TIDMAVM
RNS Number : 4665Q
Avocet Mining PLC
29 November 2016
29 November 2016
Proposed partial disposal and financing of Tri-K, transfer of
listing category, reduced notice period and notice of General
Meeting
Avocet Mining PLC ("Avocet" or "the Company") announces that it
has today sent to shareholders a circular (the "Circular") and a
Notice of General Meeting, to be held at the offices of Fieldfisher
LLP, Riverbank House, 2 Swan Lane, London EC4R 3TT at 11.00 a.m. on
22 December 2016.
At this meeting, the following resolutions will be proposed:
1. To approve the partial disposal and financing of Tri-K (as announced on 10 October 2016);
2. To approve a move down from the Premium List to the Standard
List of the London Stock Exchange; and
3. To approve a proposed reduction in the notice period required
to be given for general meetings of shareholders (other than AGMs)
from 21 to 14 days.
The partial disposal of Tri-K will be proposed as an ordinary
resolution, requiring a simple majority of the votes cast, while
the other two resolutions will be proposed as special resolutions,
requiring the approval of 75 per cent of the votes cast.
A copy of the Circular is available on the Company's website
www.avocetmining.com
The above highlights should be read in conjunction with the full
text of the following announcement.
Capitalised terms used herein but not defined have the same
meanings as set out in the Circular.
Strand Hanson Limited ("Strand Hanson"), which is regulated in
the United Kingdom by the FCA, is acting exclusively for Avocet
Mining plc and no one else in connection with the Proposals and
will not be responsible to anyone other than Avocet Mining plc for
providing the protections afforded to its clients, for the contents
of this announcement or for providing any advice in relation to
this announcement or the Proposals.
FOR FURTHER INFORMATION PLEASE CONTACT
Avocet Mining PLC Bell Pottinger Strand Hanson J.P. Morgan Cazenove
Financial PR Consultants Sponsor Corporate Broker
David Cather, CEO Lorna Cobbett Andrew Emmott Michael Wentworth-Stanley
Jim Wynn, FD Richard Tulloch
+44 20 3709 2570 +44 (0)20 3772 2555 +44 (0) 20 7409 3494 +44 20 7742 4000
NOTES TO EDITORS
Avocet Mining PLC ("Avocet" or the "Company") is an unhedged
gold mining and exploration company listed on the London Stock
Exchange (ticker: AVM.L) and the Oslo Børs (ticker: AVM.OL). The
Company's principal activities are gold mining and exploration in
West Africa.
In Burkina Faso the Company owns 90% of the Inata Gold Mine. The
Inata Gold Mine poured its first gold in December 2009 and produced
74,755 ounces of gold in 2015. Other assets in Burkina Faso include
five exploration permits surrounding the Inata Gold Mine in the
broader Bélahouro region. The most advanced of these projects is
Souma, some 20 kilometers from the Inata Gold Mine.
The Company also holds an interest in the Tri-K project in
Guinea. On 10 October 2016, the Company announced that it had
agreed to dispose of 40% of the project to Managem, a Moroccan
group listed on the Casablanca stock exchange, subject to, inter
alia, shareholder approval, and which will increase upon completion
of a bankable feasibility study for a CIL plant at the site, the
incurring of expenditures of at least US$10 million, and the
enlarging of the ore reserve, to 70% (in the event of an increase
of the reserve to 1 million ounce or more) or 60% (if less than 1
million ounces).
THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR
DISTRIBUTION IN OR INTO THE RUSSIAN FEDERATION, THE UNITED STATES,
CANADA, AUSTRALIA OR JAPAN
AVOCET MINING PLC ("AVOCET" OR "THE COMPANY")
Proposed partial disposal and financing of Tri-K
Transfer of listing category
Reduced notice period
and
Notice of General Meeting
1. Introduction
On 10 October 2016, the Company announced that it had entered
into a conditional agreement to establish a joint venture in
relation to the Group's gold project in Guinea, known as Tri-K,
with Managem SA, a Moroccan mining group listed on the Casablanca
Stock Exchange. Managem has agreed to acquire an initial minority
interest in Tri-K (referred to herein as First Closing) which will
increase to a majority interest of up to 70 per cent on completion
of an agreed work programme and subject to certain milestones being
met (referred to herein as Second Closing).
In return for an initial payment of US$4.0 million, Avocet will
transfer at First Closing:
-- its equity interest in the Exploitation Permit to SMM, an
existing dormant subsidiary in which Avocet holds 85 per cent of
the equity and the Government holds 15 per cent;
-- its 85 per cent interest in SMM to Manacet, a new joint
venture company in which Avocet will hold 60 per cent and Managold
(a wholly owned subsidiary of Managem) will hold 40 per cent of the
equity; and
-- 40 per cent of the intra-group loans associated with Tri-K
(amounting to approximately US$13.9 million) to Managold.
Managem will then undertake an agreed work programme, expected
to be completed within 12 months, which will consist of at least
US$10.0 million worth of drilling, analysis and documentation work
to facilitate an anticipated increase in the Ore Reserves and
completion of the Feasibility Study for a CIL operation at the
site. On successful completion of these objectives and the delivery
of an Independent Feasibility Study Report, Managem's interest in
Manacet will increase at Second Closing to 70 per cent of the
equity (and Avocet will be diluted to 30 per cent) and Avocet will
make a further transfer of the intra-group loans associated with
Tri-K such that Managold will hold 70 per cent of the total (being
approximately US$31.3 million), subject to Ore Reserves increasing
to at least 1 million ounces, failing which Managem's increased
interest in Manacet and the loans will be limited to 60 per
cent.
Avocet retains the option to repurchase Managem's interests in
Manacet and the Tri-K intra-group loans, and resume full ownership
of Tri-K, should the agreed work programme and Feasibility Study
not be completed and the milestones not met.
In addition, the Company is also announcing today proposals to
seek authority from Shareholders to transfer its listing on the
London Stock Exchange from the current Premium listing segment to
the Standard listing segment of the Official List, and to reduce
the notice period required for general meetings (other than annual
general meetings) of Shareholders to 14 days.
The Disposal constitutes a Class 1 Disposal under the Listing
Rules and is therefore conditional upon Shareholder approval. The
Proposed Transfer and the Proposed Reduced Notice Period are also
conditional upon Shareholder approval. Accordingly, a Circular is
being posted to Shareholders today providing information regarding
the Proposals and to seek their approval of the Resolutions at a
general meeting of the Company to be held at 11.00 a.m. on 22
December 2016 at the offices of Fieldfisher LLP, Riverbank House, 2
Swan Lane, London EC4R 3TT. A notice convening the General Meeting
containing the full text of the Resolutions to be considered at the
meeting is set out in Part X of the Circular. If the Disposal
Resolution is passed at the General Meeting on 22 December 2016,
First Closing is expected to take place by early January 2017.
The purpose of the Circular is to provide information on the
Proposals and why the Board believes the Proposals are in the best
interests of the Company and Shareholders as a whole and to
recommend that Shareholders vote in favour of the Resolutions.
Copies of the Circular are available from www.avocetmining.com
.
2. Background to and reasons for the Proposals
2.1 Background to and reasons for the Disposal
Since the completion of a feasibility study for Tri-K in
September 2013, the Company has been actively seeking financing to
develop the asset. The award of the Exploitation Permit on 27 March
2015 was expected to stimulate interest. However, it also meant
that under Article 34 of the Guinean Mining Code, construction work
needed to commence by 27 March 2016 in order to avoid incurring
penalties, and by 27 September 2016, in order to avoid the risk of
the Government withdrawing the Exploitation Permit. On 1 September
2016, the Guinean Minister of Mines and Geology confirmed by letter
that he was prepared to grant an additional three-month extension
to this deadline, until 27 December 2016, in consideration of the
fact that negotiations with interested parties were in
progress.
