HARVEST MINERALS LIMITED ACN 143 303 388 NOTICE OF GENERAL MEETING
TIME: 10:00 am (WST) DATE: Tuesday, 12 January 2016 PLACE: Level 1, 330 Churchill Avenue Subiaco, WA 6008
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 advisers prior to voting. The Independent Expert has concluded that the transaction the subject of Resolution 1 outlined in this Notice of General Meeting is NOT FAIR BUT REASONABLE to Shareholders. The Independent Expert's Report is enclosed with this Notice of Meeting. It is recommended that all Shareholders read the Independent Expert’s Report in full. Should you wish to discuss the matters in this Notice of Meeting please do not hesitate to contact the Company Secretary on (+61 8) 9200 1847.
CONTENTS
Notice of General Meeting (setting out the proposed resolutions) 3 Explanatory Statement (explaining the proposed resolutions) 4 Glossary 10 Schedule 1 – Terms and Conditions of Options 11 Proxy Form Enclosed Annexure A – Independent Expert’s Report Enclosed
IMPORTANT INFORMATION
TIME AND PLACE OF MEETING
Notice is given that the general meeting of the Shareholders to which this Notice of Meeting relates will be held at 10:00 am on Tuesday, 12 January 2016at: Level 1, 330 Churchill Avenue Subiaco, WA 6008 YOUR VOTE IS IMPORTANT
The business of the General Meeting affects your shareholding and your vote is important. VOTING ELIGIBILITY
The Directors have determined pursuant to Regulation 7.11.37 of the Corporations Regulations 2001 (Cth) that the persons eligible to vote at the General Meeting are those who are registered Shareholders at 10:00 am (WST) on Sunday, 10 January 2016.
VOTING IN PERSON For personal use only use personal For To vote in person, attend the General Meeting at the time, date and place set out above. VOTING BY PROXY
To vote by proxy, please complete and sign the enclosed Proxy Form and return by the time and in accordance with the instructions set out on the Proxy Form. In accordance with section 249L of the Corporations Act, members are advised that: each member has a right to appoint a proxy;
3591-01/1419592_1 1 the proxy need not be a member of the Company; and a member who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. If the member appoints 2 proxies and the appointment does not specify the proportion or number of the member’s votes, then in accordance with section 249X(3) of the Corporations Act, each proxy may exercise one-half of the votes. Shareholders and their proxies should be aware that changes to the Corporations Act made in 2011 mean that: if proxy holders vote, they must cast all directed proxies as directed; and any directed proxies which are not voted will automatically default to the Chair, who must vote the proxies as directed. Further details on these changes are set out below. Proxy vote if appointment specifies way to vote Section 250BB(1) of the Corporations Act provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution and, if it does: the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way (i.e. as directed); and if the proxy has 2 or more appointments that specify different ways to vote on the resolution – the proxy must not vote on a show of hands; and if the proxy is the chair of the meeting at which the resolution is voted on – the proxy must vote on a poll, and must vote that way (i.e. as directed); and if the proxy is not the chair – the proxy need not vote on the poll, but if the proxy does so, the proxy must vote that way (i.e. as directed). Transfer of non-chair proxy to chair in certain circumstances Section 250BC of the Corporations Act provides that, if: an appointment of a proxy specifies the way the proxy is to vote on a particular resolution at a meeting of the Company's members; and the appointed proxy is not the chair of the meeting; and at the meeting, a poll is duly demanded on the resolution; and either of the following applies: o the proxy is not recorded as attending the meeting; o the proxy does not vote on the resolution, the chair of the meeting is taken, before voting on the resolution closes, to have been appointed as the proxy
for the purposes of voting on the resolution at the meeting. For personal use only use personal For
3591-01/1419592_1 2 BUSINESS OF THE MEETING
AGENDA
ORDINARY BUSINESS
1. RESOLUTION 1 – APPROVAL PURSUANT TO ITEM 7 SECTION 611 OF THE CORPORATIONS ACT To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution: “That, for the purposes of Section 611 (Item 7) of the Corporations Act and for all other purposes, approval is given for the Company to issue up to (on a post-Consolidation basis): (a) 5,642,000 Shares; (b) 2,821,000 Options; and (c) 11,020,500 Shares upon the exercise of the New Options referred to in paragraph (b) above and the 8,199,500 Options already held, to Edwards Family Holdings Ltd on the terms and conditions set out in the Explanatory Statement, which in addition to the 16,399,000 Shares that will already be held, will result in Edwards Family Holdings Ltd’s voting power increasing from 18.56% to a maximum 31.48% in the capital of the Company.” Expert’s Report: Shareholders should carefully consider the report prepared by the Independent Expert for the purposes of the Shareholder approval required under Section 611 Item 7 of the Corporations Act. The Independent Expert’s Report comments on the fairness and reasonableness of the transactions the subject of this resolution to the non-associated Shareholders in the Company. Voting Exclusion: The Company will disregard any votes cast on this Resolution by Edwards Family Holdings Ltd and any of its associates or any other person who might obtain a benefit, except a benefit solely in the capacity of a holder of ordinary securities, if the Resolution is passed. However the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote in accordance with the directions on the Proxy Form or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.
DATED: 10 DECEMBER 2015 BY ORDER OF THE BOARD JONATHAN HART
COMPANY SECRETARY For personal use only use personal For
3591-01/1419592_1 3 EXPLANATORY STATEMENT
This Explanatory Statement has been prepared to provide information which the Directors believe to be material to Shareholders in deciding whether or not to pass the Resolutions which are the subject of the business of the Meeting. At a general meeting to be held on 17 December 2015 (December EGM) the Company is seeking shareholder approval of a consolidation on the basis that every 10 (ten) Securities on issue be consolidated into 1 (one) (Consolidation). Subject to approval, completion of the Consolidation is expected to complete on 4 January 2016. Accordingly, unless otherwise stated all references to Securities in this Notice are on a post-Consolidation basis. Any conversion of currency contained in this Notice is based on the exchange rate of 1 GBP: 2.13 AUD, which is the average of the buy and sell rates for GBP in Australian dollars as quoted at www.oanda.com on 6 November 2015. The Company notes that this exchange rate has been used as an indication only and the AUD/GBP exchange rate on the date of issue of Securities or exercise of Options will likely differ. This will result in the funds raised as depicted in Australian dollars to also differ.
1. APPROVAL PURSUANT TO ITEM 7 SECTION 611 OF THE CORPORATIONS ACT 1.1 General As announced on or around 12 November, the Company is undertaking a private placement of up to 31,724,000 Shares to raise up to £2,379,300 (AUD$5,075,840) at an issue price of 7.5 pence (AUD$0.16) per Share, together with one (1) free attaching Option for every two (2) Shares subscribed for and issued (Placement). The Shares and Options will be issued to clients of Mirabaud Securities LLP (Mirabaud) and has been agreed that one of these clients, Edwards Family Holdings Ltd (Edwards Family Holdings), will take up a substantial investment in the Company by subscribing for up to 22,041,000 Shares. Subject to approval being sought at the December EGM, the Company will issue up to 26,082,000 Shares and 13,041,000 Options in order to raise £1,956,150 (AUD$4,173,120) (Tranche 1 Placement). Edwards Family Holdings will be issued 16,399,000 Shares and 8,199,500 Options under the Tranche 1 Placement with the remaining 5,642,000 Shares (New Shares) and 2,821,000 Options (New Options) (Tranche 2 Placement) to be issued subject to Shareholder approval of Resolution 1. Edwards Family Holdings invests in a diversified portfolio of global investments. The registered owner of Edwards Family Holdings is HSBC International Trustee Limited (Jersey Branch). Mr Graham Edwards and his family are beneficiaries of Edwards Family Holdings. Mr Edwards is a resident of the United Kingdom and chief executive officer of Telereal Trillium, a property outsourcing and investment business. The board of Edwards Family Holdings is comprised of independent directors. Resolution 1 seeks Shareholder approval, for the purpose of Item 7 of Section 611 of the Corporations Act to allow the Company to issue the New Shares to Edwards Family Holdings, which in addition to the 16,399,000 Shares that will already be held by Edwards Family Holdings (assuming the approval of the Tranche 1 Placement), will result in Edwards Family Holdings’ voting power in the Company increasing from 18.56% up to 23.45%. Resolution 1 also seeks Shareholder approval for the issue of the New Options to Edwards Family Holdings on the terms outlined in Schedule 1, and for the future issue of up to 11,020,500 Shares upon the exercise of the New Options and the 8,199,500 Options that will be issued to Edwards Family Holdings on completion of Tranche 1 Placement (together the Total New Options). If all of the Total New Options are issued and exercised, it will result in Edwards Family Holdings’ voting power in the Company increasing to 31.48% assuming no other Shares are issued and no other Options are exercised. Pursuant to ASX Listing Rule 7.2 (Exception 16), Listing Rule 7.1 does not apply to an issue of securities approved for the purpose of Item 7 of Section 611 of the Corporations Act. Accordingly, if Shareholders approve the issue of securities pursuant to Resolution 1, the Company will retain the flexibility to issue equity securities in the future up to the 15% annual placement capacity set out in ASX Listing Rule 7.1 and the additional 10% annual capacity set out in ASX Listing Rule 7.1A without the requirement to obtain prior Shareholder approval.
1.2 Item 7 of Section 611 of the Corporations Act For personal use only use personal For (a) Section 606 of the Corporations Act – Statutory Prohibition Pursuant to Section 606(1) of the Corporations Act, a person must not acquire a relevant interest in issued voting shares in a listed company if the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person and because of the transaction, that person’s or someone else’s voting power in the company increases: (i) from 20% or below to more than 20%; or
3591-01/1419592_1 4 (ii) from a starting point that is above 20% and below 90%, (Prohibition). (b) Voting Power The voting power of a person in a body corporate is determined in accordance with Section 610 of the Corporations Act. The calculation of a person’s voting power in a company involves determining the voting shares in the company in which the person and the person’s associates have a relevant interest. (c) Edwards Family Holdings’ current entitlement in the Company Following the completion of the Tranche 1 Placement Edwards Family Holdings will hold the following Shares and Options in the Company: Current holdings of Edwards Family Holdings Shares Options Voting Power 16,399,000 8,199,500 18.56%
(d) Associates For the purposes of determining voting power under the Corporations Act, a person (second person) is an “associate” of the other person (first person) if: (i) (pursuant to Section 11 of the Corporations Act) the primary person is a body corporate and the second person is: (A) a director or secretary of the body; (B) a related body corporate; or (C) a director or secretary of a related body corporate, (ii) (pursuant to Section 12(2) of the Corporations Act) the first person is a body corporate and the second person is: (A) a body corporate the first person controls; (B) a body corporate that controls the first person; or (C) a body corporate that is controlled by an entity that controls the person; (iii) the second person has entered or proposed to enter into a relevant agreement with the first person for the purpose of controlling or influencing the composition of the company’s board or the conduct of the company’s affairs; or (iv) the second person is a person with whom the first person is acting or proposed to act, in concert in relation to the company’s affairs. Associates are, therefore, determined as a matter of fact. For example where a person controls or influences the board or the conduct of a company’s business affairs, or acts in concert with a person in relation to the entity’s business affairs. (e) Relevant Interests Section 608(1) of the Corporations Act provides that a person has a relevant interest in securities if they: (i) are the holder of the securities; (ii) have the power to exercise, or control the exercise of, a right to vote attached to the securities; or (iii) have power to dispose of, or control the exercise of a power to dispose of, the securities.
For personal use only use personal For It does not matter how remote the relevant interest is or how it arises. If two or more people can jointly exercise one of these powers, each of them is taken to have that power. In addition, Section 608(3) of the Corporations Act provides that a person has a relevant interest in securities that any of the following has: (iv) a body corporate in which the person’s voting power is above 20%; (v) a body corporate that the person controls.
3591-01/1419592_1 5 (f) Control The Corporations Act defines “control” very broadly under section 50AA of the Corporations Act control to mean that an entity has the capacity to determine the outcome of decisions about the financial and operating policies of the Company. (g) Associates of Edwards Family Holdings No associates of Edwards Family Holdings currently have or will have a relevant interest in the Company. 1.3 Reason Section 611 Approval is Required Item 7 of Section 611 of the Corporations Act provides an exception to the Prohibition, whereby a person may acquire a relevant interest in a company’s voting shares with shareholder approval. Assuming the Tranche 1 Placement completes prior to the date of the Meeting, Edwards Family Holdings will have a relevant interest in 16,399,000 Shares in the Company, representing an 18.56% voting power in the Company’s Shares. Following the issue of the Tranche 2 Placement, Edwards Family Holdings will hold a total of 22,041,000 Shares, increasing its voting power to 23.45%. This assumes that no other Shares (other than those Shares to be issued following approval at the December EGM) are issued or Options are exercised. Further, following the issue of the New Options, Edwards Family Holdings will be entitled to exercise the Total New Options and be issued up to 11,020,500 additional Shares. This would increase Edwards Family Holdings voting power to 31.48%. This also assumes that no other Shares (other than those Shares to be issued following approval at the December EGM) are issued or Options are exercised. Accordingly, Resolution 1 seeks Shareholder approval for the purpose of section 611 Item 7 of the Corporations Act and all other purposes to enable the Company to issue the Tranche 2 Placement to Edwards Family Holdings and to enable Edwards Family Holdings to exercise the Total New Options. Shareholder approval is required to enable these parties to acquire a relevant interest in the Shares issued to Edwards Family Holdings as its voting power in the Company will also increase above 20%. 1.4 Specific Information required by section 611 Item 7 of the Corporations Act and ASIC Regulatory Guide 74 The following information is required to be provided to Shareholders under the Corporations Act and ASIC Regulatory Guide 74 in respect of obtaining approval for Item 7 of Section 611 of the Corporations Act. Shareholders are also referred to the Independent Expert’s Report prepared by BDO Corporate Finance (WA) Pty Ltd annexed to this Explanatory Statement. (a) Identity of the Acquirer and its Associates It is proposed that Edwards Family Holdings will be issued the Tranche 2 Placement as set out in Section 1.1 of this Explanatory Memorandum. Further information in respect of Edwards Family Holdings is also set out in Section 1.1 of this Explanatory Memorandum. No associates of Edwards Family Holdings currently have or will have a relevant interest in the Company accrodingly there are no associates of Edwards Family Holdings for the purposes of determining its voting power under the Corporations Act. (b) Relevant Interest and Voting Power The relevant interest of Edwards Family Holdings and its associates in voting shares in the capital of the Company (both current (assuming Tranche 1 Placement completes), and following the issue of the Tranche 2 Placement and the completion of the other issues of Shares that are being approved at the December EGM) are set out in the table below: Event Shares held by or Cumulative Cumulative Total Cumulative issued to Relevant interest Shares on issue Edwards Family Edwards Family of Edwards Holdings and Holdings Family Holdings associates and associates voting power
Current 16,399,000 16,399,000 88,349,167 18.56% For personal use only use personal For Following issue of 22,041,000 22,041,000 93,991,167 23.45% Tranche 2 Placement Following exercise of 33,061,500 33,061,500 105,011,667 31.48% Total New Options
(c) Summary of increases
3591-01/1419592_1 6 From the above chart it can be seen that the maximum relevant interest that Edwards Family Holdings will hold after the Tranche 2 Placement is 22,041,000 Shares, and the maximum voting power that Edwards Family Holdings will hold is 23.45%. This represents a maximum increase in voting power of 4.89% (being the difference between 18.56% and 23.45%). Further, following the issue of the New Options, Edwards Family Holdings will be entitled to exercise the Total New Options and be issued up to 11,020,500 additional Shares. This would increase Edwards Family Holdings voting power to 31.48%. This represents a maximum increase in additional voting power of 8.02% (being the difference between 23.45% and 31.48%). (d) Assumptions Note that the following assumptions have been made in calculating the above: (i) the Consolidation is approved by Shareholders and completed prior to the date of the Meeting; (ii) the Company has 88,349,167 Shares on issue, which includes: (A) 56,267,167 Shares on issue at the date of this Notice of Meeting; (B) 26,082,000 Shares to be issued under the Tranche 1 Placement; (C) 6,000,000 Shares to be issued for part consideration for the 100% conditional acquisition of Sergi Potash Project in Brazil, (iii) prior to the completion of the Tranche 2 Placement the Company does not issue any additional Shares other than as set out in (ii). The issue of additional Shares would result in a decrease in the relative voting power of Edwards Family Holdings; (iv) no existing Options are exercised. The exercise of any additional Options would result in a decrease to the relative voting power of Edwards Family Holdings; (v) prior to the completion of the Tranche 2 Placement, Edwards Family Holdings and its associates do not acquire any additional Shares. (e) Intentions of Edwards Family Holdings Other than as disclosed elsewhere in this Explanatory Statement, the Company understands that Edwards Family Holdings (or any of its associates): (i) has no present intention of making any significant changes to the business of the Company; (ii) has no present intention to inject further capital into the Company, other than capital required if Edwards Family Holdings exercises part or all of the Total New Options; (iii) has no present intention of making changes regarding the future employment of the present employees of the Company; (iv) does not intend to redeploy any fixed assets of the Company; (v) does not intend to transfer any property between the Company and Edwards Family Holdings or any of its associates; and (vi) has no intention to change the Company’s existing policies in relation to financial matters or dividends. These intentions are based on information concerning the Company, its business and the business environment which is known to Edwards Family Holdings and its associates at the date of this document. These present intentions may change as new information becomes available, as circumstances change or in the light of all material information, facts and circumstances necessary to assess the operational, commercial, taxation and financial implications of
those decisions at the relevant time. For personal use only use personal For (f) Reasons for the proposed issue of securities As set out in Section 1.1 of this Explanatory Statement, the reason for the Tranche 2 Placement is to complete the Placement and raise £423,150 (AUD$902,720) to enable the Company to develop the Company’s Arapua Fertilizer Project, consider other opportunities and to increase general working capital. The full use of funds of the Tranche 2 Placement and full Placement is set out below: Item Proceeds of the Tranche 2Placement Allocation of Allocation of %
3591-01/1419592_1 7 GBP AUD$1 1. Exploration of Arapua Fertilizer Project £259,560 $553,728 61.34%
2. Consideration for other opportunities £43,245 $92,258 10.22% in Brazil
3. Expenses of the Tranche 2 Placement £38,930 $83,050 9.20%
4 Working Capital £81,414 $173,683 19.23%
Total £423,150 $902,720 100%
Item Proceeds of the Placement Allocation of Allocation of % GBP AUD$1 1. Exploration of Arapua Fertilizer Project £1,459,463 $3,113,520 61.34%
2. Consideration for other opportunities £243,164 $518,751 10.22% in Brazil
3. Expenses of the Placement £218,896 $466,977 9.20%
4 Working Capital £457,777 $976,592 19.23%
Total £2,379,300 $5,075,840 100%
(g) Date of proposed issue of securities The New Shares and New Options the subject of Resolution 1 will be issued on a date after the Meeting to be determined by the Company and Edwards Family Holdings. (h) Material terms of proposed issue of securities The Company is proposing to issue: (i) 5,642,000 New Shares at a price of 7.5 pence (AUD$0.16) per Shares; and (ii) 2,821,000 New Options for nil cash consideration on the terms set out in Schedule 1. (i) Interests and Recommendations of Directors None of the current Board members have a material personal interest in the outcome of Resolution 1. All of the Directors are of the opinion that the Placement is in the best interests of Shareholders and, accordingly, the Directors unanimously recommend that Shareholders vote in favour of Resolution 1. The Directors’ recommendations are based on the reasons outlined in Section 1.5. The Directors are not aware of any other information other than as set out in this Notice of Meeting and Explanatory Statement that would be reasonably required by Shareholders to allow them to make a decision whether it is in the best interests of the Company to pass Resolution 1. (j) Capital Structure The effect of the Tranche 2 Placement on the capital structure of the Company, assuming no Options are exercised or additional Shares are issued (other than those to be issued following the December EGM), is set out below. Shares Number Shares currently on issue (includes 26,082,000 Shares and 6,000,000 Shares to 88,349,167
For personal use only use personal For be issued following approval at December EGM) Proposed issue of New Shares under the Tranche 2 Placement 5,642,000 Total Shares on issue following issue of Tranche 2 Placement 93,991,167
Options
3591-01/1419592_1 8 Terms Number
Options on issue:
Options exercisable at AUD$0.50 on or before 31/12/20151 600,000 Options exercisable at 8.8 pence (AUD$0.19) on or before 31/5/2017 (to be 13,041,000 issued following approval of Resolution 1 at December EGM)
Options exercisable at 7.5 pence (AUD$0.16) within 5 years from the date of
issue (to be issued following approval of Resolution 2 at December EGM) 951,720
Proposed issue of New Options under the Tranche 2 Placement 2,821,000
Total Options on issue following issue of Tranche 2 Placement1 16,813,720 Notes: 1. The 600,000 Options will expire on 31/12/2015 and therefore are not included in the Total Options on issue following Tranche 2 Placement. 1.5 Advantages of the Tranche 2 Placement The Directors are of the view that the following non-exhaustive list of advantages may be relevant to a Shareholder’s decision on how to vote on proposed Resolution 1: (a) the Tranche 2 Placement will complete the Company’s obligations in respect of the Placement; (b) the issue of the New Shares, would provide the Company with additional funds of £423,150 (AUD $902,720); (c) the funds raised will enable the Company to progress development at the Company’s Arapua Fertilizer Project in Brazil; (d) the issue of the New Shares is at a superior price to the most recent capital raising in May 2015; (e) Edwards Family Holdings is a strong institutional shareholder partner who will add value to the Company’s strategic goals, the presence of Edwards Family Holdings as a major shareholder, may also increase the Company’s ability to raise additional funds that may be required in the future to fund the Company’s longer term development strategy of its exportation assets; and (f) If the New Options are issued to Edwards Family Holdings and the Total New Options are exercised by Edwards Family Holdings, additional funds of £968,000 (AUD$1,980,000) will be raised from the exercise of the Total New Options, the exercise price of the Options is greater than the closing price on ASX on the last full trading day prior to the announcement of the Placement. 1.6 Disadvantages of the Tranche 2 Placement The Directors are of the view that the following non-exhaustive list of disadvantages may be relevant to a Shareholder’s decision on how to vote on proposed Resolution 1: (a) the Independent Expert has concluded that the issue of the New Shares and New Options is not fair to the non-associated shareholders; (b) the issue of the New Shares to Edwards Family Holdings will increase the voting power of Edwards Family Holdings and its associates from 18.56% and 23.45%, reducing the voting power of non-associated Shareholders in aggregate from 81.44% to 73.55%; and (c) following the issue of the New Options, Edwards Family Holdings will be entitled to exercise the Total New Options and be issued up to 11,020,500 additional Shares. This would increase Edwards Family Holdings voting power to 31.48% reducing the voting power of non-associated Shareholders in aggregate to 68.53%;
For personal use only use personal For (d) the maximum interest that Edwards Family Holdings could obtain is 31.48% (assuming no other shares are issued or options exercised), which will give it a significant level of control over the Company in comparison to existing Shareholders. Although Edwards Family Holdings will not control enough voting power to pass general or special resolutions, it will be able to block special resolutions following the exercise of the Total New Options; (e) there is no guarantee that the Company’s Shares will not fall in value as a result of the issue.
