Agreement to Acquire Kapan Mining Company CJSC

RNS Number : 6761F

Chaarat Gold Holdings Ltd

30 October 2018

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Not for release, publication or distribution to United States newswire services or for release, publication or dissemination in the United States and does not constitute an offer of the securities herein.

This press release does not constitute an offer to sell, or a solicitation of an offer to buy, securities in the United States or any other jurisdiction.  Any securities described in this press release have not been, and will not be, registered under the US Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration except in transactions exempt from, or not subject to, registration under the US Securities Act and applicable US state securities laws.  There is no public offering of the securities in the United States expected.  Any public offering of securities to be made in the United States will be made by means of a prospectus that may be obtained from Chaarat and that will contain detailed information about Chaarat and management, as well as financial statements.

30 October 2018

Chaarat Gold Holdings Limited

("Chaarat" or the "Company")

AGREEMENT TO ACQUIRE KAPAN MINING AND PROCESSING COMPANY CJSC

Chaarat (AIM: CGH), the AIM quoted exploration and development company with assets in the Kyrgyz Republic, is pleased to announce that it and one of its wholly-owned subsidiaries, Chaarat Gold International Limited ("CGIL"), have entered into a binding conditional sale and purchase agreement (the "SPA") with PMTL Holding Ltd. ("Polymetal"), a subsidiary of Polymetal International plc, to acquire Kapan Mining and Processing Company CJSC ("Kapan"), which owns a medium-sized polymetallic mine (the "Mine") in the Republic of Armenia (the "Acquisition"). 

The consideration of US$55 million, subject to net debt, working capital and other adjustments, is payable in cash, save that US$5 million of the consideration may be satisfied by way of the issue by the Company of convertible notes equal to an amount of US$5million pursuant to the Company's 10% secured convertible loan note instrument dated 11 September 2018 (the "Convertible Notes").  Chaarat expects to fund the cash portion of the consideration through a new debt financing facility, its existing cash resources, and the proceeds of the previously announced Convertible Notes offering.

The Acquisition is an important step in achieving Chaarat's goal of building a leading emerging markets gold company with an initial focus on Central Asia and the FSU through organic growth and selective M&A:

·     Accelerates Chaarat's transformation from a developer to a producer

·     The combination provides a catalyst for a potential re-rating

·  Strengthens the Company's portfolio of assets, with an anticipated group production of approximately 65 Koz Au Eq in 2019*

·   Significantly improves the Company's financial strength for the development of Tulkubash and Kyzyltash

·     Advances Chaarat's ability to implement future M&A

·     Transforms Chaarat into a cashflow generating company with a significant growth profile

·     The Directors believe the valuation is highly attractive; anticipated to imply a P/ NPV 0.53x*.

*Based on Chaarat management's analysis

Artem Volynets, Chief Executive Officer of Chaarat, said: "This acquisition is expected to be an excellent addition to Chaarat's portfolio and accelerates our strategic aim of building a leading emerging markets gold company. It turns the Company cashflow-generative in a single step, and demonstrates Chaarat's ability to execute deals quickly, diligently and on accretive terms. M&A is a vital component of our growth strategy and we are delighted to be in the process of securing this asset at what management believe is a very attractive price for Chaarat and its shareholders."

Chaarat is well placed to take advantage of the opportunities presented by this cash-generative asset, which, following significant investment in the asset over the last two years, is estimated to grow production by approximately 30% per annum in 2019 versus 2017 (based on Chaarat management's analysis).

Mine overview

Production at the Mine commenced in 2003 and the current reserve life extends to 2023; however, conversion of current inferred resources to reserves and new exploration success is likely to extend the mine life. Indeed, the Company's internal modelling assumes production will continue until 2029. For the year ended December 2017, the Mine produced c. 50,000 oz of gold equivalent, generating an EBITDA of over US$20m, PBT of US$2m, and had gross assets of US$96m (Seller's stand-alone IFRS accounts, unaudited). Meanwhile, 2019 production guidance is currently 65 Koz of gold equivalent.

The Chaarat management base case scenario yields more than $100m in NPV. The NPV is based only on JORC-compliant reserves and mine production through to 2023 with average annual production of c. 65 Koz of gold equivalent.  This implies the acquisition of Kapan at what the Chaarat Directors consider a highly attractive P/NAV of 0.53x. Chaarat management is confident in the potential of Kapan to extend production beyond 2023.

The tables below provide further information on reserves and resources, as well as indicative key project metrics.

