Katoro Gold Regulatory News (KAT)

Katoro Gold plc (Incorporated in England and Wales)

(Registration Number: 9306219)

Share code on AIM: KAT

ISIN: GB00BSNBL022

("Katoro" or "the Company")

30 January 2020

Katoro Gold plc ('Katoro' or the 'Company')

STRATEGIC GOLD PRODUCTION OPPORTUNITY AND FINANCING

Katoro Gold plc (AIM: KAT), the Tanzania focused gold and nickel exploration and development company, is pleased to announce that it has entered into a binding conditional agreement (the 'Agreement') to participate in a strategic gold production opportunity in South Africa, focused on the reprocessing of an existing 1.34 million ounce of gold ('Moz of Au') JORC compliant tailings resource.

As further set out below, Katoro also announces that it has raised £397,000 in the form of a Convertible Loan Note ('CLN') with a number of high net worth clients of SI Capital Limited, the Company's broker, to support its commitments under the Agreement.

Set out below is an overview of the Agreement, the tailings and the CLN, though readers should read the whole of the announcement, including the section headed 'Important Information for Shareholders'.

OVERVIEW OF THE AGREEMENT, TAILINGS AND CLN

Joint Venture

Katoro has entered into a binding conditional agreement to form a 50/50 unincorporated joint venture ('JV') with Blyvoor Gold Operations (Pty) Ltd ('Blyvoor') and its holding company, Target Mine Consulting (Pty) Ltd ('Target' and, together with Katoro and Blyvoor, 'the JV Partners').

Project and Resource

The JV Partners plan to exploit potentially viable deposits of gold and any other minerals from six gold tailings dams ('the Tailings') owned by Blyvoor in South Africa ('the Project), which contain a JORC Code compliant resource of, in aggregate, 1.34Moz of Au at an average grade of 0.30g/t Au.

Mining Licence and Environmental Impact Assessment

The Project already has in place the requisite mining licence and environmental impact assessment ('EIA') for the reprocessing of the Tailings, allowing production to commence immediately upon commissioning of the processing plant.

Production Plans, Targeted Ounces and Life of Mine

Subject to funding, the JV Partners are targeting initial production of up to 250,000 tonnes per month ('tpm') of material from the Tailings as part of a production ramp-up to achieve production of 500,000tpm within two years.

At 500,000tpm, the Project is targeted to produce approximately 35,000 ounces of gold per annum and to have a 35-year life of mine.

Feasibility Studies and Testwork

The Project will seek to use proven mining and processing technologies, whereby the JV Partners believe recoveries of 56% to 60% are achievable, based on feasibility studies and test work completed to date by Minxcon (Pty) Ltd ('Minxcon'), with additional confirmatory test work planned to optimise the financial projections and conceptual designs for the processing plant.

Cost of Production

At 500,000tpm, the Project has projected low all in sustaining costs ('AISC') of approximately US$664/oz for the first five years of full production.

Subject to funding and achieving 500,000tpm within two years, attractive financial returns are forecast, with projected unlevered IRR estimated at 31% at a gold price of US$1,300 (held flat on a nominal basis).

Katoro Loan to the JV

Pursuant to the Agreement, Katoro is to provide a ZAR15.0 million loan (approximately £790,000) to the JV ('the Katoro Loan Facility'), which will fund ongoing development work on the Project, with a first payment of ZAR5.0 million (approximately £263,000) ('the Initial Tranche') due to be paid by 3 February 2020 ('the Initial Tranche').

The JV Partners may drawdown the balance of the Katoro Loan Facility, being ZAR10.0 million (approximately £527,000) ('the Additional Tranches'), as required prior to completion of project level financing. All amounts drawn down constitute a loan to the JV by Katoro and are provided on the terms outlined below.

Financing by Katoro Gold

To fund the Katoro Loan Facility, Katoro has raised £397,000 in the form of a CLN on terms set out below, which will fund the Initial Tranche of the Katoro Loan Facility.

Katoro has also put in place a facility with Sanderson Capital Partners Ltd ('Sanderson') under which the Company may require Sanderson to subscribe for up to £400,000 in the form of a convertible loan note on terms that, if drawn down, will be no more favourable to Sanderson than the terms on which investors have participated in the CLN, and which, together with unallocated proceeds of the CLN, the directors of Katoro ('the Board') expect will fund the Additional Tranches if necessary/required.

Project Level Financing

Katoro has already held preliminary discussions with potential funding parties for the Project, which the Board believe will be secured at the Project level and will likely be in the form of debt funding.

Louis Coetzee, Executive Chairman of Katoro, said: "The JV represents a unique and exciting investment opportunity for the Company with the possibility of significant near term revenue generation.

