Conditional Agreement to Sell Kapan Mine

Chaarat Gold Holdings Ltd

16 August 2023

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE MARKET ABUSE REGULATION (EU) 596/2014 AS IT FORMS PART OF UK DOMESTIC LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 ("MAR"), AND IS DISCLOSED IN ACCORDANCE WITH THE COMPANY'S OBLIGATIONS UNDER ARTICLE 17 OF MAR

16 August 2023

Chaarat Gold Holdings Limited

("Chaarat" or the "Company")

Conditional Agreement to Sell the Kapan Mine in Armenia

Chaarat Gold (AIM: CGH), the AIM-quoted gold mining company is pleased to announce that it has entered into a binding conditional sale and purchase agreement (the "SPA") with Gold Mining Company LLC ("the Buyer")", to sell its 100% owned Armenian subsidiary, Chaarat Kapan CJSC, which owns the Kapan mining operation (the "Asset" or the "Kapan Mine") in Armenia (the "Proposed Sale").

The Asset

The Kapan Mine is located in the south of Armenia and has been operating since the 1960s. It hosts a polymetallic ore body and produces copper and zinc concentrates with gold and silver by-products. Chaarat acquired the Kapan Mine in 2019.  During this time, mine life has been extended, operational performance has been improved, delivering on production guidance between 50-65koz AuEq in each year under Chaarat's ownership. The asset has been the sole operating asset of the Company, which generated an EBITDA of USD 22.7 million in 2021 and USD 12.6 million in 2022 and a profit after tax of USD 10.5 million and USD 1.7 million in 2021 and 2022 respectively. As recently announced, the EBITDA for H1 2023 was USD 2.3 million (comprising positive EBITDA in Q1 2023 of USD 3.2 million and negative EBITDA in Q2 2023 of USD 0.9 million), which was again impacted by the adverse USD/AMD FX rate exchange and lower production. This persistently high AMD against the USD FX rate impact began in Q2 2022 and has retained its strength relative to the USD. As at 31 December 2022, the Kapan Mine had assets of USD 75.1 million and liabilities of USD 53.4 million. 

The Buyer

The Buyer operates the Lichkvaz mine in Armenia which has supplied third-party ore to the Kapan plant for processing for a number of years.  The Buyer's shareholder is also the managing director and a co-owner of S&A Mining LLC which has been the long-term mining contractor partner at the Kapan Mine.

The Consideration

The consideration for the Proposed Sale is USD 55.4 million (the "Consideration") which comprises USD 5 million payable in cash and USD 50.4 million being satisfied by way of the Buyer taking an assignment of intra-group payables due to Chaarat Kapan¹. No adjustments are being made to the Consideration whether for debt, working capital, or other obligations.  The Proposed Sale is conditional upon Chaarat shareholder approval, Ameriabank CJSC agreeing to release its existing security and guarantees from members of the Chaarat  group of companies, approval of the Armenian Competition Protection Commission, and  Buyer shareholder approval.

Rationale for the Proposed Sale  

Chaarat acquired the Kapan Mine in 2019 and has added value to the operation by extending mine life, improving ESG standards, improving operational performance and continuing to invest in the community despite significant geo-political events impacting on the operation including hostilities with a neighbouring country, impacts of COVID-19, and the indirect effects of the ongoing conflict in Ukraine.

After four years of meeting the production guidance, improving the financial performance, and deleveraging the business, the significant appreciation of the Armenian Dram has had a significant impact on the financial performance which has led the Company to review all strategic options to ensure the sustainability of Kapan and  to preserve the long-term value of Chaarat in pursuing growth options through building Tulkubash, advancing Kyzyltash as well as pursuing other external M&A opportunities.

Chaarat sees the Proposed Sale as a beneficial exit opportunity at a time when the asset sees increasing all in sustaining cash cost ("AISC"), potential losses and further funding requirements following several years of profitable operation.  Its cash flows have assisted in funding corporate activities and deleveraging the original acquisition loan.