3591-01/1419592_1 9 1.7 Independent Expert’s Report The Independent Expert’s Report assesses whether the issue of the New Shares and New Options outlined in Resolution 1 is fair and reasonable to the Shareholders who are not associated with Edwards Family Holdings. The Independent Expert’s Report also contains an assessment of the advantages and disadvantages of the proposed issue of the New Shares and New Options the subject of Resolution 1. This assessment is designed to assist all Shareholders in reaching their voting decision. The Independent Expert has provided the Independent Expert’s Report and has provided an opinion that it believes the proposal as outlined in Resolution 1 and, on balance, IS NOT FAIR BUT REASONABLE to the Shareholders of the Company not associated with Edwards Family Holdings. It is recommended that all Shareholders read the Independent Expert’s Report in full. The Independent Expert's Report is enclosed with this Notice of Meeting.
2. ENQUIRIES Shareholders should contact the Company Secretary on +61 8 9200 1847 if they have any queries in respect of the matters set out in this Notice of Meeting.
GLOSSARY
$ means Australian dollars. General Meeting means the meeting convened by the Notice of Meeting. ASIC means the Australian Securities and Investments Commission. ASX means ASX Limited or the Australian Securities Exchange, as the context requires. ASX Listing Rules means the Listing Rules of ASX. Board means the current board of directors of the Company. Business Day means Monday to Friday inclusive, except New Year’s Day, Good Friday, Easter Monday, Christmas Day, Boxing Day, and any other day that ASX declares is not a business day. Company or Harvest means Harvest Minerals Limited (ACN 143 303 388). Consolidation means a consolidation on the basis that every 10 (ten) Securities on issue be consolidated into 1 (one)for which approval is being sought at the December EGM. Constitution means the Company’s constitution. Corporations Act means the Corporations Act 2001 (Cth). December EGM means the general meeting of the Company to be held on 17 December 2015. Directors means the current directors of the Company. Explanatory Statement means the explanatory statement accompanying the Notice of Meeting. Independent Expert means BDO Corporate Finance (WA) Pty Ltd. Independent Expert’s Report means the report by the Independent Expert annexed to this Notice of Meeting as Annexure A. New Option means an Option on the terms and conditions set out in Schedule 1. Notice of Meeting or Notice of General Meeting means this notice of General Meeting including the Explanatory Statement. Option means an option to acquire a Share. Resolutions means the resolutions set out in the Notice of Meeting, and Resolution means any one of them, as the context requires. Shares means fully paid ordinary shares in the capital of the Company.
Shareholder means a holder of a Share. For personal use only use personal For Tranche 1 Placement has meaning set out at Section 1.1. Tranche 2 Placement has meaning set out at Section 1.1. WST means Western Standard Time as observed in Perth, Western Australia.
3591-01/1419592_1 10 SCHEDULE 1 – TERMS AND CONDITIONS OF OPTIONS
(a) Entitlement Each Option entitles the holder to subscribe for one Share upon exercise of the Option. (b) Exercise Price Subject to paragraph (j), the amount payable upon exercise of each Option will be 8.8 pence (AUD$0.18) on a pre-Consolidation basis Exercise Price) (c) Expiry Date Each Option will expire at 5:00 pm (WST) on 31 May 2017 (Expiry Date). An Option not exercised before the Expiry Date will automatically lapse on the Expiry Date. (d) Exercise Period The Options are exercisable at any time on or prior to the Expiry Date (Exercise Period). (e) Notice of Exercise The Options may be exercised during the Exercise Period by notice in writing to the Company in the manner specified on the Option certificate (Notice of Exercise) and payment of the Exercise Price for each Option being exercised by electronic funds transfer or other means of payment acceptable to the Company. (f) Exercise Date A Notice of Exercise is only effective on and from the later of the date of receipt of the Notice of Exercise and the date of receipt of the payment of the Exercise Price for each Option being exercised in cleared funds (Exercise Date). (g) Timing of issue of Shares on exercise Within 15 Business Days after the Exercise Date, the Company will: (a) allot and issue the number of Shares required under these terms and conditions in respect of the number of Options specified in the Notice of Exercise and for which cleared funds have been received by the Company; (b) if required, give ASX a notice that complies with section 708A(5)(e) of the Corporations Act, or, if the Company is unable to issue such a notice, lodge with ASIC a prospectus prepared in accordance with the Corporations Act and do all such things necessary to satisfy section 708A(11) of the Corporations Act to ensure that an offer for sale of the Shares does not require disclosure to investors; and (c) if admitted to the official list of ASX at the time, apply for official quotation on ASX of Shares issued pursuant to the exercise of the Options and if admitted to AIM at the time, apply for the Shares issued pursuant to the Options to be admitted to trading on AIM. If a notice delivered under paragraph (g)(b) for any reason is not effective to ensure that an offer for sale of the Shares does not require disclosure to investors, the Company must, no later than 20 Business Days after becoming aware of such notice being ineffective, lodge with ASIC a prospectus prepared in accordance with the Corporations Act and do all such things necessary to satisfy section 708A(11) of the Corporations Act to ensure that an offer for sale of the Shares does not require disclosure to investors. (h) Shares issued on exercise Shares issued on exercise of the Options rank equally with the then issued shares of the Company. (i) Quotation of Shares issued on exercise If admitted to the official list of ASX at the time, application will be made by the Company to ASX for quotation of the Shares issued upon the exercise of the Options and if admitted to AIM at the time, apply for the Shares issued pursuant to the Options to be admitted to trading on AIM. (j) Reconstruction of capital
For personal use only use personal For Subject to the Corporations Act and the ASX Listing Rules at the time of reconstruction, upon any sub-division or consolidation of the Shares or reduction of share capital, the number of Shares to be subscribed on any subsequent exercise of the Options will be increased or reduced in due proportion so as to maintain the same relative subscription rights for the Options and the Exercise Price will be adjusted accordingly. (k) Participation in new issues There are no participation rights or entitlements inherent in the Options and holders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options without exercising the Options.
3591-01/1419592_1 11 (l) Change in exercise price An Option does not confer the right to a change in Exercise Price or a change in the number of underlying securities over which the Option can be exercised. (m) Unquoted The Company will not apply for quotation of the Options on ASX or AIM. (n) Transferability
The Options are not capable of transfer without the Company’s prior approval. For personal use only use personal For
3591-01/1419592_1 12 APPOINTMENT OF PROXY HARVEST MINERALS LIMITED ACN 143 303 388 GENERAL MEETING
I/We
of
being a member of Harvest Minerals Limited entitled to attend and vote at the General Meeting, hereby
Appoint Name of proxy
OR the Chair of the Annual General Meeting as your proxy
or failing the person so named or, if no person is named, the Chair of the General Meeting, or the Chair’s nominee, to vote in accordance with the following directions, or, if no directions have been given, and subject to the relevant laws as the proxy sees fit, at the General Meeting to be held at 10:00AM (WST), on Tuesday, 12 January 2016 at Level 1 330 Churchill Avenue Subiaco WA 6008 and at any adjournment thereof. If no directions are given, the Chair will vote in favour of all the Resolutions in which the Chair is entitled to vote undirected proxies.
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3591-01/1419592_1 13 Instructions for Completing ‘Appointment of Proxy’ Form 1. (Appointing a Proxy): A member entitled to attend and vote at a General Meeting is entitled to appoint not more than two proxies to attend and vote on a poll on their behalf. The appointment of a second proxy must be done on a separate copy of the Proxy Form. Where more than one proxy is appointed, such proxy must be allocated a proportion of the member’s voting rights. If a member appoints two proxies and the appointment does not specify this proportion, each proxy may exercise half the votes. A duly appointed proxy need not be a member of the Company. 2. (Direction to Vote): A member may direct a proxy how to vote by marking one of the boxes opposite each item of business. Where a box is not marked the proxy may vote as they choose. Where more than one box is marked on an item the vote will be invalid on that item. 3. (Signing Instructions): (Individual): Where the holding is in one name, the member must sign. (Joint Holding): Where the holding is in more than one name, all of the members should sign. (Power of Attorney): If you have not already provided the Power of Attorney with the registry, please attach a certified photocopy of the Power of Attorney to this form when you return it. (Companies): Where the company has a sole director who is also the sole company secretary, that person must sign. Where the company (pursuant to Section 204A of the Corporations Act) does not have a company secretary, a sole director can also sign alone. Otherwise, a director jointly with either another director or a company secretary must sign. Please sign in the appropriate place to indicate the office held. 4. (Attending the Meeting): Completion of a Proxy Form will not prevent individual members from attending the General Meeting in person if they wish. Where a member completes and lodges a valid Proxy Form and attends the General Meeting in person, then the proxy’s authority to speak and vote for that member is suspended while the member is present at the General Meeting. 5. (Return of Proxy Form): To vote by proxy, please complete and sign the enclosed Proxy Form and return by: (a) deliver the proxy form by hand to the Company’s registered office at Level 1, 330 Churchill Avenue, Subiaco, Western Australia; (b) mail the proxy form to the Company’s registered office at PO Box 540 Subiaco, Western Australia, 6904; or (c) send the proxy from by facsimile to the Company on facsimile number +61 8 9200 4469, so that it is received not less than 48 hours prior to commencement of the Meeting.
Proxy forms received later than this time will be invalid. For personal use only use personal For
3591-01/1419592_1 14 HARVEST MINERALS LIMITED Independent Expert’s Report
26 November 2015 For personal use only use personal For Financial Services Guide
26 November 2015
BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 (‘we’ or ‘us’ or ‘ours’ as appropriate) has been engaged by Harvest Minerals Limited (‘HMI’) to provide an independent expert’s report on the proposal for HMI to undertake a private placement of up to 31,724,000 Shares and 15,862,000 Options to raise approximately £2.4 million (A$5.08 million) before expenses. It is understood that one of the investors, Edwards Family Holdings Ltd as trustee for the Edwards Family Trust, will subscribe for a total of 22,041,000 Shares and 11,020,500 Options amounting to a maximum relevant interest of 31.48% in HMI. You will be provided with a copy of our report as a retail client because you are a shareholder of HMI.
Financial Services Guide In the above circumstances we are required to issue to you, as a retail client, a Financial Services Guide (‘FSG’). This FSG is designed to help retail clients make a decision as to their use of the general financial product advice and to ensure that we comply with our obligations as financial services licensees.
This FSG includes information about:
i Who we are and how we can be contacted; i The services we are authorised to provide under our Australian Financial Services Licence, Licence No. 316158; i Remuneration that we and/or our staff and any associates receive in connection with the general financial product advice; i Any relevant associations or relationships we have; and i Our internal and external complaints handling procedures and how you may access them.
Information about us BDO Corporate Finance (WA) Pty Ltd is a member firm of the BDO network in Australia, a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International). The financial product advice in our report is provided by BDO Corporate Finance (WA) Pty Ltd and not by BDO or its related entities. BDO and its related entities provide services primarily in the areas of audit, tax, consulting and financial advisory services.
We do not have any formal associations or relationships with any entities that are issuers of financial products. However, you should note that we and BDO (and its related entities) might from time to time provide professional services to financial product issuers in the ordinary course of business.
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When we provide the authorised financial services we are engaged to provide expert reports in connection with the financial product of another person. Our reports indicate who has engaged us and the nature of the report we have been engaged to provide. When we provide the authorised services we are not acting for you.
General Financial Product Advice We only provide general financial product advice, not personal financial product advice. Our report does not take into account your personal objectives, financial situation or needs. You should consider
For personal use only use personal For the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice.
BDO CORPORATE FINANCE (WA) PTY LTD Financial Services Guide Page 2
Fees, commissions and other benefits that we may receive We charge fees for providing reports, including this report. These fees are negotiated and agreed with the person who engages us to provide the report. Fees are agreed on an hourly basis or as a fixed amount depending on the terms of the agreement. The fee payable to BDO Corporate Finance (WA) Pty Ltd for this engagement is approximately $20,000.
Except for the fees referred to above, neither BDO, nor any of its directors, employees or related entities, receive any pecuniary benefit or other benefit, directly or indirectly, for or in connection with the provision of the report.
Remuneration or other benefits received by our employees All our employees receive a salary. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a report. We have received a fee from HMI for our professional services in providing this report. That fee is not linked in any way with our opinion as expressed in this report.
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Complaints resolution Internal complaints resolution process As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing addressed to The Complaints Officer, BDO Corporate Finance (WA) Pty Ltd, PO Box 700 West Perth WA 6872.
When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the written complaint, we will advise the complainant in writing of our determination.
Referral to External Dispute Resolution Scheme A complainant not satisfied with the outcome of the above process, or our determination, has the right to refer the matter to the Financial Ombudsman Service (‘FOS’). FOS is an independent organisation that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial service industry. FOS will be able to advise you as to whether or not they can be of assistance in this matter.
Our FOS Membership Number is 12561. Further details about FOS are available at the FOS website www.fos.org.au or by contacting them directly via the details set out below.
Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Toll free: 1300 78 08 08 Facsimile: (03) 9613 6399 Email: [email protected]
Contact details
You may contact us using the details set out on page 1 of the accompanying report. For personal use only use personal For TABLE OF CONTENTS
1. Introduction 1
2. Summary and Opinion 2
3. Scope of the Report 4
4. Outline of the Placement 5
5. Profile of Harvest Minerals Limited 7
6. Profile of Edwards Family Holdings Ltd 12
7. Economic analysis 12
8. Industry analysis 13
9. Valuation approach adopted 19
10. Valuation of HMI prior to the Tranche 2 Placement 20
11. Valuation of HMI following the Tranche 2 Placement 31
12. Is the Tranche 2 Placement fair? 32
13. Is the Tranche 2 Placement reasonable? 33
14. Conclusion 36
15. Sources of information 36
16. Independence 36
17. Qualifications 37
18. Disclaimers and consents 38
Appendix 1 – Glossary and copyright notice
Appendix 2 – Valuation methodologies
Appendix 3 – Independent Valuation Report prepared by Al Maynard & Associates Pty Ltd For personal use only use personal For
© 2015 BDO Corporate Finance (WA) Pty Ltd 26 November 2015
The Directors Harvest Minerals Limited Level 1, 33 Ord Street West Perth WA 6005
Dear Directors INDEPENDENT EXPERT’S REPORT
1. Introduction
As announced on 12 November 2015, Harvest Minerals Limited (‘HMI’ or ‘the Company’) is undertaking a private placement of up to 31,724,000 Shares to raise approximately £2.4 million (A$5.08 million) before expenses at an issue price of 7.5 pence (A$0.16) per Share, together with one free attaching Option for every two Shares subscribed for and issued (‘the Placement’). The Shares and Options will be issued to clients of Mirabaud Securities LLP (‘Mirabaud’) and it is understood that one of these clients, Edwards Family Holdings Ltd (‘Edwards Family Holdings’), will take up a substantial investment in the Company by subscribing for up to 22,041,000 Shares and 11,020,500 Options. The Placement will be conducted over two tranches, with 26,082,000 Shares and 13,041,000 Options (‘Tranche 1 Placement’) being placed conditionally upon, among other things, Shareholder approval at a general meeting of the Company to be convened and to be held on or about 17 December 2015. The balance of 5,642,000 Shares and 2,821,000 Options (‘Tranche 2 Placement) will be issued following separate Shareholder approval at a general meeting of the Company to be convened and to be held on or about 5 January 2016. Each free attaching Option issued under the Placement is exercisable at 8.8 pence (A$0.19) at any time before 31 May 2017 (‘Placement Options’). No Shares will be issued under the Tranche 1 Placement to any party (including Edwards Family Holdings) where it would increase the party’s voting power in the Company above 20%. However, following completion of the Tranche 2 Placement, Edwards Family Holdings may obtain an interest in the share capital of HMI up to a maximum of 31.48%. Therefore, the Tranche 2 Placement is subject to the approval by the non-associated shareholders of HMI (‘Shareholders’), which is to be sought under Section 611 of
the Corporations Act 2001 (Cth) (‘the Act’). For personal use only use personal For The Company will hold a General Meeting at which, among other things, Shareholders will vote on the consolidation of the Company’s capital on a 1 for 10 basis (‘Capital Consolidation’). All references in our Report are on a post Capital Consolidation basis unless otherwise stated.
BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 AFS Licence No 316158 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Corporate Finance (WA) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. 2. Summary and Opinion
2.1 Purpose of the report The directors of HMI have requested that BDO Corporate Finance (WA) Pty Ltd (‘BDO’) prepare an independent expert’s report (‘our Report’) to express an opinion as to whether or not the Tranche 2 Placement is fair and reasonable to the non-associated shareholders of HMI. Our Report is prepared pursuant to Section 611 of the Act and is to be included in the Notice of Meeting for HMI in order to assist the Shareholders in their decision whether to approve the Tranche 2 Placement.
2.2 Approach Our Report has been prepared having regard to Australian Securities and Investments Commission (‘ASIC’), Regulatory Guide 74 ‘Acquisitions Approved by Members’ (‘RG 74’), Regulatory Guide 111 ‘Content of Expert’s Reports’ (‘RG 111’) and Regulatory Guide 112 ‘Independence of Experts’ (‘RG 112’). In arriving at our opinion, we have assessed the terms of the Tranche 2 Placement as outlined in the body of this Report. We have considered: x How the value of a HMI share prior to the Tranche 2 Placement on a control basis compares to the value of a HMI share following the Tranche 2 Placement on a minority basis; x Other factors which we consider to be relevant to the Shareholders in their assessment of the Tranche 2 Placement; and x The position of Shareholders should the Tranche 2 Placement not proceed.
2.3 Opinion We have considered the terms of the Tranche 2 Placement as outlined in the body of this report and have concluded that the Tranche 2 Placement is not fair but reasonable to the Shareholders of HMI. We have determined that the Tranche 2 Placement is not fair as the range of values of a HMI share following the Tranche 2 Placement on a minority basis is less than the range of values of a HMI share prior to the Tranche 2 Placement on a control basis. However, we consider the Tranche 2 Placement to be reasonable due to significant advantages that it will bring to the Company.
2.4 Fairness In Section 12 we determined how the value of a HMI share prior to the Tranche 2 Placement on a control basis compares to the value of a HMI share following the Tranche 2 Placement on a minority basis, as detailed below.
Low Preferred High
$ $ $
Value of a HMI share prior to the Tranche 2 Placement on a control basis 0.359 0.386 0.413
For personal use only use personal For Value of a HMI share following the Tranche 2 Placement on a minority basis 0.254 0.282 0.312 Source: BDO analysis
2 The above valuation ranges are graphically presented below:
Value of a HMI share prior to the Tranche 2 Placement on a control basis
Value of a HMI share following the Tranche 2 Placement on a minority basis
0.020 0.120 0.220 0.320 0.420 Value ($)
Source: BDO analysis The above pricing indicates that the range of values of a HMI share following the Tranche 2 Placement on a minority basis are less than the range of values of a HMI share prior to the Tranche 2 Placement on a control basis. In the absence of any other relevant information, the Tranche 2 Placement is not fair for Shareholders.
2.5 Reasonableness We have considered the analysis in Section 13 of this Report, in terms of both: x advantages and disadvantages of the Tranche 2 Placement; and x other considerations, including the position of Shareholders if the Tranche 2 Placement does not proceed and the consequences of not approving the Tranche 2 Placement. In our opinion, the position of Shareholders if the Tranche 2 Placement is approved is more advantageous than the position if the Tranche 2 Placement is not approved. Accordingly, in the absence of any other relevant information we believe that the Tranche 2 Placement is reasonable for Shareholders. The respective advantages and disadvantages considered are summarised below:
ADVANTAGES AND DISADVANTAGES
Section Advantages Section Disadvantages
13.1.1 Minority interest values significantly 13.2.1 The Tranche 2 Placement is not fair overlap
13.1.2 The Tranche 2 Placement provides the 13.2.2 Dilution of existing Shareholders’ interests Company with an additional cash injection
13.1.3 Guaranteed funding at a superior price to 13.2.3 Edwards Family Holdings will gain a significant
most recent capital raising level of control of HMI For personal use only use personal For 13.1.4 Support from a strategic investor
13.1.5 No changes to current operating arrangements
3 13.1.6 Exercise price of Placement Options
Other key matters we have considered include:
Section Description
13.3.1 Alternative proposals
13.3.2 Edwards Family Holdings practical level of control
13.3.3 Movement in the Company’s ASX share price following the announcement of the Placement
3. Scope of the Report
3.1 Purpose of the Report
Section 606 of the Act expressly prohibits the acquisition of shares by a party if that acquisition will result in that person (or someone else) holding an interest in 20% or more of the issued shares of a public company, unless a full takeover offer is made to all shareholders. If Shareholders approve the issue of the Tranche 2 Placement, Edwards Family Holdings may hold up to a maximum of 31.48% of the share capital of HMI assuming no other Shares are issued or Options exercised apart from the Placement Options held by Edwards Family Holdings. Section 606 of the Corporations Act Regulations expressly prohibits the acquisition of shares by a party if that acquisition will result in that person (or someone else) holding an interest in 20% or more of the issued shares of a public company, unless a full takeover offer is made to all shareholders. Section 611 permits such an acquisition if the shareholders of that entity have agreed to the issue of such shares. This agreement must be by resolution passed at a general meeting at which no votes are cast in favour of the resolution by any party who is associated with the party acquiring the shares, or by the party acquiring the shares. Section 611 states that shareholders of the company must be given all information that is material to the decision on how to vote at the meeting. RG 74 states that the obligation to supply shareholders with all information that is material can be satisfied by the non-associated directors of HMI, by either: x undertaking a detailed examination of the transaction themselves, if they consider that they have sufficient expertise; or x by commissioning an Independent Expert's Report. The directors of HMI have commissioned this Report to satisfy this obligation.