"The six tailings dams, containing, in total, 1.34Moz of Au, represents a considerable resource for the JV. In addition, the Project has attractive projected economics and notably the targeted 35-year mine life, 35,000 gold ounce per annum production target, solid recoveries and low initial all in sustaining costs of US$664 per ounce which compares favourably against the current gold price of US$1,565 per ounce.

"Our initial objective is to rapidly secure the project level funding required to construct and commission the plant to reprocess the Tailings in order to start generating revenues. I must emphasise that this is financing at the project level and does not represent dilution at the Katoro Gold plc level.

"In support of this, the necessary approvals are already in place, including a mining licence and EIA, meaning the JV is poised for immediate action as soon as the project funding has been secured.

"We look forward to working with Blyvoor to bring the Project into production and keeping shareholders updated on our progress. 

"We will also be providing further market updates shortly in respect of our other interests in Tanzania including the Imweru/Lubando gold projects and our Haneti polymetallic project held in JV with Power Metal Resources plc."

FURTHER INFORMATION

The Agreement, JV and the Tailings

The JV Partners intend to exploit potentially viable deposits of gold and any other minerals from the Tailings.

The Tailings, which were acquired by Blyvoor in 2015 and 2016, are the result of seven decades of mining operations by various operators of the Blyvooruitzicht Gold and Doornfontein Mines between 1937 and 2013 and which produced, in aggregate, 1,767t Au with average grades of over 14g/t Au. The Tailings, which are located 75km south west of Johannesburg in the Gauteng Province of South Africa, have a JORC Code compliant resource of, in aggregate, 1.34Moz of gold at a grade of 0.30g/t Au.

Table 1: Resource Statement for the Tailings (Extracted from Whittaker, D.J., "Independent Audit of the Blyvoor Gold (Pty) Ltd Surface Mineral Resources, Including: Blyvooruitzicht TSF's 1,6 & 7 and Doornfontein TSF's 1, 2 & 3. December 6, 2016.")

Tailings Retreatment Process

Pursuant to the Agreement, the JV Partners will seek to reprocess the Tailings for the reclamation of gold and any other economically viable minerals from material from the Tailings only.

The JV Partners will seek to use proven mining and processing technologies and methodologies to reprocess the Tailings, with the Tailings to be mined by means of hydro-mining methods, which utilises high pressure water cannons to hydraulically mobilise the in-situ tailings. The material will then be moved to the cyanide leach processing plant by means of low-cost slurry pumps and gravity trenches with the JV Partners believing that, based on the feasibility studies and test work completed by Minxcon, the plant should be capable of recoveries of 56% to 60%.

Taking into account the feasibility studies undertaken by a combination of external consultants, such as DRA Global, J.S. Davel, Golder & Associates, Intasol and others to date, the Board believes that the Tailings can be economically reprocessed at a gold price of US$1,300/oz, meaning there is opportunity for significant upside given the current gold price of US$1,565/oz, which market commentators are forecasting to rise.

The JV Partners are, subject to securing the necessary construction funding, targeting an initial production rate of up to 250,000tpm of material from the Tailings as part of the production ramp-up plan, with the ultimate production target of 500,000tpm within two years of the initial plant being commissioned, to produce 35,000oz of Au per annum, giving a 35-year life of mine for the Tailings.

The Board believes that, based on the findings and conclusions of Minxcon, the Project has a low total capital cost with a mining cost of ZAR 5.50/t expected. The JV Partners will seek to initially reprocess tailings from dump TSF 7 from the Blyvooruitzicht Gold mine, which, based on the indicative financial model, the Board believes will have an all-in-sustaining-costs of approximately US$664/oz for the first five years of full production. Accordingly, the Board believes the Project will generate first revenues in production year one, with positive cash flows, pre debt financing costs, expected from end of year three.

As such, at a gold price of US$1,300/oz (held flat on a nominal basis), and based on total estimated Project capital costs of US$30 - US$35 million, the Board believes that, the Tailings can deliver attractive estimated financial returns with an indicative unlevered NPV10 of US$49 million and unlevered IRR of 31%.

The above valuation metrics are based on the expected total revenues from the Project's operations over a 16-year period that provides the following attractive economic indicators, taking into account capital costs and pre debt financing costs:

·; Initial production of 250,000tpm of material from the Tailings, ramping up to 500,000tpm within two years;

·; Revenue from "production year" 1 onwards;

·; Positive cash flow from end of "production year" 3 onwards;

·; Potential for significant upside based on current gold price being at US$1,565/oz, which is at a significant premium to the gold price of US$1,300/oz used in calculating the fundamentals for the Project;

·; Rapid payback of 4 years; and

·; Projected low CAPEX requirement.

