Attn: All Minority Shareholders of Core Gold
Seeing as the letter from Zhaojin Mining Industry was referred to in today's news article
in the widely respected MIning Journal, and the fact that Zhaojin Mining addressed the
letter to the shareholders of Core Gold and to the board of directors, here is the letter,
in its entirety.
The statements speak for themselves. Do what you wish with the information, the BCSC,
OSC and TSXV should be very interested in hearing what the shareholders have to say
about the blantantly obvious attempts by certain members of Core Gold board of directors
to purposely thwart, sabotage, and baragin in bad faith with Zhaojin Mining Industry.
One key item to note, certain board members refused tro even respond to Zhaojin's offer
and within days, Gregg Sedun and Javier Reyes signed lock up agreements with TItan
Minerals on behalf of associated parties, without providing minority Core Gold shareholders
the same level of disclosure of material information that these two individuals had when
taking the actions they did.
I will leave it up to the reader to decide how to use this information
Again,
DO NOT TENDER YOUR SHARES TO THE TITAN MINERALS HOSTILE TAKEOVER OFFER
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Zhaojin Mining Letterhead
BY EMAIL
January 7, 2020
Core Gold Inc. Suite 1201 - 1166
Alberni Street
Vancouver, BC
Canada V6E 3Z3
Attn: Shareholders and Board of Directors of Core Gold Inc.
Dear Sirs:
Re: Zhaojin Mining Industry Co Ltd. (“Zhaojin”) in connection with a potential transaction with the Core Gold Inc. (“Core Gold”)
We refer to our letter dated December 12, 2019 (the “Final Proposal”), the news release of Core Gold dated December 17, 2019 (the “Press Release”) and our letter to you dated December 19, 2019 (the “Response”) in response to Core Gold’s news release.
Specifically, our Final Proposal set out the key terms of the offer for the acquisition of the Company by Zhaojin and its subsidiary Zhaojin Mining Company Ecuador S.A. (“Zhaojin”) and the Response setout in detail our response to the Press Release which we believe misinterpreted key elements of the Final Proposal. We note that while our Response requested that Core Gold publicly disclose the Response as it provided certain material clarifications and a detailed rebuttal of the various objections raised by the Company to our offer in the Press Release, the board of directors of Core Gold has elected to not proceed in that manner.
When Core Gold was first approached by a representative of Zhaojin in August 2019, Zhaojin was advised that Core Gold was pursuing a formal process and that any offer from Zhaojin would need to go forward under the process mandated by Core Gold’s board of directors. Accordingly, Zhaojin proceeded in the manner requested and put forth various proposals for the consideration of Core Gold’s board of directors. Unfortunately, as a result of delays in receiving responses from the Core Gold board, Core Gold finds itself in the unenviable position of having had Titan Minerals lock-up a significant number of Core Gold’s shares to a takeover bid prior to Core Gold’s shareholders having been made aware of the terms of Zhaojin’s Final Proposal.
As a result of these events and the waiver on January 2, 2020 by Core Gold of Zhaojin’s non-disclosure obligations pursuant to a confidentiality and standstill agreement in September 2019 (the “Confidentiality and Standstill Agreement”), Zhaojin now finds itself in the novel position of needing to inform Core Gold’s shareholders of the principal terms and rationale of the Final Proposal, as well as disclosing the many attempts it has made to agree to a negotiated transaction with Core Gold’s board.
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This disclosure by Zhaojin only became possible following Core Gold’s agreement on January 2, 2020 to waive Zhaojin’s non-disclosure obligations to Core Gold.
We believe that fully informed shareholders will see the merits of Zhaojin’s Final Proposal over that of the Titan Minerals’ bid and choose not to tender their Core Gold shares to the Titan bid.
History of the Negotiations
July 19, 2019
Core Gold announces that it has recommenced a strategic review process in order to investigate a broad range of options, including debt, equity financings, core and non-core asset sales, strategic investments and joint ventures, as well as a merger with another Company. PI Financial was retained to act as financial advisor.
August 16-17, 2019
A representative of Zhaojin approached one of Core Gold’s directors to discuss a proposal on a nonames basis. The board members were excited with the prospect and indicated a desire to move quickly.
