Proposed Disposal

RNS Number : 5189K

Ovoca Gold PLC

19 December 2008

 



OVOCA GOLD PLC

19 DECEMBER 2008

PROPOSED DISPOSAL OF CJSC PROSPECTORS ARTEL AYAX 

Ovoca Gold plc ('Ovoca' or the 'Company') is pleased to announce that it has entered into a conditional agreement to sell its 100 per cent interest in the issued share capital of CJSC Prospectors Artel Ayax ('Ayax') to JSC Polymetal ('Polymetal') (the 'Proposed Disposal'). Ayax owns a 100 per cent interest in an exploration and production licence for the production of silver at the ore field 'Goltsovoye,' a silver deposit located in the district of Omsukchan in the Magadan Oblast, north east Russia.

The Proposed Disposal constitutes a transaction which is classified as a fundamental change of business under the AIM Rules and the IEX Rules. The Board for this reason is required to issue a circular setting out the reasons for the Proposed Disposal and to seek Shareholder approval to the Proposed Disposal at a general meeting of the Company. The purpose of this circular is to provide Shareholders with further information on the Proposed Disposal and a notice convening an extraordinary general meeting at which a resolution will be proposed seeking Shareholder approval of the Proposed Disposal. The Circular will be posted to Shareholders early next week.

BACKGROUND AND REASONS FOR THE PROPOSED DISPOSAL

In July 2008, Ovoca entered into a non-binding term sheet with a major Russian banking institution for a US$92.7 million project finance loan facility for the construction and commissioning of the Goltsovoye silver mine. A financing due diligence exercise then commenced which was expected to take approximately 3 months to complete. As is normal in such project finance arrangements, an equity placing would have been required to be undertaken by the Company at the time of completing such project financing arrangements.  

However during the period of the due diligence exercises there has been a continuing deterioration in Russian and international credit and equity capital market conditions and the emergence of economic recession in many developed and emerging market economies. This has resulted in a significant loss of confidence and liquidity in financing markets and falls in both commodity prices and the share prices of junior mining companies which has severely impacted on the ability of junior mining companies, including Ovoca, to raise debt finance and equity on appropriate terms for the development of their projects. The timing of improvement in credit and equity markets is uncertain at this time. 

In November 2008, Ovoca received an unsolicited proposal from JSC Polymetal to acquire Ayax for a consideration of US$11 million cash, 7,500,000 common shares of JSC Polymetal and a cash payment for certain other ancillary assets and machinery equivalent to their book value of US$697,024. The value of the cash and share consideration on 18 November 2008, being the latest practicable date prior to when the Proposed Disposal was first announced, and on 18 December 2008, being the latest practicable date prior to this announcement, compared to Ovoca's market capitalisation at those dates is as follows

	Value of Cash Consideration	Value of Share Consideration (1) (2)	Value of Total Consideration	Market Capitalisation of Ovoca (3) (4)	Premium of Total Consideration over Market Capitalisation of Ovoca
	US$ m	US$ m	US$ m	US$ m
18 November  2008	11.00	20.03	31.03	17.39	78.31%
18 December  2008	11.00	30.38	41.38	14.09	193.69%

(1)        Valued at the closing mid market share price of JSC Polymetal per the official list of the London Stock Exchange as at 18 November 2008.

 

(2)        Valued at the closing mid market share price of JSC Polymetal per the official list of the London Stock Exchange as at 18 December 2008.

 

(3)        Valued at the closing mid market price of Ovoca per the official list of the London Stock Exchange as at 18 November 2008.

 

(4)        Valued at the closing mid market price of Ovoca per the official list of the London Stock Exchange as at 18 December 2008.

The Board's primary objective when considering the Proposed Disposal was to maximise value for all Shareholders. Other possible options available to the Board included continuing to attempt to project finance the development of Goltsovoye or to defer such financing and put all of Ovoca's projects on care on maintenance until such time as debt and equity capital markets improve sufficiently.  