Reserves and Resources as of 1 January 2018 (JORC Code 2012)
 

		Grade				Contained Metal
	Tonnes (Mt)	Au (g/t)	Grade Cu (%)	Ag (g/t)	Zn (%)	Au (Koz)	Cu (Kt)	Ag (Koz)	Zn (Kt)
Reserves
Proved	0.2	2.9	0.5	42	2.5	20	1	289	5
Probable	3.9	2.1	0.4	40	1.6	254	16	4,905	62
Total	4.1	2.1	0.4	40	1.7	274	17	5,194	68
Resources
Measured	0.0	5.2	1.0	74	4.1	3	0	38	1
Indicated	0.3	2.9	0.7	57	2.4	30	2	588	8
Inferred	8.0	2.9	0.7	62	2.3	739	53	16,012	183
Total	8.4	2.9	0.7	62	2.3	771	56	16,638	191

Mineral Resources and Mineral Reserves were estimated at 2.5 g/t AuEq cut-off grade

Resources are shown inclusive of reserves
Discrepancies in the calculations are due to rounding

Source: Report on Mineral Resource and Ore Reserve Estimation at the Shaumyan Gold-Polymetallic Deposit as of 01.01.2018, written by JSC Polymetal Engineering 

Indicative Key Project Metrics
Based on the Chaarat management base case scenario using US$1,250/oz gold, US$15/oz silver, US$6,500/t copper and US$2,500/t zinc prices, 10% discount rate and JORC reserve-only LOM through 2023

Metric	Unit	Amount
Average LOM Production - Gold p.a.	(Koz Au)	30
Average LOM Production - Copper p.a.	(kt Cu)	2.0
Average LOM Production - Silver p.a.	(Koz Ag)	600
Average LOM Production - Zinc p.a.	(kt Zn)	6.5
Average LOM Production - Gold Eq p.a.	(Koz Au Eq)	65
Projected Asset Life	(years)	6
Average LOM Annual EBITDA	(US$ mm)	25
Average LOM AISC	(US$/oz)	950
NPV (at 10% for reserves only)	(US$ mm)	103

Polymetal has made significant investment into the mine in recent years (approximately US$35m), with throughput increased from mechanised mine operations and increased mill capacity. The increased throughput capacity provides operating cost efficiencies and the historical high ratio of resource to reserve conversion is expected to continue. Applying conservative resource to reserve conversion ratios based on historical ratios achieved, the asset is anticipated to deliver an additional 6 years of mine life from current resources. Identified resources within the Mine footprint are anticipated to be converted into reserves without extensive underground development. In addition, there are multiple walk-up targets and favourable structures / identified mineralization within hundreds of metres of existing workings.

Reverse Takeover

The proposed Acquisition is categorised as a reverse takeover under the AIM Rules and will be subject to approval of the Company's shareholders at a General Meeting which will be called as soon as practicable ("Shareholder Approval").

SPA

The Acquisition comprises the purchase of the entire issued share capital of Kapan by CGIL from Polymetal. CGIL will also acquire all debt owed by Kapan to members of the Polymetal group under intra-group loan agreements. The Company is a guarantor of all of CGIL's obligations under the SPA.

The consideration for the Acquisition will be US$55,000,000 (subject to net debt and working capital adjustments) payable in cash with the option to pay US$5,000,000 thereof at completion by the issue by the Company of Convertible Notes equal to that amount. CGIL will pay a deposit of US$5,000,000 shortly after the execution of the SPA (the "Deposit").

The SPA is conditional on (amongst other things): (i) Shareholder Approval; (ii) approval by the State Commission for the Protection of Economic Competition of the Republic of Armenia; and (iii) the Company obtaining financing in relation to the Acquisition (the "Financing").  These conditions are to be satisfied as soon as reasonably practicable and in any case by 15 February 2019.

If the SPA is terminated (i) because CGIL fails to satisfy its conditions (including Shareholder Approval and the Financing) or fails to comply with its completion obligations, Polymetal will retain the Deposit and CGIL must pay an additional US$5,000,000 (or the Company issues Convertible Notes for that amount to Polymetal) by way of additional termination fee, (ii) because Polymetal fails to satisfy its conditions or completion obligations, Polymetal must repay the Deposit and pay US$5,000,000 to CGIL by way of termination fee, (iii) for any other reason, Polymetal must repay the Deposit to CGIL and no further amounts are payable.

The SPA also provides for the optional transfer to CGIL of Polymetal's obligations under a pre-existing royalty agreement in relation to Kapan, as required by that agreement.