3.2 Regulatory guidance Neither the Australian Securities Exchange (‘ASX’) Listing Rules nor the Act defines the meaning of ‘fair
For personal use only use personal For and reasonable’. In determining whether the Tranche 2 Placement is fair and reasonable, we have had regard to the views expressed by ASIC in RG 111. This regulatory guide provides guidance as to what matters an independent expert should consider to assist security holders to make informed decisions about transactions.
4 This regulatory guide suggests that where the transaction is a control transaction, the expert should focus on the substance of the control transaction rather than the legal mechanism to affect it. RG 111 suggests that where a transaction is a control transaction, it should be analysed on a basis consistent with a takeover bid. In our opinion, the Tranche 2 Placement is a control transaction as defined by RG 111 and we have therefore assessed the Tranche 2 Placement as a control transaction to consider whether, in our opinion, it is fair and reasonable to Shareholders.
3.3 Adopted basis of evaluation RG 111 states that a transaction is fair if the value of the offer price or consideration is greater than the value of the securities subject of the offer. This comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length. When considering the value of the securities subject of the offer in a control transaction the expert should consider this value inclusive of a control premium. Further to this, RG 111 states that a transaction is reasonable if it is fair. It might also be reasonable if despite being ‘not fair’ the expert believes that there are sufficient reasons for security holders to accept the offer in the absence of any higher bid. Having regard to the above, BDO has completed this comparison in two parts: x A comparison between the value of a HMI share prior to the Tranche 2 Placement on a control basis and the value of a HMI share following the Tranche 2 Placement on a minority basis (fairness – see Section 12 ‘Is the Tranche 2 Placement Fair?’); and x An investigation into other significant factors to which Shareholders might give consideration, prior to approving Tranche 2 Placement, after reference to the value derived above (reasonableness – see Section 13 ‘Is the Tranche 2 Placement Reasonable?’). This assignment is a Valuation Engagement as defined by Accounting Professional & Ethical Standards Board professional standard APES 225 ‘Valuation Services’ (‘APES 225’). A Valuation Engagement is defined by APES 225 as follows: ‘an Engagement or Assignment to perform a Valuation and provide a Valuation Report where the Valuer is free to employ the Valuation Approaches, Valuation Methods, and Valuation Procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the Engagement or Assignment available to the Valuer at that time.’ This Valuation Engagement has been undertaken in accordance with the requirements set out in APES 225.
4. Outline of the Placement
As announced on 12 November 2015, HMI is undertaking a private placement of up to 31,724,000 Shares to raise approximately £2.4 million (A$5.08 million) before expenses at an issue price of 7.5 pence per Share, together with one free attaching Option for every two Shares subscribed for and issued. The Shares and
Options will be issued to clients of Mirabaud and it is understood that one of these clients, Edwards Family For personal use only use personal For Holdings, will take up a substantial investment in the Company by subscribing for up to 22,041,000 Shares and 11,020,500 Placement Options. The Placement will be conducted in two tranches as follows:
5 Tranche 1 Placement The issue of 26,082,000 Shares and 13,041,000 Placement Options to clients of Mirabaud. Edwards Family Holdings will be issued 16,399,000 Shares and 8,199,500 Placement Options under the Tranche 1 Placement. Tranche 2 Placement The issue of 5,642,000 Shares and 2,821,000 Placement Options to clients of Mirabaud. Edwards Family Holdings will be issued 5,642,000 Shares and 2,821,000 Placement Options under the Tranche 1 Placement. Assuming Shareholder approval is granted for the Tranche 1 Placement and the Tranche 2 Placement, immediate application will be made to the London Stock Exchange and the ASX for the Tranche 1 Placement Shares and the Tranche 2 Placement Shares to be admitted to trading on the Alternative Investment Market (‘AIM’), a market operated by the London Stock Exchange, and the ASX. The Company will hold a General Meeting at which, among other things, Shareholders will vote on the Capital Consolidation on a 1 for 10 basis. All references in our Report are on a post Capital Consolidation basis unless otherwise stated. No Shares will be issued under the Tranche 1 Placement to any party (including Edwards Family Holdings) where it would increase the party’s voting power in the Company above 20%. However, following completion of the Tranche 2 Placement, Edwards Family Holdings may obtain an interest in the share capital of HMI up to of 23.45%. This may increase to a maximum of 31.48%, following the exercise of all Placement Options held by Edwards Family Holdings assuming no other Shares are issued or Options exercised. Following the issue of the Tranche 1 Placement and the Tranche 2 Placement, the potential changes in shareholding of HMI are summarised in the table below.
HMI share structure following the Placement Edwards New Placement Existing Post Capital Consolidation Family Holdings Shareholders Shareholders Total Current shares on issue pre Capital Consolidation - - 502,671,666 502,671,666 Current shares on issue post Capital Consolidation (10:1) - - 50,267,167 50,267,167 % holdings as at the date of this Report 0.00% 0.00% 100.00% 100.00%
Issue of shares to acquire Sergi Project (issued on 18-Nov-15) - - 6,000,000 6,000,000 Issue of shares to acquire Sergi Project (to be issued) - - 6,000,000 6,000,000 Completion of Tranche 1 Placement 16,399,000 9,683,000 - 26,082,000 Issued shares following the Tranche 1 Placement 16,399,000 9,683,000 62,267,167 88,349,167 % holdings following the Tranche 1 Placement 18.56% 10.96% 70.48% 100.00%
Completion of the Tranche 2 Placement 5,642,000 - - 5,642,000 Issued shares following the Tranche 2 Placement 22,041,000 9,683,000 62,267,167 93,991,167 % holdings following the Tranche 2 Placement 23.45% 10.30% 66.25% 100.00%
Issue of shares following the exercise of Placement Options* 11,020,500 - - 11,020,500 For personal use only use personal For Issued shares following the exercise of Placement Options 33,061,500 9,683,000 62,267,167 105,011,667 % holdings following the exercise of Placement Options 31.48% 9.22% 59.30% 100.00%
*The above table only shows the impact on shareholdings upon the exercise of the Edwards Family Holdings Placement Options.
Source: BDO analysis
6 The above table shows the dilution to non-associated Shareholders following the Tranche 1 Placement and the Tranche 2 Placement. Following the Tranche 1 Placement non-associated Shareholders will be diluted to 81.44%. Following the Tranche 2 Placement existing Shareholders will be diluted further to 76.55%. This excludes the issue of any shares following the exercise of any current options or any Placement Options issued as part of the Placement. In the instance where Edwards Family Holdings exercises all its Placement Options and no other shares are issued or options exercised, Edwards Family Holdings voting power in the Company could increase to a maximum of 31.48%. Each Placement Option issued is exercisable at 8.8 pence at any time before 31 May 2017. If only Edwards Family Holdings 11,020,500 Placement Options are exercised the Company would receive £0.97 million (A$2.08 million) in cash.
5. Profile of Harvest Minerals Limited
5.1 History HMI, formerly known as Triumph Tin Limited, was listed on the ASX in September 2010 and on AIM, a market operated by the London Stock Exchange, on 7 September 2015. HMI is focused on its three main projects being the Arapua phosphate and potash tenement (‘Arapua Project’), the Capela potash tenement (‘Capela Project’) and the Sergi potash tenement (‘Sergi Project’). The three projects are located in Brazil. The Company’s current board members are set out below: x Mr Brian McMaster, Executive Chairman; x Mr Luis Azevedo, Executive Director; x Mr Matthew Wood, Executive Director; x Mr Mark Reilly, Non-executive Director; and x Mr Frank Moxon, Non-executive Director. On 27 May 2015, HMI announced it had successfully raised $600,000 through a private placement of shares at a price of $0.01 per share (pre Capital Consolidation). On 29 May 2015, HMI also announced a non- renounceable entitlement issue on a 1 for 6 basis at an issue price of $0.01 per share (pre Capital Consolidation) (‘Rights Issue’). If the Rights Issue was fully subscribed, the Company would raise a maximum of $0.55 million through the issue of approximately 55.4 million shares. On 24 June 2015, the Company announced it had acceptances pursuant to the Rights Issue of 15.8 million shares and an additional 9.3 million shares of the shortfall had been taken up to raise $251,535. During July 2015, the underwriter to the Rights Issue was able to place the 30.2 million shortfall shares at an issue price of $0.01 per share. The Company announced on 13 July 2015 that it had terminated arrangements with the vendor of the Mata Azul Tin project after being unable to reach an agreement for the divestment of the project with a third For personal use only use personal For party. The termination of the arrangement removed any further obligations of HMI in regards to the project.
7 On 25 August 2015, the Company announced that it would be admitted to AIM on 7 September 2015 under the ticker ‘HMI’. The Company announced its successful admission in its quarterly activities report on 6 October 2015 as well as appointing a new non-executive director, Mr Frank Moxon.
5.2 Projects
Arapua Project HMI acquired the Arapua Project in September 2014. The Project is located in the Brazilian state of Minas Gerias and comprises three blocks; Arapua, Pindaiba and Maxixe. The Company’s work to date on the Arapua Project area has included geological mapping over the Arapua block and flotation test work on weathered samples from the project. Preliminary results indicate approximately 55% of the Arapua block contain development grade phosphate rock mineralisation.
Capela Project The Capela Project is located on the east coast of Brazil in the Sergpipe Alagoas Basin. The Company is in the process of obtaining the requisite permits and environmental licenses, as well as planning and budgeting for a drill programme in the area. Under the Mineral Rights Purchase and Sale Agreement, the Company has the following contingent payments remaining on the Capela Project: x The issue of further shares in the Company to the value of $400,000 on the identification of 10 million tonnes of carnallite or sylvite with a minimum grade of 10% potassium chloride ('KCl’); x The issue of further shares in the Company to the value of $800,000 on the identification of a JORC inferred reserve with the minimum of 25 million tonnes with a minimum grade of more than 10% of KCl; and x The issue of further shares in the Company to the value of $1,000,000, not before 31 December 2015, if the Company completes a scoping study, feasibility study or another study that confirms the economic feasibility of the Capela Project under the JORC Code.
Sergi Project In April 2015, the Company acquired the Sergi Project from Kmine Holdings Ltd (‘Kmine’). The Sergi Project is located on the east coast of Brazil, southwest of the Capela Project tenements. Under the Heads of Agreement, the Company has the following contingent payments remaining on the Sergi Project: x On 31 December 2015 and 2016, the payment of $100,000 and 60,000,000 fully paid ordinary shares in the Company (The Company is seeking Shareholder approval for the issue of these shares as part of the general meeting to be held on 17 December 2015); x On 31 December 2017 to 2021 payment of $100,000 (I.e. a total of $500,000) to Kmine; x On achieving minimum horizon of 10 metres of carnallite or sylvite with a minimum grade of 10%,
For personal use only use personal For payment of 60,000,000 fully paid ordinary shares in the Company; x On achieving a JORC inferred reserve with a minimum of 25 million tonnes with a minimum grade of more than 10% KCl, payment of 60,000,000 fully paid ordinary shares in the Company (the
8 condition for the issue of these shares has been met, and these shares were issued on or around 16 November 2015); x On achieving a successful scope or feasibility study that confirms the economic feasibility under the JORC Code, payment of 60,000,000 fully paid ordinary shares in the Company; and x On commencing commercial production, payment of $6,000,000 to Kmine. More information regarding the Company’s projects can be found at Appendix 3 of this Report.
5.3 Historical Statement of Financial Position
Audited as at Audited as at Audited as at 30-Jun-15 30-Jun-14 30-Jun-13 $ $ $ CURRENT ASSETS Cash and cash equivalents 1,537,960 499,601 1,476,412 Trade and other receivables 47,063 22,492 26,952 TOTAL CURRENT ASSETS 1,585,023 522,093 1,503,364 NON-CURRENT ASSETS Plant and equipment 16,503 12,755 33,388 Exploration and evaluation expenditure 1,394,679 848,924 276,393 TOTAL NON-CURRENT ASSETS 1,411,182 861,679 309,781 TOTAL ASSETS 2,996,205 1,383,772 1,813,145
CURRENT LIABILITIES Trade and other payables 701,182 120,458 80,510 TOTAL CURRENT LIABILITIES 701,182 120,458 80,510 TOTAL LIABILITIES 701,182 120,458 80,510 NET ASSETS 2,295,023 1,263,314 1,732,635
EQUITY Issued capital 14,241,114 11,549,368 10,554,368 Reserves 2,665,540 2,700,999 2,652,233 Accumulated losses (14,611,631) (12,987,053) (11,473,966) TOTAL EQUITY 2,295,023 1,263,314 1,732,635
Source: HMI audited financial statements for the years ended 30 June 2015, 2014 and 2013. Commentary of Historical Statement of Financial Position We note the following in relation to HMI’s Historical Statement of Financial Position: x Cash and cash equivalents increased during the period from 30 June 2014 to 30 June 2015
primarily due to a number of capital raisings by way of private placements and the Rights Issue. For personal use only use personal For x Exploration and evaluation expenditure has increased from $276,393 as at 30 June 2013 to $1,394,679 as at 30 June 2015. Cash spent on exploration over the period from 30 June 2014 to 30 June 2015 was $604,524 which was used for the acquisition of the Sergi Project and the Capela Project, as well as on exploration across the Company’s projects. This increase was partially offset
9 by a $769,584 impairment incurred after HMI disposed of the Azul Tin Project, leading to all related exploration and evaluation expenditure in relation to this project being impaired. x Trade and other payables as at 30 June 2015 increased to $701,182 from $120,458 as at 30 June 2014. The increase was primarily due to the accrual of $400,000 worth of shares to be issued as part of the purchase consideration for the Capela Project. The trade and other payables balance also includes $140,000 of shortfall application monies received but yet to be allotted.
5.4 Historical Statement of Comprehensive Income
Audited for the Audited for the Audited for the year ended 30-Jun-15 year ended 30-Jun-14 year ended 30-Jun-13 $ $ $ Revenue
Interest income 14,882 37,824 94,174 Other income - - 395 Expenses
Public company costs (34,253) (48,519) (42,708) Accounting and audit fees (82,145) (85,126) (66,684) Consulting and directors' fees (389,450) (579,675) (418,853) Legal fees (37,206) (16,887) (3,057) Share based payments (71,142) (59,285) (207,715) Travel expenses (152,493) (100,279) (9,868) Impairment of exploration expenditure (769,584) (61,291) (7,106,165) Foreign exchange gain 136,934 - - Loss on acquisition of subsidiary - (369,022) - Other expenses (240,121) (230,827) (154,420) Loss from continuing operations before income tax (1,624,578) (1,513,087) (7,914,901) Income tax expense - - - Loss from continuing operations after income tax (1,624,578) (1,513,087) (7,914,901) Other comprehensive (loss)/income - - - Items that may be reclassified subsequently to operating result Foreign currency translation (106,601) (10,519) 54,527 Total comprehensive loss for the year (1,731,179) (1,523,606) (7,860,374)
Source: HMI audited financial statements for the years ended 30 June 2015, 2014 and 2013. Commentary on Historical Statement of Comprehensive Income
We note the following in relation to HMI’s Historical Statement of Comprehensive Income: For personal use only use personal For x Share based payments refers to the Company’s employee share based payment scheme.
10 x Impairment of exploration expenditure of $0.77 million for the year ended 30 June 2015 related to the Company’s disposal of the Azul Tin Project and therefore any exploration and evaluation expenditure incurred on this project. x Other expenses are corporate overheads such as insurance, telecommunications, printing and rent.
5.5 Capital Structure (Pre Capital Consolidation) The share structure of HMI as 12 November 2015 is outlined below:
Pre Capital Consolidation Number Total ordinary shares on issue 502,671,666 Top 20 shareholders 323,897,854 Top 20 shareholders - % of shares on issue 64.44%
Source: Automic Registry Services The range of shares held in HMI as at 12 November 2015 is as follows:
Pre Capital Consolidation Number of Ordinary Number of Ordinary Percentage of Range of Shares Held Shareholders Shares Issued Shares (%) 1 - 1,000 4 512 0.00% 1,001 - 5,000 - - 0.00% 5,001 - 10,000 - - 0.00% 10,001 - 100,000 106 7,018,772 1.40% 100,001 - and over 247 495,652,382 98.60% TOTAL 357 502,671,666 100.00%
Source: Automic Registry Services The largest shareholders of HMI as at 12 November 2015 is as follows:
Pre Capital Consolidation Number of Ordinary Percentage of Name Shares Held Issued Shares (%) Americ as Investments & Partic ipation Limited 70,000,000 13.93% Kmine Holdings Ltd 70,000,000 13.93% Mr Jason Peterson & Mrs Lisa Peterson
For personal use only use personal For Source: Automic Registry Services
11 HMI has the following options on issue:
Pre Capital Consolidation Options on Issue Number Options with an exercise price of $0.05 each on or before 31 December 2015 6,000,000 TOTAL 6,000,000
Source: Appendix 3B dated 9 October 2015
6. Profile of Edwards Family Holdings Ltd Edwards Family Holdings invests in a diversified portfolio of global investments. The registered owner of Edwards Family Holdings is HSBC International Trustee Limited (Jersey Branch). Mr Graham Edwards and his family are beneficiaries of Edwards Family Holdings. Mr Edwards is a resident of the United Kingdom and chief executive officer of Telereal Trillium, a property outsourcing and investment business. The board of Edwards Family Holdings is comprised of independent directors. 7. Economic analysis
7.1 Global Global Overview The global economy is expanding at a reasonable pace, but some key commodity prices are much lower than a year ago. Growth in global trade slowed down over the first half of 2015, as has growth of global industrial production. Weakness in Chinese demand contributed to a further decline in commodity prices in recent months. In China, economic activity in the resource-intensive sectors has continued to moderate in the first half of 2015. In response to the slowdown in economic activity, the Chinese government has adjusted various policies in order to provide support. The Japanese economy has recovered since late 2014, while economic activity in the rest of the Asian-Pacific region has slowed to below its ten year average. The Federal Reserve is expected to start increasing its policy rate. However, with some other major central banks continuing to ease their policy, global financial conditions have remained very accommodative. The major developments in the global financial markets over the recent months have been an escalation of concerns that Greece may exit the euro zone, an unwinding of Chinese share prices, a depreciation of exchange rates of commodity-exporting nations and a correction of bond yields. Despite the various fluctuations in the markets, long term borrowing rates remain remarkably low for most sovereign and creditworthy private borrowers. Australia In the light of significant structural changes, the Australian economy has continued to grow over the past year, but at a rate somewhat below its longer-term average. Following strong growth in the March
For personal use only use personal For quarter, recent data indicates that growth to be in excess of 3% by 2017. The rate of unemployment, though elevated, has had little change recently. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the Reserve Bank of Australia (‘RBA’) target over the next one to two years, despite a lower exchange rate.
12 Low interest rates in Australia are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger borrowing by businesses, and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise in Sydney, though trends have been more varied in a number of other cities. The RBA is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates. At its most recent meeting, the RBA decided to leave the cash rate unchanged at 2.0%. The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.
Brazil Brazil is suffering from recessionary characteristics which are projected to continue into 2016. Fiscal adjustment, a tighter monetary policy and a lack of investor confidence due to political uncertainty are the main contributors to Brazil’s issues. As these issues are addressed throughout the remainder of 2015, and in 2016, it is expected that a slow recovery may begin in 2017. Unemployment is likely to grow during 2016. The central bank will have difficulty curbing inflation due to the recent significant depreciation in the Brazilian Real. Confidence in the government’s balance sheet has fallen; as such the government’s debt has been downgraded to below investment grade in 2015. The government is balancing conflicting objectives as it tries to combat a recession and a fiscal budget that needs scaling back. There is likely to be lots of policy adjusting in the areas of indirect taxes and lowering trade barriers in order to soften the administrative burdens.
Source: www.rba.gov.au Statement by Glenn Stevens, Governor: Monetary Policy Decision 3 November 2015. www.oecd.org Brazil – Economic forecast summary (November 2015)
8. Industry analysis
8.1 Phosphate
Overview Phosphate rock is a general term that refers to rock with a high concentration of phosphate minerals, most commonly of the apatite group. It is the major resource mined to produce phosphate fertilisers for the agriculture sector. As such, approximately 90% of the phosphate rock mined is processed into fertilisers. Some other uses of phosphate include animal feed supplements, soft drinks, food preservatives, anti-corrosion agents, cosmetics, fungicides, ceramics, water treatment and metallurgy. Phosphate minerals are often used for control of rust and prevention of corrosion on ferrous materials applied with electrochemical conversion coatings. Phosphate deposits can be classified into three main types, being marine sedimentary deposits of phosphorites, apatite rich igneous rocks, and modern and
For personal use only use personal For ancient guano accumulations.