Core Gold was advised of the need to sign an agreement with Zhaojin’s representative and that a formal proposal from Zhaojin would immediately follow. Core did not sign the agreement until on or about August 28, 2019
August 21, 2019
Core Gold indicates in a press release that it has amended the terms of certain debt owing to Vertex Enhanced Income Fund. The press release did not indicate whether Core had approached Vertex to renegotiate the debt which had been in default since March 2019 The changes included making the debts transferrable, and reducing the conversion price of US$1,000,0000 convertible debt from $0.30 per share to $0.18 per share.
Titan immediately acquired the debt from Vertex.
September 2, 2019
Zhaojin provides its initial proposal to acquire Core Gold. The fundamental terms were:
1. Zhaojin would make a $5million convertible loan to Core Gold immediately upon signing the term sheet and 60-days exclusivity.
2. The purchase price for the Core Gold shares would be (a) cash consideration of C$0.225 per share, and (b) a share of a newly incorporated company (“Spinco”) which would hold Project Copper Duke,
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Project Linderos, Zaruma mine and a mill.
3. Spinco and Zhaojin would form a joint venture to mine and process the oxides at Dynasty. Spinco would receive 60% of the profits and Zhaojin would receive 40% of the profits.
The final deal was subject to due diligence and Zhaojin was ready to proceed immediately. Zhaojin provided Core Gold with 10 days to accept.
September 3, 2019
Core Gold’s board was offered the opportunity to have a presentation to review Zhaojin’s initial offer, answer questions and address any points that were unclear
September 2 to 12, 2019
During the 10-day period Core Gold had to respond, it was offered the opportunity to have a call or meeting to discuss any points in the Zhaojin offer that might be unclear. Core Gold responded on September 11, 2019 requesting a call at on September 12, 2019. On that call, it appeared that Core Gold’s board was not fully prepared and that it had misinterpreted key parts of the offer.
On or around September 12, 2019 Core Gold’s legal counsel made some comments on the structure of Zhaojin’s offer. Zhaojin’s counsel was of the view that these could be overcome and were not detrimental to Zhaojin’s offer. Core Gold was asked to instruct its counsel to connect with Zhaojin’s counsel to get these points addressed by the end of September. Core Gold’s counsel did not contact Zhaojin’s counsel in this regard.
September 14, 2019
Core Gold indicated that the Zhaojin proposal would not move forward on an expedited basis since it wanted Zhaojin to participate and go through the process as established by the board of Core Gold with PI.
September 16, 2019
Titan announces it intends to make an unsolicited takeover bid for Core Gold.
September 17, 2019
Zhaojin executes the Confidentiality and Standstill Agreement with Core Gold, so Zhaojin can begin its due diligence.
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September 27, 2019
Core Gold’s senior management has its initial meeting with Zhaojin’s financial advisor and counsel. At this meeting Core Gold’s CEO indicates that it does not want to do the joint venture with Zhaojin as was proposed as part of Zhaojin’s offer.
October 31, 2019
Zhaojin made a revised offer. The principal terms were:
1. Zhaojin would invest US$5 Million to acquire a 19.9% interest in Spinco, which would hold Project Copper Duke and Project Linderos as well as any mining concessions subsequently acquired.
2. Shareholders of Core Gold would receive cash consideration of C$0.28 per share and a pro-rata interest in the 80.1% of Spinco not owned by Zhaojin.
Zhaojin confirmed that it had completed a substantial amount of its due diligence and that the balance was expected to be quickly completed subject to it receiving responses from Core Gold to its outstanding due diligence requests which remained outstanding as Zhaojin had previously advised management of Core Gold these outstanding due diligence matters weeks earlier in in late September.
