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By John Helmer in Moscow

You don’t have to be a child with an especially good memory to remember this one, which is pre-Mother Goose:

Jack Sprat could eat no fat.
His wife could eat no lean.
And so between them both, you see,
They licked the platter clean.

What four hundred years of nurses, mothers, and cooks have done to twist the meaning shouldn’t obscure the original moral of the tale – when it comes to appetite, rapacity will usually clear the plate ahead of modesty.

What attorneys for a Canadian shareholder in High River Gold (HRG:CN) have told stock market regulators in Vancouver and Toronto recently is that, when it comes to the management of the company and its share price by its Russian owner, Alexei Mordashov, there’s something decidedly unbalanced about the way HRG has been handled since Mordashov’s takeover of last November.

HRG is a Toronto-listed junior with four operating gold mines in Russia and Burkina Faso, and two mine projects in development. It has currently attributable production of about 300,000 ounces per annum, and is cashflow positive. Attributable gold reserves were estimated in February by Dan Hrushewsky, HRG’s investment relations director, at 2.2 million oz, with silver reserves at 5.2 million oz. A subsequent release from the company on March 17 reported a MICON expert audit of gold reserves at the Zun-Holba and Irokinda mines (Buryat region of southeastern Siberia). Altogether, counting the Bissa gold project in Burkino Faso and the Prognoz silver project (Sakha region of fareastern Siberia), and converting silver reserves into gold equivalent, HRG’s gold equivalent reserves and resources, on the Canadian NI 43-101 basis, add up to 6.1 million oz.

The shareholder complaint was filed on April 24 with the Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC) by the law firm, Bull, Housser and Tupper of Vancouver. The filing has been formally acknowledged by both agencies; the BCSC said jurisdiction for the Toronto-listed company rests with the OSC. The OSC wrote on May 22 to confirm that the filing has gone to its Corporate Finance Branch, where it “may or may not result in an investigation”.

According to Grant Weaver, the attorney for the complaining shareholder, Severstal’s six-month takeover has involved improper treatment of minority shareholders. The shareholder has also identified himself for this report, and says he owns “just under 1%” of HRG’s shares.

According to the text of the OSC filing, “our client is concerned that while High River was able to rely on the TSX exemption subsection 604(e), it did not fully comply with the requirements under that subsection by issuing a pre-cleared press release five business days before the closing of the transaction. This raises serious concerns about the proper treatment of High River’s shareholders and the application of the TSX policies and its role in providing proper oversight. Without the advanced notice of the transaction the shareholders were unable to bring to the attention of the regulators any concerns they may have had.”

The OSC was also told that the terms of Severstal’s takeover of both the control stake of the mining company, and its $27 million debt to Standard Bank of London, “have been completed at a time when the required financial information has not been disclosed to the market place and perhaps not to the regulators in a timely way has resulted in Severstal having a controlling position as a shareholder and a dominant position as a creditor, all to the possible disadvantage of the minority shareholders since there is no way to verify that Severstal paid proper value for its investment.”

What value HRG is currently worth, and who will get the benefit of it, are the crux of the filing, which notes that the OSC has already ruled this year (in a case involving the Lundin Mining Corporation) that shareholders should exercise the fundamental governance right of voting on the composition of the board of directors of companies, in which they hold shares. “That fundamental governance right was denied to the minority shareholders of High River,” Weaver told the OSC.

The result, he and his client claim, is “that High River is in a vulnerable state due to its debt position which is now controlled by Severstal. Nevertheless this corporate group has a number of producing gold mines, which should provide value; yet, adequate financial information has not been provided to the market such that the market can properly assess the value. There is a serious risk that if a transaction is proposed to the shareholders, it will not be at fair value and may be coersive.

Furthermore, through Severstal’s position as a creditor, Severstal stands to potentially acquire assets of High River through a realization which poses a high risk that the shareholders will not receive fair value.”

Three weeks after this was despatched to the regulator, HRG told the market that its board had received an offer by Severstal to buy out minorities. According to the company, “following an independent analysis by High River of its liquidity position and a review of financing and strategic alternatives, on May 19, 2009 Severstal indicated to the Board of High River, by way of non-binding expression of interest, that it proposes to make a cash offer of C$0.18 per share to minority shareholders in High River. There can be no guarantee that such an offer will ultimately be made at this stage. The Board of High River has formed a special committee consisting of independent directors to oversee discussions with Severstal and evaluate any proposal that may be made.”