13 Production and Reserves Production and exploration levels of phosphate are highly sensitive to the demand and supply of the final product, as well as other factors including oil prices, climate, exchange rates, and political and regulatory factors. The following table sets out the 2014 estimate of phosphate production by country and the actual production levels recorded by these countries in 2013 as presented by the 2015 US Geological Survey.
Country Mine production (000’s Mt) Reserves (000’s Mt) 2014* 2013 United States 27,100 31,200 1,100,000 Algeria 1,500 1,500 2,200,000 Australia 2,600 2,600 1,030,000 Brazil 6,750 6,000 270,000 Canada - 400 76,000 China 100,000 108,000 3,700,000 Egypt 6,000 6,500 715,000 India 2,100 1,270 35,000 Iraq 250 250 430,000 Israel 3,600 3,500 130,000 Jordan 6,000 5,400 1,300,000 Kazakhstan 1,600 1,600 260,000 Mexico 1,700 1,760 30,000 Morocco and Western Sahara 30,000 26,400 50,000,000 Peru 2,600 2,580 820,000 Russia 10,000 10,000 1,300,000 Saudi Arabia 3,000 3,000 211,000 Senegal 700 800 50,000 South Africa 2,200 2,300 1,500,000 Syria 1,000 500 1,800,000 Togo 1,200 1,110 30,000 Tunisia 5,000 3,500 100,000 Vietnam 2,400 2,370 30,000 Other 2,600 2,580 300,000 World Total 219,900 225,120 67,417,000
Source: US Geological Survey, Mineral Commodity Summaries 2015.
Key Drivers Demand in the phosphate industry is primarily affected by the state of the fertiliser manufacturing industry, which in turn is highly correlated with the global demand for agriculture products.
Oil prices have a positive correlation with the demand, and therefore pricing observed in the phosphate For personal use only use personal For industry. As the price of crude oil increases, alternative energy sources such as biodiesel and ethanol become more prevalent. These alternative energy sources require extensive agriculture therefore increasing the demand for fertiliser products, which in turn stimulates growth in the phosphate industry.
14 Climate conditions can also have an impact on the demand for fertiliser products and consequently phosphate, with the dry, harsh conditions experienced in places such as Africa requiring increasing use of fertiliser products. Exchange rates can impact the demand for phosphate with a majority of trading being denominated in US dollars, however with the availability of hedging instruments; exchange rates do not have a massive impact on the demand for phosphate products. Due to the risky nature of exploration activities and the uncertainty surrounding infant exploration projects, phosphate explorers and producers are hesitant in bearing additional sovereign risk by exploring in foreign countries. As a result the investment capital required for phosphate exploration is often restricted to those politically stable economies, therefore hindering phosphate supply in smaller developing countries.
Prices The price that a producer can obtain for phosphate rock concentrate is contingent upon the percentage of
P2O5 it contains. Phosphate prices are not quoted on a public exchange however the Moroccan Phosphate Rock, containing 70% Bone Phosphate of Lime (‘BPL’) is commonly used as a global pricing benchmark. These historical prices are often used as a base for forecasting phosphate prices, with adjustments made for the grade, impurities and other competitive factors. The following chart outlines the historical price movements of this global benchmark over the past five years.
Monthly Rock Phosphate Prices 70% BPL 500 450 400 350 300 $
S 250 U 200 150 100 50 0
Source: Bloomberg
The Moroccan phosphate rock price, along with other commodities, went through a period of high volatility during the Global Financial Crisis (‘GFC’) in 2008 and 2009. This is evident by the dramatic price movement in the graph above from a peak of US$430 per tonne in August 2008 to US$90 per tonne in July
For personal use only use personal For 2009. The Moroccan phosphate rock price recovered to US$140 per tonne in 2010 and hit a post GFC high of US$202.50 per tonne in 2011. The price found strong support at US$100 per tonne in 2013 and has recently stabilised and traded at US$115 per tonne since September 2014.
15 Outlook According to the 2015 US Geological Survey world phosphate rock capacity is projected to increase by approximately 15% from 225 Mt in 2014 to an anticipated 258 Mt in 2018. The majority of the projected growth is expected to come from expansion of existing mines in Morocco and the development of a new mine in Saudi Arabia. Global fertiliser demand is forecast to improve during 2015 primarily from increased usage in the South Asia and East Asia regions. However, it is also anticipated that the phosphate price will become more volatile due to uncertainty over consumption in Brazil and India.
Source: International Fertiliser Industry Association, Fertiliser outlook 2013-2017
8.2 Potash
Overview Potash is the common name for mined and manufactured salts that contain potassium in water soluble form, the most common being potassium chloride. Potash is primarily used as an agricultural fertilizer as potassium is a primary plant nutrient. As a plant nutrient, potash has no substitute and, as a result, it is in high demand in countries where growing agriculture industries are needed to support fast growing populations.
Potash Prices The chart below shows the US Daily Retail Average Potash price over the past several years.
US Daily Potash Price 1200
1000
800 t m / 600 $ S U 400
200
0
Source: Bloomberg
Potash prices declined more than 40% following the global financial crisis as a result of falling demand. For the majority of 2011 and 2012, the price of potash recovered and remained relatively stable at
For personal use only use personal For US$700/mt. The recovery was largely attributable to improving economic conditions in China and India resulting in increased demand for potash. Furthermore, 2012 saw the development of several new potash mines by large Northern American corporations.
16 In July 2013, potash prices dropped by nearly 30% as a result of the world’s largest potash producer, OAO Uralkali, dissolving its marketing relationship with Belaruskali, Belarus’ only potash producer. The two potash companies controlled over 40% of global potash exports with the cancellation of the marketing relationship resulted in OAO Uralkali selling potash at lower prices. This forced other companies to lower their prices to remain competitive. Despite the continued development of new mines and the expansion of new facilities in more than 15 countries, potash prices at the start of 2014 fell to approximately US$500m/t and have maintained that price level throughout 2015. Along with increased competition between Potash producers, the world’s largest consumers, China and India, also increased its’ domestic production capacity resulting in demand for potash to drop further.
Supply and Demand The graph below shows the annual global potash demand and supply from 2010 to 2015:
Potash Demand and Supply Globally 90 100.00%
80 90.00%
70 80.00% 70.00% 60 60.00% 50 50.00% 40 40.00% 30 30.00% 20 20.00% 10 10.00% 0 0.00% 2010 2011 2012 2013 2014 2015
Global supply Global demand Demand as a % of supply
Source: Bloomberg
Annually, Potash supply has outstripped demand for the past five years, especially following the global financial crisis. An increase in demand relative to supply occurred during 2014, though this has since corrected back towards 2012/13 levels.
Reserves
The graphs below show the known global reserves of Potash in 2012. Canada and Russia dominate over 80% For personal use only use personal For of the Potash market. The Canadian province of Saskatchewan itself accounts for almost half of the world’s known potash reserves.
17 Global Reserves 2014
2%
13% 22% United States Belarus Brazil 25% Canada Russia Other 36% 2%
Source: U.S. Geological Survey
Global Outlook
The demand for potash will be largely determined by China and India and other developing nations as the middle class of these economies develop a taste for fresh, locally grown produce fuelling the demand for industrial fertiliser. According to the U.S Geological Survey, world consumption of potash is expected to increase by about 3% per annum over the next several years. While demand for potash is expected to increase, potash prices are expected to remain relatively soft due to increased production, intensifying competition amongst potash producers. At the end of 2014, potash producers held stock well in excess of the 5 year average. Contributing to supply level was the world’s largest growing potash consumers, China and India, establishing their own potash projects. Furthermore,
a number of large projects in Belarus, Brazil and Congo are expected to be operational in 2018. For personal use only use personal For
18 9. Valuation approach adopted
There are a number of methodologies which can be used to value a business or the shares in a company. The principal methodologies which can be used are as follows: x Capitalisation of future maintainable earnings (‘FME’) x Discounted cash flow (‘DCF’) x Quoted market price basis (‘QMP’) x Net asset value (‘NAV’) x Market based assessment A summary of each of these methodologies is outlined in Appendix 2.
9.1 Valuation of a HMI share prior to the Tranche 2 Placement In our assessment of the value of a HMI share prior to the Tranche 2 Placement we have chosen to employ the following methodologies: x NAV on a going concern basis as our primary valuation methodology; and x QMP as our secondary valuation methodology. We have chosen these methodologies for the following reasons:
o The NAV methodology is the most appropriate to consider given the Company is an AIM and ASX listed exploration company which holds mineral assets for which we have received an independent specialist valuation; o The QMP basis is a relevant methodology to consider because HMI’s shares are listed on both AIM and ASX. This means there is a regulated and observable market where HMI’s shares can be traded. However, in order for the QMP methodology to be considered appropriate, the Company’s shares should be liquid and the market should be fully informed as to its activities. We have considered these factors in Section 10.2 of our Report; o HMI does not generate regular trading income. Therefore there are no historic profits that could be used to represent future earnings. This means that the FME valuation approach is not considered appropriate; and o In its current form, HMI has no foreseeable future net cash inflows and therefore the application of the DCF valuation approach is not considered appropriate. We note that our valuation of a HMI share prior to the Tranche 2 Placement is post completion of the Tranche 1 Placement.
Independent specialist valuation In valuing HMI’s mineral assets as part of our NAV valuation, we have relied on the independent specialist valuation performed by Al Maynard & Associates Pty Ltd (‘AM&A’) in accordance with the Code of Technical Assessment of Mineral and Petroleum Assets and Securities for Independent Expert Reports (‘the
Valmin Code’) and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore For personal use only use personal For Reserves (‘JORC Code’). We are satisfied with the valuation methodologies adopted by AM&A which we believe are in accordance with industry practice and compliant with the requirements of the Valmin Code. A copy of AM&A’s valuation report is attached in Appendix 3.
19 9.2 Valuation of HMI share following the Tranche 2 Placement
In our assessment of the value of a HMI share following the Tranche 2 Placement, we have chosen to employ the NAV (sum-of-parts) as our primary valuation methodology, having consideration to the: x value of HMI’s interest in exploration assets it has ownership over (having reliance on AM&A’s specialist valuation opinion); x effect of the Tranche 2 Placement on the cash balance of HMI; x effect of the exercise of Edwards Family Holdings Placement Options on the cash balance; and x effect of the Tranche 2 Placement and exercise of the Placement Options on the number of shares on issued in HMI.
10. Valuation of HMI prior to the Tranche 2 Placement
10.1 Net Asset Valuation of HMI The value of HMI’s assets on a going concern basis is reflected in our valuation below:
30-Jun-15 Low value Preferred value High value Notes $ $ $ $ CURRENT ASSETS Cash and cash equivalents 1 1,537,960 4,802,724 4,802,724 4,802,724 Trade and other receivables 47,063 47,063 47,063 47,063 TOTAL CURRENT ASSETS 1,585,023 4,849,787 4,849,787 4,849,787 NON-CURRENT ASSETS Plant and equipment 16,503 16,503 16,503 16,503 Exploration and evaluation expenditure 2 1,394,679 27,400,000 29,800,000 32,200,000 TOTAL NON-CURRENT ASSETS 1,411,182 27,416,503 29,816,503 32,216,503 TOTAL ASSETS 2,996,205 32,266,290 34,666,290 37,066,290 CURRENT LIABILITIES Trade and other payables 3 701,182 561,182 561,182 561,182 TOTAL CURRENT LIABILITIES 701,182 561,182 561,182 561,182 TOTAL LIABILITIES 701,182 561,182 561,182 561,182 NET ASSETS 2,295,023 31,705,108 34,105,108 36,505,108 Shares on issue (Post Capital Consolidation) 4 88,349,167 88,349,167 88,349,167 Value per share ($) $0.359 $0.386 $0.413
Source: BDO analysis We have been advised that there has not been a significant change in the net assets of HMI since 30 June 2015 apart from those adjustments discussed below. Other than those items discussed below, we have
assumed that the fair market value of the assets and liabilities as at 30 June 2015 are equal to the For personal use only use personal For carrying values as set out in the above statement of financial position. The table above indicates the net asset value of a HMI share is between $0.359 and $0.413, with a preferred value of $0.386. The following adjustments were made to the net assets of HMI as at 30 June 2015 in arriving at our valuation.
20 Note 1: Cash and cash equivalents Since 1 July 2015, the Company’s cash and cash equivalents balance has been affected by the following items: - The Company incurred approximately $0.12 million in relation to exploration expenditure; - The Company successfully listed on the AIM market of the London Stock Exchange. The Company incurred various administration expenses in relation to this in addition to ongoing working capital requirements totalling approximately $0.67 million; - The Company raised a net amount of approximately $0.25 million through the issue of shortfall shares during July 2015 under the Rights Issue; and - The Company will complete the Tranche 1 Placement (26,082,000 Shares at a price of 7.5 pence per share) to raise approximately £1.96 million (A$4.19 million). Expenses of the Tranche 1 Placement total approximately £0.18 million (A$0.38 million). Therefore we have increased the cash and cash equivalents balance to $4.80 million as shown in the below table.
Cash and cash equivalents $ Cash and cash equivalents as at 30 June 2015 1,537,960 Exploration expenditure incurred (120,000) Administration expenditure incurred (670,000) Net proceeds from issue of shares under the Rights Issue 250,000 Net proceeds from the Tranche 1 Placement 3,804,764 Cash and cash equivalents as at date of Report 4,802,724 *Amount converted at an exchange rate of $A1:£0.467
Note 2: Valuation of HMI’s exploration assets We have instructed AM&A to provide an independent market valuation of the Company’s exploration assets. AM&A has derived a preferred valuation for the exploration potential of each exploration asset utilising the Multiple of Exploration Expenditure method and the Empirical method. The Multiple of Exploration Expenditure method applies a prospectivity enhancement multiplier to previous expenditure on a mineral asset to derive a value. The Empirical method (or Yardstick method) relies on the valuers knowledge of the mineral asset and applies a discount to the values arrived at by considering conceptual target models for the area. We consider the methodologies used by AM&A to be appropriate. The range of values for as calculated by AM&A is set out below:
Harvest M inerals Limited Low value Preferred value High value Projec ts Valuation - AM &A $m $m $m Capela Project 1.44 1.60 1.76 Arapua Project 0.59 0.66 0.72
For personal use only use personal For Sergi Project 26.07 28.24 30.42 Total 28.10 30.50 32.90
Source: Independent valuation report by AM&A
21 The table above indicates a range of values for the Company’s interests in the exploration assets of between $28.10 million and $32.90 million, with a preferred value of $30.50 million. There are still a number of contingent payments (to be satisfied by the issue of shares) to be made by the Company on the Capela Project. The remaining payments will only become due and payable if certain milestones are achieved on the project, which are outlined in Section 5 of our Report. We consider that if these milestones are achieved there will be a corresponding increase in the value of the Capela Project and have therefore not reduced the value of the Capela Project, as determined by AM&A, by the fair value of these remaining payments. There are also a number of contingent payments (to be satisfied by the issue of shares) to be made by the Company on the Sergi Project. The majority of the remaining payments will only become due and payable if certain milestones are achieved on the project, which are outlined in Section 5 of our Report. We consider that if these milestones are achieved there will be a corresponding increase in the value of the Sergi Project and have therefore not reduced the value of the Sergi Project, as determined by AM&A, by the fair value of these remaining payments. However, the Company is required to pay $100,000 each year on 31 December 2015 to 2021 to Kmine in consideration for the acquisition of the Sergi Project. These payments are not contingent on any milestones being achieved and therefore we consider that the value of the Sergi Project, as determined by AM&A, should be reduced by $700,000 to reflect these payments still to be made. We have deducted the face value rather than the present value of these payments as the difference is not deemed material to our valuation. Therefore, the value of the range of values for the Company’s interests in the exploration assets is between $27.40 million and $32.20 million, with a preferred value of $29.80 million. Note 3: Trade and other payables Under the Capela Project acquisition agreement, the Company was required to issue shares up to the value of $0.40 million to Kmine prior to 31 December 2014. As at 30 June 2015, the shares have not been issued therefore a liability of $0.40 million was recorded in the statement of financial position. On 10 July 2015, the Company issued 40 million shares (pre Capital Consolidation) to settle this liability. As at 30 June 2015, the Company had accrued $140,000 which related to shortfall application monies from the Rights Issue that had been received prior to the Shares being allocated. These Shares have since been allocated and therefore this liability has been settled. During the period 1 July 2015 to 30 September 2015, the Company has incurred additional trade creditors of approximately $0.40 million relating to corporate advisory fees, legal expenses, accounting fees and other operation expenses. Therefore, we have decreased trade and other payables to $0.56 million, as shown in the below table.
Trade and other payables $ Trade and other payables as at 30 June 2015 701,182 Issue of shares under the Capela Project acquisition agreement (400,000) Issue of shortfall shares under the Rights Issue (140,000)
For personal use only use personal For Additional trade c reditors inc urred 400,000 Trade and other payables as at date of Report 561,182
22 Note 4: Shares on issue The number of shares on issue as at the date of this Report is 50,267,167. This incorporates the additional 4 million shares issued under the Capela Project acquisition agreement, all shortfall shares issued under the Rights Issue and an additional 6 million shares issued on 9 October 2015 as part consideration for the acquisition of the Sergi Project. On 18 November 2015, the Company issued an additional 6 million shares as part consideration for the acquisition of the Sergi Project and is seeking approval for the issue of an additional 6 million shares. The Company will also complete the Tranche 1 Placement prior to seeking Shareholder approval for the Tranche 2 Placement. These movements are shown in the below table.
Number of shares Number Shares on issue as at date of Report 50,267,167 Issue of additional shares to acquire Sergi Project (issued on 18-Nov-15) 6,000,000 Issue of shares to acquire Sergi Project (to be issued) 6,000,000 Completion of Tranche 1 Placement 26,082,000 Number of shares on issue following the Tranche 1 Placement 88,349,167
10.2 Quoted Market Prices for HMI securities
To provide a comparison to the valuation of HMI in Section 10.1, we have also assessed the quoted market price for a HMI share. The quoted market value of a company’s shares is reflective of a minority interest. A minority interest is an interest in a company that is not significant enough for the holder to have an individual influence in the operations and value of that company. RG 111.11 suggests that when considering the value of a company’s shares for the purposes of approval under Item 7 of Section 611 of the Act the expert should consider a premium for control. An acquirer could be expected to pay a premium for control due to the advantages they will receive should they obtain 100% control of another company. These advantages include the following: x control over decision making and strategic direction; x access to underlying cash flows; x control over dividend policies; and x access to potential tax losses. Whilst Edwards Family Holdings will not be obtaining 100% of HMI, RG 111 states that the expert should calculate the value of a target’s shares as if 100% control were being obtained. RG 111.13 states that the expert can then consider an acquirer’s practical level of control when considering reasonableness. Reasonableness has been considered in Section 13 of this Report. Therefore, our calculation of the quoted market price of a HMI share including a premium for control has been prepared in two parts. The first part is to calculate the quoted market price on a minority interest basis. The second part is to add a premium for control to the minority interest value to arrive at a quoted
market price value that includes a premium for control. For personal use only use personal For Minority interest value Our analysis of the quoted market price of a HMI share is based on the pricing prior to the announcement of the Placement. This is because the value of a HMI share after the announcement may include the effects of any change in value as a result of the Placement. However, we have considered the value of a
23 HMI share following the announcement when we have considered reasonableness in Section 13 of this Report. Information on the Placement was first announced to the market on 12 November 2015. The graph below shows HMI’s historical closing share price and volumes traded over the 12 months to 11 November 2015, as this was the last trading day prior to the announcement.
HMI share price and trading volume history 0.030 14.0
0.025 12.0 ) s ) n $ o ( 10.0 i l l e
0.020 i c i m r 8.0 ( P
0.015 e e m r 6.0 a u l h o S 0.010 4.0 V
0.005 2.0
0.000 -
Volume Closing share price
Source: Bloomberg and BDO analysis The daily price of HMI shares from 17 November 2014 to 11 November 2015 has ranged from a low of $0.006 on 22 December 2014 to a high of $0.032 on 23 July 2014. During the period May 2015 to July 2015, HMI’s share price has displayed significant growth, reaching its high of $0.032. Shortly thereafter the share price experienced a decline but has since stabilised between $0.015 and $0.020. The most significant trading volumes were experienced during August and September 2015, with the most significant trading volume, prior to the announcement of the Placing, experienced on 9 September 2015 where 13,133,159 shares were traded. During the period up until the announcement of the Placement a number of price sensitive announcements were made to the market. The key announcements are set out below.