The Company believes Tri-K to be prospective. However, the
Company does not have sufficient funds to develop Tri-K
independently and, therefore, without access to funding before 27
December 2016, there is a very real risk that the Guinea Government
will withdraw the Exploitation Permit after that date and that the
Tri-K project will be lost for no value. During 2015 and 2016, the
Company entered into discussions with Managem, a Moroccan mining
group listed on the Casablanca Stock Exchange, regarding a
potential joint venture to develop Tri-K, which the Directors are
pleased now to be able to put before Shareholders.
(a) Financial position of the Group
The Group has faced very material financial difficulties for
some time. Avocet, as the holding company for the Group, has no
revenues and relies on management fees charged to its subsidiaries
and external financing to meet its overheads and the costs of
developing its assets. From 2013, Avocet's sole operating
subsidiary, SMB, which operates the Inata gold mine in Burkina
Faso, was unable to make any payments to Avocet until August 2016
and Avocet has relied on a series of loans provided by the Elliott
Lender, an affiliate of its largest Shareholder, Elliott Management
(a large US hedge fund manager).
The Elliott Loans have an outstanding balance of approximately
US$26 million and are repayable on demand and bear interest at
between 11 per cent and 14 per cent per annum, and the majority of
the loans are secured over the Group's assets (other than Inata).
At the present time, were the Elliott Lender to demand repayment of
its loans and enforce its security, Avocet would be forced to enter
an insolvency process (be that administration or liquidation), as a
result of which Shareholders should expect to lose all of the value
of their Ordinary Shares.
Furthermore, SMB, which has suffered from lower than expected
gold prices and lower than expected production volumes over a
number of years, has itself faced very material financial
difficulties for some time. SMB has bank loans of approximately
US$32.1 million, which are being repaid according to their terms,
and trade creditors of approximately US$24.3 million, of which
approximately US$16.4 million are over 90 days old. SMB is able to
continue to trade because it has persuaded its creditors that the
best prospect of its debts being repaid in full is to be allowed to
operate, and generate cash through gold sales. In the event that
one or more of SMB's material creditors demands payment of overdue
balances, it is likely that SMB would be forced into an insolvency
process (be that administration or liquidation). The insolvency of
SMB would likely result in no further management fees being
received by the Company and no repayments of intra-group loans owed
by SMB to the Company. However, the Company has not provided any
security or guarantees for any of the liabilities of SMB.
Consequently, in the event of the insolvency of SMB, the Directors
do not believe that the Company would be liable for its debts.
Accordingly, until and following First Closing, the Directors
are of the opinion that the Group will continue to experience very
material financial difficulties and that there will continue to be
a material uncertainty as to the Company's ability to continue as a
going concern. The extent of the Group's indebtedness has meant
that for some time its priorities have been tight cash management
and a reduction in its creditors, and as a result the Group has not
been able to invest in development activities such as drilling work
at Inata, or the advancement of Tri-K.
If the Disposal proceeds the Company will have the benefit of
the Initial Consideration of US$4.0 million (approximately US$2.5
million net of expenses) and expects to receive management fees
from SMB, which will be applied to working capital, principally the
head office costs in London and, to the extent possible, repayment
of the Elliott Loans. Furthermore, if the Disposal is successful in
demonstrating the prospects for generating value from Tri-K, the
Directors believe that the Company will be better placed to raise
capital from other sources and to repay, refinance or restructure
the Elliott Loans. However, until such alternative funding is
secured, the Company's cash resources will continue to be extremely
limited. Accordingly, the Directors believe that, even if the
Disposal proceeds, until such further funding is secured:
-- in the event that the Elliott Lender demands repayment of its
loans, the Company would be forced into an insolvency process (be
that administration or liquidation), as a result of which
Shareholders should expect to lose all of the value of their
Ordinary Shares; and/or
-- in event that SMB is unable to pay management fees (for any
reason) and the Initial Consideration had been fully utilised, the
Company would be forced to seek external financing, without which
it would be forced into an insolvency process (be that
administration or liquidation), as a result of which Shareholders
should expect to lose all of the value of their Ordinary
Shares.
Alternatively, if the Disposal does not proceed, the Company
will not receive the Initial Consideration, the Company's cash
resources will be lower and its ability to meet any demand from the
Elliott Lender for repayment of the Elliott Loans will be reduced.
The Directors are of the opinion that, in such circumstances, the
Company would be at a significantly greater risk of being forced
into an insolvency process (be that administration or liquidation),
as a result of which Shareholders should expect to lose all of the
value of their Ordinary Shares.
Accordingly, the Directors believe that the Disposal offers the
Company and its Shareholders the best available prospect to
generate a return for Shareholders.
Recent events at Inata
On 7 October 2016, a bailiff acting on behalf of ex-employees at
Inata seized a shipment of 1,400 ounces of gold. In consideration
of the threat of further seizures, further gold shipments and
production were suspended from 27 October 2016. On 7 November 2016,
the court in Burkina Faso ordered the lifting of the seizure.
However, a second seizure notice was applied and the gold was not
released and gold shipments and production remained suspended for a
period.
On 24 November 2016, the Company reached agreement with
representatives of the ex-employees for the release of the gold
seized on 7 October 2016 and obtained assurance that they would not
seek any further gold seizures for a period of 30 days. During this
30-day period, a committee including legal representatives from
both sides and an independent adviser will determine the final
figure, the balance of which would be payable at this point,
subject to agreement.
Accordingly, workers returned to site on 24 November 2016 with a
view to returning the mine to production and recommencing gold
shipments as soon as practicable. Production is now expected to
return to normal levels over the next few weeks and gold sales will
recommence in the next few days - in addition to the 1,400 ounces
of gold being held under seizure, SMB has a further 6,100 ounces of
gold which has left the mine and is in transit to be refined and
sold.
The Directors are confident that a resolution at Inata is in the
interests of all parties, including current and former employees,
suppliers and the government of Burkina Faso. However, there can be
no certainty as to timing and, until a resolution is finalised,
there will remain a risk that there may be further gold seizures
and further periods of suspension of production and/or gold
sales.
Furthermore, until SMB is able to sell the existing physical
gold, it will be unable to make any payments of management fees to
the Company. As noted above, whether or not the Disposal proceeds
and until alternative funding is secured, if SMB is unable to pay
management fees to the Company (for any reason), the Company would
be forced into an insolvency process (be that administration or
liquidation), as a result of which Shareholders should expect to
lose all of the value of their Ordinary Shares.
(b) Risk of losing the Exploitation Permit on 27 December 2016
Under Article 34 of the Guinean Mining Code, the Government has
the right to withdraw a mining permit if construction has not
commenced within 18 months of the date that the permit was granted.
In the case of the Exploitation Permit, this date was initially 27
September 2016. However, on 1 September 2016, the Guinean Minister
of Mines and Geology confirmed by letter that he was prepared to
grant an additional three-month extension to this deadline, until
27 December 2016, in consideration of the fact that negotiations
with interested parties were in progress.
On 10 October 2016, the Company entered into a conditional
agreement with Managem for the Disposal, for which the approval of
Shareholders is now being sought. In the event that the Disposal
does not proceed for any reason, it is unlikely that the Company
would be able to meet its obligation to commence construction work
by 27 December 2016, and there would be a very real risk of the
Exploitation Permit being withdrawn after that date and Tri-K being
lost for no value.
One of the conditions of the Disposal, in addition to the
approval of Shareholders, is the entry into force of the Mining
Convention. The Mining Convention is expected to be signed by the
Minister of Mines in early December 2016 and will be subject to
ratification by the National Assembly, which will only be sought if
Shareholders approve the Disposal. The precise timing of this
ratification will depend on the scheduling of the National
Assembly. The Directors understand that current parliamentary
session will run until 5 January 2017, after which a recess will
take place until April.
If Shareholder approval is not obtained in sufficient time to
allow the Mining Convention to be ratified by the National Assembly
before 27 December 2016, the Government could withdraw the
Exploitation Permit. It is also open to the National Assembly to
refuse to ratify the Mining Convention, in which case the
Government would also have the right to withdraw the Exploitation
Permit from 27 December 2016.
