CRA.L Regulatory News (CRA)

Cradle Arc Plc / EPIC: CRA.L / Market: AIM / Sector: Mining

1 August 2018

Cradle Arc plc

("Cradle Arc", the "Company" or, together with its subsidiaries, the "Group")

Agreement to Redeem Convertible Loan Notes, Issue of Equity in respect of Warrant Exercise and Subscription

and

Operational Update

Cradle Arc (AIM: CRA), the African focused base and precious metals exploration and production company, is pleased to announce that it has reached agreement to suspend the holders' conversion rights and redeem all of its £1.275 million principal amount of outstanding convertible loan notes (the "Convertible Loan Notes") for, in aggregate, £1.59 million in cash, by way of staged and back-end weighted payments up to their scheduled maturity date of 31 December 2018.

Funding for such redemption, alongside additional working capital for the Company's Mowana Copper Mine in Botswana ("Mowana") (in which the Company holds 60 per cent ownership), has been raised via subscriptions for new ordinary shares of £0.0001 each in the capital of the Company ("Ordinary Shares") at a price of 5.0 pence per share (the "Subscription") and the accelerated exercise of certain outstanding warrants (and related par value subscription for Ordinary Shares) to raise an aggregate amount of £2.4 million (approximately US$3.1 million) before expenses. In addition, the Company has also reached agreement to defer certain of its scheduled debt repayments as well as certain payments due to PenMin Botswana (Pty) Limited ("PenMin") under its pre-existing arrangements with the Company (together, the "Debt Rescheduling").

The abovementioned transactions collectively expand the Company's equity capital base and provide additional working capital headroom, as production continues to be ramped up at Mowana, ahead of the planned Dense Media Separation ("DMS") expansion project in due course.

The Company also provides an operational update regarding, inter alia, a reduction in the processing throughput achieved at Mowana during July 2018, whilst maintaining its overall production guidance for H2 2018 of at least 5,700 tonnes of contained copper.

Highlights:

· Agreement reached with the holders of the Company's outstanding Convertible Loan Notes for their conversion rights to be suspended and the notes to be redeemed for staged cash payments totalling £1.59 million up to their scheduled maturity date of 31 December 2018, thereby preventing potential dilution from conversion at a significant discount to the Company's prevailing share price;

· Equity funding of, in aggregate, £1.9 million (approximately US$2.4 million) raised through the accelerated exercise of 41.2 million warrants and related par value subscription for Ordinary Shares;

· A further £0.5 million (approximately US$0.7 million) raised from certain new investors subscribing for 10.0 million new Ordinary Shares at a price of 5.0 pence per share;

· Principal repayments due to certain lenders and creditors (including the vendors of Mowana) totalling US$6.55 million deferred until January 2019;

· Cradle Arc to increase its effective equity interest in Mowana by way of acquiring a minimum amount of US$1.5 million in new equity in Leboam on a fair value basis to be determined by an independent firm of accountants;

· Company's equity capital base improved and additional working capital headroom created ahead of the planned DMS expansion project in due course; and

· Despite encountering sporadic processing interruptions in early July 2018, the Company's previously announced production guidance remains unaltered being at least 5,700 tonnes of contained copper for H2 2018.

Kevin van Wouw, CEO of Cradle Arc, commented:

"I am pleased that we have been able to simplify and strengthen our capital structure through this series of financial transactions. The agreement reached with the holders of the Convertible Loan Notes prevents the prospect of future dilution from this instrument via the potential issue of new Ordinary Shares at a significant discount to the Company's prevailing share price at that time, which has understandably been a concern for both our existing shareholders and prospective investors.

"The new funds raised have primarily been derived from the early exercise of certain warrants held by existing shareholders and debt providers to the Company. Taking into account the shares which may potentially have been issued on conversion of the Convertible Loan Notes, we have effectively reduced the Company's fully diluted pro-forma share capital.