The Board has concluded that the ability of Ovoca to raise debt finance in the current market was low and that any issuance of new Ordinary Shares would be on terms that would be significantly dilutive to Shareholders. There are strict spending and work completion benchmarks that must be met to keep Ovoca's exploration and production licenses in good order and to retain property rights. The Board has estimated that the annual cost to Ovoca of meeting such license obligations at both Goltsovoye and in the Kola Peninsula would be approximately US$12 million per annum. The Board concluded that the acquisition by Polymetal of Ayax as opposed to the acquisition of the entire share capital of Ovoca will ensure greater speed and certainty of execution of the transaction. Following completion of the Proposed Disposal, Ovoca will have a strong balance sheet that can finance the development of its remaining assets and for working capital and corporate development purposes. For these reasons the Board has decided to unanimously recommend the sale of Ayax.

INFORMATION ON AYAX

Ayax, registered as a Russian Closed Joint Stock Company in 2002, holds a 100 per cent interest in an exploration and production licence for the production of silver at the Goltsovoye ore field. The Goltsovoye deposit was first discovered in the 1980s following the commissioning of the Dukat Silver Mine, which is located to the north west of the Goltsovoye deposit. Ayax acquired a mining licence for the Goltsovoye silver deposit in September 2002. The licence expires in 2012 after which it may be extended, provided Ayax has met all of its licence obligations.

In April 2006, Ovoca acquired a 74% interest in Ayax for 110,101,518 Ordinary shares and a cash payment of US$1 million and entered into a conditional option agreement, which was exercised in September 2007, which gave Ovoca the right, but not the obligation, to acquire the remaining 26% interest in Ayax for 43,007,250 Ordinary Shares. 

In 2007/08, Ovoca, together with Scott Wilson Limited., undertook a study of the resources, mining methods, mineable reserves, processing and infrastructure as well as capital and operating costs estimates for a 260,000 tonne a year underground mine, with a 10 year mine life at the Goltsovoye deposit in January 2008 (the 'Bankable Feasibility Study'). According to the Bankable Feasibility Study, annual average mine production is estimated to be 260,000 tonnes of ore and 5.8 million ounces of silver during a six year mine life based on the reserves in Ore Zone I. In 2007, Wardell Armstrong completed a JORC silver resource estimate of 69 million ounces in Ore Zones I and II. The Russian Government Commission for Natural Resources (GKZ) later approved a resource of 81.33 million ounces of silver in these Zones. The mine life is expected to be considerably longer than the 6 years. 

As per Russian accounting system the net assets of Ayax as at 31 December 2007 were 9,460,000 rubles (US$383,981) and the profit after taxation for the year ended 31 December 2007 was 4,456,000 rubles (US$180,869).

INFORMATION ON JSC POLYMETAL

JSC Polymetal is a precious metals mining company which carries out a full range of deposit development from exploration to production. Polymetal was established in 1998 by the ICT Group to create a Russian mining company that would use state-of-the-art technology from exploration to bullion production. Based on 2007 production, Polymetal is Russia's largest silver producer, the third largest gold producer and the fifth largest silver producer in the world (Source: World Silver Survey, prepared by GFMS and Silver Institute). Polymetal and its subsidiaries hold 22 licenses for exploration and production in five Russian regions. 

Currently Polymetal and its subsidiaries operate in five Russian regions, the Magadan, Sverdlovsk and Chita Regions, and the Krasnoyarsk and Khabarovsk Territories. The company has brought four major mining projects into production being Dukat, Khakanja, Vorontsovskoye and Lunnoye. Other than Dukat which was an extensive brown-field project, all these projects were green-field. In 2007, the Company produced 15.9 million ounces (495 tons) of silver and 242 thousand ounces (7.5 tones) of gold.

Polymetal's ordinary shares are traded on the RTS and MICEX exchanges in Russia and its global depository receipts are traded on the main market of the London Stock Exchange. Polymetal's market capitalisation on 18 December 2008 was US$1,275.75 million, based on the closing mid market share price on 18 December 2008 per the official list of the London Stock Exchange.

SUMMARY OF THE DISPOSAL AGREEMENT

Under the terms of the Disposal Agreement, Ovoca has agreed to sell, subject inter alia to the approval by Shareholders and by the Russian Federation Anti-Monopoly Committee, the entire issued share capital of Ayax to Polymetal for a total cash consideration of US$11,697,024 and 7,500,000 common shares of JSC Polymetal (which on 18 December 2008 had a value of US$4.05 per share). The shares in Ayax will be acquired by Polymetal itself and by a third party entity which will be obliged to deliver the shares in Ayax to Polymetal upon satisfaction of certain conditions. Under the Disposal Agreement Ovoca will receive a cash consideration of US$3,043,342 and Polymetal will be obliged to enter into a Deed of Novation and Assignment to which Polymetal will acquire receivables of USD$8,653,682.10 due from Ayax to Ovoca in exchange for a payment of US$8,653,682 by Polymetal to Ovoca. The Disposal Agreement contains warranties for the benefit of inter alia Polymetal which are customary for this type of transaction.

USE OF PROCEEDS

Following completion of the Proposed Disposal and the receipt of the transaction proceeds, Ovoca will have sufficient working capital for its present requirements, which include the cost of planned feasibility studies and other exploration and development activities on the Company's properties in the Kola Peninsula (Murmansk Region of the Russian Federation), as well as for corporate and working capital purposes. It is the Board's current intention to retain the Polymetal common shares as a medium term investment. 

OVOCA'S REMAINING ASSETS

Following completion of the Proposed Disposal, Ovoca will retain its exploration and development properties in the Kola Peninsula, in Russia. Ovoca's core assets are its licenses in the Kola Peninsula (Murmansk Region of the Russian Federation), which is located in the North-West of Russia near the Finnish border. Ovoca holds two exploration licenses on the Kola Peninsula, occupying, in the view of the Board, the best prospective areas along the Kolmozer-Voronya Greenstone Belt. The geology of Finland, Karelia & Kola includes extensive Archean greenstone belts, similar to those hosting major gold deposits and platinum-palladium deposits throughout the world in places such as Canada, West Australia, Southern & Western Africa and South America. Such geology structures account for over 50% of the world's gold production.

The Company's core targets on the Kola Peninsula are Pellapahk, Leshaya, Oleninskoye and Nyalm I and II. They are located relatively close to infrastructure: 50 kilometers from a hydropower station, 160 kilometers from a large year-round seaport, 90 kilometers from the nearest railroad station. Pellapahk was discovered by Ovoca and is a world class molybdenum/copper ore body. Ovoca is now investigating ways to advance this project. Additionally, promising gold occurrences and drilling intersections on Leshaya, Oleninskoye and Nyalm I and II sites will continue to be investigated.

EXTRAORDINARY GENERAL MEETING

An Extraordinary General Meeting has been convened to be held at Buswells hotel, 23-25 Molesworth Street, Dublin 2, Ireland at 11 a.m. on 19 January 2009, at which the Resolution will be proposed. Whether or not Shareholders intend to be present at the meeting, they are requested to complete, sign and return the Form of Proxy to Computershare Investor Services (Ireland) Limited, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland as soon as possible but in any event so as to arrive not later than 11 a.m. on 15 January 2009. The completion and return of a Form of Proxy will not preclude Shareholders from attending and voting in person should they subsequently wish to do so.

RECOMMENDATION

The Directors unanimously consider that the Proposed Disposal is in the best interests of the Company and Shareholders as a whole. Accordingly, the Directors unanimously recommend that you vote in favour of the Resolution to be proposed at the EGM as they intend to do or procure to be done in respect of their own beneficial holdings, which amount in aggregate to 165,907,629 Ordinary Shares, representing approximately 37.51 per cent of the Existing Issued Share Capital.

TIMETABLE

Latest time and date for receipt of Forms of Proxy	11 a.m. on 15 January 2009
Extraordinary General Meeting	11 a.m. on 19 January 2009

Capitalised terms in this announcement have the same meaning as in the Circular to be posted to Shareholders. 

For further information contact:

Ovoca Gold plc
Mr. Leonid Skoptsov, CEO	[phone]	[e-mail]
Mr. Danesh Varma, CFO	[phone]	[e-mail]
Davy Corporate Finance
John Frain	[phone]

 

END

 

 

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