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Recent trends and key M&A/ECM issues in the African mining industryMichael Walter, Partner, Herbert Smith LLP26th September 2011

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Contents

• A: Sector and market overview

Current trends and recent transactions

A busy sector: selected headlines from the FT

Mining M&A: current trends

African M&A: deal drivers and challenges in 2011

Mining M&A: recent global transactions

Mining M&A: recent African transactions

Mining ECM: current trends

Mining ECM: recent transactions

• B: African M&A Key Issues

Due diligence

Deal certainty

Warranty packages

Public Company acquisitions

• C: IPOs

Preparing for an IPO

Pre-IPO issues

Preliminary valuations and price formation

Which market?

Where to list

Timing

IPO Timetable

Key IPO Issues

Reserves and resources reporting

Working capital

At and after admission

FTSE Listing Criteria

FTSE 100 Mining Companies

•D: Case Studies

Bharti/Zain M&A transaction

In summary

Glencore IPO

In summary

•E: Contact Information

◦ Contact Information

Current trends and recent transactions (1)A busy sector – Selected headlines from the Financial Times

• “Avocet switches its focus to west Africa” (1/4)

• “Lonmin to invest $2bn to boost production” (10/5)

• “Africa pioneer eyes new ground for Cluff Gold” (30/5)

• “Vale drops $1.1bn bid to purchase Metorex” (11/7)

• “Hanlong Mining bids A$1.2bn for Sundance” (18/7)

• “Glencore eyes bid for South African miner” (26/8)

• “South Africa: Undermined potential” (4/9)

• “Rio and Anglo to sell Palabora Stakes” (5/9)

• Vale set to cede 35% of Guinea mining project” (21/9)

• “Miners sue Anglo American for damages” (21/9)

• “Opposition leader wins Zambian presidency” (23/9)

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Current trends and recent transactions (2)- Mining M&A: current trends

• Market dominated by the big three: BHP Billiton, Vale and Rio Tinto. Rio Tinto, the smallest of these three, has a market capitalisation double that of the next largest company

• Rio Tinto, Xstrata and Vale were the most active acquirers between 2000 and 2010, with over $100 billion of acquisitions

• 2,693 mining deals (both resource acquisition and M&A) with an aggregate value of $113 billion in 2010 – up 28% up on 2009

• No deals were valued at or above $10 billion in 2010 (n.b. BHP Billiton/Potash Corporation)

• Deals to acquire gold reserves prominent in 2010 (44% by deal volume and 31% by deal value in 2010) - economic uncertainty/ Central Banks becoming net buyers

Source: PwC Global Mining Deals 2010

Current trends and recent transactions (3)- African M&A deal drivers and challenges in 2011

Drivers

•Comeback of Private Equity

•Cash-rich corporates

•Improved financial conditions

•Sector consolidations

•Asian buyers

Challenges

•Macro-economic uncertainty

•Price dislocation

•Lack of targets

Source: Mergermarket Conference, September 2011

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Current trends and recent transactions (4) - Mining M&A: recent global transactions

$8.765 billion acquisition of Lihir Gold

(September 2010)

$8.4 billion merger with Uralkali

(December 2010)

$7.66 billion takeover of Equinox(April 2011)

$6.8 billion takeover by Kinross Corporation(September 2010)

$4.7 billion sale of fertilizer business to

Vale SA(May 2010)

$3.825 billion takeover by Rio Tinto(April 2011)

$3.4 billion takeover of Western Coal Corporation

(December 2010)

$3 billion acquisition of 75% stake in Berau

Coal and 25% stake in Bumi Energy(June 2011)

$2.5 billion acquisition of 51% stake in BSG

Resources(April 2010)

$1.55 billion acquisition of 25.6% stake to gain

majority holding in Imerys SA

(April 2011)

Current trends and recent transactions (5)- Mining M&A: recent African transactions

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$1.4 billion intended acquisition of Johannesburg-based Metorex (Jul 2011)

$1.3 billion planned acquisition of Optimum Coal by investor group comprised of Piruto (a unit of Glencore), and Lexshell Investments (Sep 2011)

