By John Helmer, Moscow
There is a unique protection in the Ontario Business Corporations Act which may have Alexei Mordashov’s name written all over it. It’s called the oppression remedy.
What this does is to allow minority shareholders to go to court to challenge the votes and decisions of majority or control shareholders in a Canadian company, when the latter act in a way that is prejudicial, disadvantageous, or unfair to the former. The evidence and standard of unfairness can be decided by a court-ordered investigation of the company’s affairs and of the “reasonable expectations” of the shareholders. Such an investigation is the first thing a Canadian judge can do, before ruling on unfairness. What’s more, an applicant shareholder needs to convince the investigators, not of evidence of fraud or dishonesty, but of the “appearance” that the board of directors, control shareholders, or company management “unfairly disregard” the interests of the minority.
A finding of “oppression” can then be issued by the judge, even if the company actions complained of are legal. The statute and the Canadian case law have held  that “no bad faith is required in order to establish conduct as oppressive. It is the effect of the conduct, and not the intention of the party engaging in the conduct, that is of primary importance in oppression remedy cases”.
For one of the Canadian shareholders in High River Gold (HRG:CN), it is already obvious that Mordashov has been holding down HRG’s fair share value by stripping the company of cash to benefit his parent company, the Moscow and London-listed Nordgold (NORD:LI), and use that cash to finance a buyout of the objecting minorities — at a share price the holders contend is too low.
Low-balling isn’t by itself oppressive, according to the Canadian law; to date Canadian regulators, judges and reporters have adopted a relatively supine position towards the complaints of oppressiveness which have been filed against HRG. Mordashov’s critics among the shareholders now fighting his takeover offer say there is much more to it.
One of the shareholders refers to this item in the last HRG quarterly financial report (page 32): “Loans to related parties. As at March 31, 2012 the Group provided $148.9 million (December 31, 2011- $81.6 million) to affiliates of Nordgold at interest rates ranging from 6.0% per annum to 6.25% per annum. The current portion of the loans as at March 31, 2012 – $110.4 million (December 31, 2011 – $24.3 million).” The dollar figures are in Canadian dollars, which are just above parity with the US dollar at the moment.
Put the loan in context: in the quarter to March 31, HRG’s total revenue from sales of gold and silver came to$138.9 million, its operating profit $64.1 million; its net operating cash flow, $71.4 million. (The second quarter sales revenue comes to about $143 million, but the other financial results have yet to be released.) Why $148.9 million in generosity from the board’s two non-Russian, ostensibly independent directors – Karl Glackmeyer, a retired veteran of junior Canadian mining ventures, and Andrew Matthews, a lawyer? According to the critical shareholder, the effect of their conduct is “oppressive” for him and his fellow minority shareholders, and now requires a remedy. An offer of double Mordashov’s takeover price might do it, the source claims, but not Mordashov’s offer of July 18 .
The biggest holder of shares in the resisting minorities appears to agree. That is Sprott Asset Management of Toronto, with an estimated 31 million shares in hand.
If all 209 million HRG shares not already owned by Mordashov are tendered to his offer for C$1.40 per share in cash, that would cost him C$292.6 million. But he says 58 million of the shares will be swapped for Nordgold scrip. So that would leave 151 million shares. See the offer arithmetic here . Buying them all out at Mordashov’s price would cost C$211.4 million (US$210.7 million).
According to the objecting minorities, there is no reason to trust the record of Glackmeyer and Andrews to know an independent valuer when they see one, if the job now required is to assess the fairness of the Mordashov offer. The objecting shareholders believe the only way to assure independence and fairness of outcome for the valuation process is a court ordered investigation.
The third member of the HRG board currerntly in line to make the valuer appointment and judge its outcome is a Russian, Alexei Khudyakov. He works for the group of companies of Mikhail Fridman. In August 2008 , the Fridman group had been aiming to acquire HRG at a significantly higher price than Mordashov paid. But their plan was aborted by the near-bankruptcy of Fridman’s telecommunications company, Vimpelcom, and by Fridman’s sudden loss of cash and taste for mining. If Fridman’s group still holds HRG shares, it remains to be seen what valuation process and outcome Khudyakov will support.
According to a published statement by Chris Charlwood, a leading representative of the resisting minorities acting as individual investors, rather than as institutional shareholders, “the Directors have on many occasions over the last 18 months signed off on HRG loans to Nord Gold for almost $150M notwithstanding numerous complaints from HRG minority to Nord, the HRG Board as well as to the Ontario Securities Commission. Therefore, I fully expect the committee to come out and endorse the offer from Nord and to recommend HRG shareholders accept the offer in one of its forms…The offer does not have a minimum tendering requirement. Therefore, whichever option [cash or swap for Nordgold shares] is chosen, the shares tendered become Nord’s shares. Nord has stated that if within 120 days of the original offer 90% of minority accept Nord’s offer, Nord will then seek to acquire the last 10% through a compulsory acquisition transaction.”
