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KALNORTH GOLD MINES LIMITED Independent Expert's Report

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KALNORTH GOLD MINES LIMITED Independent Expert's Report 19 October 2015 Dear Shareholder 2015 ANNUAL GENERAL MEETING Please find enclosed the Notice for the 2015 Annual General Meeting (AGM) and an accompanying Explanatory Statement (AGM Material). The meeting will deal with all the matters that are usually handled at annual general meetings including tabling of the Annual Report, approval of the Remuneration Report, re-election of directors and so on. In addition and, very importantly, the AGM will also deal with a number of resolutions seeking shareholder approval for: the issue of shares in settlement of secured and unsecured loans and outstanding interest; and the issue of convertible notes with respect to a $2 Million funding facility and the issue of shares on the future conversion, if any, of these convertible notes. These proposed share and convertible note issues have been announced to the market over the past few weeks. Upon the completion of these transactions: each of South Victory Global Limited and Renergy Pty Ltd who are presently shareholders and secured lenders will increase its voting power beyond 20% of the Company’s issued shares; and subject to the Company drawing down the full convertible note facility amount of $2M, the Company’s existing largest shareholder, Cross-Strait Common Development Fund Co., Limited will also increase its voting power beyond 20% of the Company’s issued shares if it elects to convert all the convertible notes into shares. I point out that Cross-Strait, at the date of this letter, already has voting power of 26%. This percentage will however reduce to approximately 11% if shareholders approve the issue of shares in settlement of loans and outstanding interest. Thereafter, if it converts all the convertible notes, Cross-Strait’s voting power could go up to 31%. Independent Expert’s Report In order to assist shareholders in deciding whether to approve these transactions, the Directors engaged BDO Corporate Finance (WA) Pty Ltd to prepare an independent expert’s report to assess whether these transactions are fair and reasonable to shareholders who are not associated with the entities to whom shares are proposed for issue. BDO’s report is also enclosed with the AGM Material. BDO has concluded that the transactions are not fair but reasonable. Board’s Analysis An analysis of these transactions addressing the matter of “fair and reasonable” is also provided by the Board in the Explanatory Statement. For the reasons fully explained in the AGM material, each Director recommends that shareholders approve all of the resolutions relating to the proposed share issues. For personal use only The Board acknowledges that completion of these transactions will result in a significant dilution of the existing shareholders’ interest in the Company’s issued capital and that is the major disadvantage of approving the resolutions. KalNorth Gold Mines Limited (ASX: KGM) 224 Dugan Street Kalgoorlie WA Australia 6430 Telephone: +61 8 9021 8327 ABN 55 100 405 954 www.kalnorthgoldmines.com On the other hand, there are significant disadvantages and risks in rejecting the resolutions. Shareholders should note that the Company is in default of its loan agreements for non-payment of interest which fell due for payment on 30 June 2015. The lenders, including the secured lenders, undertook not to take any action until such time as shareholders have had an opportunity to deal with the transaction at the AGM. Consequently, if these share issues in settlement of the loans are not completed, there is a significant risk that the lenders may initiate default action. Further, the availability of the convertible note facility is dependent on the passing of the resolutions for the settlement of the loans. In summary, whilst the Directors are cognisant of the significant dilution of existing shareholders’ interest, the Directors believe that the agreement by the majority of the lenders to accept Shares in settlement of their loan amounts (including interest) and the concurrent approval of the Cross-Strait convertible note facility gives the Company the best possible opportunity to remain a going concern in current market circumstances and remain viable for any improvement in the mineral exploration sector (including any exploration success from the use of funds under the convertible note facility) which may ultimately see some restoration in shareholder value. You are encouraged to read the AGM Material including the independent expert’s report in its entirety. The Directors look forward to welcoming you to the AGM. If you are unable to attend, please lodge your completed proxy form. Yours faithfully Jiajun Hu Chairman For personal use only KalNorth Gold Mines Limited (ASX: KGM) 224 Dugan Street Kalgoorlie WA Australia 6430 Telephone: +61 8 9021 8327 ABN 55 100 405 954 www.kalnorthgoldmines.com Notice of Annual General Meeting and Explanatory Statement KalNorth Gold Mines Limited ACN 100 405 954 Date: Wednesday, 25 November 2015 Time: 9.00am Venue: The Offices of RSM Bird Cameron Level 7 8 St. George’s Terrace Perth, WA For personal use only This Notice of Meeting should be read in its entirety. If shareholders are in doubt as to how they should vote, they should seek advice from their professional advisors prior to voting. Notice Notice is hereby given that the 2015 Annual General Meeting of Shareholders of KalNorth Gold Mines Limited ACN 100 405 954 (“KGM” “KalNorth” or the “Company”) will be held at 9am on Wednesday, 25 November 2015 at the office of RSM Bird Cameron, Level 7, 8 St. George’s Terrace, Perth, WA. The Explanatory Statement accompanying this Notice provides additional information on matters to be considered at the Meeting. The Explanatory Statement and the Proxy Form are part of this Notice. Terms and abbreviations used in this Notice are defined in the Glossary in Section 9 of the Explanatory Statement. If you are unable to attend the Meeting, you are encouraged to complete and return the proxy form attached to this Notice as your vote is important. Voting Eligibility The Directors have determined pursuant to Regulation 7.11.37 of the Corporations Regulations 2001 that the persons eligible to vote at the Meeting are those who are registered as Shareholders at 7:00PM (Australian Eastern Standard Time) on Monday, 23 November 2015. If you are not the registered holder of Shares at that time, you will not be entitled to vote at the Meeting. Voting by Proxy and Voting Exclusion A Shareholder has the right to appoint a proxy (who need not be a Shareholder). More details are provided later in this Notice. Voting exclusions apply to certain Resolutions and details are provided elsewhere in this Notice. Proxies must be received by the Company no later than 48 hours before the commencement time of the Meeting in order to be valid. Queries If you have any queries regarding matters contained in the Meeting documents, please call the Company Secretary on +61 8 9021 8327 or by emailing [email protected]. For personal use only KALNORTH GOLD MINES LIMITED - Notice of Meeting, Explanatory Statement and Proxy Form 1 Agenda ORDINARY BUSINESS 1. Financial Report for the Year ended 30 June 2015 “To receive and consider the financial report of the Company for the year ended 30 June 2015, together with the reports of the directors and auditors thereon.” There is no vote on this item of business. 2. Resolution 1 - Adoption of the Remuneration Report To consider and, if thought fit, to pass, with or without amendment, the following resolution as a non-binding resolution: “That, for the purposes of section 250R(2) of the Corporations Act, the Remuneration Report forming part of the Company’s 2015 annual financial report for the financial year ended 30 June 2015 be adopted.” Voting Exclusion: A vote on Resolution 1 must not be cast (in any capacity) by or on behalf of either of the following persons: (a) a member of the Key Management Personnel, details of whose remuneration are included in the Remuneration Report; (b) a Closely Related Party of such a member. However, a person (the “Voter”) described above may cast a vote on this Resolution as a proxy if the vote is not cast on behalf of a person described above and either: (a) the Voter is appointed as a proxy by writing that specifies the way the proxy is to vote on the resolution; or (b) the Voter is the Chairman of the Meeting and the appointment of the Chairman as proxy: (i) does not specify the way the proxy is to vote on the resolution; and (ii) expressly authorises the Chairman to exercise the proxy even if the resolution is connected directly or indirectly with the remuneration of a member of the key management personnel for the Company or, if the Company is part of a consolidated entity, for the entity. If you wish to appoint a member of the key management personnel (which includes each of the directors and the Chairman) as your proxy, please read the voting exclusion above and in the proxy form carefully. Shareholders are encouraged to direct their proxies how to vote. 3. Resolution 2 - Re-election of Mr Mr Yuanguang Yang as a Director To consider and, if thought fit, to pass the following resolution as an ordinary resolution: “That Mr Yuanguang Yang, who retires in accordance with Clause 11.3 of the Constitution of the Company and, being eligible, offers himself for re-election, be and is hereby re-elected as a director of the Company.” For personal use only KALNORTH GOLD MINES LIMITED - Notice of Meeting, Explanatory Statement and Proxy Form 2 4. Resolution 3 – Approval of issue of shares to Director,
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