"The planned purchase of additional equity in Leboam, Mowana's holding company, will serve to increase our attributable interest in the Mowana Mine, and thereby help to mitigate the dilution being experienced by existing shareholders from these transactions.

"In conjunction with the raising of additional equity funding, we have been able to agree the deferral of principal repayments on our secured debt and certain other payments to creditors, which serves to provide additional working capital headroom through to January 2019 during the critical production ramp-up period at Mowana. Collectively, the increase in working capital headroom and planned additional equity investment in Leboam, reduces the Group's risk profile at a time of volatile copper prices and better positions us to seek and secure the financing required to move forward with our DMS expansion project in due course."

Agreement for the Redemption of Convertible Loan Notes

The Company has reached agreement with the holders of, in aggregate, £1.275 million principal amount of Convertible Loan Notes issued in January 2017 and June 2017, to suspend their conversion rights and redeem all of the Convertible Loan Notes for cash payments of, in aggregate, £1.59 million, by way of staged and back-end weighted payments up to their scheduled maturity date of 31 December 2018.

The Convertible Loan Notes currently carry the right to convert into Ordinary Shares at a discount to the Company's prevailing share price at the time of conversion of either 20 per cent or 25 per cent (please refer to the Company's AIM Admission Document dated 18 January 2018 (the "Admission Document") for further details). For illustrative purposes only, were the Convertible Loan Notes to have been converted in full, based on the Company's closing middle market share price of 6.0 pence as at 31 July 2018 (being the latest practicable business date prior to this announcement), this would have resulted in the issuance of approximately 27.8 million new Ordinary Shares. Accordingly, the prospect of significant equity dilution further to the potential conversion of the Convertible Loan Notes at uncertain conversion prices, has now been suspended.

In the event that the Company does not make the agreed payments in the period to 31 December 2018, the holders of the Convertible Loan Notes can either (i) request that the agreement to suspend their conversion rights be terminated or (ii) require the Company to pay in cash to the holder a fee equivalent to 10 per cent of any such outstanding amounts relating to the remaining monthly payments, with an aggregate payment to be made when the final scheduled monthly payment falls due. If the Convertible Loan Notes are not redeemed in their entirety by 31 December 2018, an additional penalty fee of 25 per cent shall be payable to the Convertible Loan Note holders on the amount then outstanding.

Warrant Acceleration

The Company has reached agreement with a sizeable proportion of the holders of certain warrants issued in conjunction with the £3.25 million October 2017 pre-IPO financing (the "October 2017 Warrants") and the US$10.0 million April 2018 debt financing (the "April and June 2018 Warrants") to exercise such warrants ahead of their scheduled expiry dates (the "Warrant Acceleration").

As an incentive to accelerate the exercise of their warrants, the Company has offered the holders of the October 2017 Warrants the option to exercise their warrants at a lowered price of 4.0 pence, providing they exercise such warrants on or before 1 August 2018. After this date, the exercise price will revert to 13.0 pence and there are no other changes to the October 2017 Warrants' terms and conditions.

As an incentive to accelerate the exercise of their warrants, the Company has offered the holders of the April and June 2018 Warrants the option to exercise their warrants at the existing 5.0 pence exercise price and allow them to subscribe at par value of 0.01 pence per share for an additional 0.669 new Ordinary Shares for each such warrant exercised on or before 1 August 2018, which represents an average issue price of approximately 3.0 pence per Ordinary Share issued to such holders of the April and June 2018 Warrants.

Accordingly, 19,633,334 new Ordinary Shares will be issued pursuant to the early exercise of the October 2017 Warrants, 21,577,972 new Ordinary Shares will be issued pursuant to the early exercise of the April and June 2018 Warrants and 14,435,662 new Ordinary Shares will be issued pursuant to the related par value subscription, raising total gross funds of approximately £1.9 million (approximately US$2.4 million).