Closing Share Price Closing Share Price Following Three Days After Date Announcement Announcement Announcement
$ (movement) $ (movement) For personal use only use personal For 06/10/2015 Quarterly Cashflow Report 0.016 5.9% 0.016 0.0% 06/10/2015 Quarterly Activities Report 0.016 5.9% 0.016 0.0% 03/09/2015 New K20 Discovery at Arapua Project 0.020 11.1% 0.019 5.0%
24 23/07/2015 Reinstatement to Official Quotation 0.025 13.6% 0.021 16.0% Inferred Mineral Resource Estimate - Sergi Potash 23/07/2015 0.025 13.6% 0.021 16.0% Project 21/07/2015 Suspension from official quotation 0.022 0.0% 0.022 0.0% 16/07/2015 Trading Halt 0.022 10.0% 0.022 0.0% 13/07/2015 Quarterly Cashflow Report 0.013 8.3% 0.022 69.2% 13/07/2015 Quarterly Activities Report 0.013 8.3% 0.022 69.2% 13/07/2015 Tin Asset Divestment 0.013 8.3% 0.022 69.2% 12/06/2015 Supplementary Prospectus 0.012 0.0% 0.012 0.0% 29/05/2015 Entitlement Issue Prospectus 0.012 9% 0.011 8% 27/05/2015 Capital Raising and Update on Corporate Intentions 0.011 22% 0.009 18% 28/04/2015 Quarterly Cashflow Report 0.010 0% 0.010 0% 28/04/2015 Quarterly Activities Report 0.010 0% 0.010 0% 20/04/2015 Harvest Minerals Acquires Sergi Potash Project 0.010 0% 0.010 0% 02/02/2015 Arapua Fertilizer Project Update 0.011 0% 0.010 9% 30/01/2015 Quarterly Cashflow Report 0.011 0% 0.010 9% 30/01/2015 Quarterly Activities Report 0.011 0% 0.010 9% 23/12/2014 Significant Advances on Brazilian Fertilizer Projects 0.008 33% 0.008 0%
Source: Bloomberg and BDO analysis On 23 December 2014, the Company announced its preliminary results surrounding geological mapping and metallurgical test work performed on its Capela and Arapua Projects. The results included favourable
grades of P2O5 and K2O in lithologies covering approximately 55% of the Arapua tenements, as well as the Company obtaining quotes for its drilling programme. HMI’s share price rose by 33% to $0.008 on the day of the release with no subsequent price movement over the following three days. HMI announced its acquisition of the Sergi Project on 20 April 2015. The announcement listed the key geological attributes of the Sergi Project, as well as the work that had been completed previously on the tenements. Key to the attractiveness of the Sergi Project was its proximity to Brazil’s only producing potash mine. Despite the price sensitive nature of this announcement, there was no price changes in the Company’s share price. On 13 July 2015, HMI announced it had divested its Mata Azul Tin Project, as well as releasing the Company’s Quarterly Activities and Cashflow Report. HMI terminated its agreements with the vendor of the Mata Azul Tin Project, relinquishing the Company from any further obligations surrounding the Project. The Activities Report included the Company’s decision to list on AIM, as well as reporting on HMI’s capital raising initiatives during the period. On an operational level, HMI outlined it had contracted Coffey in Brazil to prepare an independent technical report on the Sergi Project and that the Company had been conducting an auger drill programme at the Arapua Project. The share price initially rose to $0.013 per share, an increase of 8.3%, it then proceeded to increase a further 69.2% over the subsequent three days
For personal use only use personal For to $0.022 per share. On 21 July 2015, the Company was suspended from official quotation and subsequently reinstated on 23 July 2015 upon the announcement of a JORC compliant inferred mineral resource of 62 million tonnes of Sylvinite at a grading of 25% KCl. Coffey completed their independent technical report, establishing the
25 JORC compliant inferred resource for HMI. On the day of the announcement, the share price increased by 13.6% to $0.025 per share, and over the following three days it fell by 16% to $0.021 per share. The Company released its September Quarterly Activities Report on 6 October 2015. This highlighted the Company finding a JORC compliant resource, its discoveries at the Arapua Project, the completion of an unmarketable sale process, the divestment of the Mata Azul Tin Project and its successful admission to AIM. The share price fell by 5.9% on the day of the announcement, with no further price movements over the next three days. To provide further analysis of the market prices for a HMI share, we have also considered the weighted average market price for 10, 30, 60 and 90 day periods up until to 11 November 2015.
Share Price 11-Nov-15 10 Days 30 Days 60 Days 90 Days Closing price $0.018 Volume weighted average price (VWAP) $0.018 $0.018 $0.019 $0.021 Source: Bloomberg and BDO analysis The above weighted average prices are prior to the date of the announcement of the Transaction, to avoid the influence of any increase in price of HMI shares that has occurred since the Transaction was announced. An analysis of the volume of trading in HMI shares for the 90 trading days to 11 November 2015 is set out below:
Share price Share price Cumulative volume As a % of Trading days low high traded Issued capital 1 Day $0.016 $0.018 1,500,000 0.30% 10 Days $0.016 $0.020 7,245,125 1.44% 30 Days $0.015 $0.021 11,165,811 2.22% 60 Days $0.013 $0.022 37,299,985 7.42% 90 Days $0.012 $0.032 81,225,565 16.16% Source: Bloomberg and BDO analysis This table indicates that HMI’s shares display a moderate to high level of liquidity, with 16.16% of the Company’s current issued capital being traded in a 90 trading day period prior to the announcement of the Placement. For the quoted market price methodology to be reliable there needs to be a ‘deep’ market in the shares. RG 111.69 indicates that a ‘deep’ market should reflect a liquid and active market. We consider the following characteristics to be representative of a deep market: x Regular trading in a company’s securities; x Approximately 1% of a company’s securities are traded on a weekly basis; x The spread of a company’s shares must not be so great that a single minority trade can significantly affect the market capitalisation of a company; and x There are no significant but unexplained movements in share price.
For personal use only use personal For A company’s shares should meet all of the above criteria to be considered ‘deep’, however, failure of a company’s securities to exhibit all of the above characteristics does not necessarily mean that the value of its shares cannot be considered relevant.
26 In the case of HMI, 16.16% of the average issued capital was traded in the 90 trading day period prior to the announcement of the Placement, which we consider to be representative of a moderate to deep market for the shares. However, there were also a number of unexplained price movements and volumes of shares traded over this period with the share price trading between a low of $0.012 and a high of $0.032. We consider the trading price of the Company’s shares to be relevant in our assessment of the value of a HMI share. Our assessment of a HMI share based on market pricing, after disregarding trading following the announcement of the Placement on 11 November 2015, is between $0.016 and $0.020 (pre Capital Consolidation). Trading Activity on AIM The Company listed on the AIM stock exchange on 7 September 2015, therefore we have analysed its trading activity up to 11 November 2015.
HMI share price and trading volume history 0.014 10.0 9.0
0.012 ) s
) 8.0 n £ o ( 0.010 7.0 i l e l i c 6.0 i 0.008 m r (
P 5.0 e
e 0.006
r 4.0 m a u l h 0.004 3.0 o S
2.0 V 0.002 1.0 0.000 -
Volume Closing share price
Source: Bloomberg and BDO analysis The daily price of HMI shares from 7 September 2015 to 11 November 2015 has ranged from a low of £0.0077 on 16 October 2015 to a high of £0.0138 on 8 September 2015. The price has been reasonably stable over the 47 days it has traded on AIM. There was increased trading volume on the day it listed, as well as during October. The most significant trading volume was experienced on 8 September 2015 with 9,390,429 shares being traded. To provide further analysis of the AIM market prices for a HMI share, we have also considered the weighted average market price for 10 and 30 day periods to 11 November 2015.
Share Price 11-Nov-15 10 Days 30 Days For personal use only use personal For Closing price £0.008 Volume weighted average price (VWAP) £0.009 £0.009 Source: Bloomberg and BDO analysis
27 The above weighted average prices are prior to the date of the announcement of the Placing, to avoid the influence of any increase in price of HMI shares that has occurred since the Transaction was announced. An analysis of the volume of trading in HMI shares for the thirty days to 11 November 2015 is set out below:
Share price Share price Cumulative volume As a % of Trading days low high traded Issued capital 1 Day £0.008 £0.009 156,813 0.03% 10 Days £0.008 £0.010 6,854,749 1.36% 30 Days £0.008 £0.010 26,759,676 5.32% Source: Bloomberg and BDO analysis Trading activity on AIM has been higher than trading activity on the ASX with 5.32% of issued capital being traded on AIM in the 30 days to 11 November 2015. It is likely that the Company has attracted this increased trading activity due to performing recent capital raisings in the United Kingdom and because of the initial attention which may surround a newly listed company on AIM. We consider that it is too early to ascertain whether there is a deep market for HMI shares on AIM, as such the market price for a HMI share will be considered as a secondary approach in our valuation. Control Premium We have reviewed the control premiums paid by acquirers of companies listed on the ASX. We have summarised our findings below:
Year Number of Transactions Average Deal Value (A$m) Average Control Premium (%) 2015 12 1408.37 28.28 2014 41 467.79 31.68 2013 40 190.88 46.72 2012 54 327.08 38.48 2011 67 766.18 48.45 2010 69 741.25 37.60 2009 63 324.62 46.53 2008 42 744.89 39.04
Mean 621.38 39.60 Median 604.52 38.76 Source: Bloomberg and BDO analysis The mean and median figures above are calculated based on the average deal value and control premium for each respective year. To ensure our data is not skewed we have also calculated the mean and median of the entire data set comprising control transactions from 2008 onwards, as set out below.
Entire Data Set Metrics Average Deal Value (ASm) Average Control Premium (%) For personal use only use personal For Mean 557.20 41.23 Median 73.07 34.16 Source: Bloomberg and BDO Analysis
28 In arriving at an appropriate control premium to apply we note that observed control premiums can vary due to the: x Nature and magnitude of non-operating assets; x Nature and magnitude of discretionary expenses; x Perceived quality of existing management; x Nature and magnitude of business opportunities not currently being exploited; x Ability to integrate the acquiree into the acquirer’s business; x Level of pre-announcement speculation of the transaction; x Level of liquidity in the trade of the acquiree’s securities. The table above indicates the long term average control premiums paid by acquirers of all companies on the ASX is approximately 41.23%. In assessing the sample of transactions that were included in the table, we’ve noted transactions within the list which appear to be extreme outliers. These outliers include 29 transactions where the announced control premium was in excess of 100% and 45 transactions where the acquirer obtained a controlling interest at a discount (i.e. less than 0%). In a sample where there are extreme outliers, the median often represents a superior measure of central tendency compared to the mean. We note that the median announced control premium over the review period was 34.16%. In the case of HMI, the current market capitalisation is considerably smaller than a number of the sample companies determined above, we note that larger transactions tended to have higher control premium. We have taken into account this factor as well as the nature of the Tranche 2 Placement in determining that an appropriate control premium to apply to our valuation is between 20% and 30%. Quoted market price including control premium Applying a control premium to HMI’s quoted market share price results in the following quoted market price value including a premium for control:
Low ($) Midpoint ($) High ($)
Quoted market price (pre Capital Consolidation) 0.016 0.018 0.020
Quoted market price (post Capital Consolidation) 0.160 0.180 0.200
Control premium 20% 25% 30%
Quoted market price valuation including a premium for control 0.192 0.225 0.260
Source: BDO analysis Therefore, our valuation of a HMI share based on the quoted market price method and including a
premium for control is between $0.192 and $0.260. For personal use only use personal For
29 10.3 Assessment of HMI value prior to the Tranche 2 Placement
The results of the valuations performed are summarised in the table below:
Low Preferred High $ $ $
NAV methodology (Section 10.1) 0.359 0.386 0.413
QMP methodology (Section 10.2) 0.192 0.225 0.260
Source: BDO analysis Our valuation of a HMI share under the QMP methodology (including a premium for control) is lower than our valuation under the NAV methodology in our low, preferred and high scenarios. In our assessment of the value of a HMI share prior to the Tranche 2 Placement we have taken into consideration the following items: x Our NAV methodology includes an independent market valuation of HMI’s exploration assets performed by AM&A. AM&A has relied on a combination of valuation methods which reflect the potential value of the exploration assets; x Our share price analysis in section 10.2 indicates that there appears to be a moderate to deep market for the Company’s shares with 16.16% of the average issued capital traded on the ASX in the 90 trading days prior to the announcement of the Placement. However, there were also a number of unexplained price movements and volumes of shares traded over this period with the share price trading between a low of $0.012 and a high of $0.032 over the 90 trading day period; and x We consider that the NAV methodology incorporates the full analysis and independent valuation of HMI’s exploration assets which may not have been appreciated by the market and therefore not reflected under the QMP method. For the reasons described above, we conclude that the value obtained under the NAV approach is more reflective of the value of a HMI share prior to the Tranche 2 Placement. Therefore, we consider the value
of a HMI share to be between $0.359 and $0.413, with a preferred value of $0.386. For personal use only use personal For
30 11. Valuation of HMI following the Tranche 2 Placement
We have employed the sum-of-parts valuation method in estimating the fair market value of HMI following the Tranche 2 Placement as shown below.
Low value Preferred value High value Notes $ $ $ NAV of HMI prior to the Tranche 2 Placement 10.1 31,705,108 34,105,108 36,505,108 Adjustments: Net cash raised from the Tranche 2 Placement* 1 860,798 860,798 860,798 Net cash raised from exercise of Placement Options* 2 2,076,668 2,076,668 2,076,668 NAV of HMI following the Tranche 2 Placement (control basis) 34,642,574 37,042,574 39,442,574 Discount for minority interest 3 23% 20% 17% NAV of HMI following the Tranche 2 Placement (minority interest basis) 26,674,781.80 29,634,059 32,737,336 Number of shares on issue post the Tranche 2 Placement 4 105,011,667 105,011,667 105,011,667 Value of a HMI share following the Tranche 2 Placement (minority interest basis) 0.254 0.282 0.312 *Amount converted at an exchange rate of $A1:£0.467
Source: BDO analysis Based on the above, we consider the value of a share in HMI following the Tranche 2 Placement on a minority interest basis to be between $0.254 and $0.312, with a preferred value of $0.282. We note the following in relation to the sum-of-parts valuation above:
Note 1: Cash raised under the Tranche 2 Placement The Company will complete the Tranche 2 Placement (5,642,000 Shares at a price of 7.5 pence per Share) to raise approximately £0.42 million (A$0.91 million). Expenses of the Tranche 2 Placement total approximately £0.02 million (A$0.04 million).
Note 2: Cash raised from exercise of Edwards Family Holdings Placement Options Following completion of the Tranche 1 and Tranche 2 Placements, Edwards Family Holdings will hold a total of 11,020,500 Placement Options. Each Placement Option is exercisable at 8.8 pence at any time before 31 May 2017. If only Edwards Family Holdings 11,020,500 Placement Options are exercised the Company would receive approximately £0.97 million (A$2.08 million) in cash.
Note 3: Minority Discount The net asset value of a HMI share following the Tranche 2 Placement is reflective of a controlling interest. This suggests that the acquirer obtains an interest in the company which allows them to have an individual influence in the operations and value of the company. Therefore, if the Tranche 2 Placement is approved, Shareholders may become minority interest shareholders in HMI as Edwards Family Holdings could hold a controlling interest, meaning that Shareholders’ individual holding will not be considered significant enough to have an individual influence in the operations and value of the Company.
For personal use only use personal For Therefore, we have adjusted our valuation of a HMI share following the Tranche 2 Placement to reflect a minority interest holding. A minority interest discount is the inverse of a premium for control and is calculated using the formula 1 – [1 / (1+control premium)]. As discussed in Section 10.2, we consider an
31 appropriate control premium for HMI to be in the range of 20% to 30%, giving rise to a minority interest discount in the range of approximately 17% to 23%.
Note 4: Number of Shares The number of shares on issue following the Tranche 2 Placement is shown below:
Number of shares Number Number of shares on issue prior to the Tranche 2 Placement 88,349,167 Completion of Tranche 2 Placement 5,642,000 Exercise of Placement Options 11,020,500 Number of shares on issue following the Tranche 2 Placement 105,011,667
Source: BDO analysis
12. Is the Tranche 2 Placement fair?
The value of a HMI share prior to the Tranche 2 Placement on a control basis compares to the value of a HMI share following the Tranche 2 Placement on a minority basis, as detailed below.
Low Preferred High
$ $ $
Value of a HMI share prior to the Tranche 2 Placement on a control basis 0.359 0.386 0.413
Value of a HMI share following the Tranche 2 Placement on a minority basis 0.254 0.282 0.312
Source: BDO analysis The above valuation ranges are graphically represented below:
Value of a HMI share prior to the Tranche 2 Placement on a control basis
Value of a HMI share following the Tranche 2 Placement on a minority basis
0.020 0.120 0.220 0.320 0.420 Value ($)
Source: BDO analysis The above pricing indicates that the range of values of a HMI share following the Tranche 2 Placement on a minority basis are less than the range of values of a HMI share prior to the Tranche 2 Placement on a
For personal use only use personal For control basis. In the absence of any other relevant information, the Tranche 2 Placement is not fair for Shareholders.
32 13. Is the Tranche 2 Placement reasonable?
13.1 Advantages of approving the Tranche 2 Placement We have considered the following advantages when assessing whether the Tranche 2 Placement is reasonable.
13.1.1.Minority interest values significantly overlap In assessing the fairness of the Tranche 2 Placement in section 12, RG 111.31 stipulates that in a control transaction a comparison should be made between the value of the target entity’s securities prior to the transaction on a controlling basis and the value of the target entity’s securities following the transaction allowing for a minority discount. It is relevant for Shareholders to appreciate that as Shareholders hold a minority interest in HMI prior to the Tranche 2 Placement and they will retain a minority interest following the Tranche 2 Placement. Here, we have also provided a comparison of the value of a HMI share prior to the Tranche 2 Placement and following the Tranche 2 Placement on a minority interest basis. This comparison is outlined in the table below.
Low Preferred High
$ $ $
Value of a HMI share prior to the Tranche 2 Placement on a minority basis 0.276 0.309 0.343
Value of a HMI share following Tranche 2 Placement on a minority basis 0.254 0.282 0.312
The above valuation ranges are graphically presented below:
Value of a HMI share prior to the Tranche 2 Placement on a minority basis
Value of a HMI share following the Tranche 2 Placement on a minority basis
0.020 0.120 0.220 0.320 0.420
The tables above indicate that the range of values of a share in HMI following the issue of Tranche 2 Placement on a minority interest basis is similar to the range of values of a share in HMI on a minority interest basis prior to the Tranche 2 Placement.
13.1.2.The Tranche 2 Placement provides the Company with an additional cash injection By approving the Tranche 2 Placement, HMI will receive an additional £0.42 million (A$0.91 million), before expenses, from Edwards Family Holdings for expansion of their exploration assets, particularly the For personal use only use personal For Arapua Project. Further to this HMI will receive additional funds upon the exercise of any Placement Options issued to Edwards Family Holdings, being £0.97 million (A$2.08 million). In addition to the expenses of the Placement, the Company has outlined the use of funds as follows: - Exploration of the Arapua Project;
33 - Consideration for other opportunities in Brazil; and - Working capital of the Company.
13.1.3.Guaranteed funding at a superior price to most recent capital raising On 29 May 2015, HMI announced a Rights Issue at an issue price of $0.01 per share ($0.10 post Capital Consolidation). Of the 55.4 million shares offered under the Rights Issue, existing shareholders only took up 15.8 million shares. Although the remaining shortfall shares were eventually placed by the underwriter there was still a significant number of existing shareholders who elected not to take up their entitlement at $0.10 per share. The issue price of the Tranche 2 Placement is 7.5 pence (A$0.16) per share which is at an issue price greater than the Rights Issue that was offered to existing shareholders in May 2015.
13.1.4.Support from a strategic investor As at the date of our Report, Edwards Family Holdings does not currently hold any shares in HMI. Edwards Family Holdings interest in the issued capital of HMI will increase to 18.56% following the Tranche 1 Placement and up to 23.45% following the Tranche 2 Placement. This may increase to a maximum of 31.48%, following the exercise of all Placement Options held by Edwards Family Holdings, assuming no other shares are issued or options exercised. The presence of a major shareholder, such as Edwards Family Holdings, may also increase the Company’s ability to raise additional funds that may be required in the future to fund the Company’s longer term development strategy of its exploration assets.
13.1.5.No changes to current operating arrangements We are not aware of any operational changes that Edwards Family Holdings wishes to introduce if the issue of the Tranche 2 Placement is approved. The Company understands that Edwards Family Holdings: i. has no present intention of making any significant changes to the business of the Company; ii. has no present intention to inject further capital into the Company; iii. has no present intention of making changes regarding the future employment of the present employees of the Company; iv. does not intend to redeploy any fixed assets of the Company; v. does not intend to transfer any property between the Company and Edwards Family Holdings or any of its associates; and vi. has no intention to change the Company’s existing policies in relation to financial matters or dividends. There will also be no changes to the current HMI board of directors.
For personal use only use personal For 13.1.6.Exercise price of Placement Options Under the Tranche 1 Placement a total of 13,041,000 Placement Options will be issued and under the Tranche 2 Placement a total of 2,821,000 Placement Options will be issued. Each Placement Options is exercisable at 8.8 pence (A$0.19) at any time before 31 May 2017.
34 Edwards Family Holdings will hold a total of 11,020,500 Placement Options following the completion of the Tranche 2 Placement. The exercise price of A$0.19 is greater than the closing price on the ASX on the last full trading day prior to the announcement of the Placement (A$0.18) and greater than the Rights Issue price of $0.10 per share undertaken in May 2015. If all Edwards Family Holdings Placement Options are exercised, the Company will receive cash of approximately £0.97 million (A$2.08 million).
13.2 Disadvantages of Approving the Tranche 2 Placement If the Tranche 2 Placement is approved, in our opinion, the potential disadvantages to Shareholders include those listed below:
13.2.1.The Tranche 2 Placement is not fair As set out in section 12, the Tranche 2 Placement is not fair. RG 111 states that a transaction is reasonable if it is fair – in this case it is not fair.
13.2.2.Dilution of existing Shareholders’ interests Edwards Family Holdings does not currently hold any shares in HMI. Following the issue of the Tranche 1 Placement, existing Shareholders (excluding new Placement Shareholders) will be diluted from holding 100% of the issued capital of HMI to holding 70.48%. Following the Tranche 2 Placement, existing Shareholders (excluding new Placement Shareholders) will be further diluted to holding of 66.25% of the issued capital of HMI. Shareholders’ existing interest may be further diluted to 59.30% if only Edwards Family Holdings exercises its Placement Options. This will dilute Shareholders’ interests and their level of collective influence on the operations of the Company in the future.
13.2.3.Edwards Family Holdings will gain a significant level of control of HMI As outlined in Section 4, the maximum interest that Edwards Family Holdings could obtain is 31.48% (assuming no other shares are issued or options exercised), which will give it a significant level of control over the Company in comparison to existing Shareholders. Although Edwards Family Holdings will not control enough voting power to pass general or special resolutions, it will be able to block special resolutions following the exercise of its Placement Options.