November 11, 2019
Core Gold responds that Zhaojin’s revised offer of October 31st is not acceptable. Core Gold’s response states that an offer of CAD$0.37 per share would be attractive in countering the Titan takeover bid, that Zhaojin should receive 4.99% of Spinco for its US$5 Million investment into Spinco, and that Zhaojin complete an initial private placement into Core Gold for US$5 Million at a price of CAD$0.37 per share or such higher price as may be required by the TSX Venture Exchange. Core Gold requests that Zhaojin complete its due diligence review by November 25, 2019
November 13, 2019
Zhaojin sends a further revised proposal to Core Gold. The principal terms were:
1. Zhaojin would invest US$3.75 Million to acquire a 15% interest in Spinco;
2. Shareholders of Core Gold would receive cash consideration of CAD$0.30 per share and a prorata interest in the 85% interest in Spinco not owned by Zhaojin; and
3. Zhaojin would provide a CAD$5 million 10% convertible bridge loan to Core Gold following execution of the definitive agreement, which would automatically convert into common shares of Core Gold at a conversion price of CAD$0.30 per share if the transaction with Zhaojin is not completed within 90 days following entering into of a definitive transaction agreement with Zhaojin. Alternatively, if needed to address Core Gold’s working capital requirements, Zhaojin was prepared to advance a portion of the convertible loan upon execution of a binding term
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sheet, provided that Core Gold granted to Zhaojin a 60-day exclusivity period and upon the execution of voting support agreements with the officers and directors of Core Gold and certain significant shareholders of Core Gold.
Zhaojin advises that it has completed its technical due diligence and that subject to receiving responses to the remaining outstanding financial and legal due diligence requests, it believes due diligence can be completed within one week. Representatives of Zhaojin offer to meet in Vancouver with Core Gold and its advisors with a view to completing a binding term sheet within one week, negotiate and execute the definitive transaction agreement within 3 to 4 weeks and to complete the transaction within 60 to 90 days thereafter.
November 16, 2019
Core Gold’s counsel requests that Zhaojin’s counsel provide a draft of the proposed definitive agreement be provided for review and November 25, 2019 was agreed as the date to deliver the initial draft to Core Gold’s counsel.
November 25, 2019
Zhaojin’s counsel circulates a draft of the proposed definitive arrangement agreement to Core Gold’s counsel as previously agreed to.
December 6, 2019
A representative of Zhaojin sends a letter to Core Gold’s board asking why they are not responding to Zhaojin’s November 13th proposal.
December 12, 2019
Zhaojin makes the Final Proposal. The principal terms of the offer are as follows: 1. Zhaojin would complete a CAD$10MM private placement into Core Gold at CAD$0.25 per share following the signing of the definitive areement, conditional upon entering into voting support agreements in respect of 40 MM shares being entered into, with US$2.5MM pf the proceeds to be used to repay the debt owed to Titan and CAD$5MM to be utilized to advance key projects subject to Zhaojin’s prior approval. 2. Shareholders of Core Gold would receive cash consideration of CAD$0.33 per share and a pro rata share in the 80.9% of Spinco not owned by Zhaojin. Zhaojin would receive 19.1% interest in Spinco by reason of its becoming a 19.1% shareholder of Core Gold upon completing the private placement. 3. The transaction would be subject to mutual break-fees of CAD$7MM.
December 16, 2019
Titan announces an amendment to the terms of its takeover bid.
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December 17, 2019
Core Gold issues a news release acknowledging the existence of the Zhaojin proposal and its reasons for rejecting such proposal.
Zhaojin writes to Core Gold to clarify certain matters of its offer and the rationale underlying key elements of its offer and requests Core Gold update its public disclosure.
While Core Gold indicated in its news release that the private placement to Zhaojin as an inappropriate defensive tactic and open to regulatory challenge, it ignored that Core Gold had requested an immediate influx of funds due to its significant need for working capital and that securities regulators have previously permitted financings in similar circumstances. While the Core Gold news release stated that restrictions on the use of the private placement proceeds limited its utility, the restriction on CAD$5 million was intended by Zhaojin to ensure that sufficient funds from the placement would be available for Spinco, so that Spinco would not be undercapitalized. Spinco will have CAD$5 million of cash unless both Core Gold and Zhaojin agree otherwise. Also Spinco will have no debt.