$1.4 billion acquisition of 45% stake in Rio Tinto’s Simandou iron ore project in Guinea (Mar 2010)

$986 million acquisition of South Africa’s Taung Gold (Apr 2011)

$800 million pending acquisition of stake in Zambeze Coal Project in Mozambique by China’s Wuhan Iron & Steel (Jun 2010)

$6.8 billion takeover of Red Back Mining(Sep 2010)

$3.8 billion takeover by Rio Tinto (Apr 2011)

$2.5 billion acquisition of 51% stake in BSG Resources (Apr 2010)

$279 million for a further 8% stake in Ivanhoe Mines subsidiary Beales for(Jul 2011)

$90 million for a 51% interest in Liberia’s Western Cluster Ltd for (Aug 2011)

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Current trends and recent transactions (6) - Mining ECM: current trends

• 2009-10: mining companies were very active in the global capital markets

Global financial crisis led to steep decline in demand for, and price of, most commodities, creating a challenging operating environment

Weakness of dollar contributed to difficulties for companies without currency hedges

Security of debt finance adversely affected by liquidity constraints and covenants

• 2010-11: less active in respect of secondary capital raisings as focus moves to capital projects and privately held companies (e.g. Glencore) listing

Money raised by way of rights issues

Positive long-term supply/demand fundamentals in most key commodities make mining companies long-term investment propositions

Still difficult to list companies without a compelling equity story as markets remain volatile

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Current trends and recent transactions (7) - Mining ECM: recent transactions

$10 billion IPO in London and Hong Kong (May 2011)

$3.4 billion IPO (October 2010)

$240 million IPO (Hong Kong)

(October 2010)

$15.4 billion rights issue (June 2009) $4.1 billion rights issue and acquisition of Prodeco (March 2009)

$477 million rights issue (May 2009)

£581 million IPO(March 2010)

$30 million IPO(Australia)(July 2011)

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African M&A: Key IssuesDue diligence

Purchasers more thorough and thoughtful on due diligence:

• Due diligence Underpins price and facilitates acquisition finance Purchaser can deal with unexpected issues through price,

structure and/or deal terms

• Purchasers thinking carefully in advance about scope, priorities and identifying key value items fast

• Some common issues:

Important due diligence falls through the gaps/duplication of work Coordination and quality control on multi-jurisdictional deals Failure to feed due diligence findings to other key work streams Financing banks requirements

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African M&A: Key IssuesDeal certaintyParties are keen to get deals done quickly and are prepared to apportion risk to achieve this

• Speed and deal certainty is key

Minimise gap between exchange and completion Keep completion conditions to absolute minimum Apportion risk between parties (to the extent possible)

• Regulatory consents

Able/prepared to complete without all regulatory consents? Apportioning risk in acquisition agreement

• Third party consents

• MACs

Has the market changed?

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African M&A: Key IssuesWarranty packages Buyers are considering what sellers can and will offer and where real value on protection lies

• Business warranties Some full form; some light; more focus on key items; position of private

equity as sellers

• Warranties vs. indemnities No general move to US style indemnification but bespoke indemnities

being written for identified risks

• Focus on recourse against sellers Deferred/contingent consideration, TSAs or other commercial contract

cashflows, holdback and escrow accounts

• Caps / De Minimis / Baskets / Limitation Period

• Warranty & indemnity insurance?

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African M&A: Key IssuesPublic M&A – Acquisitions of listed companies

Public M&A is often a very different process:

• Typically more limited diligence

• Typically more limited purchaser protection and conditionality

• Significant additional regulatory issues: Role of the regulator and set timetables Requirements for financial advisers Requirements for secrecy Disclosures of Dealings Mandatory offer requirements “Level playing field” requirements Cash confirmations Insider dealing/market abuse

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Preparing for an IPO- Pre-IPO issues (1)

Capital Structure

• Consider refinancing/deleveraging prior to IPO

• Pro forma capital structure

Dividends

• Address any dividend traps and set appropriate policy

Pre-IPO agreements

• Ensure all pre-IPO shareholder agreements are terminated on IPO

• Share numbers from operation of ratchets/warrants to be agreed

Taxation

• Consider taxation (residence, reclassification, share option schemes)

