Severstal Takes Control of Cash-Strapped High River

Severstal Resources, Russia's largest steelmaker, has thrown a financial lifeline to Canada's High River Gold Mines Ltd, spending $45m to take a 50.1% controlling stake in the cash-strapped miner, the companies said on Thursday.

Severstal, best known for its steel mills and coal mines, is an emerging player in the Russian gold market. It acquired 282.3 million newly issued common shares in High River for about 15.9 cents apiece, augmenting its previous 9.9% stake.

High River, which operates gold mines in Russia and Burkina Faso, said late last month that it was in breach of debt covenants on two loans and did not have sufficient funds to make a payment on a third.

After warning that its ability to continue depended on discussions with lenders and obtaining additional financing, research firms downgraded the stock, which plunged nearly 40%.

High River said on Thursday that it will use cash from Severstal's investment to make a $15m payment to Russia's Nomos Bank that is due 21 November, and another $10m payment due 21 December. It will also set aside $9m for a provision to Societe Des Mines De Taparko in Burkina Faso for working capital.

High River's cash position dropped to C$17.2m in the second quarter, while total debt stood at C$187.6 million.

In September, the Toronto-based company formed a special committee and hired financial advisers to consider strategic alternatives. It also hired advisers to review corporate liquidity.

A month earlier, Russian investment firm Alfa Group canceled plans to buy up to C$286m of High River stock due to deteriorating market conditions.

Under the offering announced on Thursday, Severstal also receives 40.7 million warrants to buy additional shares at 64 Canadian cents apiece and four seats on the board of directors.

Under "contemplated" management changes, High River chief executive Dan Mosher will resign and be replaced by Nikolay Zelenskiy, one of the new directors.

Majority owned by billionaire Alexei Mordashov, Severstal acquired gold and molybdenum miner Celtic Resources this year and has snapped up a host of licenses to develop gold fields throughout Siberia.

High River is majority owner of Buryatzoloto, which mines gold in the Russian republic of Buryatia at the Zun Holba and Irokinda mines. Buryatzoloto produced 70,800 ounces of gold in the first half of 2008, down 1.8% from the first half of 2007 as a result of lower ore grades.

High River shares rose 1 Canadian cent close at 11 Canadian cents on the Toronto Stock Exchange on Thursday. The stock has lost about 95% of its value in the past 12 months.

Severstal shares were down about 8.8% on Moscow's MICEX exchange at 58.65 roubles. The stock has dropped by about 89% from this time last year.

($1=$1.28 Canadian)

By Susan Taylor; additional reporting by Robin Paxton in Moscow; editing by Elaine Hardcastle and Peter Gallowaym, Reuters.