Equity Subscription

In addition to the proceeds raised pursuant to the Warrant Acceleration, the Company has conditionally raised further gross funds of approximately £0.5 million (approximately US$0.7 million) pursuant to a subscription of, in aggregate, 10,006,000 new Ordinary Shares (the "Subscription Shares") by certain new institutional and other investors at a price of 5.0 pence per Ordinary Share (the "Subscription"). The Subscription is conditional, inter alia, on admission of the Subscription Shares to trading on AIM.

In connection with the Subscription and the Warrant Acceleration, the Company has entered into a deed of warranty and undertaking (the "Deed of Warranty and Undertaking"), containing certain customary warranties and undertakings for transactions of this nature, provided by the Company to Tamesis Partners LLP ("Tamesis") on behalf of the relevant investors.

Illustrative Unaudited Pro-Forma Capital Structure

The illustrative impact of the Warrant Acceleration, Subscription and redemption of the Convertible Loan Notes, and the Company's resulting unaudited pro-forma capital structure, can be summarised as follows:

(1) Includes the par value subscription shares to be issued in respect of the acceleration of the April and June 2018 Warrants.

(2) Expiring in April 2019 and February 2020 and exercisable at a price of 5 pence per Ordinary Share.

(3) Exercisable at a price of 13 pence per Ordinary Share, expiring in January 2019.

(4) Management share options subject to vesting conditions and exercisable at 10 pence per Ordinary Share.

(5) Assuming all Convertible Loan Notes converted in full based on the Company's closing share price on AIM of 6.0 pence as at 31 July 2018.

Rescheduling of certain Debt Principal Re-payments

As set out in the Admission Document, Leboam, in which the Company has a 60 per cent interest, has a total of US$19.9 million in secured loans outstanding. Whilst monthly repayments of principal were due to commence under these loans in August 2018, in conjunction with the equity raising transactions set out above, the lenders (including the vendors of Mowana) have agreed to defer principal repayments until January 2019. In addition, a re-scheduling of certain pre-payment amortisation due to Fujax Minerals and Energy Limited has been agreed, resulting in a reduction in monthly payments to US$200,000. These agreements serve to reduce Leboam's cash outflows in respect of such payments through to January 2019 by a total of approximately US$4.43 million, thereby providing additional working capital headroom during the production ramp-up phase at the Mowana Copper Mine.

Amendment to PenMin Fee Arrangements and Deferral of Payments

PenMin has agreed to continue to defer the payment of the £1 million deferred cash consideration owing to it as vendor of CAI, and to defer certain other unpaid invoices for its design, build and operate (Design Build and Operate) services provided to Mowana in relation to the processing plant. All outstanding deferred amounts will accrue interest at a rate of 13.5 per cent per annum. In addition, it has been agreed that for a period of six months it will continue to provide Design Build and Operate services to the mine at a reduced margin of 3 per cent on top of costs (down from the contractually agreed cost plus 10 per cent basis). This increases the abovementioned cash flow benefit to US$6.55 million in the period to January 2019.

Proposed Increased Equity Interest in Leboam

As part of the abovementioned transactions and rescheduling of debt, agreement has been reached with ZCI Limited ("ZCI") that the Company's wholly owned subsidiary, Cradle Arc Investments (Pty) Ltd ("CAI"), the holder of a 60 per cent stake in Leboam Holdings Ltd ("Leboam"), being the owner of the Mowana Copper Mine, shall invest a minimum of US$1.5 million for additional new ordinary shares in the capital of Leboam. The strike price for such proposed investment is to be on a fair value basis, as determined by an independent firm of accountants to be agreed on by both parties. Cradle Arc is required to make the minimum US$1.5 million investment in Leboam within 30 days or the revised amortisation schedule agreed with ZCI will revert to the amortisation schedule that was formerly in place.