Non-core/non-performing assets

• Hive out non-core/non-performing assets; consider asset injection

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Preparing for an IPO- Pre-IPO issues (2)

Corporate reorganisation

• Re-registration as a public company or (if negative net assets) insert new HoldCo

• Re-domicile? (market perception, FTSE inclusion, tax structuring, regulatory requirements)

Constitutional documents

• Identify changes which will need to be made to the articles of association, so suitable for a public listed company

• Size of board and corporate governance, borrowing powers, directors’ indemnities, electronic communication, CREST mechanics

Preliminary due diligence

• Review material customer contracts, service agreements of directors and senior executives, IP, insurance cover, pension schemes

Other work streams

• Appointing advisers – investments banks, legal advisers, reporting accountants, PR adviser, brokers, receiving agents, registrars, graphic designer, printer

• Publicity guidelines and committee in place

• New share scheme planning

• Remuneration of directors and service contracts / letters of appointment

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Preparing for an IPO - Preliminary valuations and price formation

‘Volatility and motives sour appetite for IPOs’Financial Times, 6 April 2011

‘Glencore investors cover IPO in one day’Financial Times, 5 May 2011

• Developing equity story / investment case

• Timing of preliminary valuations and appointment of lead manager(s)

• Impact of connected analysts’ views

• Pilot fishing – testing equity story, appetite and price/valuation (or possibly guidance)

• Marketing around the time of the AITF

• Price-range prospectus?

• Roadshow

• Pricing

• After market

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Which market?- Where to listAffects not only the IPO, but also the post-IPO regulatory environment

Factors to consider

• Legal factors: eligibility criteria for listing/liability regime, continuing obligations once listed

• Commercial factors: a company’s funding and liquidity requirements, potential relative valuations and the strength of analyst coverage weighed against cost and burden of regulatory compliance

London

• Main Market

Premium segment (shares)

Standard segment (shares or GDRs)

• AIM (shares or GDRs)

Other global markets

• TSX

• Euronext Amsterdam

• Deutsche Börse

• NYSE

• NASDAQ

• HKSE

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Timing- IPO Timetable

Week beginningMonth 2 Month 3 Month 4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Month 1 Month 5

17 18 19 20

Kick-off meeting

Prospectus drafting

Submit to UKLA

Due diligence

Preparation of financials

Prepare analyst meeting

Analyst briefing

Prepare research

Prepare roadshow materials

Announce intention to float

Pre-marketing

Announce price range/publish pathfinder

Bookbuilding and roadshow

Pricing and allocation

Admission/unconditional dealings

Aftermarket and stabilisation

30 days

UKLA process

Key milestones

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Key issues- Reserves and resources reporting• Prospectus - general content requirements - so some disclosure of reserves and resources information

required anyway

• In addition, CESR/ESMA Recommendations:

Basic definition of "mineral company" amended - now more outcome focussed - a "material mineral projects" test rather than a "principal activity" test

Prospectus must contain certain information - details of reserves and resources; anticipated mine life and exploration potential; duration and main terms of licences/concessions; current and anticipated progress of mineral exploration and/or extraction and processing including accessibility of deposit; exceptional factors

Need a competent person's report (CPR) on an IPO, but usually not afterwards

No longer need to forecast cash flows and have accountants report

CPR no more than six months old

Need scientific and technical information in prospectus to be consistent with that presented in CPR

Expert must be appropriately qualified

CPR to be prepared in accordance with internationally recognised standards (e.g., JORC, SAMREC, CIM Guidelines, SME, PERC)

Recommended content requirements for CPRs (n.b. valuations of reserves and resources)

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Key issues- Working capital

• Working capital forecasting has been a challenge for companies in every sector

• Test “…sufficient for the issuer’s present requirements…”

• ESMA 124: “Issuer should ensure that there is very little risk that the basis of [the working capital statement] is subsequently called into question”

• Issues of general application

Long-term forecasting

Financial covenant analysis

Constraints in debt markets – no longer safe to assume debt can be rolled over?

