High River Gold Mines Ltd.

High River Gold Mines Ltd.

Source: w3.nbdb.ca

Business:                                  

Gold mining and silver prospecting in Russia and Burkina Faso

Traded on TSX:                           HRG

Shares outstanding:                     799,200,000

Price per share:                           US$0.69

Market capitalization:                   US$599,048,000

Gold resource:                             4.2 million oz.

Silver resource:                           108.3 million oz.

Telephone number:                       416-947-1440

Web site:                                    www.hrg.ca

High River Gold (HRG) is a well-established Canadian gold company. This past year, it has had very positive results: a 6% increase in gold revenue, an increase in gold production, an increase (by nearly double) in cash on hand, and a decrease in debt. HRG does not hedge any of its production.

The company has four mines in production and two exploration projects (Bissa in gold and Prognoz in silver). Some analysts believe the current share price does not reflect the value of the Prognoz deposit—one of the world’s largest and highest-grade silver deposits, with the potential to produce 15+ million ounces of silver per year in the future.

One of Russia’s largest steel companies, OAO Severstal, owns 50.1% of HRG shares. (Troika Dialog Group and Sprott Asset Management are also large institutional shareholders.) A profitable multinational company based in Moscow, Severstal has addressed liquidity problems experienced by HRG in 2008. HRG also received a healthy injection of cash through Troika’s December purchase of 150 million shares at US$57 million.

HRG is expected to have enough cash assets to cover all debts with a surplus of US$46M once 2009 year-end results are announced.

2009 Production

Source: www.hrg.ca

Financials

At the current US$0.69 share price, HRG is trading at 4.5 times its annualized third-quarter cash flow. A study called HRG Global Peer Group Comparison & Third Party Investments presents a list of HRG’s peers in the middle tier of public gold companies, and points out that this group is trading at an average of approximately 18.1 times third-quarter operating cash flow on an annualized basis. If HRG were trading at this average multiple, then its share price would be US$2.79.

HRG generated US$30 million in positive cash flow from operations in the third quarter of 2009. If it has produced gold at the same rate in the fourth quarter, cash flow will have gone up by $11M due to higher gold prices. Many analysts predict gold trading at US$1150 or more in 2010. This could increase 2010 cash flow from operations by $82 million or more.

Financial highlights for the third quarter of 2009 include:

·         114% increase in revenues ($245M vs. $115M in the first 9 months of 2008)

·         82% increase in gold production (241,781 oz. vs. 133,130 oz. in the first 9 months of 2008)

·         35% reduction in debt (US$112M vs. US$175M at year-end 2008)

The Prognoz Silver Deposit

HRG owns 50% of the Prognoz Property in Russia, about 444 km north of Yakutsk. A June 2008 independent study by MICON International found an indicated silver resource for the deposit totaling 4.49 million Tonnes at a grade of 704 g/T—the highest grade of any undeveloped silver deposit in the world. The study concluded that, “Given the amount of work conducted on the Prognoz property to date . . . and the number of areas remaining which still have the potential to add significantly to the project, the property should be regarded as a mid-stage exploration project, with a significant economic potential.”

 Source: www.hrg.ca

HRG has conducted extensive drilling and trenching on the property and has identified thirty veins of silver. Many of the vein sets are multi-kilometre in length, and on average 2-4 metres wide and 200+ metres deep. The company Web site states that in 2010 and 2011, HRG plans to continue its drilling, metallurgical testing of bulk samples, and preliminary scoping work. However, a statement in the third quarter results says it was suspending operations on this property as a cash conservation measure. We believe this remains an excellent long-term investment.

The Bissa Gold Deposit

The Bissa gold deposit is about 85 km north of Ouagadougou, the capital of Burkina Faso. HRG owns a 90% interest in the deposit. A technical report prepared by SRK Consulting in June 2009 suggested a cost of US$2.5 million to develop the Bissa deposit, and stated that the measured and indicated gold resource was then 923,000 ounces and the inferred resource was 800,000 ounces.

Source: www.hrg.ca

For its part, HRG’s stated goal for Bissa is to advance resource to the multi-million ounce level. A feasibility study with this aim is to be completed in 2010.

Taparko

Production has improved at Taparko such that High River has notified the Company that Somita is attempting to satisfy the Completion Test, as defined in the Funding Agreement. The Completion Test commenced on December 1, 2009 and will continue for 90 days.

Pursuant to the Amended and Restated Funding Agreement dated February22, 2006 (the "Funding Agreement"), between Royal Gold, Inc. and Somita SA ("Somita"), a 90% owned subsidiary of High River and the operator of Taparko, Somita is in breach of certain obligations under the Funding Agreement. As security for the Company's investment in Somita, two of High River's subsidiaries have pledged their equity interests in Somita and High River (West Africa) Ltd., the corporate parent of Somita. This pledge will remain in effect until certain production and performance standards have been attained at the Taparko mine, sufficient to satisfy the Completion Test. Thereafter, if Somita satisfies the requirements of the Completion Test, the pledge of the equity interests in Somita and its corporate parent (High River (West Africa) Ltd.) will terminate and this security will be released.

In addition, Royal Gold obtained as collateral a pledge of shares of certain equity investments in public companies held by High River. The market value of the pledged shares is approximately $59.5 million as of December 31, 2009. The Company's carrying value of its royalty interests at Taparko was approximately $15.3 million as of December 31, 2009. The pledge of High River's equity investments will remain in effect until the satisfaction of certain requirements as provided in the construction contract between Somita and its construction contractor.

Please see Severstal's year end report below which confirms that HRG gold production should meet company’s projections in Q4.

 HRG produced 85,000 oz in Q3 and by all accounts, it will be improved in Q4 and makes up 64% of Severstal's annual gold production

Our Thoughts

We believe that over the mid-to-long term, the combination of established solid production and unexplored potential make HRG a stock to watch closely among undervalued middle-tier public mining companies.

For the HGR corporate presentation please click here.

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