Related Party Transactions

City Financial Investment Company Limited ("City Financial") has taken up the Company's offer to (i) exercise 6,666,667 of its holding of October 2017 Warrants and (ii) exercise 5,350,264 of its holding of April and June 2018 Warrants and related par value subscription of 3,579,326 Ordinary Shares. As City Financial is a substantial shareholder of the Company, this is considered to be a related party transaction pursuant to Rule 13 of the AIM Rules for Companies. Accordingly, the Directors of the Company, having consulted with the Company's Nominated Adviser, Strand Hanson Limited, consider that the terms of City Financial's participation in the Warrant Acceleration are fair and reasonable insofar as the Company's shareholders are concerned.

The Company's CEO, Kevin van Wouw, is indirectly interested in 55.4 per cent of the Company's current issued share capital via PenMin, which is also a substantial shareholder in the Company, such that PenMin is also considered to be a related party to the Company. As PenMin and certain of the Company's subsidiaries have entered into agreements to defer or reduce certain payments due to PenMin in return for accruing interest, such variations are considered to be related party transactions pursuant to Rule 13 of the AIM Rules for Companies. Accordingly, the independent Directors of the Company (being all Directors other than Mr van Wouw), having consulted with the Company's Nominated Adviser, Strand Hanson Limited, consider that the terms of the variations of the pre-existing agreements with PenMin are fair and reasonable insofar as the Company's shareholders are concerned.

Operational Update

Further to the Company's operational update and its final results announcements of 26 and 28 June 2018 respectively, an additional drilling contractor has been established on site in order to augment the mine's drill and blast operations and the third mining unit has been brought on-line as scheduled. However, sporadic processing interruptions were experienced in early July 2018, due to process plant breakdown and power outages, predominantly in the tailings disposal systems. Accordingly, the monthly volume of ore processed in July 2018 is now expected to be approximately 25 per cent less than previously forecast and, whilst June 2018 was operationally cash flow break even at the project level, the month of July 2018 will not be. Processing optimisation is ongoing as the Company continues to ramp-up to steady state production.

Leboam's ramp-up planning made allowance for temporary setbacks with respect to throughput and recoveries, therefore, whilst the processing interruptions have caused some short term working capital pressures, the Company's production guidance remains at least 5,700 tonnes of contained copper in H2 2018.

The Company is in ongoing negotiations in respect of obtaining the financing required for its planned DMS upgrades, working closely with its financial advisers to identify and evaluate the various potential options available, and an update on the result of this process will be provided in due course as and when appropriate.

Additional Information

The new Ordinary Shares to be issued pursuant to the Warrant Acceleration and the Subscription will, when issued, be credited as fully paid and will rank pari passu in all respects with the Company's existing Ordinary Shares, including the right to receive all dividends and other distributions declared after the date of their issue.

Tamesis is acting as the Company's financial adviser and broker in connection with the Warrant Acceleration and the Subscription. The completion of the Warrant Acceleration and the Subscription is conditional upon, inter alia, the Deed of Warranty and Undertaking being declared unconditional and admission of the Ordinary Shares pursuant to the Warrant Acceleration and the Subscription to trading on AIM ("Admission").

Application will be made for the Admission of, in aggregate, 65,652,968 new Ordinary Shares to trading on AIM, with such Admission expected to become effective and dealings commence at 8.00 a.m. on 7 August 2018. Following Admission, the enlarged issued share capital of the Company will comprise 274,010,774 Ordinary Shares and, accordingly, the total number of voting rights will be 274,010,774.

The above figure may be used by shareholders as the denominator for the calculation by which they will determine if they are required to notify their interest in, or a change to their interest in, Cradle Arc under the FCA's Disclosure Guidance and Transparency Rules.

Where amounts have been converted from GBP into US$ in this announcement, an exchange rate of 1.00GBP:1.31US$ has been used, being the exchange rate prevailing on 31 July 2018, the latest practicable date prior to the publication of this announcement.

**ENDS**

For further information on the Company, please visit www.cradlearc.com or contact:

Tavistock Communications Limited

Charles Vivian

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) 596/2014.