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DRDGOLD LIMITED - DRDGOLD proposes the acquisition of the remaining 26% of its majority owned subsidiary

Release Date: 18/03/2014 15:00
Code(s): DRD     PDF:  
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DRDGOLD proposes the acquisition of the remaining 26% of its majority owned subsidiary

DRDGOLD LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1895/000926/06)
JSE share code: DRD
ISIN: ZAE000058723
Issuer code: DUSM
NYSE trading symbol: DRD
(“DRDGOLD” or the “Company”)



DRDGOLD PROPOSES THE ACQUISITION OF THE REMAINING 26% OF ITS MAJORITY OWNED
SUBSIDIARY, ERGO MINING OPERATIONS (PROPRIETARY) LIMITED (“EMO”) AND THE
SIMULTANEOUS ROLL-UP OF ITS BLACK ECONOMIC EMPOWERMENT PARTNERS AS
DRDGOLD SHAREHOLDERS



1.    INTRODUCTION


DRDGOLD shareholders (“Shareholders”) are advised that on Monday, 17 March 2014 (“Signature
Date”), the Company entered into a Share Sale and Subscription agreement (“Agreement”) with
Khumo Gold SPV (Proprietary) Limited (“Khumo”), the Company’s black economic empowerment
(“BEE”) partner, to acquire Khumo’s 20% interest in the issued share capital of EMO and all its claims
against EMO in exchange for 35 000 000 new DRDGOLD ordinary shares (“Consideration Shares”)
(“Khumo Acquisition”).


Furthermore, on the Signature Date, DRDGOLD entered into an agreement with The DRDSA
Empowerment Trust (the “DRDSA Trust”), EMO’s broad based empowerment shareholder, to acquire
its 6% interest in the issued share capital of EMO and all its claims against EMO in exchange for
10 500 000 new DRDGOLD ordinary shares on substantially the same terms as the Khumo
Acquisition (“Trust Acquisition”).


The Khumo Acquisition and the Trust Acquisition collectively comprise the “Transaction”. In the event
that it is successfully implemented, the Transaction will represent a valid opportunity for all its
participants to benefit from:


        -   the achievement of a tangible and sustainable value realisation mechanism by
            DRDGOLD’s BEE partners after the expiry of a three year lock-in period;


        -   the introduction of further operational and capital management flexibility for DRDGOLD
            over its core business; whilst


        -   ensuring regulatory compliance and certainty in respect of the Company’s existing mining
            rights.

2.     THE TRANSACTION


2.1.   EMO


DRDGOLD currently owns 74% of EMO’s issued share capital, which in turn owns the majority of
DRDGOLD’s operations including, inter alia:


           - 100% of Ergo Mining (Proprietary) Limited (“Ergo”) – DRDGOLD’s gold recovery/tailings
             retreatment operations comprising a series of metallurgical plants and pipelines on the
             central and eastern Witwatersrand of South Africa. The consolidated Ergo operation
             processes approximately 2 million tonnes of gold bearing material per month; and


           - 100% of East Rand Proprietary Mines Limited (“ERPM”) – ERPM holds gold exploration
             assets together with certain small scale gold mining / recovery operations which have been
             or are in the process of being placed on care and maintenance or disposed of by
             DRDGOLD.


Khumo owns a 20% interest in the issued share capital of EMO, comprising 200 000 EMO ordinary
shares (“Sale Shares”). The remaining 6% of EMO’s issued share capital, comprising 60 000 EMO
ordinary shares, is owned by the DRDSA Trust.