If the Exploitation Permit is withdrawn, the Disposal will not
proceed and as described above, the Directors are of the opinion
that the Company would be at a significantly greater risk of being
forced into an insolvency process (be that administration or
liquidation), as a result of which Shareholders should expect to
lose all of the value of their Ordinary Shares.
(c) Impact of the Disposal on the Group
The Board believes the Disposal to be beneficial to both
Shareholders and the creditors of the Company. The impact on the
Group's financial position is discussed elsewhere in this
announcement. However, the principal benefit of the Disposal will
be to increase the likelihood that the Group will continue to
operate and to benefit from the future prospects of both Tri-K and
Inata and thereby generate value for Shareholders.
If the Feasibility Study to be completed by Managem confirms the
anticipated Ore Reserves of 1 million ounces of gold or more
(compared with the current 480,000 ounces) and demonstrates that
Tri-K can be developed on satisfactorily commercial terms, Avocet
will have an interest in that project. Without the Disposal, Avocet
will have no such interest. Developing the mine at Tri-K is likely
to cost US$200 million or more, a large part of which is intended
to be debt funded and with the balance being funded by Avocet and
Managem in proportion to their interests. Avocet intends to fund
its share by raising external debt or equity. To the extent that
Avocet cannot meet its share, Managem will provide funding and
Avocet will be diluted. If Avocet's interests fall below 10 per
cent, Managem has the right to purchase Avocet's interest in Tri-K
at fair market value. Accordingly, whether or not Avocet can fund
its share of the construction costs, it has the opportunity to
benefit from any value created through completing the Feasibility
Study.
Ore Reserves of 1 million ounces may be sufficient to justify
the costs of construction for a mine with a life of less than 10
years. It is hoped that, in common with other existing mines in the
region, that once in production, ongoing exploration will lead to a
longer mine life and greater economic returns. However, it must be
noted, that there can be no certainty whatsoever as to the eventual
Ore Reserves or mine life at Tri-K, or even whether the Feasibility
Study will confirm a commercial project.
In addition, SMB, whilst heavily indebted, is cash generative at
an operating level and generated US$13.0 million of net cashflow
from operations in the first half of 2016, which was used primarily
to reduce its liabilities. However, at current gold prices, it will
be challenging to ensure all creditors of SMB are settled in full
by the end of the current life of mine. However, the Company is
exploring the possibility of bringing additional deposits into
production to extend the life of mine, including sites at Ouzeni
and Pali (which lie within 10km of Inata), as well as Souma
(located 20km east of the Inata plant). Although there can be no
certainty whatsoever as to the feasibility of these future projects
or that they will ever proceed, it must be noted that the Company
will only be able to benefit from these future developments if the
Company continues to operate, which the Directors believe will be
significantly less likely if the Disposal does not proceed.
(d) Reliance on the Elliott Lender and its intentions following First Closing
The Company has loan facilities from the Elliott Lender with an
outstanding balance of US$26 million. The Elliott Loans bear
interest at between 11 per cent and 14 per cent per annum, are
repayable on demand and the majority of them are secured on the
Group's assets (excluding Inata). The Elliott Loans are fully drawn
and no further facilities have been provided since August 2016.
Accordingly, the Elliott Lender is entitled to enforce the terms of
the Elliott Loans and security at any time. If the Elliott Lender
was to enforce its rights to demand repayment, the Directors do not
believe that there is any likelihood of being able secure
alternative sources of finance, in which case the Company would
enter an insolvency process as a result of which Shareholders
should expect to lose all of the value of their Ordinary
Shares.
Accordingly, the Company is reliant on the continuing support of
the Elliott Lender. Following First Closing, the Company intends to
seek approval from the Elliott Lender to restructure the Elliott
Loans, such that the loans are repayable on terms which match
realistic timescales for generation of cash from the Group's assets
and the interest burden is reduced. However, the Elliott Lender has
given no indication as to whether it will continue to support the
Company by not requesting repayment of the Elliott Loans or whether
it would consider a restructuring of its Elliott Loans.
The Elliott Lender has been the sole source of external funding
to the Company since 2013, has given the consent required for the
Disposal to proceed and agreed to the changes to its security over
the Group's assets to facilitate the Disposal. The Directors
believe that the Company's strategy including the ongoing
management of Inata (and its potential expansion through developing
Souma) and the Disposal and development of Tri-K represent the best
available opportunities to repay creditors (including the Elliott
Lender and SMB's overdue creditors) and generate value for all
Shareholders, including Elliott.
(e) Elliott and the Elliott Lender's interest in the Disposal
The Elliott Lender is a related party under the Listing Rules.
However, the Proposals are not regarded as a related party
transaction as defined by the Listing Rules as, although the
Elliott Lender is a party to the Disposal Agreements, in that it
has given certain consents and has agreed to changes to its
security over the Group's assets, the purpose of the Disposal is
not to benefit Elliott or the Elliott Lender.
The Elliott Lender will, as a result of the Disposal, see the
value of the assets over which it has security change, as
follows:
-- Tri-K equity
The carrying value of the Company's interest in the equity value
of Tri-K is currently nil and will remain so following the
Disposal. Accordingly, there will be no change in the value of the
equity. However, Avocet's interest, over which the Elliott Lender
has and will continue to have security, will reduce from 100 per
cent of the equity in Tri-K to an effective 51 per cent at First
Closing (being 60 per cent of the 85 per cent to be held by
Manacet) and to 25.5 per cent at Second Closing (being 30 per cent
of 85 per cent, assuming Managold acquires the maximum 70 per cent
equity interest in Manacet).
-- Intra-group loans associated with Tri-K
The Elliott Lender currently has security over intra-group loans
owed by WM Guinea to the Company with a value of US$57.0 million,
of which US$34.8 million specifically relates to the area covered
by the Tri-K mining permit (the balance being in relation to other
permit areas which are unlikely to have any value in the future).
At First Closing, US$13.9 million of the US$34.8 million loans will
be assigned to Managold and the value of intra-group loans over
which the Elliott Lender will have security will reduce to US$20.9
million. At Second Closing, up to a further US$7.4 million of these
loans will be assigned to Managold and the value of intra-group
loans over which the Elliott Lender will have security will reduce
to US$13.4 million (assuming Managold acquires the maximum 70 per
cent equity interest in Manacet).
Accordingly, in order to facilitate the Disposal, the Elliott
Lender is accepting a material reduction in the current value of
the assets over which it has security. However, the Disposal will
generate working capital in the short term which will allow the
Company to continue to operate and generate value in the longer
term which will allow it to repay, restructure or refinance the
Elliott Loans and to generate a return for Shareholders. As a
result, whilst there is an ostensible benefit to the Elliott Lender
(in that the Company believes it will be more likely to be able to
repay, refinance or restructure the Elliott Loans) and to Elliott
as a Shareholder (in that the Directors believe the Disposal
increases the likelihood that the Company can generate value from
Tri-K and other assets), the purpose of the Disposal is to benefit
all Shareholders. However, Shareholders can only benefit if the
Company has a meaningful strategy in place to repay, refinance or
restructure the Elliott Loans and the Directors believe that the
Disposal provides the best available platform from which to do
so.
(f) Funding of future working capital
If the Disposal proceeds, the Company will receive the Initial
Consideration of US$4.0 million (approximately US$2.5 million net
of expenses). The Company intends to use the Initial Consideration
for working capital. The Company also expects to receive revenues
from its ongoing production activities (which comprise management
fees receivable by the Company from SMB) which it will use for
working capital purposes and, to the extent possible, repayment of
the Elliott Loans. The Elliott Lender has not requested and the
Company has not offered to make any repayment of the Elliott Loans.
However, the Directors are cognisant that the Company must either
repay, refinance or restructure the Elliott Loans as part of its
overall strategy to generate shareholder value.
It is the intention of the Company as far as possible to rely on
the payment of management fees from Inata in order to fund
corporate and head office activities in 2017 and beyond. However,
the availability of such funds depends on the cashflows of Inata,
which have proven to be variable, and subject to factors such as
the price of gold, creditor demands, operating performance,
strikes, or unforeseen events such as the recent seizure of the
gold shipment announced by the Company on 24 October 2016.