While the Core Gold news release stated that the proposed break fee was coercive and off market, such criticism ignores the particular circumstances of the transaction which warrants a break fee at the higher end of the range. Specifically, Titan had obtained irrevocable (hard) lock-ups with shareholders of Core Gold holding a significant number of shares who did not have knowledge of Zhaojin’s competing proposal. As a result of the lock-ups, Zhaojin would be absorbing significant risk, because of the volume of shares covered by the Titan lock-ups but also by Zhaojin’s willingness to complete the CAD$10 Million private placement into Core Gold, without any assurance that its acquisition of Core Gold would succeed. In Zhaojin’s view, if Titan succeeds in acquiring 100% of Core Gold, Zhaojin will receive Titan shares worth considerably less than the CAD$0.25 private placement subscription price to be paid by Zhaojin. This risk required Zhaojin to ask for a significant break fee. Nonetheless, as noted below, Zhaojin has made a subsequent revised proposal that reduces this break fee.
Core Gold has decided not to inform the shareholders of this revised proposal.
Terms of Final Proposal
The key terms of the Final Proposal are summarized below:
1. Purchase Price: Pursuant to the terms of the acquisition, shareholders of the Company would cash consideration of CAD$0.33 (the “Offer Price”) per share. The Offer Price represents approximately a 32% premium to the closing price of the common shares of the Company on January 3, 2020 and when combined with the consideration attributed to each share of Spinco which is estimated to be at least CAD$0.12 per share, the aggregate consideration per share under this offer is at least CAD$0.45 per share.
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We believe that an all cash transaction is the differentiating factor which should compel shareholders to accept our proposal as it provides them with an immediate means to realize on their equity in the Company at a significant premium, without having to assume any potential liquidity and valuation risks which are inherent in the Titan offer given that it is an all share deal.
2. Spinco: In connection with the acquisition, Core Gold will spin out (the “Spin-Out”) Project Cooper Duke, Project Linderos and any other mining concession which Core Gold may acquire subsequent to the date of the Final Proposal to Spinco which is intended to qualify as a “reporting issuer” under applicable securities legislation. Pursuant to the terms of the Spin-Out, the existing shareholders of Core Gold will be issued common shares in the capital Spinco pursuant to the acquisition on a pro rata basis relative to their shareholdings in Core Gold.
As a result, shareholders will have the opportunity to participate in the potential economic upside associated with certain exploration assets of the Company through a listed and well capitalized vehicle.
3. Private Placement: Concurrent with Zhaojin and the Company entering into a definitive agreement, Zhaojin would commit to completing a private placement into the Company for aggregate gross proceeds of CAD$10MM, at a price of CAD$0.25 per share, which would represent approximately, 19.1% of the issued and outstanding share capital of the Company. The use of proceeds will be subject to the restrictions as set out above in the Final Proposal dated December 12, 2019.
The private placement has been structured on this basis in order to provide the Company with an immediate injection of much needed cash in light of its working capital challenges, while at the same time ensuring Spinco is appropriately capitalized from its inception.
The terms of the financing would be finalized concurrent with Core Gold and Zhaojin entering into the definitive agreement and the closing of the private placement will be conditional upon Zhaojin entering into voting support agreements as set out in the Final Proposal dated December 12, 2019
4. Break Fee: The Final Proposal as revised by the Response provided for a break fee of CAD$5MM (the “Break Fee”) which shall be payable in certain circumstances which will set out in the Agreement by either Core Gold or Zhaojin in the event that either party shall terminate the Agreement without the mutual consent of the other party. For the reasons as set out above, we believe that the quantum of the Break-Fee is in line with unique circumstances of this transaction.
We have provided this summary of the time-line and key developments as it demonstrates our ongoing commitment to engage with the Company to complete a transaction which we believe is superior to the offer by Titan.
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Given our desire to continue to negotiate in good faith and explore a potential transaction with the Company and its shareholders, Zhaojin has also agreed to extend the deadline for the Company to accept the terms of its Final Proposal to January 31, 2020 at 5pm (Toronto Time).
Yours truly,
ZHAOJIN MINING COMPANY ECUADOR S.A.
By: SIGNATURE
Name: Guowei Li
Title: General Manager
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Originally posted on Stockhouse :
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