2.2.   Suspensive Conditions


The Khumo Acquisition remains subject to the fulfilment or, as the case may be, waiver of the
following suspensive conditions (“Suspensive Conditions”) that:


       -       by no later than 2 June 2014, all the necessary approvals for entering into and completing
               the Khumo Acquisition must be obtained from the Issuer Regulation Division of the JSE
               Limited (“JSE”) in terms of the Listings Requirements of the JSE (“Listings
               Requirements”), other than any approval related to the listing of the Consideration
               Shares on the exchange operated by the JSE (“Exchange”);


       -       by no later than 15 July 2014, Shareholders and Khumo’s shareholders pass all
               resolutions and otherwise give all approvals necessary to approve the entering into of the
               Agreement and the implementation of the Khumo Acquisition;


       -       on the first anniversary of the Signature Date, the requisite consent is received pursuant
               to section 102 of the Mineral and Petroleum Resources Development Act, 28 of 2002, to
               amend the terms of the mining and / or prospecting rights currently held by EMO and its
               subsidiaries to reflect the terms of the Khumo Acquisition (“Section 102 Consent”) and
               the Section 102 Consent is unconditional or subject to conditions acceptable to
               DRDGOLD; and


       -    on the third business day following the fulfilment of the Suspensive Conditions listed
            above, no insolvency event shall have occurred at EMO (“Insolvency Condition”) and
            the JSE grants all approvals necessary for the listing of the Consideration Shares on the
            Exchange.


DRDGOLD is entitled to waive the Insolvency Condition. None of the other Suspensive Conditions are
capable of waiver. Furthermore, DRDGOLD has the once-off right to extend the date for fulfilment of
each of the Suspensive Conditions for a period of up to 60 days.


2.3.   Purchase Consideration


The Khumo Acquisition purchase consideration of R147 000 000 (“Purchase Consideration”) will be
discharged by the issue and allotment of the Consideration Shares to Khumo. The Consideration Shares will be issued to Khumo on the 10th business day following the day on which the last of the
Suspensive Conditions have been fulfilled (“Closing Date”).


In order to ensure that the value of the Consideration Shares and Sale Shares is retained between the
Signature Date and the Closing Date (“Reference Period”), the Agreement provides for the following
cash payments in addition to the Purchase Consideration:


       -    All cash distributions paid by EMO in respect of the Sale Shares during the Reference
            Period (“EMO Distributions Amount”) will be paid into an interest bearing escrow
            account (“Escrow Account”) for the benefit of DRDGOLD. The EMO Distributions
            Amount and the interest accrued thereon shall be paid from the Escrow Account to
            DRDGOLD on the 20th business day after the end of the Reference Period (“Reference
            Period Calculation Date”).


       -    In the event that DRDGOLD pays cash dividends during the Reference Period, an
            amount, which may not be less than zero, (“DRDGOLD Dividends Amount”) equal to
            the aggregate value of:
            -   the dividends that the Consideration Shares would have received had they been
                issued on the Signature Date; and
            -   the interest that would have accrued on such amounts should they have been
                deposited in the Escrow Account from each relevant dividend’s payment date, shall be
                paid in cash by DRDGOLD to Khumo on the Reference Period Calculation Date.


       -    In the event that DRDGOLD implements a rights offer which closes during the Reference
            Period, DRDGOLD shall, on the Closing Date, pay to Khumo an aggregate amount (“LA
            Proceeds”), in cash, equal to the volume weighted average price of a letter of allocation
            (“LA”) for the relevant period that LAs were trading during the relevant rights offer
            multiplied by the number of LAs that Khumo would have received had the Consideration
            Shares been issued and allotted to Khumo on the Signature Date.


       -    The DRDGOLD Dividends Amount plus the LA Proceeds less the EMO Distributions
            Amount shall equal the “Distribution Amount”.


       -    If the Distribution Amount is calculated to be a positive number that exceeds
            R20 000 000, then the Distribution Amount shall be limited to R20 000 000 by first
            reducing the DRDGOLD Dividends Amount and secondly reducing the LA Proceeds, in
            aggregate, by such amount/s as is required to reduce the Distribution Amount to
            R20 000 000.


2.4.   Lock-in Period


Both Khumo and the DRDSA Trust shall, in accordance with the Transaction Agreements, be
prevented from disposing of or creating any encumbrance over their DRDGOLD shares received
pursuant to the Transaction for a period of 3 years from the Closing Date (“Lock-In Period”).