The Company will need to raise additional external finance in
order to develop other assets, such as Souma. Discussions have been
held with interested parties in this regard and are expected to
continue if the Disposal proceeds.
Further details of the terms of the Disposal are set out in
paragraph 3.3 below.
2.2 Background to and reasons for the Proposed Transfer
The Board is also seeking authority at the General Meeting to
transfer the Company's listing category on the Official List.
Accordingly, Shareholders will be asked to vote on the Proposed
Transfer of the listing of the Ordinary Shares from the current
category of a Premium Listing and into the category of a Standard
Listing. If the Proposed Transfer is approved, the Ordinary Shares
will continue to be traded on the Main Market.
After careful consideration, the Board has concluded that in
order to ensure liquidity in the Ordinary Shares through a public
listing whilst maintaining an appropriate degree of flexibility for
a company of the size and type of Avocet, it is appropriate to
transfer the listing of the Ordinary Shares from a Premium Listing
to a Standard Listing under the Listing Rules. The Proposed
Transfer will facilitate more cost efficient potential future
financing, disposal and acquisition opportunities and
administration generally.
Companies with securities admitted to a Standard Listing will
not normally be required to seek prior Shareholder approval in
connection with the acquisition or disposal of assets which exceed
certain size criteria and/or involve a transaction with a related
party. Furthermore, the Board wishes to align its regulatory
responsibilities and the associated cost consequences with the
Company's size. The Proposed Transfer will mean that the Company
will not be required to comply with the super-equivalent provisions
of the Listing Rules which apply to companies with a Premium
Listing, and this will have a direct cost saving for the
Company.
Further information on the Proposed Transfer is provided in
paragraph 4 below and in Part VII of the Circular.
2.3 Background to and reasons for the Proposed Reduced Notice Period
The Board is seeking authority to reduce the notice period for a
general meeting of Shareholders (other than an annual general
meeting) to not less than 14 clear days. The Proposed Reduced
Notice Period will, in the event that the Company requires
Shareholder approval in connection with any other matters before
the next AGM, such as corporate transactions or financings, enable
the Company to act more quickly which, given the Company's
financial position, the Directors believe is in the best interests
of both the Company and Shareholders.
3. The Disposal
3.1 Information on Tri-K
Avocet is a gold mining and exploration company with a portfolio
of assets principally comprising Inata, a producing asset in
Burkina Faso, and two exploration assets, Tri-K in Guinea and Souma
in Burkina Faso.
Tri-K comprises the Exploitation Permit, the Existing
Exploration Licences and related support functions in Guinea, which
are owned and controlled by Avocet through WM Guinea.
On 20 December 2013, the Company announced that it was
undertaking a business review, the objective of which was to
achieve the refinancing of the Group. In particular, the Company
was eager to secure financing to allow the development of Tri-K,
following an application for an exploitation permit which had been
submitted in September 2013. Lower gold prices, together with a
prolonged bear market for mining finance (plus the ebola crisis in
Guinea), meant that over the course of 2014 and 2015, limited
progress was made with regard to securing the necessary
refinancing, either for the Group as a whole or Tri-K.
However, an improvement in market conditions during 2016,
including an increase in the gold price, has resulted in renewed
interest in Tri-K. The Company has held discussions with a number
of potential investors in Tri-K culminating in signing the Disposal
Agreements with Managem for a partial disposal and financing of
Tri-K and joint negotiations on the Mining Convention with Managem
and the Government. Further details of the Disposal Agreements and
the Mining Convention are set out in paragraph 3.3 below.
Tri-K is a project in northeast Guinea with a total Mineral
Resource of 3.0 million ounces. The Initial Feasibility Study was
completed in 2013 on the basis of a heap leach development of only
the oxide portion of the orebody showed that Tri-K can support a
7-year life of mine, producing an average of 55,000 ounces of gold
per year. A maiden Ore Reserve of 480,000 ounces (7.9 million
tonnes grading at 1.89 g/t Au) was also announced as part of the
Initial Feasibility Study.
The Exploitation Permit was awarded on 27 March 2015. Under
Article 34 of the Mining Code, if construction of the mine has not
commenced within 12 months of the date of the award, the Government
has the right to impose penalties, and if construction has still
not commenced after a further six months, the Government may
withdraw the permit. On 6 September 2016, the Company received
written confirmation from the Government that it would not enforce
before 27 December 2016 its right to withdraw the Exploitation
Permit which would otherwise have arisen on 27 September 2016, in
consideration of the fact that negotiations with interested parties
were in progress.
Further information on Tri-K and its resources are set out in
Part V of the Circular.
3.2 Information on Managem
Managem is a Moroccan mining company publicly listed on the
Casablanca Stock Exchange and majority-held by Société National
d'Investissement (SNI), a Moroccan investment holding company.
Managem owns nine operating base metals and precious metals
mines in Morocco and sub-Saharan Africa. In addition, Managem has a
successful track-record in gold discoveries and development in
Morocco, Niger, Burkina Faso and Guinea.
Beyond conventional mining exploitation, Managem has an
integrated business model with services ranging from engineering
and technical expertise (through its subsidiary REMINEX) to
drilling and shaft sinking works (through its subsidiary TECHSUB).
In addition, Managem owns a research and development centre which
has provided supporting services to its operations since 1986.
Managem is not a related party and is not an associate of
Elliott or the Elliott Lender, or any other related party of the
Company.
3.3 Terms of the Disposal Agreements and the Mining Convention
The Company has entered into the Disposal Agreements with
Managem for the formation of Manacet, a joint venture company to be
owned 60:40 by Avocet and Managold, and a partial disposal to, and
financing of Tri-K through, Manacet. The Company has received the
consent of the Elliott Lender for the Disposal and the
consequential changes to the security held by it as required under
the terms of the Elliott Lender's security. First Closing of the
Disposal is conditional on, inter alia, Shareholder approval and
the entry into force of the Mining Convention following, inter
alia, its ratification by the National Assembly.
At First Closing:
-- Avocet will procure that WM Guinea will transfer the
Exploitation Permit to SMM, an existing dormant subsidiary
incorporated in Guinea and owned 85:15 by AGL and the Government,
in consideration of SMM assuming from WM Guinea the liability to
repay approximately US$34.8 million of intra-group loans due to
Avocet;
-- Avocet will cause AGL to transfer its 85 per cent equity interest in SMM to Manacet; and
-- Avocet shall assign 40 per cent of its intra-group loans to
SMM (being US$13.9 million) to Managold for cash consideration of
US$4.0 million.
Following First Closing, Avocet and Managold will hold 60 per
cent and 40 per cent, respectively, of the equity in Manacet and of
the intra-group loans to SMM relating to Tri-K, Manacet will hold
85 per cent of SMM (the Government owning the other 15 per cent)
and SMM will own 100 per cent of the Exploitation Permit.
Following First Closing, Managold will invest up to US$10.0
million in an agreed work programme of further drilling, test work,
and the Feasibility Study over a period of 24 months. Second
Closing will occur on the achievement of such investment and
certain other milestones within that period, including the
completion of a Feasibility Study Report.
On Second Closing, Avocet will be required to transfer a further
20 per cent interest in the equity of Manacet to Managold and a
further 20 per cent of the intra-group loans relating to Tri-K
(being a further US$3.0 million). In the event Managem delivers an
Independent Feasibility Study Report after Second Closing but on or
before the first anniversary of Second Closing which shows an Ore
Reserve of at least 1 million ounces of gold, Managem shall be
entitled to increase its interest from 60 per cent to 70 per cent
of the equity and intra-group loans, respectively.
An organisation chart showing the Group structure before and
after First Closing and Second Closing is included at Appendix
1.
