Argo Blockchai. Regulatory News (ARB)

28 Feb 2006 10:20

JOINT ANNOUNCEMENTAFRICAN RAINBOW MINERALS LIMITED XSTRATA PLC(Incorporated in the Republic of South Africa) (Incorporated in Switzerland)(Registration number 1933/004580/06 (Registration number 4345939)JSE Share code: ARI ZSE Share code: XTA.SLSE Share code: AGM LSE Share code: XTA.LISIN: 000054045 ("Xstarta")("ARM" or the "Company")ARM AND XSTRATA ESTABLISH A NEW MAJOR SOUTH AFRICAN COAL MINING COMPANY -DETAILED TERMS ANNOUNCEMENT 1. INTRODUCTION ARM and Xstrata are pleased to announce that agreement has been reached toestablish a major black controlled coal mining company ("ARM Coal"), in atransaction valued at approximately R2.4 billion, which will have significantoperating assets and growth projects in South Africa and a substantialparticipation in the export and domestic thermal coal markets.In terms of the agreement, ARM will pay R400 million and Xstrata will pay R384million to subscribe for 51% and 49%, respectively, of the issued share capitalof ARM Coal. ARM Coal will hold a 20% equity based participation interest inthe existing coal operations of Xstrata South Africa (Proprietary) Limited("XSA") and a 51% interest in an unincorporated joint venture to beestablished, in respect of the Goedgevonden project (collectively, "thetransaction"). This will provide ARM Coal with an effective interest in XSA"scoal business of approximately 29%.To enhance ARM"s participation in the South African coal industry, XSA hasagreed to grant ARM an option to acquire a direct equity based participationinterest in XSA"s coal business of 10%, which may result in HistoricallyDisadvantaged South African ("HDSA") control of 36% of XSA"s coal business. Theoption is described in more detail in paragraph 6 below.ARM and Xstrata intend to strengthen their business relationship furtherthrough the pursuit of opportunities in a range of other commodities in Africa.ARM is a niche-diversified South African mining company of which 42.9% is ownedby African Rainbow Minerals & Exploration Investments (Proprietary) Limited("ARMI"). Negotiations with numerous broad-based empowerment beneficiaries arebeing finalised which will result in 56.9% of ARM being controlled by HDSAs.ARM owns ferrous metals, nickel and platinum operations and a significantinterest in gold through its holding in Harmony Gold Mining Company Limited.Furthermore, ARM holds an African exploration portfolio (copper, cobalt andgold) through a company it controls and which is listed on the Toronto StockExchange, TEAL Exploration and Mining Incorporated.Xstrata is a major global diversified mining group, listed on the London andSwiss stock exchanges with approximately 26,000 employees and contractorsworld-wide. Xstrata maintains a meaningful position in six major internationalcommodity markets: copper, coking coal, thermal coal, ferrochrome, vanadium andzinc, with additional exposures to gold, lead and silver with operations andprojects across four continents and seven countries: Australia, South Africa,Spain, Germany, Argentina, Peru and the UK. Xstrata Coal is one of the world"slargest producers of export thermal coal and a significant producer of cokingcoal. XSA"s coal operations contribute around one third of Xstrata"s totalannual coal production. In South Africa, XSA is the third largest exporter ofthermal coal and produces almost 20% of all thermal coal exported. Currently ithas interests in 13 mines, most of which are located within the two majorcoalfields - Witbank and Ermelo, with consolidated annual production capacityof in excess of 20 million tonnes of thermal coal, the majority of which isexported. 2. RATIONALE FOR THE TRANSACTION The formation of ARM Coal will result in the creation of a significant coalparticipant in South Africa with a balanced exposure to export and domesticsales, a majority interest in the Goedgevonden project and access to capital topursue future growth opportunities.The transaction enables ARM to further diversify its asset portfolio with theaddition of quality coal assets and to establish a strategic relationship withan international mining house and leading coal producer. As the controllingshareholder of ARM Coal, ARM will be instrumental in the formulation andexecution of strategic goals inclusive of the identification and pursuit ofgrowth opportunities. ARM will also contribute management expertise andassistance to XSA"s coal operations in growing its business and achieving itstargets in respect of the Mining Charter.Xstrata is fully supportive of the principles outlined in the Mineral andPetroleum Resources Development Act and the Mining Charter and is committed tothe empowerment of HDSAs through their participation in its South Africanoperations.The transaction achieves meaningful and sustainable empowerment ownership andinvolvement in its South African coal assets, and positions the parties tojointly pursue future opportunities. Xstrata"s commitment is furtherdemonstrated through the provision of vendor financing on preferential terms toARM Coal and the provision of management support as more fully described below. 