2.5.   Trust Acquisition


The Trust Acquisition will be affected on, mutatis mutandis, substantially the same terms as the
Agreement. The primary differences being:


       -    The Trust Acquisition purchase consideration of R44 100 000 will be discharged by the
            issue and allotment of 10 500 000 new DRDGOLD ordinary shares to the DRDSA Trust
            and is subject to the same adjustments described in paragraph 2.3 above.


       -    The Trust Acquisition is subject to the further suspensive condition that all of the
            Suspensive Conditions contained in the Agreement are timeously fulfilled or waived, as
            the case may be.


       -    The Distribution Amount, as it pertains to the Trust Acquisition, (“Trust Distribution
            Amount”) shall:
            -   be calculated using the same dividend per share as calculated per Consideration
                Share pursuant to the Agreement, whilst the LA Proceeds (as it pertains to the Trust
                Acquisition) shall be calculated, mutatis mutandis, as it is in the Agreement; and
            -   be limited to an amount of R6 000 000. If the Trust Distribution Amount is calculated to
                be a positive number that exceeds R6 000 000, then the Trust Distribution Amount
                shall be limited to R6 000 000, mutatis mutandis, in the same manner as the
                Agreement.

3.       RATIONALE


Khumo and the DRDSA Trust have been DRDGOLD’s BEE partners since 2005 and, save for certain
pre-emptive rights in favour of the other EMO shareholders, their respective interests in EMO are
unencumbered and freely transferable. Furthermore, EMO controls DRDGOLD’s operations through
its wholly owned subsidiaries Ergo and ERPM thereby providing Khumo and the DRDSA Trust with
control over and a beneficial interest in 26% of the Company’s operations.


In light of the above, DRDGOLD proposes the Transaction for the following reasons:
     -    The Transaction remains subject to the procurement of the Section 102 Consents. The
          successful procurement of the Section 102 Consents will ensure that the mining and
          prospecting rights currently held by the DRDGOLD group shall not be compromised as a
          result of any dilution in the BEE ownership credentials of EMO and / or DRDGOLD.


     -    Implementation of the Transaction will result in DRDGOLD acquiring the entire issued share
          capital of EMO thereby providing DRDGOLD with unfettered control over EMO and its
          operations and cash flow. Furthermore, assuming that the Transaction is successfully
          implemented, all cash distributions paid by EMO after the Signature Date shall accrue for
          DRDGOLD’s benefit furthering its ability to efficiently manage capital within its corporate /
          operating structures.


     -    The successful implementation of the Transaction will result in the streamlining and
          simplification of DRDGOLD’s corporate and financial reporting structures and EMO will be fully
          consolidated into DRDGOLD’s financial results.


     -    Khumo and the DRDSA Trust have both agreed to the Lock-In Period which provides
          increased certainty regarding their continued participation as DRDGOLD’s BEE partners.


     -    The Transaction presents an opportunity to provide Khumo and the DRDSA Trust with the
          ability to realise the value of their interests in EMO on the Exchange which is a liquid market
          and most likely to provide fair value, thereby furthering the objectives of BEE in South Africa.


4.       FINANCIAL EFFECTS


The table below sets out the unaudited pro forma financial effects of the Transaction on DRDGOLD’s
earnings per share (“EPS”), headline earnings per share (“HEPS”), net asset value (“NAV”), net
tangible asset value (“NTAV”) per share, diluted EPS and diluted HEPS as disclosed in the unaudited
results of the Company for the six month period ended 31 December 2013 (“Financial Effects”).


The Financial Effects are the responsibility of the board of directors of DRDGOLD (“Board”) and have
been prepared for illustrative purposes only to provide information about how the Khumo Acquisition
and Transaction may impact Shareholders at the relevant reporting dates and because of their nature
may not give a fair reflection of the Company’s financial position, changes in equity, results of
operations or cash flows or future earnings after the Transaction has been implemented. The pro
forma financial effects of the Trust Acquisition are not separately disclosed as a result of this
transaction be conditional upon the implementation of the Khumo Acquisition, whereas the Khumo
Acquisition is independent of the implementation of the Trust Acquisition.