On completion of the agreed work programme and the milestones,
any further expenditure on Tri-K shall be borne by Avocet and
Managold in strict proportion to their respective interests in the
equity in Manacet and the intra-group loans to SMM. However, Avocet
has the right to decline to participate in such expenditure, in
which event its interests in the equity and intra-group loans will
be diluted based on the contribution made by Managold. In the event
that Avocet's interest is diluted below 10 per cent, Managem will
have the right to purchase Avocet's interest at fair market
value.
SMM, Managem and Avocet have agreed the terms of a Mining
Convention with the Government which is expected to be signed in
early December 2016. The Mining Convention contains the relevant
terms and deadlines which apply to the Tri-K permit, including the
following:
- a waiver of the right to apply penalties under the Mining Code
due to construction of the mine not having begun by 27 September
2016;
- a reduction in royalties due on production from 5 to 3 per
cent if the gold price is below US$1,300 per ounce, 5 per cent if
the gold price is between US$1,300 and US$2,000 per ounce, and 7
per cent if the gold price is above US$2,000 per ounce;
- the grant of the New Exploration Permits in the Tri-K area to
the Exploration Company following the surrender by WM Guinea of the
Existing Exploration Permits; and
- a 6-year tax holiday from corporation tax.
The terms of the Mining Convention have been agreed and are
expected to be signed in early December 2016, but remains subject
to ratification by the National Assembly. It is expected that
ratification will be sought following the General Meeting.
Ratification is only possible once Avocet has confirmed to the
Government that all other conditions, including Shareholder
approval, have been met. An announcement will be made by Avocet on
receipt of such ratification.
The Disposal Agreements may be terminated by either Avocet or
Managem prior to ratification of the Mining Convention, if the
conditions have not been met.
Further details of the Disposal Agreements and the Mining
Convention are set out in Part VI of the Circular.
3.4 Use of proceeds
If the Disposal proceeds, the Company will receive the Initial
Consideration of US$4.0 million (approximately US$2.5 million net
of expenses) on First Closing. The Initial Consideration will be
used for working capital.
3.5 Financial effects of the Disposal on the Group
A pro forma statement of the net assets showing the effect of
the Disposal on the Group is set out in Part IV of the Circular
(the "Pro Forma").
The Disposal will result in significant movements in the Group's
consolidated balance sheet. At First Closing, the Group will
continue to consolidate its interests in Manacet as a subsidiary,
and will reverse previous impairments relating to Tri-K and will
recognise the transfer of intra-group loan balances to Managold;
together with the net proceeds of the Disposal. These changes will
result in an increase in net assets of approximately US$4.6 million
and a profit on disposal of approximately US$4.5 million. At Second
Closing, the Group accounts will cease to consolidate its interests
Manacet as a subsidiary and will account for those interests as an
associate. Accordingly, at Second Closing, the Group's interests in
Manacet and the related intra-group loans will be cease to be
recognised, resulting in a decrease in net assets of US$7.4 million
and a loss on disposal of US$7.4 million.
Until Second Closing, Manacet will be recognised as a subsidiary
of Avocet and its financial results will continue to be
consolidated in the Group's financial reporting together with a
minority interest with regard to the interests of Managem and the
Government in Tri-K. Until that point, the funding provided by
Managem will be recognised as a loan to Manacet and the Group
results will consolidate all of the costs incurred by Manacet.
Following Second Closing, Manacet will cease to be recognised as a
subsidiary and will be accounted for as an associate. From that
point, the Group's financial reporting will include only Avocet's
share of the profits of Manacet.
Managold has committed, in accordance with the terms of the
Earn-In Agreement and the agreed work programme, to fund operations
at Tri-K, subject to such terms, and Avocet will have no further
liability to meet any costs with regard to Tri-K, following First
Closing until Second Closing or the earlier termination of the
Earn-in Agreement. Following Second Closing, it is the intention of
Avocet and Managem to raise the funds needed to commence
construction of a CIL gold mine at Tri-K. The capital requirement
will not be known until completion of the Feasibility Study.
However, it is likely to be at least US$200 million, and possibly
more. Part of this funding may be provided through bank debt, but
there is likely to be a requirement for contribution from Managem
and Avocet. Avocet may decline to provide such financing if it is
unable or unwilling to do so and, if so, its interest in Tri-K may
be further diluted. If its interests are diluted below 10 per cent,
Managem will have the right to purchase Avocet's interest at fair
market value. It is Avocet's current intention to raise finance and
contribute its share of the funding requirement not met by bank
debt. However, it reserves the right to decline to provide such
funding if requested to do so. Accordingly, following First
Closing, Avocet is not committed to incur any further expenditure
towards Tri-K.
4. Proposed Transfer
After careful consideration, the Board has concluded that in
order to ensure liquidity in the Ordinary Shares through a public
listing whilst maintaining an appropriate degree of flexibility for
a company of the size and type of Avocet, it is appropriate to
transfer the listing of the Ordinary Shares from a Premium Listing
to a Standard Listing under the Listing Rules. This transfer forms
part of the long-term strategic plan of the Company which will
facilitate more cost efficient potential future disposal and
acquisition opportunities and administration generally.
Companies with securities admitted to a Standard Listing will
not normally be required to seek prior Shareholder approval in
connection with the acquisition or disposal of assets which exceed
certain size criteria and/or involve a transaction with a related
party. Furthermore, the Board wishes to align its regulatory
responsibilities and the associated cost consequences with the
Company's size. The Proposed Transfer will mean that the Company
will not be required to comply with the super-equivalent provisions
of the Listing Rules which apply to companies with a Premium
Listing and this will have a direct cost saving for the
Company.
A Standard Listing requires the issuer to comply with the
minimum regulatory requirements imposed by the EU that apply to all
securities that are admitted to trading on EU regulated markets. As
an issuer with a Standard Listing, the Company will remain subject
to the Listing Rules (as applicable to a company whose equity
shares have a Standard Listing), the Prospectus Rules and the
Disclosure Guidance and Transparency Rules. However, it will not be
required to comply with the super-equivalent provisions of the
Listing Rules which apply to companies with a Premium Listing. Such
super-equivalent provisions include:
-- certain continuing obligations set out in Chapter 9 of the
Listing Rules such as providing pre-emption rights to Shareholders,
certain rules regarding employee share schemes and long-term
incentive plans, certain rules regarding the conduct of rights
issues, open offers and placings and certain disclosures in annual
financial reports;
-- complying or explaining against the UK Corporate Governance
Code (although the Company will still be required to make a
corporate governance statement under paragraph 7.2 of the
Disclosure Guidance and Transparency Rules); and
-- complying with the provisions in Chapters 10 and 11 of the
Listing Rules relating to significant and related party
transactions.
The super-equivalent provisions provide Shareholders with rights
to vote on certain corporate actions, including significant and
related party transactions. Upon the transfer to Standard Listing
becoming effective, Shareholders will no longer have the
opportunity to vote on such corporate actions.
The administrative requirements associated with the Ordinary
Shares having a Standard Listing will be simplified as the Listing
Rules for securities with a Standard Listing are less demanding and
stringent than those applicable to securities with a Premium
Listing. In particular, companies with securities admitted to a
Standard Listing will not normally be required to produce
documentation and seek prior Shareholder approval in connection
with the acquisition or disposal of assets which exceed certain
size criteria and/or involve a transaction with a related
party.
The higher level of regulation contained in the super-equivalent
provisions referred to above has been designed to offer
shareholders in premium listed companies additional rights and
protections. Accordingly, investors should be aware that any
investment in a company that has a Standard Listing is likely to
carry a higher risk than an investment in a company with a Premium
Listing. However, the Board intends to maintain appropriate
standards of reporting and corporate governance for a company with
a Standard Listing and, to the extent it considers appropriate in
light of the Company's size and future developments, will observe
the requirements of the UK Corporate Governance Code. However, if
the Company complies with the UK Corporate Governance Code, it
would be on a voluntary basis only. Furthermore, the Board has not
made, and does not anticipate or intend to make, any changes to the
Company's business in connection with the Proposed Transfer from a
Premium to a Standard Listing.