The JV Agreement

Under the terms of the Agreement, Katoro is required to provide the Katoro Loan Facility of, in aggregate, ZAR15.0 million (approximately £790,000) to the JV to fund ongoing development work for the Project. This development work is expected to entail, though not be limited to, amongst other requirements:

·; Final detailed mine planning and scheduling to optimise mining strategy and to better define the expected plant feed grades and identify possible low-grade zones;

·; Further feasibility work to optimise operating cost estimates; and

·; Processing optimisation.

The Initial Tranche (of the Katoro Loan Facility of ZAR5.0 million (approximately £263,000)) must be provided by 3 February 2020. Funding for the Initial Tranche has already been secured by the Company in the form of the CLN as detailed below. The balance of the Katoro Loan Facility of ZAR10.0 million (approximately £527,000) can be drawn in further tranches, if required before the project financing has been secured.

The Company has also put in place a facility with Sanderson under which the Company may require Sanderson to subscribe for up to £400,000 in the form of a convertible loan note, on terms that, if drawn down, will be no more favourable to Sanderson than the terms on which investors have participated in the CLN, and which, together with the unallocated proceeds from the CLN, the Board expects will fund the Additional Tranches if required.

The Katoro Loan Facility shall form part of the development capital project financing that Katoro shall procure in accordance with its obligations contained in the Agreement, as detailed below, provided that:

·; the balance of the Katoro Loan Facility then outstanding shall be subordinated to third party creditors participating in the development capital project financing;

·; the Katoro Loan Facility will bear interest at the 12-month London Inter Bank Offered Rate, or its successor; and

·; the Katoro Loan Facility will be repayable within 12 months after:

- the last third-party creditor participating in the project financing shall have been paid; or

- any earlier date on which the Parties may agree.

Katoro will confirm by written confirmation to Blyvoor that it has completed a corporate, legal and technical due diligence investigation in respect of Blyvoor and the Tailings and Rights, by 3 February 2020.

Under the terms of the Agreement, the Company is also required to secure funding for the construction and commissioning of a beneficiation plant and auxiliary operations. The initial production capacity that is targeted as the first phase of the production ramp-up must be capable of processing at least 120,000tpm of material from the Tailings, which the Board estimates will cost approximately US$11.0 million ('the Initial Project Funding'). The Board anticipates that the Initial Project Funding will likely be in the form of debt funding secured at the JV level.

In accordance with the terms of the Agreement, the Initial Project Funding, together with all necessary regulatory and government approvals that may be required in order to form the JV, must be in place by 30 April 2020. In the event that these conditions are not satisfied by 30 April 2020 and the JV Partners do not agree to extend the date, the Agreement shall fall away, the JV will not be established and the Katoro Loan Facility will become repayable immediately with accrued interest to Katoro by Blyvoor.

Pursuant to the Agreement, once all conditions have been satisfied (by no later than 30 April 2020, unless this date is mutually extended), the JV Partners will form the JV, which is intended to be an unincorporated JV held 50% by the Company and 50% by Blyvoor, on the basis that the Initial Project Funding is all debt financed. In the event that the Initial Project Funding includes an equity element from an external investor, the JV Partners interest in the JV will be reduced. The Agreement also includes customary dilution provisions in the event either party does not provide its proportion of any future funding requirements.

Under the Agreement, Blyvoor shall make available to the JV, all technical data relating to the Tailings and the Rights, including but not limited to all geological data, feasibility studies, geophysical and geochemical data (including borehole samples and interpretations thereof) in its possession.

Blyvoor has also provided customary warranties and undertakings to Katoro in respect of ownership of the Blyvoor Properties and Rights.

It is proposed that the JV will continue for an indefinite period for as long as Katoro is in compliance with its obligations in accordance with the Agreement and mining, processing, beneficiating and selling concentrates of gold or any other minerals that may be processable in economically viable quantities, in accordance with the Agreement.

The right to net revenue earned from all concentrates of gold or any other mineral mined or acquired by the JV is to vest in accordance with each party's interest in the JV. Priority processing at the JV's plant will be for gold or any other material derived from mining of the Tailings.

Under the Agreement, Katoro has a pre-emption right to acquire up to 60% of the total issued share capital in and the same percentage of all claims on shareholder loan accounts against Blyvoor or deriving from any other cause whatsoever. If the right is exercised, the purchase price may be elected by Target to be payable in cash or new Katoro shares.

The Agreement contains assignment rights of the whole or any part of a party's rights and obligations to an affiliate, subject to such affiliate covenanting to be bound by the terms and conditions of the Agreement. The Agreement also contains termination rights including: (i) if the consequences of expropriation materially affect the economic feasibility of the JV; (ii) in the event that the mining or processing activities conducted by the JV should prove, to the satisfaction of both parties, that further exploration or mining of the Tailings would not be commercially viable; or (iii) at any time by mutual agreement. In addition, the JV shall terminate 90 days after the manager of the JV delivers to each party a written notice stating that all viable deposits of gold and/or any other minerals to which the Tailings relate have been or are exhausted.

