KazakhGold Announced Combination of KazakhGold and Polyus Gold
OREANDA-NEWS. June 20, 2011. The Board of KazakhGold Group Limited (“KazakhGold”) and OJSC Polyus Gold (“Polyus Gold”) are pleased to announce the proposed combination of KazakhGold and Polyus Gold (the “Proposed Combination”), which, if completed, would result in KazakhGold acquiring all or substantially all of the issued share capital of Polyus Gold, currently the indirect controlling shareholder of KazakhGold.
The Proposed Combination, if completed, will create a single holding company listed on the London Stock Exchange owning the businesses of both KazakhGold and Polyus Gold, thereby unifying the shareholder bases of the respective companies.
Background
On 9 July 2009, Polyus Gold, through its indirect wholly-owned subsidiary, Jenington International Inc. (“Jenington”), made a recommended partial offer to acquire 50.1% of the issued and to be issued share capital of KazakhGold (the “Partial Offer”). The Partial Offer was declared unconditional on 14 August 2009. As part of the Partial Offer, Jenington also agreed to underwrite the USD 100 million equity capital raising of new KazakhGold Shares which was placed with Jenington and a number of qualified investors on 1 July 2010 (the “Placing”). Accordingly, Jenington now owns 65% of the issued share capital of KazakhGold.
Since acquiring its interest in KazakhGold in 2009, Polyus Gold has managed KazakhGold and, through Jenington, has funded the development and operations of KazakhGold through two USD 50 million shareholder loans in 2009 and 2010 as well as a further aggregate USD 10.675 million loaned in 2011.
On 30 June 2010, the Board of KazakhGold announced a proposed combination of KazakhGold and Polyus Gold, which would have resulted in KazakhGold acquiring all or substantially all of the issued share capital of Polyus Gold (the “2010 Proposed Combination”). The 2010 Proposed Combination was terminated on 26 October 2010, following the announcement by the Ministry of Industry and New Technologies of the
On 10 April 2011, KazakhGold and AltynGroup Kazakhstan LLP (“AltynGroup”) (a limited liability partnership controlled by members of the Assaubayev family) entered into a Restated and Amended Principal Agreement (the “Amended Principal Agreement”) providing for the sale of the shares of KazakhGold’s operating subsidiaries in Kazakhstan, Romania and Kyrgyzstan (the “KazakhGold Operating Subsidiaries”), for an aggregate consideration of USD 509 million as well as the provision by the buyer of funds required for KazakhGold to repay USD
On 10 April 2011, KazakhGold, Jenington and members of the Assaubayev family and certain related companies also entered into a settlement deed which provides for the settlement and release of all orders, judgments and claims outstanding between them, without any admission of liability on either part (the “Settlement Deed”). All the conditions to the effectiveness of the Settlement Deed have been obtained, including the waivers from the MINT of its pre-emptive rights of KazakhGold securities and the issuance to KazakhGold of an irrevocable documentary letter of credit for USD 100 million, which is available for drawdown in certain circumstances, including as partial payment on completion of the first tranche of the sale of the shares in KazakhGold’s Operating Subsidiaries which is to occur by 12 September 2011 under the terms of the Amended Principal Agreement.
All governmental and regulatory approvals, consents and waivers necessary to permit KazakhGold to consummate the Proposed Combination have been received.
Terms of the Proposed Combination
The Proposed Combination is to be effected through a series of transactions, including an exchange of new KazakhGold Shares and GDRs for Polyus Gold common shares and ADSs (represented by ADRs). Under the terms of the Proposed Combination, the consideration to be offered to Polyus Securityholders will be as follows:
for each Polyus Share: 17.14 KazakhGold GDRs
for each Polyus ADS*: 8.57 KazakhGold GDRs
*Every two Polyus ADSs represent one Polyus Share.
In determining the Exchange Ratio, the Board of KazakhGold took into account, among other things, the relative financial position of Polyus Gold and KazakhGold, Polyus Gold’s operational outlook and the consideration payable by AltynGroup for KazakhGold’s Operating Subsidiaries.
The Exchange Ratio was determined based on the following assumed values:
each Polyus Share and every two Polyus ADSs of approximately USD 68.56;
each KazakhGold GDR of approximately USD 4.00.
Based on the above assumed values, the Exchange Ratio implies a value for the existing issued share capital of Polyus Gold of approximately USD13.1 billion.
On 17 June 2011 the Board of KazakhGold determined that the Exchange Ratio was fair from a financial point of view so far as the existing shareholders of KazakhGold were concerned. In arriving at this determination, the Board of KazakhGold took financial advice from HSBC Bank plc as financial adviser to KazakhGold.