The Company believes the potential for further adverse balance sheet impacts would be limited via the Proposed Sale. The decrease in EBITDA, mainly caused by the adverse USD/AMD FX rate, has had a material impact on Kapan operations cash flow. A significant investment would be required to implement efficiency improvements into operations in the immediate future. These investments potentially would also be required in the long term, given the persistently adverse USD/AMD FX environment.  The Proposed Sale would further allow Chaarat to focus on developing its Kyrgyz assets. 

Chaarat is of the opinion that the Buyer, a reputable and long-established mining operator in Armenia, can add further value to the business and continue the positive momentum from the Chaarat period of ownership.

The Proposed Sale is an important step in focusing Chaarat's efforts towards building a leading emerging markets gold company through the development of its Kyrgyz assets and selective M&A.

Use of Proceeds

This transaction presents the opportunity to significantly improve Chaarat`s balance sheet by reducing the short- and long-term liabilities by USD 39 million² and receive a cash injection to corporate of USD 5 million.  These funds will be used to provide working capital which will assist the Company to among other items, continue working towards completing the potential Xiwang investment which upon completion would assist in developing the Tulkubash project.

Company Structure Post-Sale

The Proposed Sale would transform Chaarat from a producer to a developer and would allow the Company to focus resources on its larger and lower cost development assets and similar selective M&A targets globally as well as securing funding for such assets.

Upon completion of the Proposed Sale, Chaarat would remain the owner of two gold development assets with a combined book value of USD 82.5 million³ (c.52% of the Company's assets as at 31 December 2022) which have the potential to, in aggregate, produce over 350,000 ounces of gold per annum. It would be the Company's strategy to continue to pursue the development of these assets going forward, as well as potentially executing on inorganic growth opportunities.

The Proposed Sale, if completed, would have a material impact on Chaarat's balance sheet, in terms of both assets and liabilities. As at 31 December 2022³, the Kapan operation consisted  of the following from the Group; assets of USD 75.1 million (48% of Chaarat's total assets of USD 158.1 million) and liabilities of USD 53.4 million (62% of Chaarat's total liabilities of USD 85.5 million). Further details of the balance sheet impact will be provided as an indicative assessment in the 2023 half year results.

General Meeting

As the Proposed Sale constitutes a fundamental change of business for the purposes of AIM Rule 15, it is conditional upon, among other things outlined above, the approval of the shareholders of the Company at a general meeting.  Notice of that general meeting, which will contain further particulars of the Proposed Sale, will be posted to shareholders shortly.

Mike Fraser, Chief Executive Officer of Chaarat, commented:

"The Proposed Sale allows Chaarat to focus on its growth pipeline in the gold sector with the aim of developing lower cost and higher value options within its portfolio. It accelerates our strategic objective of developing the Tulkubash project and evaluating opportunities for inorganic growth options."

¹ The intragroup payables due to Chaarat Kapan of USD 50.4 million are eliminated on consolidation when preparing the Group's accounts.  When the Proposed Sale is accounted for, the Group accounts will therefore show disposal proceeds of USD 5 million.  Further details will be provided in the Group's 2023 half-year report and 2023 full-year results in due course.

² Per unaudited 30 June 2023 preliminary figures.

³ Per audited 31 December 2022 results.

Enquiries
Chaarat Gold Holdings Limited	[phone]
Mike Fraser (CEO)	[e-mail]
Canaccord Genuity Limited (NOMAD and Joint Broker)	[phone]
Henry Fitzgerald-O'Connor
James Asensio
finnCap Limited (Joint Broker)	[phone]
Christopher Raggett
Panmure Gordon (UK) Limited (Joint Broker)	[phone]
John Prior Hugh Rich

About Chaarat

Chaarat is a gold mining company which owns the Kapan operating mine in Armenia as well as Tulkubash and Kyzyltash Gold projects in the Kyrgyz Republic. The Company has a clear strategy to build a leading emerging markets gold company through organic growth and selective M&A.

Chaarat aims to create value for its shareholders, employees and communities from its high-quality gold and mineral deposits by building relationships based on trust and operating to the best environmental, social and employment standards. Further information is available at www.chaarat.com.

ENDS

 

END