Rights and Permits

Blyvoor has the necessary mining licence, EIA and supporting approvals in place to commence operations once funding has been secured and plant construction completed. The life of the "New Order Mining Right" is thirty years, renewable in 2047, and the EIA (approved in 2000) was updated in 2017, to reflect the proposed mining process for the Tailings.

Katoro Gold Financing

Under the terms of the Agreement, Katoro has agreed to provide the Loan to the JV. In order to fund the Initial Tranche of the Loan, the Company has secured £397,000 via the CLN.

The CLN accrues interest at 20% per annum on a daily basis, and the principal plus accrued interest is repayable in full on or before 3 February 2021.

The CLN is convertible into ordinary shares of 1 penny each in the capital of the Company ('Ordinary Shares') at a conversion price of 1.4 pence at anytime prior to repayment and/or 20 January 2021, at the sole election of a holder of the CLN, upon submission by the holder of a CLN of a completed conversion notice to the Company ('Conversion Notice').

For illustrative purposes only, if the holders sought conversion of the CLN in full on 20 January 2021, being the last practicable date to convert, and elected to receive such number of Ordinary Shares based on the outstanding principal plus accrued interest (approximately £473,790) divided by 1.4 pence, then the Company would issue 33,842,114 new Ordinary Shares, representing approximately 18.8% of the Company's current issued share capital of 179,555,462 shares.

On 20 January 2021, if a CLN holder has not converted all of their CLNs, they must elect to either receive:

·; such number of new Ordinary Shares as is equal to:

- (the outstanding principal plus accrued interest) / (90% * the average of the previous 10 days volume weighted average share price for an Ordinary Share); or

·; cash equal to the outstanding principal plus accrued interest.

In the event that 90% * the average of the previous 10 days volume weighted average share price for an Ordinary Share is less than 1.0 pence, being the nominal value of an Ordinary Share, the Company will be required to reorganise its share capital in order to lower the nominal value to be able to issue such Ordinary Shares.

The CLN is not tradeable and is non-transferable.

The Company has also put in place a facility with Sanderson under which the Company may require Sanderson to subscribe for up to £400,000 in the form of a convertible loan note ('the Sanderson CLN'), which, together with the unallocated proceeds from the CLN, the Board expects will fund the Additional Tranches if required. The terms of the Sanderson CLN, if drawn down, will be substantially similar to the terms of the CLN, and no less favourable to the Company than the CLN. Under the terms of this facility, the Company must confirm to Sanderson the quantum to be drawn down on or before 24 February 2020.

Important Information for Shareholders

Katoro shareholders should note that whilst the Company has a binding commitment from Sanderson to subscribe, on Katoro's request, for up to £400,000 to enable it to meet the Additional Tranches requested under the Katoro Loan Facility, in the event that any amount so requested is not provided and the Additional Tranches are sought in full, there can be no guarantee that the Company will be able to provide the Additional Tranches as and when required, in which event the Agreement will fall away and the Company will have no interest in the JV.

Katoro shareholders should also note that there is no certainty that the Project Funding will be secured for the construction and commissioning of a plant to reprocess material from the Tailings. In the event that the Project Funding is not secured, the conditions of the Agreement will not have been satisfied and the JV will not be formed, meaning that the Company will have no interest in the JV and/or the Tailings. Katoro shareholders should also note that in such an instance, whilst the Loan would become repayable by the JV Partners pursuant to the terms of the Agreement, there is no guarantee that the Loan will be repaid in full or if it is repaid, will be repaid in a timely manner.

Katoro shareholders should be aware that there is no certainty that the projected returns set out above for the Project will be achieved, as there is no certainty that the Project Funding will be secured and if it is secured, that debt funding will be secured to finance all of the projected costs of the Project and if the Board is able to secure such debt funding, that it will be in line with the Board's current expected rates, in which case the Project's returns, as set out above, could be materially impacted resulting in the Project not being economical. In addition, if the Project Funding is in the form of a mixture of debt and equity, as opposed to just debt as currently proposed by the Board, it is likely that the Parties interest in the JV will be diluted and the Company's interest in the JV could therefore be materially lower than 50%.

Also, there can be no guarantee that in the event that the Tailings are reprocessed, that the projected production and/or recovery rates will be achieved, or that the targeted 500,00tpm of material within two years will be achieved, which could result in lower returns and which may require additional funding to be secured, which could result in the Company's interest in the JV being reduced.

Further announcements in respect of the JV, and any request made to draw down funds from Sanderson under the arrangements referred to in this announcement, will be made as appropriate.

This announcement contains inside information as stipulated under the Market Abuse Regulations (EU) no. 596/2014.

**ENDS**

For further information please visit www.katorogold.com or contact: