29 Apr 2009 07:00
Polymetal announces acquisition of Mayskoye gold deposit in consortium with a group of Russian investors for total consideration of US$105 million
Saint-Petersburg, Russia, April 29, 2009 - JSC "Polymetal" (LSE, MICEX, RTS: PMTL) ("Polymetal" or the "Company") announces that it has acquired a 9% equity stake in OOO «Zolotorudnaya Kompaniya Mayskoye» ("ZK Mayskoye" or the "Asset"), a Russian legal entity holding the mining license for Mayskoye gold deposit valid till 2024, from a subsidiary of Highland Gold Mining Limited ("Highland Gold") for US$13,300 (thirteen thousand three hundred US dollars).
The remaining 91% equity stake in ZK Mayskoye was simultaneously acquired by four Russian private companies (the "Equity Buyers") unrelated to Polymetal and Highland Gold for US$134,480. As part of the transaction, all inter-company loans owed by ZK Mayskoye to Highland Gold and its affiliates were assigned to a third party (the "Loan Buyer"), unrelated to Polymetal, for US$24,852,220. ZK Mayskoye also has a US$80 million loan from NOMOS-BANK (the "NOMOS Loan") but no other financial indebtedness. Total enterprise value of the Asset is thus US$105 million. The transaction was completed on April 28, 2009.
Prior to completion of the ZK Mayskoye acquisition Polymetal and the Equity Buyers entered into a legally binding agreement, under which, subject to obtaining Polymetal's formal Board approval:
(A) Polymetal and the Equity Buyers have agreed to recapitalize ZK Mayskoye by contributing a total of US$104,852,220 million to ZK Mayskoye's share capital pro rata to their equity ownership stakes in ZK Mayskoye (i.e., Polymetal will contribute US$9,436,699.80, and the Equity Buyers will contribute US$95,415,520.20 to the recapitalization), which will be used by ZK Mayskoye to repay the NOMOS Loan and the former intra-company debt now owed to the Loan Buyer.
(B) Polymetal has agreed, subject to obtaining necessary regulatory approvals, to buy a 91% equity stake in the Asset for US$95,550,000.20 in cash or 15,925,000 ordinary shares of Polymetal (the "Purchase Consideration") plus a recapitalization adjustment in cash (see paragraph (C) below). The Equity Buyers have the right to choose between which of the two possible alternatives of Purchase Consideration (i.e., cash or Polymetal shares) they will receive. The number of shares was determined so as to equally value the two alternatives using a Polymetal share price of US$6 per ordinary share (based on the average closing price of Polymetal Global Depositary Receipts ("GDRs") on LSE in the period between April 20, 2009 and April 24, 2009 inclusive, which was US$5.99 per GDR).
(C) A 14% per annum charge will be applied to the total investment contributed by the Equity Buyers under the terms of the transaction. This amount will be added to the Purchase Consideration as a recapitalization adjustment payable in cash by Polymetal at completion.
As stated above, Polymetal's acquisition of a 91% equity stake in ZK Mayskoye is conditional upon it obtaining necessary regulatory approvals. This transaction involves gaining control of a strategic deposit by a company with foreign participation (as defined according to the Federal Russian Law on foreign investment in strategic industries and Federal Russian Subsoil Law). Therefore, the purchase must be approved by the State Commission for Supervision over Foreign Investments in the Russian Federation (the "Commission") in addition to requiring the conventional Federal Antimonopoly Service of the Russian Federation ("FAS") approval. The Commission is chaired by the Prime Minister of the Russian Federation. So far there have been a limited number of precedents of the Commission reviewing applications of foreign investors. Accordingly, the time needed to receive the Commission's decision and the basis on which it will make its decision are uncertain.
The transaction with Highland Gold was negotiated and concluded on «as is, where is» basis with ZK Mayskoye retaining all inventories, current assets and current liabilities as well as responsibility for future potential litigation. ZK Mayskoye will also be responsible for negotiating and settling any claims from commercial counter-parties. Currently there exists a material commercial claim by Wagner Services LLC ("Wagner") related to construction and related services allegedly performed by Wagner. The new shareholders of ZK Mayskoye intend to treat this and, potentially, any further commercial claims fairly and without prejudice.
ASSET DESCRIPTION
Mayskoye is one of the top five largest gold deposits in Russia. It is located in the far North-East of Russia in the Chukotka region, 180 kilometers from the town and the sea port of Pevek. Mayskoye was discovered in 1972 and extensively explored in 1974-1986 with a total of 26,886 meters of underground workings and 403,044 meters of diamond drilling completed. The deposit was the subject of several statutory feasibility studies in both the Soviet Union and Russia. The most recent resource estimate prepared under JORC guidelines by Aker Kvaerner is summarized in the table below (in situ cut-off grade of 5.0 g/t gold):
| | Tonnes (Kt) | Au Grade, g/t | Contained Au, Kg | Contained Au, Moz |
| Mineral Resources | | | | |
| Measured and Indicated | 7,914 | 11.79 | 93,336 | 3.00 |
| Inferred | 11,882 | 11.73 | 139,431 | 4.48 |
| Total | 19,796 | 11.76 | 232,768 | 7.48 |
There are no audited reserve estimates for Mayskoye prepared under JORC guidelines. The most recent statutory Feasibility Study approved by the GKZ in 2002 estimated economic reserves (C1 + C2) of the deposit at 22.7 Mt of ore with the average grade of 10.9 g/t for 248 tons of contained gold.
More than 90% of Mayskoye ore is refractory and requires special pre-treatment to achieve acceptable recoveries. The refractory nature of the deposit is the main reason for the failure of many attempts to develop the asset. Extensive test work has been performed on Mayskoye ore confirming the technical feasibility of both biological oxidation (BIOX) and pressure oxidation (POX).
The Aker Kvaerner study envisaged an 850 Ktpa mechanized underground mine with the flotation/BIOX/RIL (Resin-in-Leach) processing plant. Gold production in the study was estimated on average at 250 Koz per annum. The previous owner of the Asset commenced construction on site with an access road, accommodation camp, and heated maintenance/storage facility completed. Work started on the construction of the power line connecting the site with the regional grid. A limited amount of earthworks for the processing plant and portals for underground declines was also done.
Polymetal plans to revise the feasibility study based on a different flowsheet. The Company believes its extensive experience in building and operating mines in remote locations with harsh climate and challenging logistics will be instrumental in successful development of Mayskoye.
Polymetal's strategic rationale for the transaction is as follows:
Acquiring a world-class gold asset with substantial high-grade resources and outstanding reserve potential
Gaining access to Chukotka, the Russian region which is widely considered to be the most promising in terms of potential to discover new world-class gold deposits
Reaping large capital synergies with Polymetal's POX facility in Amursk which is being built as part of the project to develop Albazino gold mine. Processing Mayskoye concentrate at Amursk will validate the Company's fundamental strategic idea of making Amursk the processing hub for refractory gold concentrates from all over the Russian Far East
Polymetal intends to drastically reduce the capital expenditure ("CAPEX") requirement by eliminating the oxidative pre-treatment at a remote site. The Company plans to produce gold concentrate at Mayskoye with this material seasonally shipped to Amursk for POX treatment and production of Dore metal. The Amursk POX facility has been designed to be able to accommodate additional concentrate tonnage. CAPEX synergy is estimated by the Company at approximately US$120 million.
The cost of transporting concentrate from Mayskoye to Amursk (180 kilometers by truck to Pevek and 4,000 kilometers by sea and river from Pevek to Amursk) will be more than compensated by a significant fall in concentrate treatment cost at Amursk compared to Pevek thanks to cheaper energy, labor and consumables. POX recovery is also expected to be 2-3% better compared with BIOX.
Polymetal plans the following milestones for the development of Mayskoye:
Reserve estimate and revised feasibility study - Q1 2010
Resumption of construction - Q3 2010
First concentrate production - Q4 2011
"With the acquisition of Mayskoye, Polymetal gains a flagship gold asset and validates its unique strategy of building the refractory processing hub" said Vitaly Nesis, CEO of Polymetal. "We are very excited about this excellent opportunity to change the scale of the Company and consolidate one of the most robust growth pipelines among mid-tier gold producers globally."
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