3. DESCRIPTION OF ASSETS XSA is South Africa"s third largest exporter of thermal coal. In 2004,consolidated production of thermal coal was 19.2 million tonnes and, of theconsolidated sales of 17.5 million tonnes, approximately 74% was exported withthe majority of such going to the Atlantic market. XSA manages eleven operatingmines and has interests in a further two joint venture mines.The Goedgevonden project, which includes the prospecting rights in respect ofthe Zaaiwater West property, is expected to produce approximately 3.2 millionadditional tonnes for export and approximately 3.4 million tonnes per annum ofdomestic thermal generation coal. The feasibility study for the Goedgevondenproject was completed in September 2005.ARM Coal will benefit from XSA"s entitlement to export coal through theRichards Bay Coal Terminal ("RBCT"). ARM Coal will apply on behalf of theGoedgevonden joint venture for additional export capacity in the Phase Vexpansion of RBCT. Xstrata Coal Marketing AG, a subsidiary of Xstrata, willcontinue to market all export coal produced by both the existing operations andthe Goedgevonden joint venture. 4. STRUCTURE OF THE TRANSACTION The final structure is depicted below: Please refer to the announcement whichhas been posted on the Company"s website, www.arm.co.za, or to the announcementwhich will be published in the South African press on Thursday, 2 March 2006for a diagrammatic representation of the structure.ARM Coal will subscribe for participating preference shares ("PreferenceShares") in the capital of XSA for a cash consideration of R784 million, byapplying the subscription proceeds received from Xstrata and ARM for itsordinary shares. The Preference Shares will entitle ARM Coal to participate in20% of the free cash flow of XSA"s existing coal operations. Dividends receivedfrom the Preference Shares will flow directly to ARM Coal"s shareholders.For the purposes of this transaction, R4 billion of debt has been attributed toXSA"s existing coal operations. This debt will bear interest at the prime rateand will be repaid over a ten year period following a five year vendorfacilitation period during which no interest will accrue and no principal willbe required to be repaid.ARM Coal will furthermore acquire a 51% participation interest in anunincorporated joint venture, the Goedgevonden project, to be established withthe objective of developing and optimally exploiting the Goedgevonden coalreserves. XSA will provide debt funding of R765 million to ARM Coal in order tofund its acquisition of its 51% interest in the Goedgevonden project. This debtwill bear interest at the prime rate and the repayment period will be linked tothe underlying cash flows of ARM Coal.Furthermore, XSA will provide the project funding required to bring theGoedgevonden project into commission. The project funding is expected to peakat approximately R2.3 billion and will be repayable over ten years following aneight year vendor facilitation period. During this eight year period, nointerest will accrue and no principal will be required to be repaid in respectof XSA"s portion of the project funding and ARM Coal will be entitled to sharein this benefit. The project funding will bear interest at the prime rate.In order for ARM to gain immediate access to cash flows, a cash upstreamprinciple will be applied for the first five years following completion of thetransaction, whereby 20% of Goedgevonden"s operating cash flow will bedistributed to the joint venture parties according to their respectiveinterests. The remaining 80% of the operating cash flow will be utilisedtowards the servicing of the project funding debt. Furthermore, 80% of theoperating cash flow received from Goedgevonden by ARM Coal will be used toservice ARM Coal"s debt of R765 million and the remaining 20% will bedistributed to the shareholders of ARM Coal. 5. MANAGEMENT OF ARM COAL AND ITS OPERATIONS ARM will be involved in the management of the business at three levels: * At ARM Coal - ARM will appoint four out of the seven directors of ARM Coal, in line with its controlling interest in ARM Coal. * At the existing operations - XSA"s existing coal operations shall be governed by a supervisory committee, consisting of four representatives appointed by XSA and two representatives appointed by ARM through ARM Coal. * The Goedgevonden project - The project will be managed through a management committee, consisting of three representatives appointed by XSA and four representatives appointed by ARM Coal. XSA will manage the Goedgevonden project on behalf of the joint venture on a cost recovery basis. 6. EXCLUSIVITY AND OPTION TO INCREASE ARM"S INTEREST IN XSA"S EXISTING COAL OPERATIONS ARM and XSA undertake to offer all opportunities to participate in anyprospecting or mining for coal in South Africa to ARM Coal.XSA has granted ARM an option, at no cost, to acquire a direct equity basedparticipation in XSA"s coal business of 10%. The option period commences on theday after the fulfillment of the conditions precedent and expires on 1September 2006. The subscription price will be R400 million and the newpreference shares will carry the same rights and obligations as the PreferenceShares except that no facilitation will be provided by XSA . 7. CONDITIONS PRECEDENT AND UNDERTAKINGS The implementation of the transaction is subject to the fulfillment of certainconditions precedent, including, inter alia, obtaining the necessary regulatoryapprovals, including that required in terms of the Exchange Control Regulationsof South Africa and the Competition Act.Johannesburg 28 February 2006Financial adviser and sponsor to ARM Investment Bank to XstrataDeutsche Securities (SA) (Pty) Ltd Standard BankAttorneys to ARM Attorneys to XstrataBowman Gilfillan Werksmans Inc.ENDAFRICAN RAINBOW MINERALS LTD