appears to have left Nord Gold short of cash for its mining operations, so HRG was pressed into service. Sergei Loktionov, the Moscow-based spokesman for Severstal’s mining businesses, declined to clarify whether there had been any repayment of the HRG loan money, referring instead to Diana Asonova, the new Nord Gold spokesman, whom the company website identifies as having a telephone number in Amsterdam.

In fact, that office is operated by a Dutch trustee company called TMF. It admits that Nord Gold is a client, but concedes there is noone from Nord Gold at the TMF telephone number in Amsterdam, nor at the office premises there. Instead, callers to Asonova are routed to Moscow. There Asonova hung up rather than respond to the request for clarification of the current status of the HRG loan to Nord Gold. By email she responded later: “Unfortunately, I cannot tell you anything more detailed than what has already been published in the consolidated accounts of Nord Gold under IFRS.”

A shareholder source in Canada says “there have been no repayments of HRG’s loans along the way. I expect they will increase the HRG loans again in the third quarter as Nord Gold has announced that it has paid off the Crew Gold [a Guinea mining subsidiary] bonds of $58 million. I would guess a lot of this was funded by new money from HRG.” Here is the bond repayment announcement from Nord Gold; note that it places spokesman Asonova in the correct geography.

In Guinea, where Crew Gold operates the LEFA mine, but where Nord Gold has an unresolved concession problem with the government, the first half-year operating report shows that mine output is down, compared to last year; grade is down; gold sales are down; and earnings are down. For more on the perils of Mordashov’s position in Guinea, read on here.

An advertisement by the Moscow Times for Nord Gold was published on September 21. According to chief executive Nikolai Zelenski, “Unlike our Russian peers, we chose to invest in foreign assets. We are ready to take the risk of investing abroad to find greater reserves of better quality than those available in Russia.” The interviewer omitted to ask why that “risk” was financed by HRG in Canada.

Asked for his source of inspiration, Zelenski replied: “I do not need to look far. Alexei Mordashov, CEO of Severstal and majority shareholder of Nordgold, is a very effective leader…The secret is a proper business model: creating a vertically integrated company and shedding unprofitable assets, plus a permanent focus on increasing efficiency. As a result, when the market falls the company is in the best position to maintain its margins and share price. I sometimes ask Mordashov for advice. He has a wealth of management experience and is open to sharing it with others.”

The Canadian shareholders have responded uproariously.

According to one of the Canadian minorities, “we have a private bet as to the offer. 20% believe Nord will pull the offer! 40% believe the offer will be between $1.70 and $1.80 CDN per share. 30% believe the offer will be $2.00 CDN per share. 10% will never sell to them and do not care if the offer is less than $4.50 share.”

Chris Charlwood, one of the coordinators of the minority opposition, reports that he has “identified shareholders holding close to or over 10% of HRG shares who have confirmed they will not tender to either of Nord’s current offers. 10% keeps minority shareholders from being squeezed out by Nord using the 90% rules in Canada. I am hoping to identify more HRG shareholders who do not wish to tender to the Nord offer by way of this letter. We are looking to add enough shares to get us over the 104.8M shares, majority of the minority, required to vote down a potential follow-on amalgamation squeeze-out offer from Nord. Nord cannot vote its shares.”

In his interview with the Moscow Times a fortnight ago, Nord Gold CEO Zelenski said that in addition to taking his cues from Mordashov, his bedside reading at the moment is a book called “Too Big to Fail”.

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