                                                                                 Change from                           Change from
                                                                                  the “Before                           the “Before
                                                                 After the                the                                   the
                                             Before the           Khumo          Transaction”           After the      Transaction”
                                            Transaction        Acquisition            column         Transaction            column
                                                 (cents)            (cents)               (%)            (cents)                (%)

 EPS                                                (4.0)              (5.7)             (42.5)              (6.1)             (52.5)

 HEPS                                               (3.0)              (4.5)             (50.0)              (4.9)             (63.3)

 Diluted EPS                                        (4.0)              (5.7)             (42.5)              (6.1)             (52.5)

 Diluted HEPS                                       (3.0)              (4.5)             (50.0)              (4.9)             (63.3)

 NAV per share                                        3.5                3.6                2.9                3.6               2.9

 NTAV per share                                       3.5                3.6                2.9                3.6               2.9

 Number of shares in issue                    385 383 767        420 383 767                9.1        430 883 767              11.8

 Weighted average number of
 shares in issue                              379 190 980        414 190 980                9.2        424 690 980              12.0


Assumptions and notes:
The following assumptions were applied in the preparation of the Financial Effects:
      i.     DRDGOLD issued 35 000 000 new ordinary shares of no par value pursuant to the Khumo Acquisition; and
             10 500 000 new ordinary shares of no par value pursuant to the Trust Acquisition.
     ii.     The Financial Effects have been prepared on the assumption that, for purposes of EPS, HEPS and diluted EPS and
             HEPS, the Transaction was affected on 1 July 2013; and for NAV and NTAV, the assumption that the Transaction
             was affected on 31 December 2013.
     iii.    The issue price of each new DRDGOLD ordinary share issued pursuant to the Transaction was R4.20 (which is equal
             to the 5 day volume weighted average price of a DRDGOLD ordinary share on the Exchange after the close of trade
             on Friday, 14 March 2014, less a discount of 5%).
     iv.     The Transaction is accounted for as a transaction with owners in their capacity as owners in accordance with
             International Accounting Standard (“IAS”) 27 - Consolidated and Separate Financial Statements. The difference
             between each purchase consideration and their respective values, which amount to R16.2 million for the Khumo
             Acquisition and R4.9 million for the Trust Acquisition, are accounted for in equity and are not reflected in earnings.
     v.      Costs directly attributable to the Transaction are expected to approximate R3.45 million (excluding VAT) and have
             been capitalised against equity in accordance with IAS32.35 and are therefore not reflected in earnings.
     vi.     All of the adjustments, other than those pertaining to once-off costs, shall have a continuing effect on the Company.



5.          RELATED PARTY TRANSACTION AND CATEGORISATION


5.1.        Related party transaction


Khumo owns in excess of 10% of EMO’s issued share capital and EMO is a subsidiary of DRDGOLD.
Furthermore, Dr Paseka Ncholo is a director of EMO. Accordingly Khumo is classified, in accordance
with the Listings Requirements, as his associate.
The Khumo Acquisition is therefore, in terms of the Listings Requirements, classified as a related party
transaction requiring approval by Shareholders and requires an independent expert acceptable to the
JSE to opine on the fairness of the Khumo Acquisition.


In this regard, the Board has appointed PricewaterhouseCoopers Corporate Finance Proprietary
Limited (“PwC”) as the independent professional expert, to provide an independent fairness opinion.
Details of PwC’s opinion will be included in a circular to be posted to Shareholders detailing the
Transaction.


5.2.   Categorisation


The Transaction is categorised as a Category 2 transaction in terms of the Listings Requirements.


6.     CIRCULAR AND GENERAL MEETING


A circular setting out the full details of the Transaction and including the notice of the general meeting
of Shareholders is in process of being finalised. Further information and the salient dates and times of
the Transaction will be announced in due course.


Roodepoort
18 March 2014


Corporate advisor and JSE transaction sponsor
One Capital


Attorneys
Malan Scholes Incorporated


Tax attorneys
ENSafrica


Independent Expert
PwC

Date: 18/03/2014 03:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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