Sensitivity about risk factor disclosures

• Issues of specific application to the mining sector

Commodity price fluctuations

Exchange rate fluctuations

Energy prices

Cost control measures/capex constraints

Appropriate sensitivities in times of volatility

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At and after admission- FTSE Listing CriteriaBasic Criteria

• Must have a premium listing of ordinary shares

• Special rule allows for fast-track admission to FTSE 100 index if market capitalisation at end of first day of trading will be equal to or more than 1% of total index capitalisation.

Nationality

• Must normally be incorporated in the UK; if not incorporated in a Developed Country then it must only be listed in the UK, or if a company with multiple listings its most liquid market must be the UK

Corporate Governance

• If not incorporated in the UK, must agree to acknowledge and adhere to the UK Combined Code, the Pre-Emption Rights Guidance and the UK Takeover Code

Liquidity

• Must meet specified liquidity thresholds

Free Float Restrictions

• Index weighting will be reduced where shares are held as:

Trade investments (i.e. cross holdings)

Significant long-term holdings by founders, their families and/or directors

Government holdings

Employee share schemes

Portfolio investments subject to lock-in clauses

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At and after admission– FTSE 100 Mining Companies

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Bharti Airtel’s acquisition of Zain Africa

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Bharti Airtel's US$10.7bn acquisition of Zain Africa

• Bharti Airtel had been interested in entering the African market for more than 12 years

• Africa is "the continent of hope" - Bharti Chairman and Group CEO, Sunil Mittal

• A truly international deal - significant Indian buyer and Kuwaiti seller, assets in fifteen different African countries

• Second-largest overseas acquisition by an Indian company ever, largest emerging markets deal ever

• Bharti Airtel now the world's fifth largest mobile operator

• Very tight deal time frame Work commenced on 15 February 2010 Due diligence substantially done 4 weeks later Deal signed on 30 March 2010 Deal closed on 8 June 2010

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Bharti Airtel's US$10.7bn acquisition of Zain Africa

• Challenging coordination of due diligence in 15 jurisdictions

• Complex regulatory issues in many jurisdictions

• Significant local financing arrangements in place

• Share purchase agreement containing deal conditions and complex protection package, negotiated in London and subject to English law

• Signing and closing in Amsterdam

• Mandatory offer in Zambia

• Transitional arrangements for a short period

• Parallel acquisition of "Zap"

• Excellent project management and team working between Bharti and advisers throughout

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Glencore IPO- In summary

• $10 billion offering, with the first ever simultaneous listing on the LSE and HKSE as part of an IPO

• Listing priced under a price range prospectus at 530 pence per share (middle of range of 480 to 580 pence per share)

• IPO consisted of an institutional offer in the UK and Hong Kong and a 144A placement in the USA. Retail offer was also made to private investors in Hong Kong only

• The first company in 25 years to be included in the FTSE 100 on admission, and only the third company ever to do this

• The largest ever metals and mining IPO and the largest ever IPO in the LSE premium segment. Glencore was also the largest ever European non-privatisation IPO

• $3.1 billion placed with 12 cornerstone investors, largest by value ever achieved in an IPO

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Contact information

Michael Walter, corporate partner, Londonmichael.walter@herbertsmith.comT: +44 20 7466 2841M: +44 771 094 0228

Michael has over 30 years of experience across a broad range of company and commercial work which includes mergers, acquisitions and disposals, joint ventures, demergers and corporate reconstructions, privatisations, equity and debt offerings and Stock Exchange and Takeover Panel issues. His clients have included British and international companies and corporations, large and small, public and private, quoted and unquoted, engaged in a variety of businesses and market sectors. Michael’s African transactions have included advising Bharti Airtel on its US$10.7 billion acquisition of the mobile telephone businesses of Kuwaiti telecoms group Zain in 15 African countries ; Lonmin in relation to a range of matters from the demergers and IPOs of Ashanti Goldfields and Lonrho Africa to more recent transactions including the disposal of its interest in Ashanti and the restructuring of its Black Economic Empowerment arrangements in South Africa; and De Beers in relation to the US$19 billion takeover by a consortium comprising CHL, Anglo American and Debswana.

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