The transfer to a Standard Listing will not affect the way in
which Shareholders buy or sell Ordinary Shares and, following the
transfer, existing share certificates in issue in respect of
Ordinary Shares will remain valid. The Ordinary Shares will also
continue to be eligible to be held in ISAs and SIPPs. As for a
company with a Premium Listing, a company with a Standard Listing
is still required to have a minimum of 25 per cent of its shares in
public hands and will continue to be obliged to publish a
prospectus when issuing new shares to the public unless such an
issue falls within one of the permitted exemptions. Companies with
Standard Listings are also still required to disclose inside
information to the market and to comply with the provisions of the
Disclosure Guidance and Transparency Rules including to make
notifications of dealings in shares. They must also prepare annual
audited financial reports, half yearly financial reports and
interim management statements in the same way that companies with a
Premium Listing are required to do.
A more detailed summary of the differences between the
regulatory requirements of companies with a Standard Listing and
those with a Premium Listing is contained at Part VII of the
Circular. While the Ordinary Shares have a Standard Listing, they
will not be eligible for inclusion in the UK series of FTSE
indices.
Under the Listing Rules, the Proposed Transfer requires the
Company to obtain the prior approval of a resolution for such
transfer from not less than 75 per cent of Shareholders who vote in
person or by proxy at a general meeting. Therefore, the Transfer
Resolution being proposed at the General Meeting to approve the
Proposed Transfer is being proposed as a special resolution.
Pursuant to the Listing Rules, the date of transfer of listing
category must not be less than 20 business days after the passing
of the Transfer Resolution. The Board proposes to apply immediately
following First Closing for the transfer to be effected and so,
subject to the passing of the Transfer Resolution and the UKLA
confirming that the Company meets the eligibility requirements for
a Standard Listing, an announcement will be made at that time
giving the anticipated date that the transfer will become
effective. The Ordinary Shares will, on completion of the Proposed
Transfer, continue to be traded on the Main Market, but under the
designation "Listed: Standard". The Company will also maintain the
listing of its Ordinary Shares on the Oslo Børs and the trading
arrangements for the Company's Ordinary Shares on the OSE.
5. Proposed Reduction of Notice Period
Under the Act general meetings (other than annual general
meetings) may be called on 14 clear days' notice. However, The
Companies (Shareholders' Rights) Regulations 2009 increased the
notice period required for general meetings of a company to 21
clear days. Companies do have the ability pursuant to the Act to
reduce this notice period to not less than 14 clear days, provided
that they offer facilities for shareholders to vote and appoint
proxies by electronic means and that, annually, shareholder
approval is obtained to reduce the minimum notice period from 21
clear days to 14 clear days. Annual general meetings must continue
to be held on at least 21 clear days' notice. It is intended that
the shorter notice would not be used as a matter of routine for
such meetings but only where the flexibility is merited by the
business of the meeting and is thought to be in the interests of
Shareholders as a whole. The Directors are, therefore, proposing
this resolution to seek this shareholder approval for 14 clear days
to be the minimum period of notice for all general meetings of the
Company, other than annual general meetings. The approval will
expire at the conclusion of the next annual general meeting, when
it is intended that renewal of this authority will be sought.
6. Importance of the Resolutions being passed
As described more fully elsewhere in this announcement and in
the Circular, the Company:
-- has agreed conditionally to the disposal of up to 70 per cent of its interests in Tri-K;
-- proposes the transfer of the Ordinary Shares from a Premium
Listing to a Standard Listing; and
-- proposes the reduction in the notice period required to be
given for general meetings of Shareholders, other than annual
general meetings, from 21 days to 14 days.
The Disposal is conditional, inter alia, on the Disposal
Resolution.
The Proposed Transfer is conditional on the Transfer Resolution
and the Proposed Reduced Notice Period is conditional on the Notice
Resolution.
The Resolutions are set out in the Notice of General Meeting in
Part X of the Circular.
Disposal Resolution:
a. If the Disposal Resolution is not passed, or if any other
condition for implementation of the Disposal is not satisfied, the
Disposal will not proceed, the National Assembly will not ratify
the Mining Convention, the Company will not receive the Initial
Consideration and Managem will not finance the production of a
Feasibility Study Report. In such circumstances, the Directors
believe that it is more than likely that the Government would
withdraw the Exploitation Permit under the terms of the Mining Code
(as it is entitled to do so from 27 December 2016) and as a result
the Company would lose all possibility of generating any value from
Tri-K. In such circumstances the Directors would need to consider
whether the potential returns from Inata and Souma outweighed the
continuing and increasing interest cost accruing on the Elliott
Loans. If the Directors determined that in such circumstances the
risks to creditors of continuing were greater than the
opportunities, the Company would be forced into an insolvency
process (be that administration or liquidation), as a result of
which Shareholders should expect to lose all of the value of their
Ordinary Shares.
Furthermore, the Directors believe that in the event that the
Exploitation Permit is withdrawn, there would be a significantly
increased risk that Avocet would lose the support of the Elliott
Lender and it would therefore face a significantly increased risk
that the Elliott Lender will enforce its rights under the terms of
the Elliott Loans to demand repayment and enforce its security over
the Company's assets (other than Inata). If the Elliott Lender were
to enforce its rights, the Directors do not believe that there is
any likelihood of being able secure alternative sources of finance,
in which case the Company would enter an insolvency process as a
result of which Shareholders should expect to lose all of the value
of their Ordinary Shares.
b. If the Disposal Resolution is passed, the Disposal will
proceed subject to the satisfaction of any remaining conditions,
including ratification of the Mining Convention by the National
Assembly (which will only take place following the passing of the
Disposal Resolution). Avocet will transfer an initial 40 per cent
of its interests in Tri-K to Managem and up to 70 per cent of its
interests, subject to the outcome of the Feasibility Study Report
to be funded and prepared by Managem over a period of 24 months.
Managem has committed, subject to relevant approvals, to a work
programme intended to prove Ore Reserves of at least 1 million
ounces of gold and to establish a mine life, through completion of
further drilling and exploration and the Feasibility Study, on the
basis of a CIL development. Until the Feasibility Study has been
completed, it would be premature to speculate on the eventual mine
life. However, early scoping of the study would suggest that an Ore
Reserve of approximately 1 million ounces can be realistically
targeted from within the current resources, compared with the
existing Ore Reserve of 0.48 million ounces, which was based on a
heap leach development. The Directors are of the opinion that, if
Avocet and Managem are successful in developing Tri-K, the
reduction in Avocet's percentage interest in the project will be
compensated by the scale of the project.
However, even if First Closing proceeds:
-- if the Feasibility Study Report demonstrates that developing
Tri-K is commercially viable, the Directors expect that the
construction costs of a mine will be of the order of US$200 million
or more (the Feasibility Study Report will, inter alia, estimate
these costs). Avocet and Managem currently intend that these costs
should be debt funded as far as possible. Costs in excess of those
funded through debt will be shared by Avocet and Managem in
proportion to their interests. Accordingly, Avocet would need to
contribute for 30-40 per cent of this balance in order to maintain
its proportionate interest in the project. Avocet currently
anticipates raising equity finance for this balance, either from
existing Shareholders or new investors. To the extent that Avocet
is unable to contribute its share of the balance, Managem is
required, under the terms of the agreement, to provide all of the
necessary financing and Avocet will be diluted. If Avocet is
diluted below 10 per cent of the equity in the project, Managem
will have the right to acquire Avocet's interests at fair market
value; and
-- the Elliott Lender can demand repayment of its loans at any
time. If the Elliott Lender were to enforce its rights under the
terms of the Elliott Loans to demand repayment (before any
restructuring or refinancing had been agreed) and enforce its
security over the Company's assets (other than Inata), the
Directors do not believe that there is any likelihood of being able
to secure alternative sources of finance, in which case the Company
would be forced into an insolvency process (be that administration
or liquidation) as a result of which Shareholders should expect to
lose all of the value of their Ordinary Shares.