That squeeze-out at the end can be stopped if the acceptances leave Mordashov with less than 756 million HRG shares. But if he crosses that threshold, the remaining shareholders may ask for court intervention.
Just how impoverished Mordashov’s gold business is without HRG is spelled out in Charlwood’s coommunique to the other minorities. “For the year 2011, HRG made up 49% of [Nordgold’s] production, 49% of revenues, 54% of EBITDA and 68% of profit. In Q1 2012, HRG made up 54% of Nord’s production, 53% of revenues, 79% of EBITDA and 105% of profit. At the end of Q1, if Nord repaid the recent $150M in loans it took from HRG and HRG sold its third party stock (mostly Detour Gold); it would have $322M in cash with $11M debt. At the end of Q1, Nord had $433M debt and, without HRG’s loans, would only have $21M in cash.”
“The cash option of the offer at $1.40 is completely unacceptable to me and probably still values HRG at a half to a third of its real value. If you deduct the $322M cash (Q2 should result in even more cash) from the $1.176B offer, you get to a net $854M. Divide this by Q1 profit of $62M (4x annualized) and you get a 3.4 multiple. As Nord has little of its own cash, keeps borrowing HRG’s cash and has a low market cap, it would need to dilute itself significantly in order to fund our desired $3-4 cash/share. Therefore, I don’t expect they will increase their cash offer anywhere near acceptable levels.”
The Canadian business press has so far played patsy to the Mordashov pitch. Last week, the Financial Post reporter Peter Koven asked Nordgold’s chief executive , Nikolai Zelenski, “have the High River investors been happy with how you’ve run the company?” Zelenski is quoted as replying: “If you look at both the performance of the company itself and the share price, they basically speak for our impact. …We rescued the company from bankruptcy in 2008, we improved its balance sheet dramatically, the operations are very stable and working well.”
Koven reports no comment from Sprott or the other resisting minority shareholders, and no calculations himself. He concludes : “any concerns about how a Russian-controlled High River would operate have been put to rest, as the company has undergone a turnaround under the stewardship of both Severstal and Nordgold.”
According to Charlwood’s calculations – ones Zelenski and Mordashov are bound to have made but not released – in the near future there will be a significant increase in HRG’s mineable gold reserves, and thus its capital value. Charlwood talking: “in the CPR Report on the Assets of Nord Gold for Burkina Faso, Guinea, Kazakhstan and the Russian Federation (pp. 413 & 442), which was presented shortly after the Nord Gold prospectus was distributed, it states that Buryatzoloto has a potential increase of 3.4M oz in the P1 (inferred equivalent) category. Lastly, the other 50% partner in Prognoz, Polar Silver, completed 117 drill holes in 2008 and has a 43-101 report from July 2009 that shows Prognoz Silver resources at 293M oz of silver, not 205M oz that HRG disclosed in its 2008 43-101 report (a 43% increase). Also, in Baker Steel’s 2011 December annual report (Baker is an investor in Polar Silver) it states “A NI 43-101 compliant preliminary economic assessment was completed by Micon in February 2012. This indicates potential for a mine producing an average of 13 million ounces of silver per annum over a 16 year mine life”. Lastly, HRG’s Bissa mine is expected to come on stream early next year and this is expected to add 100k oz of production in 2013 and grow to 200K oz p.a. Bissa should bring HRG’s total production up to the 450K oz range in 2013. These expected changes to HRG’s resource base and production will only add to HRG minorities’ expectation of value as time goes on.”
This is evidence a court-ordered investigation would weigh in judging whether the outcome of Mordashov’s takeover at $1.40 would be oppressive to those he is aiming to squeeze out of possession. As for running the risk of court intervention, lawyers for Mordashov can’t assure him the Canadian judges will take his side, especially after Justice Ronald Veale ruled for another group of minorities targeted by Mordashov in a squeeze-out of the Crew Gold minorities in October 2011 .
Charlwood says he isn’t opposed to swapping his HRG shares for Nordgold, if the price and swap ratio are upped significantly. “Increasing Nord’s float from 10% to 23% should bring in significant institutional buying (currently not happening due to the small float). If Nord’s float increases to 23%, then Mordashov only needs to sell a few more percentage points to have Nord meet the 25% threshold of a main listing on the LSE. This should bring in additional institutional buying. Another key milestone for gold mining companies is to achieve 1M oz of production a year and those that do, end up with higher valuations. Nord is expected to reach that milestone in 2013. If we become Nord shareholders, we benefit from HRG’s 60+% contribution to the financial metrics and will partake in a proposed dividend policy of 25% of net profits (supposedly projected at a 2-3% return). In conclusion, if Nord agrees to up its offer to .333 Nord share for each HRG share (3 HRG for 1 Nord or 66% of Nord’s value), I will be tendering my shares to the share exchange offer. In my opinion, if you remove the emotion of past poor minority shareholder treatment, it does makes business sense to me to ride Nord’s shares up.”