13.3 Other considerations
13.3.1.Alternative offers We are unaware of any alternative proposal that might offer the Shareholders of HMI a premium over the value, resulting from the Tranche 2 Placement.
13.3.2.Practical level of control If the Tranche 2 Placement is approved then Edwards Family Holdings may hold an initial relevant interest
For personal use only use personal For in HMI of 23.45% (prior to the exercise of its Placement Options). When shareholders are required to approve an issue that relates to a company there are two types of approval levels. These are general resolutions and special resolutions. A general resolution requires 50% of shares to be voted in favour to approve a matter and a special resolution required 75% of shares on issue to be voted in favour to approve a matter. If the Tranche 2 Placement is approved, then on an undiluted basis, Edwards Family Holdings
35 will not control enough voting power to block special resolutions, however if Edwards Family Holdings exercises its Placement Options (assuming no other shares are issued or options exercised) its relevant interest will increase up to a maximum of 31.48% and he will have the capacity to block special resolutions. If Shareholders approve the Tranche 2 Placement, there will be no changes to the current HMI board of directors.
13.3.3.Movement in the Company’s share price following the announcement of the Placement We have analysed movements in HMI’s share price on the ASX since the Placement was announced to the market on 12 November 2015. In the short amount of time since the date of the announcement and the date of this Report a total of 320,000 shares have been traded and the closing share price on 25 November 2015 was $0.015 (pre Capital Consolidation). This is a decrease of 16.67% on the closing price of $0.018 (pre Capital Consolidation) on the last day prior to the announcement of the Placement.
14. Conclusion
We have considered the terms of the Tranche 2 Placement as outlined in the body of this report and have concluded that the Tranche 2 Placement is not fair but reasonable to the Shareholders of HMI. We have determined that the Tranche 2 Placement is not fair as the range of values of a HMI share following the Tranche 2 Placement on a minority basis is less than the range of values of a HMI share prior to the Tranche 2 Placement on a control basis. However, we consider the Tranche 2 Placement to be reasonable due to significant advantages that it will bring to the Company.
15. Sources of information
This report has been based on the following information: x Draft Notice of General Meeting and Explanatory Statement on or about the date of this report; x Agreement outlining the terms of the Placement; x Audited financial statements of HMI for the years ended 30 June 2015, 30 June 2014 and 30 June 2013; x Independent Valuation Report of HMI’s exploration assets dated 24 November 2015 performed by Al Maynard and Associates Pty Ltd; x Share registry information of HMI; x Information in the public domain; and x Discussions with Directors and Management of HMI.
16. Independence BDO Corporate Finance (WA) Pty Ltd is entitled to receive a fee of $20,000 (excluding GST and reimbursement of out of pocket expenses). The fee is not contingent on the conclusion, content or future
use of this Report. Except for this fee, BDO Corporate Finance (WA) Pty Ltd has not received and will not For personal use only use personal For receive any pecuniary or other benefit whether direct or indirect in connection with the preparation of this report.
36 BDO Corporate Finance (WA) Pty Ltd has been indemnified by HMI in respect of any claim arising from BDO Corporate Finance (WA) Pty Ltd's reliance on information provided by the Company, including the non- provision of material information, in relation to the preparation of this report. Prior to accepting this engagement BDO Corporate Finance (WA) Pty Ltd has considered its independence with respect to HMI and any of their respective associates with reference to ASIC Regulatory Guide 112 ‘Independence of Experts’. In BDO Corporate Finance (WA) Pty Ltd’s opinion it is independent of HMI and its respective associates. A draft of this report was provided to HMI and its advisors for confirmation of the factual accuracy of its contents. No significant changes were made to this report as a result of this review. BDO is the brand name for the BDO International network and for each of the BDO Member firms. BDO (Australia) Ltd, an Australian company limited by guarantee, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of Independent Member Firms. BDO in Australia, is a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International).
17. Qualifications
BDO Corporate Finance (WA) Pty Ltd has extensive experience in the provision of corporate finance advice, particularly in respect of takeovers, mergers and acquisitions. BDO Corporate Finance (WA) Pty Ltd holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission for giving expert reports pursuant to the Listing rules of the ASX and the Corporations Act. The persons specifically involved in preparing and reviewing this report were Sherif Andrawes and Adam Myers of BDO Corporate Finance (WA) Pty Ltd. They have significant experience in the preparation of independent expert reports, valuations and mergers and acquisitions advice across a wide range of industries in Australia and were supported by other BDO staff. Sherif Andrawes is a Fellow of the Institute of Chartered Accountants in England & Wales and a Member of the Institute of Chartered Accountants in Australia. He has over twenty five years’ experience working in the audit and corporate finance fields with BDO and its predecessor firms in London and Perth. He has been responsible for over 250 public company independent expert’s reports under the Corporations Act or ASX Listing Rules and is a CA BV Specialist. These experts’ reports cover a wide range of industries in Australia with a focus on companies in the natural resources sector. Sherif Andrawes is the Chairman of BDO in Western Australia, Corporate Finance Practice Group Leader of BDO in Western Australia and the Natural Resources Leader for BDO in Australia. Adam Myers is a member of the Australian Institute of Chartered Accountants. Adam’s career spans 18 years in the Audit and Assurance and Corporate Finance areas. Adam has considerable experience in the preparation of independent expert reports and valuations in general for companies in a wide number of
industry sectors. For personal use only use personal For
37 18. Disclaimers and consents
This report has been prepared at the request of HMI for inclusion in the Explanatory Memorandum which will be sent to all HMI Shareholders. HMI engaged BDO Corporate Finance (WA) Pty Ltd to prepare an independent expert's report to consider the proposal for HMI to undertake a private placement of up to 31,724,000 Shares and 15,862,000 Options to raise approximately £2.4 million (A$5.08 million) before expenses. It is understood that one of the investors, Edwards Family Holdings as trustee for the Edwards Family Trust, will subscribe for a total of 22,041,000 Shares and 11,020,500 Options amounting to a maximum relevant interest of 31.48% in HMI. BDO Corporate Finance (WA) Pty Ltd hereby consents to this report accompanying the above Explanatory Memorandum. Apart from such use, neither the whole nor any part of this report, nor any reference thereto may be included in or with, or attached to any document, circular resolution, statement or letter without the prior written consent of BDO Corporate Finance (WA) Pty Ltd. BDO Corporate Finance (WA) Pty Ltd takes no responsibility for the contents of the Explanatory Memorandum other than this report. We have no reason to believe that any of the information or explanations supplied to us are false or that material information has been withheld. It is not the role of BDO Corporate Finance (WA) Pty Ltd acting as an independent expert to perform any due diligence procedures on behalf of the Company. The Directors of the Company are responsible for conducting appropriate due diligence in relation to Edwards Family Holdings. BDO Corporate Finance (WA) Pty Ltd provides no warranty as to the adequacy, effectiveness or completeness of the due diligence process. The opinion of BDO Corporate Finance (WA) Pty Ltd is based on the market, economic and other conditions prevailing at the date of this report. Such conditions can change significantly over short periods of time. With respect to taxation implications it is recommended that individual Shareholders obtain their own taxation advice, in respect of the transaction, tailored to their own particular circumstances. Furthermore, the advice provided in this report does not constitute legal or taxation advice to the Shareholders of HMI, or any other party. BDO Corporate Finance (WA) Pty Ltd has also considered and relied upon an independent valuation of the Company’s exploration assets. The valuer engaged for the independent valuation, Al Maynard & Associates Pty Ltd, possess the appropriate qualification and experience in the industry to make such assessments. The approaches adopted and assumptions made in arriving at the valuation are considered appropriate for this Report. We have received consent from the valuer for the use of the valuation in the preparation of this Report and to append a copy of their report to this report. The statements and opinions included in this report are given in good faith and in the belief that they are not false, misleading or incomplete. The terms of this engagement are such that BDO Corporate Finance (WA) Pty Ltd has no obligation to
update this report for events occurring subsequent to the date of this report. For personal use only use personal For
38 Yours faithfully BDO CORPORATE FINANCE (WA) PTY LTD
Sherif Andrawes Adam Myers
Director Director For personal use only use personal For
39 Appendix 1 – Glossary of Terms
Reference Definition
The Act The Corporations Act 2001 (Cth)
AIM Alternative Investment Market, a market operated by the London Stock Exchange
AM&A Al Maynard & Associates Pty Ltd
APES 225 Accounting Professional & Ethical Standards Board professional standard APES 225 ‘Valuation Services’
Arapua Project Arapua phosphate and potash project
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
BPL Bone Phosphate of Lime
BDO BDO Corporate Finance (WA) Pty Ltd
Capela Project Capela potash project
Capital Consolidation The Company will hold a general meeting at which, among other things, Shareholders will vote on the consolidation of the Company’s capital on a 1 for 10 basis
The Company Harvest Minerals Limited
Corporations Act The Corporations Act 2001 (Cth)
DCF Discounted Future Cash Flows
EBIT Earnings before interest and tax
EBITDA Earnings before interest, tax, depreciation and amortisation
Edwards Family Holdings Edwards Family Holdings Ltd
FME Future Maintainable Earnings
GFC Global Financial Crisis
For personal use only use personal For HMI Harvest Minerals Limited
JORC Code The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves
40 Reference Definition
Kmine Kmine Holdings Limited
Mirabaud Mirabaud Securities LLP
NAV Net Asset Value
Placement Private placement of up to 31,724,000 Shares to raise approximately £2.4 million (A$5.08 million) before expenses at an issue price of 7.5 pence (A$0.16) per Share, together with one free attaching Option for every two Shares subscribed for and issued
Placement Options A total of 15,862,000 options issued under the Placement which are exercisable at 8.8 pence (A$0.19) at any time before 31 May 2017
QMP Quoted market price
RBA Reserve Bank of Australia
Regulations Corporations Act Regulations 2001 (Cth)
Our Report This Independent Expert’s Report prepared by BDO
RG 74 Acquisitions approved by Members (December 2011)
RG 111 Content of expert reports (March 2011)
RG 112 Independence of experts (March 2011)
Rights Issue The non-renounceable entitlement issue undertaken in May 2015 on a 1 for 6 basis at an issue price of $0.01 per share (pre Capital Consolidation)
Section 611 Section 611 of the Corporations Act
Sergi Project Sergi potash project
Shareholders Non-associated shareholders of HMI also not associated with Edwards Family Holdings
Tranche 1 Placement The issue of 26,082,000 Shares and 13,041,000 Options
Tranche 2 Placement The issue of 5,642,000 Shares and 2,821,000 Options
Valmin Code Code of Technical Assessment of Mineral and Petroleum Assets and Securities for
Independent Expert Reports For personal use only use personal For
Valuation Engagement An Engagement or Assignment to perform a Valuation and provide a Valuation Report where the Valuer is free to employ the Valuation Approaches, Valuation Methods, and Valuation Procedures that a reasonable and informed third party would perform taking
41 Reference Definition
into consideration all the specific facts and circumstances of the Engagement or Assignment available to the Valuer at that time.
VWAP Volume Weighted Average Price
Copyright © 2015 BDO Corporate Finance (WA) Pty Ltd
All rights reserved. No part of this publication may be reproduced, published, distributed, displayed, copied or stored for public or private use in any information retrieval system, or transmitted in any form by any mechanical, photographic or electronic process, including electronically or digitally on the Internet or World Wide Web, or over any network, or local area network, without written permission of the author. No part of this publication may be modified, changed or exploited in any way used for derivative work or offered for sale without the express written permission of the author.
For permission requests, write to BDO Corporate Finance (WA) Pty Ltd, at the address below: The Directors BDO Corporate Finance (WA) Pty Ltd 38 Station Street SUBIACO, WA 6008
Australia For personal use only use personal For
42 Appendix 2 – Valuation Methodologies
Methodologies commonly used for valuing assets and businesses are as follows:
1 Net asset value (‘NAV’) Asset based methods estimate the market value of an entity’s securities based on the realisable value of its identifiable net assets. Asset based methods include: x Orderly realisation of assets method x Liquidation of assets method x Net assets on a going concern method The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to entity holders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the entity is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the entity may not be contemplated, these methods in their strictest form may not be appropriate. The net assets on a going concern method estimates the market values of the net assets of an entity but does not take into account any realisation costs. Net assets on a going concern basis are usually appropriate where the majority of assets consist of cash, passive investments or projects with a limited life. All assets and liabilities of the entity are valued at market value under this alternative and this combined market value forms the basis for the entity’s valuation. Often the FME and DCF methodologies are used in valuing assets forming part of the overall Net assets on a going concern basis. This is particularly so for exploration and mining companies where investments are in finite life producing assets or prospective exploration areas. These asset based methods ignore the possibility that the entity’s value could exceed the realisable value of its assets as they do not recognise the value of intangible assets such as management, intellectual property and goodwill. Asset based methods are appropriate when an entity is not making an adequate return on its assets, a significant proportion of the entity’s assets are liquid or for asset holding companies. 2 Quoted Market Price Basis (‘QMP’) A valuation approach that can be used in conjunction with (or as a replacement for) other valuation methods is the quoted market price of listed securities. Where there is a ready market for securities such as the ASX, through which shares are traded, recent prices at which shares are bought and sold can be taken as the market value per share. Such market value includes all factors and influences that impact upon the ASX. The use of ASX pricing is more relevant where a security displays regular high volume trading, creating a ‘deep’ market in that security.
For personal use only use personal For 3 Capitalisation of future maintainable earnings (‘FME’) This method places a value on the business by estimating the likely FME, capitalised at an appropriate rate which reflects business outlook, business risk, investor expectations, future growth prospects and other entity specific factors. This approach relies on the availability and analysis of comparable market data.
43 The FME approach is the most commonly applied valuation technique and is particularly applicable to profitable businesses with relatively steady growth histories and forecasts, regular capital expenditure requirements and non-finite lives. The FME used in the valuation can be based on net profit after tax or alternatives to this such as earnings before interest and tax (‘EBIT’) or earnings before interest, tax, depreciation and amortisation (‘EBITDA’). The capitalisation rate or ‘earnings multiple’ is adjusted to reflect which base is being used for FME. 4 Discounted future cash flows (‘DCF’) The DCF methodology is based on the generally accepted theory that the value of an asset or business depends on its future net cash flows, discounted to their present value at an appropriate discount rate (often called the weighted average cost of capital). This discount rate represents an opportunity cost of capital reflecting the expected rate of return which investors can obtain from investments having equivalent risks. Considerable judgement is required to estimate the future cash flows which must be able to be reliably estimated for a sufficiently long period to make this valuation methodology appropriate. A terminal value for the asset or business is calculated at the end of the future cash flow period and this is also discounted to its present value using the appropriate discount rate. DCF valuations are particularly applicable to businesses with limited lives, experiencing growth, that are in a start-up phase, or experience irregular cash flows. 5 Market Based Assessment The market based approach seeks to arrive at a value for a business by reference to comparable transactions involving the sale of similar businesses. This is based on the premise that companies with similar characteristics, such as operating in similar industries, command similar values. In performing this analysis it is important to acknowledge the differences between the comparable companies being analysed and the company that is being valued and then to reflect these differences in the valuation.
Copyright © 2015 BDO Corporate Finance (WA) Pty Ltd
All rights reserved. No part of this publication may be reproduced, published, distributed, displayed, copied or stored for public For personal use only use personal For
44
Appendix 3 – Independent Valuation Report For personal use only use personal For
45 AL MAYNARD & ASSOCIATES Pty Ltd Consulting Geologists www.geological.com.au ABN 75 120 492 435 9/280 Hay Street, Tel: (+618) 9388 1000 Mob: 04 0304 9449 SUBIACO, WA, 6008 Fax: (+618) 9388 1768 [email protected] Australia Australian & International Exploration & Evaluation of Mineral Properties
INDEPENDENT TECHNICAL VALUATION
OF
HARVEST MINERALS LIMITED
BRAZILIAN PROJECT PORTFOLIO
FOR
BDO CORPORATE FINANCE (WA) PTY LTD
only use personal For Author: Brian J. Varndell, BSc(Spec.Hons.), FAusIMM. Peer Review: Allen J Maynard BAppSc(Geol), MAIG, MAusIMM Company; Al Maynard & Associates Pty Ltd Date: 24th November, 2015 Revised: 7th December, 2015 Valuation of the Harvest Minerals Limited Brazilian Assets
EXECUTIVE SUMMARY
This Independent Technical Valuation Report of the Harvest Minerals Limited (“Harvest”) Brazilian exploration assets has been prepared by Al Maynard & Associates (“AM&A”) at the request of Mr Sherif Andrawes, a Director of BDO Corporate Finance (WA) Pty Ltd (“BDO”) for inclusion with a Notice of Meeting (“NOM”). The NOM will address, and also the BDO Report, a proposed transaction whereby a shareholder will hold an interest in 20% or more of the issued shares of Harvest. The BDO Report will provide an opinion to Harvest shareholders and as such it will be a public document.
The AM&A report has been prepared in accordance with the guidelines of the Valuation of Mineral Assets and Mineral Securities for Independent Expert’s Reports (the “Valmin Code”) (2005) as adopted by the Australian Institute of Geoscientists (“AIG”) and the Australasian Institute of Mining and Metallurgy (“AusIMM”).
Harvest has interests in three projects. Sergio, Arapua and Capela in Brazil that cover a small portion of the potash and phosphate producing areas in eastern Brazil. The Sergio Deposit sits within the Mesozoic marginal basins context in Brazil (Sergiope-Alagoas Basin), related to Upper Jurassic Gondwana breakup. It is an evaporite sequence called Muribeca Formation, composed of anhydrite, halite, taquidrite, carbonates, carnallite and sylvinite. The potash mineralisation consists of two upper sylvinite rich layers and two lower carnallite rich layers, with 25% and 16% KCl average content respectively.
Exploration at the project has identified JORC Code 2012 Inferred Resources at the Sergio Project and all project areas warrant additional investigation with the aim to upgrade their status. Given the relevance of the assumptions and factors underlying the development and conceptual prospectivity for resources of the project, AM&A has concluded that it is reasonable to rely on the data provided for the purposes of this report and the derivation of a current valuation accordingly based on that information. AM&A has relied on the technical data supplied by Harvest and accepted that data in reaching our conclusions.
The summary of the valuation conclusions is presented in Table 9. This current valuation has used a form of the Empirical Method applied to an Exploration Target range that is relevant to the Sergio Project and the MEE method used for the Capela and Arapua Projects.
This Report concludes that the cash value of 100% of the Harvest Brazilian tenement portfolio at 24th November, 2015, is ascribed at $30.5M from within the range $28.1M to $32.9M.
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Harvest Minerals Limited Independent Technical Valuation Report – AM&A Executive Summary 1 Valuation of the Harvest Minerals Limited Brazilian Assets
Figure 1: Harvest Minerals Brazilian Projects - Location Map.
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Harvest Minerals Limited Independent Technical Valuation Report – AM&A Executive Summary 2 Valuation of the Harvest Minerals Limited Brazilian Assets
CONTENTS PAGE
1.0 Introduction 1 1.1 Scope and Limitations ...... 1 1.2 Statement of Competence ...... 2 2.0 Valuation of the Mineral Assets – Methods and Guides 2 2.1 General Valuation Methods ...... 2 2.2 Discounted Cash Flow/Net Present Value ...... 3 2.3 Joint Venture Terms ...... 3 2.4 Similar or Comparable Transactions ...... 3 2.5 Multiple of Exploration Expenditure ...... 3 2.6 Ratings System of Prospectivity (Kilburn) ...... 4 2.7 Empirical Methods (Yardstick – Real Estate) ...... 4 2.8 General Comments ...... 4 2.9 Environmental implications ...... 4 2.10 Indigenous Title Claims ...... 4 2.11 Commodities-Metal prices ...... 4 2.12 Resource/Reserve Summary ...... 4 2.13 Previous Valuations ...... 5 2.14 Encumbrances/Royalty ...... 5 3.0 Background Information 5 3.1 Introduction ...... 5 3.2 Specific Valuation Methods ...... 5 3.3 Tenement Holdings ...... 5 3.4 Brazilian Land Tenure and Property Title Explanation ...... 6 4.0 Sergio and Capela Projects 8 4.1 Introduction ...... 8 4.2 Location and Access ...... 9 4.3 Regional Geological Setting...... 9 4.4 Local Geological Setting...... 13 4.5 Mineralisation ...... 15 4.6 Previous Exploration ...... 16 4.7 Recent Development ...... 17 4.8 Resources and Exploration Potential ...... 19 5.0 Arapua Project 24 5.1 Introduction ...... 24 5.2 Location and Access ...... 24 5.3 Regional Geological Setting...... 26 5.4 Local Geology ...... 29 5.5 Exploration History ...... 32 5.6 Mineralisation ...... 33 5.7 Exploration Potential ...... 36 6.0 Valuation of the Projects 37 6.1 Selection of Valuation Methods ...... 37 6.2 Valuation – Empirical and MEE Methods ...... 37 6.3 Valuation Conclusions ...... 37 7.0 References 38 8.0 Glossary of Technical Terms and Abbreviations 39 Appendix 1: Details of Valuation Estimates. 41
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Harvest Minerals Limited Independent Technical Valuation Report – AM&A Contents i Valuation of the Harvest Minerals Limited Brazilian Assets
List of Figures Figure 1: Harvest Minerals Brazilian Projects - Location Map...... 2 Figure 2: Modified Stratigraphic Column for the Sergiope Basin (Santos & Souza, 2001)...... 11 Figure 3: Generalised Section of the Sergiope Basin (modified after Santos & Souza, 2001)...... 12 Figure 4: Reconstructed Regional Structure of the Sergiope Basin...... 13 Figure 5: Mineralisation of the Ibura-Member in the Northern Basin of the Project Area...... 14 Figure 6: Paleo-geographic Reconstruction of Sergiope Basin...... 15 Figure 7: Sergio Project 2012 Drillholes...... 20 Figure 8: Isopach Map for Ibura Member Thickness with Sergio Project Outline...... 21 Figure 9: Inferred JORC Category Area from Seven Available Drillholes...... 22 Figure 10: Arapua Project Location map...... 25 Figure 11: Arapua Tenements on Google Image………………………………………………………… 26 Figure 12: Arapua Project, Geologic Setting……………………………………………………………… 27 Figure 13: Lithostratigraphic Setting, Mota da Corda Formation……………………………………….. 28 Figure 14: Arapua Stratigraphy……………………………………………………………………………. 29 Figure 15 Contact between Capacete and Kamafugite, Arapua Concession………………………….31 Figure 16: P2O5-K mineralisation in Kamafugite and Carbonate Breccia………………………………31 Figure 17: Arapua Deposit Target Areas...... 34 Figure 18: Bedrock Geochemical sampling conducted at the Arapue Concessions...... 35 Figure 19: Arapua Auger Niton XRF Phosphate Results...... 36
List of Tables
Table 1: Typical PEM Factors...... 3 Table 2: Harvest Brazilian Tenement Holdings...... 6 Table 3: Drill Holes with Potential Potash Mineralisation...... 19 Table 4: Sergio Project Complete Drillhole Data...... 22 Table 5: Sergio Project Drillhole assays...... 23 Table 6: Sergio Deposits Summary of Resources by Status...... 24 Table 7: Sergio Deposit - Mineral Resource Statement at Effective Date 10 June 2015...... 24 Table 8: Summary Range of Current Values...... 37
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Harvest Minerals Limited Independent Technical Valuation Report – AM&A Contents ii Valuation of the Harvest Minerals Limited Brazilian Assets
The Directors 7th December, 2015 BDO Corporate Finance Pty Ltd, 38 Station Street, Subiaco, WA, 6008 Dear Sirs, VALUATION OF HARVEST MINERALS LIMITED BRALIAN EXPLORATION ASSETS
1.0 Introduction This Independent Technical Valuation Report of the Harvest Minerals Limited (“Harvest”) Brazilian exploration assets has been prepared by Al Maynard & Associates (“AM&A”) at the request of Mr Sherif Andrawes, a Director of BDO Corporate Finance (WA) Pty Ltd (“BDO”) for inclusion with a Notice of Meeting (“NOM”). The NOM will address, and also the BDO Report, a proposed transaction whereby a shareholder will hold an interest in 20% or more of the issued shares of Harvest. The BDO Report will provide an opinion to Harvest shareholders and as such it will be a public document.