Nonetheless, the Directors strongly believe that the Disposal in
the best interests of the Company and Shareholders for the
following reasons:
-- the Disposal will result in the receipt of approximately
US$2.5 million in cash, net of expenses, which will be available
for working capital;
-- if the investment by Managem results in a Feasibility Study
Report which demonstrates a larger commercial viable project,
Avocet will have the opportunity to participate in any increased
value (or eventual cash generation from operations), whether or not
it is able to contribute to costs of construction, and thereby
create opportunities to repay the Elliott Loans and deliver
shareholder value which do not exist without the Disposal
proceeding; and
-- the Directors believe that if First Closing occurs, the
Elliott Lender is less likely to demand repayment of its loans as
the Group will be better placed to repay, refinance or restructure
the Group's liabilities, and also to seek funding for new
opportunities, in particular those in Burkina Faso which could, if
successful, extend the production at Inata and thereby increase the
likelihood of repaying SMB's overdue creditors, repaying the
Elliott Loans and generating shareholder value.
Transfer Resolution:
a. If the Transfer Resolution is not passed, the Company will
retain its Premium Listing. Shareholders will retain the additional
protections afforded by the super-equivalent provisions of the
Listing Rules and the Company will continue to incur the costs and
complexity of ensuring compliance with those rules.
b. If the Transfer Resolution is passed, the Company will
transfer to a Standard Listing and will no longer be required to
comply with the super-equivalent provisions of the Listing Rules.
The Company will therefore save the costs and complexity of
ensuring compliance with those rules, although it will continue to
comply with the requirements of the remaining Listing Rules and the
Disclosure Guidance and Transparency Rules. The Directors believe
that the cost savings and management time savings available as a
result of the Proposed Transfer outweigh the benefits to
Shareholders from maintaining the Premium Listing for a company of
the size and type of Avocet.
Notice Resolution:
a. If the Notice Resolution is not passed, Shareholders will
continue to receive 21 days' notice of general meetings (other than
annual general meetings) in accordance with the Act and the
Articles.
b. If the Notice Resolution is passed, the Directors may call
general meetings (other than annual general meetings) on not less
than 14 days' notice. It is intended that the shorter notice would
not be used as a matter of routine for such meetings but only where
the flexibility is merited by the business of the meeting and is
thought to be in the interests of Shareholders as a whole. The
Directors are, therefore, proposing this resolution to seek this
shareholder approval for 14 clear days to be the minimum period of
notice for all general meetings of the Company (other than annual
general meetings). The approval will expire at the conclusion of
the next annual general meeting, when it is intended that renewal
of this authority will be sought.
Accordingly, it is critical to the future of the Company that
Shareholders vote in favour of the Resolutions in order that the
Disposal can proceed and the Group can continue to operate.
7. Working capital
In the opinion of the Company, the Group does not have
sufficient working capital for its present requirements, that is
for at least the next 12 months following the date of the
Circular.
In order to make the above working capital statement, the
Directors have assessed whether there is sufficient margin or
headroom to cover a downside scenario. This includes reasonable and
adverse eventualities as well as the effect of potential mitigating
actions that are available under this scenario. The working capital
assessment, under this downside scenario, comprises the forecast
working capital position of the Group following First Closing.
As at 25 November 2016, being the latest practicable date, the
Group had loans repayable on demand of US$26.2 million, creditor
balances more than 90 days old of US$16.4 million and other
creditor and term loan balances of US$40.1 million.
Accordingly, taking a reasonable worst case scenario, the Group
has an existing working capital shortfall of approximately US$107
million (comprising existing liabilities noted above and additional
liabilities which would crystallise in a reasonable worst case
scenario) and, following First Closing, is expected to have a
working capital shortfall of US$123 million by the end of December
2017.
In order to meet its future working capital requirements, the
Group will be dependent on the continuing support of its creditors
and the cash resources generated by the Disposal, revenues from its
ongoing production activities and/or a refinancing or restructuring
of its existing loans and creditors. In particular, the Group owes
US$26 million to the Elliott Lender under loan facilities which are
repayable on demand, the majority of which are secured over the
Group's assets and bear interest at rates of between 11 per cent
and 14 per cent per annum. If the Elliott Lender were to enforce
its rights under the terms of the Elliott Loans to demand repayment
and enforce its security over the Company's assets (other than
Inata), the Directors do not believe that there is any likelihood
of being able secure alternative sources of finance, in which case
the Company would enter an insolvency process as a result of which
Shareholders should expect to lose all of the value of their
Ordinary Shares.
The forecast working capital shortfall of the Group may be
reduced should, for example:
-- gold production be achieved consistent with the Group's
original guidance for 2016 of 75,000-85,000 ounces of gold;
-- production costs be achieved consistent with (or below) the
Group's performance in the third quarter of 2016 at US$1,047 per
ounce (being the latest available production data); or
-- gold sales be realised at a price above US$1,200 per ounce.
However, whilst the occurrence of some of the above could
generate additional cash, the Company has no expectation that these
will materially reduce the Group's working capital shortfall by the
end of 2017. Accordingly, the Directors will consider undertaking
some, or all, of the following mitigating actions during the 12
months following First Closing:
-- seeking approval from the Elliott Lender to restructure the
Elliott Loans, which have an outstanding balance of US$26 million
owed by the Company, carry interest of between 11 per cent and 14
per cent per annum, are repayable on demand and the majority of
which are secured, such that the loans are repayable on terms which
match realistic timescales for generation of cash from the Group's
assets and the interest burden is reduced;
-- seeking approval from other creditors with regard to
repayment plans in respect of creditor balances over 90 days old
which totalled approximately US$16.4 million as at 25 November
2016;
-- seeking additional sources of cost-effective financing
including, for example, gold prepayment financing; and/or
-- seeking further capital injections from Shareholders or other investors.
If the Directors were unable to implement any of the mitigating
actions set out above, in the event that the Elliott Lender were to
enforce its rights under the terms of the Elliott Loans to demand
repayment and enforce its security over the Company's assets (other
than Inata), the Company would be forced into an insolvency process
(be that administration or liquidation) as a result of which
Shareholders should expect to lose all of the value of their
Ordinary Shares.
If the Disposal does not proceed, the Company will not receive
the Initial Consideration of US$4.0 million (approximately US$2.5
million net of expenses). The Company intends to use the Initial
Consideration for working capital. The Company also expects to
receive revenues from its ongoing production activities (which
comprise management fees receivable by the Company from SMB) which
it will use for working capital purposes and, to the extent
possible, repayment of the Elliott Loans. Accordingly, if First
Closing does not occur, the Company's cash resources will be lower
and its ability to meet any demand from the Elliott Lender for
repayment of its loans will be reduced and the Directors are of the
opinion that, in such circumstances, the Company would be at a
significantly greater risk of being forced into an insolvency
process (be that administration or liquidation).
Furthermore, until and following First Closing, the Directors
are of the opinion that the Group will continue to experience very
material financial difficulties and may need to raise further
capital in order to continue to operate.
In particular, if First Closing is delayed for any reason, such
as, for example, a delay in the signing or ratification of the
Mining Convention as discussed above, the Company will need to
raise additional working capital to meet its costs until First
Closing occurs and the Initial Consideration is received. The
Company expects that its anticipated working capital requirements
can be met by management fees payable by SMB, failing which it will
need to seek an alternative source of capital.
If there are further gold seizures at Inata and gold sales are
suspended again, SMB may not be able to pay management fees to the
Company. In such circumstances, if necessary, the Company would
request further funding from the Elliott Lender. If the Elliott
Lender is not willing or able to provide further funding, the
Directors do not believe that there is any likelihood of being able
secure alternative sources of finance, in which case the Company
would enter an insolvency process as a result of which Shareholders
should expect to lose all of the value of their Ordinary
Shares.
