The case analysis is about a company known as High River Gold. The company is actually a Canadian junior producer of Gold and is among the companies trading on the Toronto Stock Exchange. The management of the company aims at making it a global mining company by means of expanding its global gold production links, ore reserves as well as its resource base. High River has three main projects that are underway. The first project of the company is located in the northern Manitoba of Canada and is called new Britannia. In this project, High River has a direct joint venture interest of fifty percent with TVX Normandy Americans (the ones that operates the project/mine). The second project which is the main focus of the case is located in Russia and owned/operated by a company known as JSC Buryatzoloto. The company is among the first three largest producers of Gold in Russia. It owns and operates two mines known as Zun-Holba and Irokinda. The third project for High River is located in West Africa at a place called Tarpako in Burkina Faso. The region is about 1,200-sq-km mining concession and out of this; High River has equity of about 61.5 percent. Other affiliates in the project (share holders) include the government of Burkina Faso which holds equity of about twenty percent interest and Incanore Gold Mines which holds 18.5 percent equity interest. Being the largest share holder, High River is charged with the responsibility of running all the operations of the project and has recently acquired a three year option of purchasing all the shares being held by Incanore Gold Mines (18.5 percent). The problem with this project is that the region offers very low prices for the product (the value of the ounces is quite low compared to the prices offered in Russia and Canada itself) (Zerbe & Pitt, 2001).
Buryatzoloto is among the most successful regions following the break up of the Soviet Union in the year 1990. Before the break up, the Soviet Union consisted of fifteen soviet republics with a linked central planning which was coordinated in Moscow. Most of the central coordination was managed and controlled by the military, communist party as well as the KGB. After the break up, most of the affiliate republics decided to go independent thus leading to crumbling of the central coordinating and planning systems. This whole process resulted in a number of negative consequences among them being the stagnation of the economy and emergence of industrial chaos. After the decision by every republic to establish its own currency, a series of problems arose among them being lack of real banking and financial system to manage and give finance to various investments as well as the sales. This problem seems to be alive up to today where by the barter system and the US dollars are still in use when handling internal buying or selling as well as settling of external trade accounts (Snead, 2007).
JSC Buryatzoloto has been able to record tremendous development despite all the above challenges. In this aspect, the company has been able to develop an efficient and credible Gold producing system operating in accordance with the set international standards and at the same time embracing corporate governance. With help from High River, the company has been able to come up with a three-stage development agenda to improve its performance. The first agenda which has already been attained was to upgrade the company’s existing underground mines in the two regions so that the gold ounces can be produced at a cost effective rate (declining costs of production). The second agenda which has also been achieved was to implement minor upgrades to the existing gold production facilities so that the company can achieve an increase in annual production to about 125000 ounces. After upgrading of the existing resources and the company’s underground mines, the third agenda was to expand the company’s annual production to more that 200,000 ounces every year through maximum utilization of the available potential properties and vast resource base (Levy, 2004).
Assessment of High River’s involvement in Russia
High River is a gold producing company in Canada with an objective of expanding its global gold production links. Because of this, High River has involved itself in Russia by setting out one of its project in the region (Russia). The project is owned and operated by one of the largest gold producing companies in Russia called JSC Buryatzoloto. This Russian company operates two distinct mines called Zun-Holba and Irokinda. High River’s involvement with a Russian third largest producer of gold was because of the high productivity (production potential) by the Russian company and the high value obtained from the sale ounces (total sales) as compared to the Canadian project and the West African project (Burkina Faso). Since High River is a company anticipating to expand its resource base and ore reserve, the Russian project seemed promising due to its annual growth rate in terms of production and annual increase in the value of the gold ounce. This being a great opportunity, High River is directly involved with this Russian company by controlling about 26.5 percent equity interest in the company and at the same time plays a roles as the main strategic advisor of the company. With this, High River has been able to develop a very strong business relation with this Russian company. For instance, there has been exchange of personnel between the companies where by the Russian company’s chairman has recently been elected to serve at the High River Company as one of the directors. In my own assessment, the decision by the High River Company to make links and associations with JSC Buryatzoloto will be of great importance or benefit following the high profit rates that are being attained by the company (Zerbe & Pitt, 2001). The company is also on a continuous expansion plan and this is a great opportunity for High River to expand its shares and establish a strong resource base in the region. Since the cost of production for the company is declining, this is a great achievement in terms of increasing the returns and getting high value for the production. In my own opinion, I would say that the decision by the management of High River to associate with the Russian company is a great step that is likely to guarantee the company a great future and create value for its share holders and the company. At the same time, the association is likely to create opportunities for the company to expand is share holding capacity in the region. The analysis clearly shows that this Russian company is well positioned and has a promising future together with its potential to capitalize on other projects within its region (Snead, 2007).
Specific factors to consider in weighing the advantages of the Russian project to High River’s share holders
There are several specific factors in weighing the benefits likely to be realized by High River from the Russian project. One of these factors is the high value of gold in the region. The company anticipates about 200 Dollars per ounce which is likely to be of great value to the share holders following high production rates. Another factor is the high growth rate in terms of the rate of production output per year. The Russian company is recording a tremendous growth of production rate and is one of the leading producers of gold in the region. Being an associate company, High River’s share holders are likely to benefit from the economies of scale. Due to its large production capacity, the company has earned a reputation in the region for its products and this has enabled it to establish ready market links with loyal customers. With ready market links, the shareholders of High River are likely to benefit since they are sure of earning continuous returns on their investment. High River’s association in Russia is likely to benefit the share holders by enabling them access ready and diversified opportunities such as the oil sector, telecommunications and gas production. Since High River is the main advisor to the Russian company, its share holders are likely to benefit from the company’s ability to manipulate management decisions and activities to suit their interests. Having developed a strong business relation with the Russian company, High River has also been able to outsource the company’s chairman to be one of the directors of its management board. This step is a critical one because the chairman is likely to bring new managerial skills, expertise/experiences and knowledge being used in Russia to the company. Such skills are likely to benefit the company by improving its management operations and other key areas in the other two projects. Once the projects are at peak, the share holders will be the first beneficiaries by gaining high returns on their investments (Levy, 2004).
Following the recent steps taken by the Russian company to improve its performance in the two mines, High River’s (holding some shares in the Russian company) share holders are also likely to benefit from these improvements in terms of high rates of returns. First, upgrading of the underground mines in the two locations is likely to cut down costs of production and increase profits. The upgrading of the existing facilities is likely to attain high production potential and thus enhance economies of scale. The company’s step to utilize available resources maximally will increase production rates and thus raise profits. The anticipated continuous expansion is also another specific factor that gives opportunities for shareholders to invest more and expand the company’s resource base. Lastly, the Russian company has proved itself as a future promising company. This factor, in combination with the recent reforms that followed leadership change, will give the share holders an advantage because they will be exposed to a market based economy and opportunities to own land, invest and expand their resource base. In other words, the future of the shareholders in the company is being guaranteed (Langbein, 2009).
Considering the above analysis, I would recommend that High River company goes ahead to venture and invest most of its resources in the Russian company. This is because the value of the ounces is a bit favorable and the production rate is very high for economies of scale. The region also holds other key economic areas such as oil industry, gas and telecommunications. All these are alternative investment opportunities for shareholders incase the gold production deal goes sour.
I also recommend that High River should limit its investment in other two projects. Considering the Canadian project, the value of gold is high but the production rates/potential is very low. In Burkina Faso, the opportunity for expanding production is high but the value of the gold is very low. The only alternative is to produce in high production potential regions and sell the in regions that will fetch high prices per ounce. However, this may call for a cost benefit analysis following other expenses such as taxes and transport.