This report has been prepared in accordance with the guidelines of the Valuation of Mineral Assets and Mineral Securities for Independent Expert’s Reports (the “Valmin Code”) (2005) as adopted by the Australian Institute of Geoscientists (“AIG”) and the Australasian Institute of Mining and Metallurgy (“AusIMM”). The assets valued in this report are the tenements in Brazil.
1.1 Scope and Limitations This Report has been prepared in accordance with the requirements of the Valuation of Mineral Assets and Mineral Securities for Independent Expert’s Reports (the “Valmin Code”- 2005) as adopted by the Australian Institute of Geoscientists (“AIG”) and the Australasian Institute of Mining and Metallurgy (“AusIMM”).
This Report is valid as of 7th December, 2015 which is the date of the latest review of the data and technical information and there have been no material changes to this data or valuation since that date. The valuation can be expected to change over time having regard to political, economic, market and legal factors. The valuation can also vary due to the success or otherwise of any mineral exploration that is conducted either on the mineral assets concerned or by other explorers on prospects in the near environs. The valuation could also possibly be affected by the consideration of other exploration data from adjacent licences with production history affecting the mineral assets which have not been made available to the writer.
In order to form an opinion as to the value of any mineral asset, it is necessary to make assumptions as to certain future events, which might include economic and political factors and the likelihood of exploration success. The writer has taken all reasonable care in formulating these assumptions to ensure that they are appropriate to the case. These assumptions are based on the writers’ technical training and 40 years’ experience in the exploration and mining industry. Whilst the opinions expressed represent the writers’ professional opinion at the time of this Report, these opinions are not however, forecasts as it is never possible to predict accurately the many variable factors that need to be considered in forming an opinion as to the value of any mineral asset.
Theonly use personal For information presented in this Report is based on technical reports provided by Harvest supplemented by our own inquiries as to the reasonableness of the supplied data. At the request of AM&A, copies of relevant technical reports and agreements were readily made available. There is also information available in the public domain and relevant references are listed in Section 6.0 –References. No site visit was undertaken since A. J. Maynard is familiar with the terrane from earlier visits to Brazil.
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 1 Valuation of the Harvest Minerals Limited Brazilian Assets
Harvest will be invoiced and expected to pay a fee, estimated to be from $8,500 to $10,000 for the preparation of this Report. This fee comprises a normal, commercial daily rate plus expenses. Payment is not contingent on the results of this report. Except for these fees, neither the writer nor any family members nor Associates have any interest, nor the rights to neither any interest in Harvest nor any interest in the mineral assets reported upon. Harvest has confirmed in writing that all technical data known it was made available to the writer.
The valuation presented in this Report is restricted to a statement of the fair value of the mineral asset package. The Valmin Code defines fair value as “The estimated amount of money, or the cash equivalent of some other consideration, for which, in the opinion of the Expert reached in accordance with the provisions of the Valmin Code, the mineral asset or security shall change hands on the Valuation date between a willing buyer and a willing seller in an arms’ length transaction, wherein each party had acted knowledgeably, prudently and without compulsion”.
It should be noted that in all cases, the fair valuation of the mineral assets presented is analogous with the concept of “valuation in use” commonly applied to other commercial valuations. This concept holds that the assets have a particular value only in the context of the usual business of the company as a going concern. This value will invariably be significantly higher than the disposal value, where, there is not a willing seller. Disposal values for mineral assets may be a small fraction of going concern values.
In accordance with the Valmin Code, we have prepared the “Range of Values” as shown in Table 9, section 6.3. Regarding the Project it is considered that sufficient geotechnical data has been provided from the reports covering the previous exploration of the relevant area to enable an understanding of the geology. This provides adequate information to form an informed opinion as to the current value of the mineral assets. A site visit was not undertaken since the authors are familiar with the project areas from many field trips over previous years for other clients.
1.2 Statement of Competence This Report has been prepared by Brian J. Varndell BSc (SpecHonsGeol), a Fellow of the Australasian Institute of Mining & Metallurgy (“AusIMM”) (No111022), a geologist with over 40 years in the industry and 35 years in mineral asset valuation. The Peer review was conducted by Allen J. Maynard, the Principal of AM&A and a qualified geologist, a Member of the AusIMM (No 104986) and a Member of the Australian Institute of Geoscientists (“AIG” #2062). He has had over 35 years of continuous experience in mineral exploration and evaluation and more than 30 years’ experience in mineral asset valuation. The writers hold the appropriate qualifications, experience and independence to qualify as an independent “Expert” and “Competent Person” under the definitions of the Valmin Code.
2.0 Valuation of the Mineral Assets – Methods and Guides With due regard to the guidelines for assessment and valuation of mineral assets and mineral securities as adopted by the AusIMM Mineral Valuation Committee on 17th February, 1995 – the Valmin Code (updated 1999 & 2005). AM&A has derived the estimates listed below using the MEE method for the current technical value of the mineral assets as described below since no JORC Code compliant resources have been declared for any of the tenements.
The ASIC publications “Regulatory Guides 111 & 112” have also been referred to and duly considered in relation to the valuation procedure. The subjective nature of the valuation task is kept asonly use personal For objective as possible by the application of the guideline criteria of a “fair value”. This is a value that an informed, willing, but not anxious, arms’ length purchaser will pay for a mineral (or other similar) asset in a transaction devoid of “forced sale” circumstances.
2.1 General Valuation Methods The Valmin Code identifies various methods of valuing mineral assets, including:- Discounted cash flow, Joint Venture and farm-in terms for arms’ length transactions,
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 2 Valuation of the Harvest Minerals Limited Brazilian Assets
Precedents from similar comparable asset sales/valuations, Multiples of exploration expenditure, Ratings systems related to perceived prospectivity, Real estate value and rule of thumb or yardstick approach.
2.2 Discounted Cash Flow/Net Present Value This method provides an indication of the value of a mineral asset with identified reserves. It utilises an economic model based upon known resources, capital and operating costs, commodity prices and a discount for risk estimated to be inherent in the project.
Net present value (‘NPV’) is determined from discounted cash flow (‘DCF’) analysis where reasonable mining and processing parameters can be applied to an identified ore reserve. It is a process that allows perceived capital costs, operating costs, royalties, taxes and project financing requirements to be analysed in conjunction with a discount rate to reflect the perceived technical and financial risks and the depleting value of the mineral asset over time. The NPV method relies on reasonable estimates of capital requirements, mining and processing costs.
2.3 Joint Venture Terms The terms of a proposed joint venture agreement may be used to provide a market value based upon the amount an incoming partner is prepared to spend to earn an interest in part or all of the mineral asset. This pre-supposes some form of subjectivity on the part of the incoming party when grass roots mineral assets are involved.
2.4 Similar or Comparable Transactions When commercial transactions concerning mineral assets in similar circumstances have recently occurred, the market value precedent may be applied in part or in full to the mineral asset under consideration.
2.5 Multiple of Exploration Expenditure The multiple of exploration expenditure method (‘MEE’) is used whereby a subjective factor (also called the prospectivity enhancement multiplier or ‘PEM’) is based on previous expenditure on a mineral asset with or without future committed exploration expenditure and is used to establish a base value from which the effectiveness of exploration can be assessed. Where exploration has produced documented positive results a MEE multiplier can be selected that take into account the valuer's judgment of the prospectivity of the mineral asset and the value of the database. PEMs can typically range between ‘zero’ to 3.0 and occasionally up to 5.0 where very favourable exploration results have been achieved, applied to previous exploration expenditure to derive a dollar value. Typical PEM Factors are shown in Table 1.
PEM Range Criteria 0.2 – 0.5 Exploration (past and present) has downgraded the tenement prospectivity, no mineralisation identified 0.5 – 1.0 Exploration potential has been maintained (rather than enhanced) by past and present activity from regional mapping 1.0 – 1.3 Exploration has maintained, or slightly enhanced (but not downgraded) the prospectivity 1.3 – 1.5 Exploration has considerably increased the prospectivity (geological mapping, geochemical or geophysical) 1.5 – 2.0 Scout Drilling has identified interesting intersections of mineralisation
For personal use only use personal For 2.0 – 2.5 Detailed Drilling has defined targets with potential economic interest. 2.5 – 3.0 A resource has been defined at Inferred Resource Status, no feasibility study has been completed 3.0 – 4.0 Indicated Resources have been identified that are likely to form the basis of a prefeasibility study 4.0 – 5.0 Indicated and Measured Resources Table 1: Typical PEM Factors.
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 3 Valuation of the Harvest Minerals Limited Brazilian Assets
2.6 Ratings System of Prospectivity (Kilburn) The most readily accepted method of this type is the modified Kilburn Geological Engineering/Geoscience Method and is a rating method based on the basic acquisition cost (‘BAC’) of the mineral asset that applies incremental, fractional or integer ratings to a BAC cost with respect to various prospectivity factors to derive a value. Under the Kilburn method the valuer is required to systematically assess four key technical factors which enhance, downgrade or have no impact on the value of the mineral asset. The factors are then applied serially to the BAC of each mineral asset in order to derive a value for the mineral asset. The factors used are; off-property attributes on- property attributes, anomalies and geology. A fifth factor that may be applied is the current state of the market.
2.7 Empirical Methods (Yardstick – Real Estate) The market value determinations may be made according to the independent expert’s knowledge of the particular mineral asset. This can include a discount applied to values arrived at by considering conceptual target models for the area. The market value may also be rated in terms of a dollar value per unit area or dollar value per unit of resource in the ground. This includes the range of values that can be estimated for an exploration mineral asset based on current market prices for equivalent assets, existing or previous joint venture and sale agreements, the geological potential of the mineral assets, regarding possible potential resources, and the probability of present value being derived from individual recognised areas of mineralisation.
This method is termed a “Yardstick” or a “Real Estate” approach. Both methods are inherently subjective according to technical considerations and the informed opinion of the valuer.
2.8 General Comments The aims of the various methods are to provide an independent opinion of a “fair value” for the mineral asset under consideration and to provide as much detail as possible of the manner in which the value is reached. It is necessarily subjective according to the degree of risk perceived by the mineral asset valuer in addition to all other commercial considerations. Efforts to construct a transparent valuation using sophisticated financial models are still hindered by the nature of the original assumptions where no known resource exists and are not applicable to mineral assets without an identified resource or reserve.
The values derived for this Report have been concluded after taking into account the general geological environment for the mineral assets under consideration with respect to the exploration potential of each tenement.
2.9 Environmental implications Information to date is that there are no identified existing material environmental liabilities on the mineral assets. Accordingly, no adjustment was made during this Report for environmental implications.
2.10 Indigenous Title Claims Neither the Company nor the authors are aware of any indigenous title claims within the project areas. Accordingly, no adjustment was made during this Report for indigenous title implications.
2.11only use personal For Commodities-Metal prices Where appropriate, current metal prices are used sourced from the usual market publications or commodity price reviews (e.g.” Infomine.com” or “Alibaba”).
2.12 Resource/Reserve Summary There are no JORC Code compliant resources or reserves estimates which could be used for a DCF valuation.
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 4 Valuation of the Harvest Minerals Limited Brazilian Assets
2.13 Previous Valuations No previous valuations of the tenement package are known to the authors.
2.14 Encumbrances/Royalty The Projects may be subject to government royalties as stipulated by the Brazilian Government where currently applicable.
No royalty payments are considered in this valuation as no mining is occurring.
3.0 Background Information 3.1 Introduction This valuation has been provided by way of a detailed study of existing information and field data provided by Harvest regarding mining and exploration activities operations completed to date on the projects.
3.2 Specific Valuation Methods There are various methods acceptable for the valuation of a mineral prospect ranging from the most favoured DCF analysis of identified Proved & Probable Reserves to the more subjective rule-of- thumb assessment when no Reserves have yet been calculated but Resources may exist. These are discussed above in Section 2.0.
For the Harvest Projects the Empirical and MEE Methods have been applied to determine a value range as at 24th November, 2015 and a preferred or most likely value ascribed within that range.
3.3 Tenement Holdings Together with its wholly owned subsidiaries, Harvest holds 18 tenements covering three projects in Brazil (Table 2). The Company provided the full tenement details to AM&A. We have sighted a legal opinion that confirmed the tenement details by FFA Legal Ltda.,dated 01 September, 2015, a legal firm from Brazil. Harvest Minerals acquired the mineral rights for the Sergio Potash Project from KMINE Holdings Limited. Triunfo Mineração do Brasil Ltda, a wholly owned subsidiary company of Harvest Minerals, holds an Exploration Permit (DNPM-878.111/2008) with an area of 1,355.57 ha, under which a Final Exploration Report was submitted and the approval of this report is expected.
Project Spend to Date AUD Mineral Titleholder Assignee Status Project Expiry Annual Fee per TAH's Due 30/09/2015 Rights no. Date Hectare (TAH) Date 831.144/2 Janine Tavares Triunfo Exploration Arapua 25-Mar- N/A N/A $ 010 Camargo Fertilizantes & Licence Extended 16 385,413 Minera9ao Lida 831.145/2 Janine Tavares Triunfo Exploration Arapua 25-Mar- N/A N/A 010 Camargo Fertilizantes & Licence Extended 16 Mineracao Lida 831.146/2 Janine Tavares Triunfo Exploration Arapua 25-Mar- N/A N/A 010 Camargo Fertilizantes & Licence Extended 16 Mineracao Lida 831.275/2 Janine Tavares Triunfo Exploration Arapua 28-Apr- R$7,885.86 31-Jul-16 010 Camargo Fertilizantes & Licence Extended 17 Mineracao Lida 832.447/2 Fernando Pereira Triunfo Exploration Arapua 31-Jul- R$7,841.86 31-Jan-16
009 da Rocha Fertilizantes & Licence Extended 16 For personal use only use personal For Thomsen Mineracao Lida 832.448/2 Fernando Pereira Triunfo Exploration Arapua 31-Jul- R$7,150.88 31-Jan-16 009 da Rocha Fertilizantes & Licence Extended 16 Thomsen Mineracao Lida 832.451/2 Fernando Pereira Triunfo Exploration Arapua 9-Jul-16 R$7,798.52 31-Jan-16 009 da Rocha Fertilizantes & Licence Extended Thomsen Mineracao Lida 878.107/2 Triunfo Triunfo Application for Capela N/A N/A N/A $ 015 Mineracao do Mineracao do Exploration 939,001 Brasil Ltda Brasil Ltda
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878.108/2 Triunfo Triunfo Application for Capela N/A N/A N/A 015 Mineracao do Mineracao do Exploration Brasil Ltda Brasil Ltda 878.109/2 Triunfo Triunfo Application for Capela N/A N/A N/A 015 Mineracao do Mineracao do Exploration Brasil Ltda Brasil Ltda 878..111/ Triunfo N/A Final Exploration Sergio 12-Jun- N/A N/A $ 2008 Mineracao do Report Presented 15 181,076 Brasil Ltda 878.045/2 B&A Pesquisa Triunfo Exploration Sergio 10-Jan- R$3,401.15 31-Jul-16 009 Mineral Ltda. Mineracao do License Extended 17 Brasil Ltda 878.079/2 Triunfo N/A Application for Sergio 15-Sep- R$316.23 31-Jan-16 015 Mineracao do Exploration 18 Brasil Ltda 878.80/20 Triunfo N/A Application for Sergio 15-Sep- R$2,604.86 31-Jan-16 15 Mineracao do Exploration 18 Brasil Ltda 878.087/2 Triunfo N/A Application for Sergio 24-Sep- R$3,020.47 31-Jan-16 015 Mineracao do Exploration 18 Brasil Ltda
Table 2: Harvest Brazilian Tenement Holdings.
The tenement schedule includes guidelines addressed in Paragraph 68 of the VALMIN Code (2005) that are considered to be material to the valuation. AM&A believes the tenements are in good standing at the date of this valuation as represented by Harvest and our own review of the ‘Tenement Report’ by Brazilian Independent Legal firm FFA Legal Ltda, dated 01 September, 2015 Excerpt from that report is :
“…4 OPINION
4.1 Based on and subject to the assumptions contained in paragraph 3 above we are of the opinion that:
4.1.1 The Licence Holders are duly incorporated and validly existing and have all requisite corporate powers and authority to conduct their business now carried on by them and to own their properties and assets.
4.1.2 The Licence Holders are in compliance with the mineral legislation as described in paragraph 3 above.
4.1.3 The Mineral Rights are duly supported and in good standing, without any defects that may affect their validity, except otherwise provided herein.
4.1.4 None of the Mineral Rights are subject to any liens or encumbrances registered with the DNPM, nor do any of the Mineral Rights cover any areas of land wherein mining activities are prohibited…..”
3.4 Brazilian Land Tenure and Property Title Explanation The application for exploration authorisations are located in accordance with the Brazilian National Department of Mineral Production (“Departamento Nacional de Producao Mineral, “DNPM”) requirement of a ‘tie point’ that is usually the coordinates of a surveyed cartographic monument or the confluence of two rivers. From this ‘tie point’ a vector with the azimuth and length to the first corner of the claim is established. From the first corner the direction, which can only be north, south, east or west is assigned with the length defining the first border line. The same procedure is used
asonly use personal For many times as necessary until the closing of the polygon at the first corner. This polygon defines the extent of the claim application.
After receiving the approval of the application, the DNPM converts the exploration application into an “Exploration Authorisation”. Annual fees only apply to Exploration Authorisations after the publication of each permit in the Official Gazette. Table 2 summarizes the fees after the exploration applications being converted into Exploration Authorisations.
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Table 2: prescribes Annual Fees for the Exploration Authorisations with Type of Mineral Right Area (ha) and Actual annual fees at R$2.02 per ha.
Brazil’s Constitution describes that the exploration and exploitation of mineral resources shall occur under federal authorization or concession and only Brazilian citizens or companies organised under Brazilian laws with headquarters located in the country, are entitled to practice such activities and to obtain mineral rights. In addition, mineral rights in Brazil are governed by the Mining Code Decree 227, February 27, 1967, and further rules enacted by the Federal Government.
As described in Article 14 and Article 18 of the Mining Code, mineral exploration comprises the work necessary to measure and evaluate a resource and its technical and economic feasibility. The Brazilian legislation also specifies that the exploration may be carried out by means of onsite and laboratory studies, geological and geophysical studies, and any other type of geological exploration work.
DNPM’s “Local Officer” grants the authorization to an interested party by means of an Exploration Authorization, the “Alvara de Pesquisa”. In order to obtain the Exploration Authorization, the titleholder must first file an application with the DNPM. After reviewing the application, DNPM may issue an Exploration Authorization valid for a period of one to three (1 – 3) years. This period may be further extended, subject to analysis of the exploration by the DNPM. The holder of an Exploration Authorization (as described in the mineral code): May assign or transfer it, provided that the assignee fulfils the legal conditions to hold the title; May, at any time, waive the Exploration Authorization; Shall be exclusively responsible for damages caused to third parties as a result of the performance of the exploration; and Shall submit to DNPM a detailed technical report on the exploration activities prior to the final term of the Exploration Authorisation.
After DNPM reviews of the technical report mentioned above, it can decide if the development is technically and economically feasible. DNPM may withhold approval of the exploration process in cases where the work is insufficient or where the report presents technical deficiencies.
If exploitation (mining) is considered technically and economically feasible, the DNPM will approve the project, and the holder of the Exploration Authorisation will have one year to apply for the mining concession or negotiate the mining right with third parties. DNPM will provide only one extension to this period and the extension must be obtained before the expiration date of the first one-year term.