As part of the Proposed Combination, KazakhGold is creating a Level I GDR programme which will be similar to the current Polyus Gold Level I ADR programme.
Intention to delist Polyus Gold ADSs
Following completion of the Proposed Combination, Polyus Gold intends to apply to the UKLA and the London Stock Exchange to have the Polyus ADSs delisted from the Official List and from the Main Market of the London Stock Exchange in accordance with the respective rules of the Financial Services Authority and the London Stock Exchange, and Polyus Gold may subsequently terminate its Level I ADR programme. In such circumstances, any remaining holders of Polyus ADSs would receive Polyus Shares in exchange for their Polyus ADSs. If the Proposed Combination does not complete, Polyus Gold will maintain the listing of the Polyus ADSs on the Official List and the Main Market.
Reasons for and benefits of the Proposed Combination
The Board of KazakhGold and Polyus Gold believe that the Proposed Combination will provide substantial benefits to both Polyus Gold and KazakhGold, as well as holders of their respective shares and depositary receipts, including:
Creation of a leading gold producer
The Proposed Combination will create one of the leading gold producers in the world and the largest pure gold mining company listed on the London Stock Exchange in terms of gold production and mineral resources. Based on the 2010 annual results for KazakhGold and Polyus Gold, the Combined Group had aggregate production of 1,386 thousand ounces in 2010, proven and probable reserves of 81.0 million ounces, and measured, indicated and inferred resources of 125.9 million ounces on 1 January 2010 (adding Polyus Gold reserves and resources as of January 2011 and KazakhGold reserves and resources as of May 2011, determined in accordance with the JORC Code at such date).
Strong platform for growth
The Board of KazakhGold and Polyus Gold believe that the Combined Group will have a strong platform for future growth in
Improved financial position for KazakhGold
Since completion of the Partial Offer, the KazakhGold Group has not been able to generate sufficient cash to service its debt, and has relied on funding supplied by Jenington to support its debt and other obligations. Polyus Gold has, through Jenington, funded the development and operations of KazakhGold through two USD 50 million shareholder loans, as well as further loans in an aggregate principal amount of USD 10.675 million loaned in 2011 to fund interest payments on the Senior Notes and other obligations of KazakhGold. The KazakhGold Group had a loss in 2010 of USD 57,271 thousand (compared to USD 143,739 thousand in 2009), and had cash outflows from operations in 2010 of USD 43,886 thousand (compared to USD 48,987 thousand in 2009). In the absence of the Proposed Combination, there can be no assurance that further financial support from Jenington or Polyus Gold will be forthcoming beyond 30 April 2012. If the Proposed Combination is completed, KazakhGold will be the parent company of the Polyus Group, enabling it, and indirectly the holders of the GDRs, to benefit from the enlarged group’s operating cash flows and improved liquidity.
Enhanced liquidity and visibility of the Combined Group
The Board of KazakhGold and Polyus Gold believe that, with an enlarged shareholder base and greater free float in USD terms following completion of the Proposed Combination, the Combined Group will benefit from enhanced liquidity in its GDRs, as well as increasing its visibility in the London equity market, resulting in a more transparent valuation for the Combined Group going forward.
Improved access to capital markets
Through the combination with Polyus Gold, the Board of KazakhGold and Polyus Gold believe that KazakhGold will have a more stable financial footing and will have access to more reliable sources of financing on more beneficial terms than those presently available to it. Polyus Gold is currently subject to limitations under Russian law on the aggregate number of depositary receipts it can have in issue, which restricts its capability to raise capital in the international equity markets and the ability of its shareholders to convert common shares into depositary receipts. The Board of KazakhGold and Polyus Gold expect the internationalisation of Polyus Gold through the combination with KazakhGold to give the Combined Group the ability to raise capital through a more direct access to international capital markets.
Enhanced corporate governance
The new board of KazakhGold is expected to have at least three independent non-executive directors. As GDR holders of the Combined Group, existing KazakhGold GDR holders will benefit from enhanced corporate governance through the appointment of at least two additional independent non-executive directors, and Polyus Securityholders will benefit from the appointment of at least one additional independent non-executive director to the Board of KazakhGold.
Attractive acquisition currency
The Board of KazakhGold and Polyus Gold believe that the Combined Group’s London Stock Exchange listing will provide an attractive acquisition currency for future expansion and consolidation opportunities within the gold sector, both regionally and globally.
Elimination of multiple trading platforms
The completion of the Proposed Combination will result in a single, London-listed investment opportunity for investors in the form of KazakhGold depositary receipts with one unified market capitalisation, eliminating the multiple trading platforms for investment in Polyus Gold or KazakhGold securities that currently exist.