Polymetal has given certain warranties and other protections to CGIL concerning, among other things, Kapan and its business and operations, subject to certain limitations of liability.

If any Convertible Notes are issued as summarised above, Polymetal may require CGIL to purchase those notes at par (including accrued interest) no earlier than one year after issue thereof or upon an earlier change of control of the Company.

Exclusivity and right of first refusal agreement for Poly Armenia

On completion of the Acquisition, Polymetal and Polymetal Netherlands B.V., the minority shareholder of Polymetal Armenia LLC ("Poly Armenia"), will also grant the Company: (a) exclusive rights for a period of 6 months from completion of the Acquisition to negotiate terms in relation to the acquisition of the entire issued share capital of Polymetal Armenia, together with its two subsidiaries, Lichkvaz CJSC ("Lichkvaz") and North Exploration Company LLC (together, the "Poly Armenia Companies"); and (b) a right of first refusal in respect of: (i) the Poly Armenia Companies for a period of 12 months beginning on expiry of the exclusivity period and (ii) ore concentrate produced by Lichkvaz for a period of 18 months from completion of the Acquisition.

Enquiries

Chaarat Gold Holdings Limited Martin Andersson (Chairman)	[phone]
Artem Volynets (CEO)	[e-mail]
Numis Securities Limited
John Prior, Paul Gillam (NOMAD)	[phone]
James Black (Corporate Broking)
Powerscourt
Conal Walsh	[phone]
Matthew Attwood Isabelle Saber	[e-mail]

About Chaarat Gold

Chaarat Gold is an exploration and development company operating in the Kyrgyz Republic with a large, high grade resource - the Chaarat Gold Project. The Company's key objective is to become a low-cost gold producer generating significant production from the development of the Chaarat Gold Project. Chaarat is engaged in an active community engagement programme to optimise the value of the Chaarat investment proposition.

Chaarat aims to create value for its shareholders, employees and communities from its high-quality gold and mineral deposits in the Kyrgyz Republic by building relationships based on trust and operating to the best environmental, social and employment standards.

Further information is available at www.chaarat.com

Qualified Person

The Qualified Person with overall responsibility for technical disclosure in this press release for the Company, and who has reviewed the information contained herein, is Dorian L. (Dusty) Nicol (FAussIMM), the Company's Technical Director and Head of Exploration.  He is a geologist with more than 40 years of experience in the resource industry who has sufficient experience relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'.  He has supervised the work which is the subject of this release.  Mr. Nicol consents to the inclusion in the report of the matters based on this information in the form and context in which it appears.

Glossary of Technical Terms

"Au"	chemical symbol for gold
"Ag"	chemical symbol for silver
"Cu"	chemical symbol for copper
"cut off"	the lowest grade value that is included in a resource statement.  It must comply with JORC requirement 19: "reasonable prospects for eventual economic extraction" the lowest grade, or quality, of mineralised material that qualifies as economically mineable and available in a given deposit.  It may be defined on the basis of economic evaluation, or on physical or chemical attributes that define an acceptable product specification
"g/t"	grammes per tonne, equivalent to parts per million
"Inferred Resource"	that part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a low level of confidence.  It is inferred from geological evidence and assumed but not verified geological and/or grade continuity.  It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability
"Indicated Resource"	that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence.  It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.  The locations are too widely or inappropriately spaced to confirm geological and/or grade continuity but are spaced closely enough for continuity to be assumed
"JORC"	The Australasian Joint Ore Reserves Committee Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2012 (the "JORC Code" or "the Code").  The Code sets out minimum standards, recommendations and guidelines for Public Reporting in Australasia of Exploration Results, Mineral Resources and Ore Reserves
"koz"	thousand troy ounces of gold
"Measured Resource"	that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence.  It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.  The locations are spaced closely enough to confirm geological and grade continuity
"Mineral Resource"	a concentration or occurrence of material of intrinsic economic interest in or on the Earth's crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction.  The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources are sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories when reporting under JORC
"Mt"	million tonnes
"oz"	troy ounce (= 31.103477 grammes)
"Proven Reserve"	A `Proven Reserve' is the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified.
"Probable Reserve"	A `Probable Reserve' is the economically mineable part of an Indicated and in some circumstances a Measured Mineral Resource demonstrated by a least a Preliminary Feasibility Study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified.
"Reserve"	the economically mineable part of a Measured and/or Indicated Mineral Resource
"t"	tonne (= 1 million grammes)
"Zn"	chemical symbol for zinc

 

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