8. Current trading
Avocet announced its unaudited results for the six months ended
30 June 2016 on 26 August 2016, in which it noted:
-- total gold sold in H1 2016 amounted to 42,752 ounces,
compared with 39,740 in the first half of 2015. This factor,
combined with average realised gold prices of US$1,213 per ounce
being slightly higher than H1 2015 (US$1,203 per ounce), translated
into an increase in revenue of US$4.0 million, or 8 per cent, from
US$47.8 million in H1 2015 to US$51.8 million in the first half of
2016;
-- gross margin increased from a US$6.6 million loss in H1 2015
to a profit of US$7.6 million in H1 2016, partly due to the
increase in revenues mentioned above, but also partly due to cost
reduction measures at the Inata mine, as well as the reduction in
the depreciation charge resulting from the impairments applied to
the mine's assets in 2015;
-- the impairments of US$30.1 million recognised in H1 2015 were
not repeated in H1 2016, as no triggers for impairment were
identified;
-- EBITDA, an indicator of underlying cash generation which
excludes working capital movements, showed a profit of US$6.9
million in H1 2016 compared with a loss in H1 2015 of US$2.9
million. However, net cash generated by operating activities, after
interest and tax, was US$9.4 million in H1 2016 compared with
US$6.7 million in H1 2015, with the variance reflecting working
capital movements during the respective periods;
-- with the focus on cash conservation, capital expenditure was
kept low in H1 2016 at just US$0.1 million (H1 2015: US$2.7
million). No exploration costs were capitalised during the
period;
-- two new Elliott Loans of US$0.75 million and US$0.8 million
were drawn down between January and June 2016; and
-- capital repayments under the Ecobank loan facility totalled
US$5.0 million. Capital repayments under the Coris Bank loan
facility totalled US$7.1 million, while the Ecobank VAT facility
payments (net of further advances) totalled US$1.7 million.
During the third quarter, gold production was lower at 17,694
ounces at a cash cost of US$1,047 per ounce, as a result of lower
recoveries due primarily to the treatment of ore types with a
higher preg-robbing index (PRI), and the impact of maintenance work
on the plant.
On 7 October 2016, a bailiff acting on behalf of ex-employees at
Inata seized a shipment of 1,400 ounces of gold. In consideration
of the threat of further seizures, further gold shipments and
production were suspended from 27 October 2016. On 7 November 2016,
the court in Burkina Faso ordered the lifting of the seizure.
However, to date that order has not become effective and the gold
has not been released and gold shipments and production remain
suspended.
On 24 November 2016, the Company reached agreement with
representatives of the ex-employees for the release of the gold
seized on 7 October 2016 and obtained assurance that they would not
seek any further gold seizures for a period of 30 days. During this
30-day period, a committee including legal representatives from
both sides and an independent adviser will determine the final
figure, the balance of which would be payable at this point,
subject to agreement.
Accordingly, workers returned to site on 24 November 2016 with a
view to returning the mine to production and recommencing gold
shipments as soon as practicable. The Company therefore anticipates
that Inata will be able to pay management fees that will cover the
Company's costs through to First Closing.
9. Prospects of the Continuing Group
Following First Closing, the Group will continue to operate
Inata and will own Souma, the gold exploration asset in Burkina
Faso, as well as its interest in Tri-K.
In the audited financial statements for the year ended 31
December 2015 and the unaudited interim financial statements for
the six months ended 30 June 2016, the Company reported ongoing
material uncertainties as to its financial position that may cast
significant doubt over the ability of the Group to continue as a
going concern and that it may be unable to realise all of its
assets and discharge all of its liabilities in the normal course of
business. Following First Closing, the Directors are of the opinion
that the Group will continue to experience very material financial
difficulties and that there will continue to be a material
uncertainty as to the Company's ability to continue as a going
concern.
Paragraph 7 above, sets out the Group's financial position and
the Company's proposals to manage its financial difficulties in
more detail.
It is anticipated that, subject to a successful conclusion of
the Feasibility Study and the subsequent raising of the requisite
funding to develop the mine, Tri-K will enter production by
mid-2020. Avocet will generate value from Tri-K, once in production
and generating a surplus, through a combination of the repayment of
debt owed to Avocet, dividends paid on Avocet's equity interest in
Tri-K or by disposing of some or all of its remaining
interests.
Inata, whilst heavily indebted, is cash generative at an
operating level and generated US$13.0 million of net cashflow from
operations in the first half of 2016, which was used primarily to
reduce its liabilities. However, at current gold prices, it will be
challenging to ensure all creditors of the mine are settled in full
by the end of the current life of mine. The Company is exploring
the possibility of bringing additional deposits into production to
extend the life of mine, including sites at Ouzeni and Pali, as
well as Souma, located 20km east of the Inata plant.
Avocet's head office function in London had administrative costs
of approximately US$1.0 million in H1 2016, and is expected to
continue to incur costs at this level for the rest of 2016 and
2017. These costs have been primarily funded by loans from the
Elliott Lender over the last two years together with management
fees received from SMB since August 2016. If the Disposal proceeds,
the Company will receive the Initial Consideration of US$4.0
million (approximately US$2.5 million net of expenses). The Company
intends to use the Initial Consideration for working capital
purposes. The Company also expects to receive revenues from its
ongoing production activities (which comprise management fees
receivable by the Company from SMB) which it will use for working
capital purposes and, to the extent possible, repayment of the
Elliott Loans. The Elliott Lender has not requested and the Company
has not offered to make any repayment of the Elliott Loans.
However, the Directors are cognisant that the Company must either
repay, refinance or restructure the Elliott Loans as part of its
overall strategy to generate shareholder value.
10. General Meeting
Set out in Part X of the Circular is a notice convening the
General Meeting to be held at the offices of Fieldfisher LLP,
Riverbank House, 2 Swan Lane, London EC4R 3TT at 11.00 a.m. on 22
December 2016 at which the Resolutions will be proposed, as
follows:
1. To approve the Disposal;
2. To approve the Proposed Transfer; and
3. To approve the Proposed Reduced Notice Period.
The Disposal Resolution will be proposed as an ordinary
resolution, requiring a simple majority of the votes cast, and the
Transfer Resolution and the Notice Resolution will be proposed as
special resolutions, requiring the approval of 75 per cent of the
votes cast.
11. Recommendation
The Board considers the Proposals to be in the best interests of
Shareholders as a whole. Accordingly, the Board unanimously
recommends that the Shareholders vote in favour of the Resolutions
to be proposed at the General Meeting as set out in Part X of the
Circular. The Directors intend to vote in favour of the Resolutions
in respect of their own beneficial holdings which amount in
aggregate to 24,950 Ordinary Shares, representing approximately
0.11 per cent of the current issued Ordinary Share capital of the
Company as at 28 November 2016, (being the last practicable day
prior to the date of publication of the Circular).
Forward-looking Statements
This announcement may contain "forward-looking statements" with
respect to the Group's financial condition, results of operations
and business and certain of the Group's plans and objectives.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
"will", "anticipates", "aims", "due", "could", "may", "should",
"expects", "believes", "intends", "plans", "targets", "goal" or
"estimates". By their nature, forward-looking statements are
inherently unpredictable, speculative and involve risk and
uncertainty because they relate to events and depend on
circumstances that will occur in the future. There are a number of
factors that could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking
statements.
These factors include, but are not limited to, the
following:
-- general economic and political conditions in the
jurisdictions in which the Group operates and changes to the
associated legal, regulatory, competition and tax environments;
-- changes in the economies and markets in which the Group operates;
-- changes in the markets from which the Group raises finance;
-- the impact of legal or other proceedings against, or which may affect, the Group; and
-- changes in interest rates and foreign exchange rates.
Any written or oral forward-looking statements, made in this
announcement or subsequently, which are attributable to the Group
or any persons acting on their behalf are expressly qualified in
their entirety by the factors referred to above. No assurances can
be given that the forward-looking statements in this announcement
will be realised. Subject to compliance with applicable law and
regulations, the Group does not intend to update these
forward-looking statements and does not undertake any obligation to
do so.
Other than in accordance with its legal or regulatory
obligations (including under the Listing Rules and the Disclosure
Guidance and Transparency Rules), the Company is under no
obligation and the Company expressly disclaims any intention or
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCZMMZMVLKGVZM
(END) Dow Jones Newswires
November 29, 2016 11:30 ET (16:30 GMT)
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