Potential to move to a Premium Listing
Following the integration of the KazakhGold and Polyus Gold groups, the Combined Group will consider applying in due course to the UKLA for a Premium Listing of its ordinary shares on the London Stock Exchange, which would allow the Combined Group to seek future inclusion in key FTSE indices and which, the Board of KazakhGold and Polyus Gold believe, would lead to a re-rating of the Combined Group. Moving to a Premium Listing would also require enhancement to the corporate governance of the company and provide greater rights for minority shareholders than KazakhGold’s Jersey-incorporation and Standard Listing presently affords them. No final determination has been made to apply for a Premium Listing, and no assurance can be given that such a listing would be obtained.
Transaction structure
The Proposed Combination will be effected through a series of conditional transactions (each a “Transaction” and together, the “Transactions”). A brief description of each Transaction is set out below:
The Private Exchange Offer: KazakhGold will make a private exchange offer to Eligible Polyus Securityholders to exchange their Polyus Securities for KazakhGold GDRs on the following basis:
· for each Polyus Share: 17.14 KazakhGold GDRs
· for each Polyus ADS*: 8.57 KazakhGold GDRs
*Every two Polyus ADSs represent one Polyus Share.
– The Private Exchange Offer is subject to a number of conditions, in particular, an acceptance condition of 16% of the issued and outstanding share capital of Polyus Gold, which, if not achieved, may result in the Proposed Combination not completing;
– Other key conditions and details of the Private Exchange Offer are set out in Section 2 of Appendix II of this announcement.
The Principal Shareholders Option Agreement: KazakhGold has entered into an option agreement with the Principal Shareholders of Polyus Gold, granting KazakhGold the option to acquire the Polyus Securities owned by the Principal Shareholders or in which the Principal Shareholders are otherwise interested, comprising 96,636,443 Polyus Shares and 85,619,611 Polyus ADSs, representing in aggregate 73.2% of the issued and outstanding share capital of Polyus Gold, in exchange for KazakhGold Regulation S GDRs, using the same exchange ratio as is being used in the Private Exchange Offer
– The exercise of the Principal Shareholders Option Agreement is subject to several conditions, including satisfaction of the acceptance condition under the Private Exchange Offer
The Jenington Option Agreement: KazakhGold has entered into an option agreement with Jenington, granting KazakhGold the option to acquire the Polyus Securities owned by Jenington comprising 10,776,161 Polyus Shares, representing in aggregate, approximately 5.65% of the existing issued share capital of Polyus Gold, in exchange for KazakhGold Shares, using the same exchange ratio as is being used in the Private Exchange Offer
– The exercise of the Jenington Option Agreement is subject to several conditions, including satisfaction of the acceptance condition under the Private Exchange Offer
The Transactions are described in more detail in Appendix II of this announcement and full details of the transaction structure will be set out in the Prospectus to be published shortly.
Following completion of the Private Exchange Offer and the exercise of the options under the Principal Shareholders Option Agreement and the Jenington Option Agreement, KazakhGold is expected to acquire approximately 94.8% of the issued share capital of Polyus Gold, as a result of which Polyus Gold will become a subsidiary of KazakhGold. On this basis:
· existing Polyus Gold shareholders would hold approximately 96.3 per cent. of the Combined Group; and
· existing KazakhGold shareholders would hold approximately 3.7 per cent. of the Combined Group.
The Transactions, if completed, would constitute a reverse takeover of Polyus Gold by KazakhGold.
Following completion of the Proposed Combination, subject to shareholder approval and admission of the new KazakhGold GDRs to the Official List and to trading on the London Stock Exchange, KazakhGold will be renamed “Polyus Gold International Limited”.
Changes to the Board of KazakhGold
Following completion of the Transactions, it is expected that a new Board of KazakhGold will be constituted. The composition of the new Board of Directors is expected to be determined by or shortly following the completion of the Proposed Combination and will include members from the current Board, as well as members from the Board of Directors of Polyus Gold. It is expected that the Board will include at least three Independent Directors following completion of the Proposed Combination, including Mr Adrian Coates and The Earl of Clanwilliam. It is expected that the new Directors will be appointed by the current KazakhGold Board, as permitted by the Company’s Articles of Association, for terms expiring at KazakhGold’s next Annual General Meeting in 2012.
Further information regarding the new board will be contained in the Prospectus to be published shortly.
Opinion of the Board of KazakhGold
On 17 June 2011, the Board of KazakhGold determined that the Exchange Ratio was fair from a financial point of view so far as the existing shareholders of KazakhGold were concerned. In arriving at this determination, the Board of KazakhGold took financial advice from HSBC Bank Plc as financial adviser to KazakhGold.
Support by the Board of Polyus Gold
The Board of Polyus Gold has expressed its support to the terms of the Proposed Combination, including the Private Exchange Offer.
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