On the previous two trading days, the market price for the share was between 14 and 17 cents, higher than its trough in April, but below its 22-cent peaks in February and March. Asked to say if the offer is a fair price, Severstal Resurs, the Moscow-based mining division of Mordashov’s group, which supervises HRG, told Minesite through a spokesman: “At the moment of our request to HRG (May 19) the price was 14 Canadian cents. That is, our price was 28.6% higher than the market price.”

Asked to respond to the claim from other shareholders, as well the OSC complaint, that Severstal has been trying to hold HRG’s price down, in order to reduce the price of the buyout, the spokesman said: “We have neither bought nor sold HRG shares since August. And we have not sold any shares at all. So we could not suppress [the price of] HRG shares.”

The Russian bank Nomos, which is currently the largest lender to HRG, was asked what it estimates to be fair value for the goldminer at present. Speaking for the bank, Yelena Bumagina told Minesite she was unable to get her institution to comment, and unable to explain the reason. HRG reports indicate that Nomos currently has loans totaling US$43.4 million outstanding to the company. This year it has been able to extract a rate increase to 14%, retroactive to January 1; repayment is guaranteed by Severstal.

The valuation issue is being hotly debated on the North American investor bulletin boards. Two runs have asked HRG shareholders to say whether they would accept Mordashov’s 18 cents, and if not, what price they are looking for. With the annual general shareholders’ meeting scheduled for June 30 in Toronto, there is unanimity in opposition to the offer price. Shareholders claiming to hold about 6% of the non-Severstal float (currently around 46%), or about 27% of the institutional positions, range from a low of 50 cents to a high of C$1.28, with a current bullboard consensus forming around C$1. That indicates a prospective market capitalization of HRG of about C$600 million. At the current share price, the market cap is just C$130 million.

Another international institutional shareholder told Minesite he believes there is no prospect of Severstal getting the required level of acceptances for the 18-cent offer. “Mordashov is very happy with HRG’s prospects,” the source said. “His strategy is to hold down the share price takeoff for as long as possible, knowing that many shareholders want to see the price go up, but realizing there are others – possibly RAB Capital – who can’t raise the money if there were to be a rights issue, and who may want to close their books, and sell now. Perhaps Severstal can pick up 10% to 20% from those without current cash.”

This source thinks HRG should be trading at not more than a 50% discount to Peter Hambro Mining (POG:LN). With POG currently at US$1.9 billion, that would lift HRG to US$950 million.

Others suggest the benchmark should be those Canadian goldminers reporting close to HRG’s first-quarter gold production of 69,118 oz. They include Golden Star Resources (GSC:CN) at C$597 million; Red Back Mining (RBI:CN) at C$2.2 billion; Eldorado Gold (ELD:CN) at CS$3.9 billion; and Semafo Inc.(SMF:CN) at C$589 million. “HRG is trading at 6.5% of their average market cap,” claims one shareholder. “I cannot wait to see how the independent members of the HRG board will defend this as a fair valuation. If HRG were to be valued at the benchmark of these peers, the share price would be C$3.21 per share.”

HRG’s historic high was C$3.47 in February of 2008, when the company’s gold output was one-third less; the cash cost of production was 25% higher; the bottom-line was lossmaking, and the debt burden was considerably greater.

In Moscow, there are signs that Mordashov has been doing some investigating of his own of his mining division, after some Russian gold asset acquisitions proved to be far more costly than appears, in retrospect, to be justified. Roman Deniskin, the chief executive of Severstal Resurs at the time, left the company on April 30, and he has been replaced by the chief financial officer, Alexander Grubman, at least for the time being.

What will happen next is less likely to depend on Mordashov than on HRG’s minorities. The shareholder who has issued the OSC challenge told Minesite: “What we minority shareholders may do depends on Severstal’s next steps. If they make an official bid, then we can vote against until the price is right. If Severstal calls in their loan, then they risk losing control of HRG assets as other loans could be called and then a receiver may be appointed to sell assets to highest bidder. Severstal will then be forced to pay a fair price for the assets, or walk away. Obviously, if Severstal does anything that is against the securities or corporate statutes, then we will have to seek legal remedies. Class actions suits are becoming more prevalent in Canada these days.”

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