The interested party shall apply for the mining concession. The mining concession is titled “Concessao de Lavra”. Before granting the “Mining Concession”, the DNPM must verify that all legal requirements are fulfilled, including those requirements in connection with the prior exploration activities and the approval of the technical report by DNPM.
The holder of the Mining Concession, based on the mining code, can:
For personal use only use personal For Exploit the mine until it is completely exhausted; Assign or transfer the title, provided that the assignee fulfils the legal conditions to hold a Mining Concession; and Waive the Mining Concession, subject to authorization by DNPM.
The responsibilities of the holder of the Mining Concession are: Exploit the mine according to an mining plan previously approved by DNPM;
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Not interrupt the mining operation for a period of more than six consecutive months after the beginning of the operation; Extract only minerals expressly mentioned in the Mining Concession; Respect the applicable environmental law; Pay financial compensation for the exploitation, the Financial Compensation for the Exploitation of Mineral Resources (“CFEM”).
The surface rights remain in the hands of landowners, typically farmers, ranchers or companies and these rights must be individually negotiated to allow the holder of a mineral exploration authorization or a mining concession to access the land and conduct the exploration and mining works. Surface owners must be compensated for disturbance of their farming and other activities. The surface rights owners are obliged by law to provide access to the mineral license holder to conduct exploration. If the parties cannot reach an agreement by mutual negotiations, such eventual dispute will be resolved by the courts based upon tradition for the region and type of mining. RIO VERDE does not own any surface rights. In Brazil, the surface rights constitute a distinct title from the mineral rights. To the extent known, no royalties, back-in rights, or payments exist on the Property.
4.0 Sergio and Capela Projects 4.1 Introduction
The Sergio and Capela Projects sit within the Sergiope-Alagoas Basin which is part of the Mesozoic marginal basins in Brazil that are, related to the Upper Jurassic - Cretaceous Gondwana breakup. The basin contains an evaporite sequence called the Muribeca Fm composed of anhydrite, halite, taquidrite, carbonates, carnallite and sylvinite. The Sergio potash mineralisation consists of two upper sylvinite rich layers and two lower carnallite rich layers, with 25% and 16% KCl average content respectively. No deposits have yet been identified at the Capela Project.
Aracaju is the capital of the state of Sergiope with a population of 570,000 and a large harbour. Several smaller cities are closer to the Sergio Project (“Sergio”) with limited services available. Area 5 is located in the state of Alagoas and is close to Maceio, the state capital with a population of almost 1 million inhabitants and good services and infrastructure.
Aracaju is the major population and economic centre in the area and it is adjacent to the four areas located in the south. The area has strong oil exploration infrastructure with all services for the rigs and oil wells for both on-shore and off-shore activities. Several companies have offices and warehouses in Aracaju including Halliburton and Schlumberger Limited to name a few. The harbour is located 15 km North of Aracaju and it is used for the transport of oil, potash and heavy equipment.
The area possesses an excellent transport network with good infrastructure and logistics. Aracaju also has the international Santa Maria Airport.
Maceio is also a major centre in the region and the economy of the city is based on commerce, agriculture and tourism. It is well served with regular flights to the rest of Brazil, a large scale harbour, has good highways and reliable services. The production of salt and chemicals is the major economiconly use personal For activity in the area which also has moderate oil and gas production in the nearby localities.
The project area is well serviced by a dense network of paved highways and roads linked by unpaved roads.
The Terminal Maritimo Inacio Barbosa seaport is located about 20 to 25km to the NE of Aracaju city and is operated by VALE. The maximum vessels that can be loaded in the seaport is 38,000 tonnes.
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The seaport is served by paved road and the Ferrovia Centro Atlantica (“FCA”) railroad for wagon trains, which crosses from NE to SW and connects Aracaju with other major cities.
4.2 Location and Access The Sergio Potash Project can be accessed via road, ship and regular flights. For personnel transport the most preferable option via the Santa Maria airport in Aracaju city. The project site can then be accessed by cars on paved and unpaved roads. For access to the drill sites a 4x4 off-road vehicle is preferred as the roads and tracks are mostly unpaved.
The project is located in the coastal zone dominated by flat lands and rolling hills with a maximum elevation of 200 m. The forests of the coastal zone consist of palms, cashew trees and mangroves. Bird life includes several varieties, and there are some mammals such as deer, cavies, and armadillos.
The project site has a subtropical climate with irregular distribution of rainfall. Whilst the annual rainfall on the coast is above 1,600 mm, the annual rainfall in the western semi-arid zone of the state drops below 800 mm and, locally below 500 mm of rainfall per annum. The rainy season occurs from April to July/August, with the maximum concentration from May to July. During the autumn- and-winter period the quantity of rainfall is small with the least (less than 50 mm) falling in November. Despite the tropical climate, the dry period in Sergio is significant.
Temperatures in the region do not change significantly during the year, reaching the maximum of 29 to 31°C in November to March, and dropping to 26°C in July and August. Rain days per month changes with the temperature and the number of sunshine hours per day reflect these changes. The maximum sunshine hours per day are from October to February with 8 to 9 h/d, and the minimum from May to July with 6 to 6.5 h/d. The maximum rain days per month are in April and June to August with 21 to 23 d/m and the minimum for October/November and January/February with 9 to 11d/m. The area is characterized by light and gentle breezes with speeds from 6 up to 9 knots, blowing mainly in east and southeast directions.
The area has an excellent supply of water, energy and power. A natural gas pipeline passes through the project area from NE to SW with natural gas processing units in Atalaia, Itaporanga and Carmopolis. The electrical supply to the project area is provided by four main electric power lines, submitting energy to a substation located in the western suburb of Aracaju (Jardim). Two of these lines operate with 500 KV and two with 230 KV. From Aracaju the electric power is further distributed by local grid systems to the surrounding areas. Water in the project area is provided by the many small permanent rivers flowing NW to SE towards the Atlantic Ocean and also from lakes.
4.3 Regional Geological Setting. The Sergiope –Alagoas Basin in north eastern Brazil is part of a series of continental margin basins formed during the opening of the South Atlantic in Mesozoic times. Structurally the basin consists of a SE dipping half graben. It is represented on-shore by a over 600 km long and 20 to 50 km wide belt, but does extend over a much wider area off-shore. Towards the north, near the Rio Sao Francisco the Sergiope Basin, where the project is located, is separated from the Alagoas Basin by the Japoata and Penedo highs, whereas to the south it is separated from the Jacuipe sub-basin by the Rio Real high. Within the sub basin the general stratigraphy is comparable, but the lithologies of theonly use personal For formations might be slightly different. Only the Sergiope Basin sensu stricto where the project is located is discussed with the stratigraphic column shown in Figure 2.
The Sergiope Basin contains sedimentary rocks that document all the different stages in the opening of the South Atlantic Ocean starting, with Late Carboniferous and Early Permian sag sedimentation, over Late Jurassic pre-rift sedimentation and Early Cretaceous syn-rift sedimentation grading into sedimentary rocks representing onset of flooding and opening of the Atlantic in the Mid to Late Cretaceous and oceanic sedimentation from Late Cretaceous to present.
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The important stratigraphic sequence starts with Late Carboniferous sedimentary rocks of the Batinga Fm consisting of conglomerates, immature sandstones and locally laminates siltstones, interpreted to represent glacial sediments. The Batinga Fm is discordantly overlain by the Early Permian sedimentary rocks of the Aracare Fm which start with black shales and, furthermore, consist of cross stratified coarse grained mature sandstones, silicified oolitic calcarenites, algal mats and stromatolites. These sedimentary rocks are interpreted to have been deposited in a coastal sabkha environment.
After a major discordance the Late Jurassic rocks of the Candeeiro Fm consisting of fine to medium grained sandstones were deposited followed by deposition of the red shales of the Bananeiras Fm and later by the medium to coarse grained sandstones with tabular and channelled cross stratification of the Serraria Fm. The depositional environment of these formations is considered fluvial to lacustrine.
A concordant overlaying of the Early Cretaceous (Berrasian, Lower Valanginian) Barra de Itiuba Fm and the inter-fingering Penedo Fm is postulated for the district. The Barra de Itiuba Fm consists of a succession of shales and fine grained sandstones interpreted to represent deposition of a deltaic system in a lacustrine environment, whereas the Penedo Fm consist of coarse to medium grained sandstones interpreted to represent deposition in a fluvial-deltaic environment subject to aeolian reworking. Within these formations a period of non-deposition (late Valanginian) is inferred. Deposition of sediments attributed to these formations started again in the Hauterivian up to Barremian, coeval with sedimentation of the coarse grained polymict conglomerates of the Rio Pitanga Fm that are interpreted as deposits associated with bounding faults to the basin.
These sedimentary rocks are concordantly overlain and in case of the Rio Pitanga Fm interfinger with sediments of the Coqueiro Seco Fm (lower Aptian), consisting of coarse grained sandstones and mudstones deposited in a fluvio-deltaic-lacustrine environment. A concordant contact is assumed with the Upper Aptian Muribeca Fm, which contain potentially potash bearing evaporites.
The Muribeca Fm is divided into: · the lower Carmopolis Member consisting of polymict conglomerates and sands with minor intercalations of shales and siltstones with a maximum estimated thickness of 320 m. The depositional environment is interpreted as alluvial fans. · the middle Ibura Member consisting of evaporitic rocks and further detailed below · the upper Oiteirinhos Member is predominantly represented by shale and siltstone, with sandstone and limestone intercalations and has a maximum thickness of 335 m and is considered to represent a neritic depositional environment.
The upper two members of the Muribeca Fm are considered a main hydrocarbon source rock within the sedimentary sequence.
The Muribeca Fm is concordantly overlain by the sedimentary rocks of the Riachuelo Fm of Albian age. This formation comprises the rocks of the Taquari Member (intercalating limestones, shales
andonly use personal For siltstones) with a maximum thickness of 716 m that interfinger with rocks of Angico Member (fine-grained and conglomeratic arenites) with a maximum thickness of 915 m, and the Maruim Member (oolitic-pisolitic beige limestone) with a maximum thickness of 1,124 m. The sedimentary environment for these formations ranges from alluvial fan to deep oceanic.
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Figure 2: Modified Stratigraphic Column for the Sergiope Basin (Santos & Souza, 2001).
The Cotinguiba Fm of Cenoman to Turonian age, concordantly overlies the Riachuelo Fm. This formation comprises the Sapucari Member (gray to light yellow limestone intercalated with calciferous sandstone, calcilutites and local breccias) with a maximum thickness of 744 m and the Aracaju Member (claystones and siltstones) with a maximum thickness of 280 m. The whole Cotinguiba Fm has an average thickness of 200 m. The sedimentary environment is interpreted to be neritic to abyssal.
A major drop in sea level during Coniacian, locally resulted in erosion of previously deposited rocks.
Theonly use personal For rocks of the Calumbi Fm ranging in age between Santonian and Pliocene concordantly cover the older sedimentary formations The Calumbi formation consists of olivegreen shales and pale yellow sandstones and siltstones. This formation locally interfingers with the medium to coarse sandstones of the Marituba Fm ranging in age from Paleocene to recent. From the Eocene onward the bioclastic calcarenites of the Mosqueiro Fm can also occur interfingering with the two other Formations of the same age. The sedimentary environment for the deposition of these three formations is considered neritic to abyssal. On-shore only older parts of these Formations are preserved.
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The Barreiras Fm is a Pliocene formation which intercalates medium to grit-coarse sandstone, with conglomeratic levels and clayish intercalations, which concordantly overly the older sedimentary rocks. Average thickness in the area is about 50 m.
Within the structural subdivision of Brazil Sergio area belongs to the Sergiope Coastal Basin, and as such is part of the youngest Brazilian geological provinces and is surrounded by Cenozoic sediments. It is situated at the border of the neighbouring Borborema Province and is thus limited to the West from the outer part of the Sergiopian Belt through alternating NE-SW and almost E-W striking normal folds. Within the basin NE-SW to NNE-SSW striking normal faults predominate, which build up a subordinated system of smaller grabens and half-grabens within the Cretaceous sediments (Fig 3). On a regional scale the potential deposit is marked by ENE-WSW-striking anticlines and synclines with ENE dipping fold axes in the north. The southern part is dominated by NE-SW to NNE-SSW-striking folds with NE – NNE dipping fold axes. The southern anticlines show open fractures accompanying the strike-direction of the mentioned axes. Based on re-interpretation of the available information of 286 oil wells and reprocessing of 234 kilometres of seismic lines the overall structure has been modelled as a graben (Fig 3). The other side of the graben is on the Angola – Congo – Gabon coast in Africa.
Figure 3: Generalised Section of the Sergiope Basin (modified after Santos & Souza, 2001).
The intense deformation of the Cretaceous sediments of the potential deposit due to the regional folding and development of graben-structures resulted in delineation of several depositional sub- basins, in which fluid circulation partly resulted in the dissolution of the Ibura Member evaporitic rocks (carnallite, sylvinite, rock salt, anhydrite). The result is local depletion of highly soluble minerals (Carnallite, Sylvite, Halite, partly Anhydrite) and enrichment of insoluble material (clay, partly Anhydrite)only use personal For of the Ibura Member.
According to the Brazilian Ministry of Mines and Energy (2002; /20/; /21/) two hydrogeological domains are important for the coastal region of the Sergiope Basin and, therefore, also important for the potential Sergio Potash Project: the superficial Cainozoic formations and the sedimentary basins (Serge/Alagoas Basin)
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Figure 4: Reconstructed Regional Structure of the Sergiope Basin.
The superficial Cainozoic formations (Barreira Fm) comprise alternating clayey, arenitic and conglomeratic sediments with abrupt lateral facies changes, primary porosity and strong variance in thickness (several meter to decametre). Increasing thickness and sand/clay ratio favour the groundwater storage and conducting conditions.
The second hydrogeological domain, the sedimentary basin (Muribeca Fm), comprises arenites, conglomerates with subordinate claystones and silts and is only locally a prolific aquifer.
4.4 Local Geological Setting. The Ibura Member is the main evaporitic unit in the basin subdivided into nine lithologic cycles (479 m of maximum thickness). Ibura cycle IX has two traceable layers over the entire basin, which have excellent correlation. The upper layer is known as Mark 39, composed of anhydrite and limestone fragments in variable proportions dispersed into a clay-calciferous matrix. The Mark 38 base (known as Topo do Sal - salt top) is in discordant contact with the basin’s soluble salts, especially in cycle VII, which contains the potential potash deposits.
The economic potential of the Basin is related to the evaporite sequence of the Ibura Member. The evaporite characteristically bears micro-inclusions of gas, which allowed the recognition of nine
cyclesonly use personal For based on the nature of the gaseous phases and the salinity. Cycles I and II include mostly halite which is transgressive to the underlining sediments. In cycles III and VI the salinity and isolation of the sub-basin became extreme resulting in the precipitation of carnallite and tachyhydrite from distal brines. The top of cycle VI is marked by an intense period of dissolution, referred as the pre-cycle VI unconformity, which removed most of the salt accumulated so far, particularly in the Carmopolis and Sirizinho arcs. Cycle VII overlays this unconformity and includes rock salt and sylvinite beds and layers of carnallite, which are mined in the Taquari Vassouras underground mine presently operated by VALE. Below this mineable sylvinite horizon a thick tachyhydritite layer exists
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 13 Valuation of the Harvest Minerals Limited Brazilian Assets and below this is a thick carnallite deposit as present in the Taquari Vassouras area. The carnallite deposit is extracted by VALE’s carnallite Solution Mining project.
Figure 5: Mineralisation of the Ibura-Member in the Northern Basin of the Project Area.
The potash zones contain carnallite and/or sylvinite. These potash layers can occur in several levels within the Ibura Member but can also be missing due to non-deposition or dissolution processes. Whilst the primary sylvinite usually occurs as single layers, the carnallite can be present as one thick carnallite layer as well as carnallite and rock salt inter-layering.
Based on the historical drill results, it is possible to build up a paleo-geographic reconstruction of the evaporite sequence which was carried out delineating the limits of the different sedimentary facies which have been divided in four domains: Siliciclastic Domain: represents paleo areas where the Ibura Member is composed only of siliciclastic lithologies. Anhydrite and soluble salts are not present on this domain, suggesting low potential zones for potash mineralisation. Anhydrite Domain: represents paleo areas where the Ibura Member is composed of anhydrite layers and siliciclastic sediments. Any kind of soluble salts (Halite, Sylvite, Carnallite or For personal use only use personal For Tachyhydrite) are present on this domain which may represent the interface between siliciclastic deposition and the evaporites. Halite Domain: represents paleo areas where the paleo-climatic conditions increased the salinity of the brine and allowed the deposition of halite which may or may not occur intercalated with anhydrite and siliciclastic sediments. In principle, potash salts are not present but the density of the information does not allow making the assumption that potash layers cannot exist. Based on that, potential zones for potash mineralisation may exist within this domain.
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Potash Domain: represents paleo areas where the paleo climatic conditions allowed the maximum salinity of the brine and the deposition of potash salts which may or may not occur intercalated with halite, anhydrite and siliciclastic sediments. Clearly, this domain represents the highest potential zones to host potash mineralisation.
The distribution of the different domains in the Sergiope Basin is illustrated in Figure 6. The map shows that two different palaeo basins with potash bearing horizons are present. Between these basins a barrier without chloride evaporation existed. The most explored region is near the VALE operations in the northern basin. The Capela, Panqueca and Mosqueiro properties are also in the northern basin. All of the remaining properties of RIO VERDE are arranged in the southern basin. A summary of the potash mineralisation based on the historical drill holes for the project area is presented below.
Figure 6: Paleo-geographic Reconstruction of Sergiope Basin.
4.5only use personal For Mineralisation The term potash is usually used to describe “muriate of potash” (“MOP”) with the chemical formula KCl. Another potassium fertilizer is “sulphate of potash” (“SOP”) with the chemical formula K2SO4. To be able to compare these products the grade of potassium products is usually expressed in K2O. The project proposes to produce KCl and a tonne of KCl contains an equivalent of 0.632 tonnes of K2O.
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According to the historical drilling results the deposit contains mainly two potash bearing minerals: Sylvite, chemical formula KCl (63.2% K2O), Carnallite, chemical formula KMgCl3 x 6H2O (~17%K2O).
A rock consisting mainly of halite together with sylvite is called sylvinite. Subordinately anhydrite, clay can occur (insoluble material). A rock consisting of mainly carnallite together with halite and/or sylvite is called carnallite. Subordinately the highly soluble mineral Tachyhydrite (CaMg2Cl6 x12 H2O) as well as anhydrite (CaSO4) and clay can occur.
Evaporitic basins develop in constrained marine environments where the influx of seawater is smaller than the evaporation rate in the basin. As the basin waters became more saline the saturation of salts is reached in the brines and precipitation occurs in the following order: a) Llimestone (CaCO3); b) Dolomite (CaMg(CO3)2; c) Gypsum (CaSO4 x 2H2O); d) Halite (NaCl); e) Sylvite, Carnallite and Tachyhydrite.
The majority of the evaporitic basin is composed of limestone and anhydrite (gypsum) and, depending on water circulation and brine concentration, the precipitation of halite occurs and can be followed by the precipitation of carnallite and sylvinite in restricted portions of the evaporitic basin. This is a cyclical process that is controlled by the rate of evaporation, influx of seawaters (less saline) and water circulation within the basin. Potash deposits tend to form when the highest level of salinity is achieved in the brine in shallow sub basins inside the main basin.
The development of the evaporite basin in Sergiope and Alagoas occurred in a rift environment during the Mesozoic (Aptian) forming a proto-oceanic gulf where the salinity of waters was high enough to allow the precipitation of salts. The correlative and equivalent evaporitic basin is found on the African coast in Gabon, Congo and Angola.
The mineralisation description is based on the exploration work completed in the Sergiope basin by PETROMISA and is mostly located outside Harvest properties. Since there is no exploration work inside the Harvest properties, the area description is presented as a reference. Based on the deposit type the mineralisation can exist as sylvinite or carnallite. Until now mineable sylvinite has only been found in the Taquari Vassouras sub basin. Carnallite is found in the Taquari Vassouras sub-basin and also in the Pirambu-Aguilhada and Estacao Calumbi (Aracaju-Mosqueiro). Since there are no detailed core descriptions or assays available from most of the drill holes in the following sections the requirements for a drill hole to be selected as potash bearing will be given. As for most drill holes only indirect information as geophysical logs suggest the potential presence of potash bearing sections are available.
4.6 Previous Exploration The Sergio Project is located in the Sergiope Basin, which has an almost 30 year history of potash exploration. The historical description of the investigation includes historical resource estimates subsidiary to oil and gas exploration in the area. The discovery of a sylvinite horizon prompted the constructiononly use personal For of the Taquari-Vassouras mine in the 1970s and 1980s. The area was transferred to VALE in 1991 and details about this deposit, which is located outside the project, is included. Recently, VALE has engaged in evaluating the potential for recovering potash from the abundant carnallite salt in the area. They expect to economically mine this resource using solution mining techniques.
It appears exploration specifically for potash was only undertaken in VALE properties. In contrast, the exploration work in the other parts of the Sergiope-Alagoas Basin has been chiefly for oil and
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 16 Valuation of the Harvest Minerals Limited Brazilian Assets gas in the project area, without specific interest and concentration of potash bearing horizons in the salt rocks. Data from a total of 303 oil exploration wells and 1000 km of seismic data were purchased and processed and interpreted by consultants. These studies have focussed on the characterisation and identification of the spatial distribution of the interval potentially bearing the potash mineralisation.
The RIO VERDE Sergio Potash Project comprises five separate land holdings, over a total area of 109,531 ha. These land holdings are in the same Sergiope Basin as established oil producing wells and also the nearby the Taquari- Vassouras potash mine, which is operated by Vale and produced 607,000 tonnes of potash in 2008.
The extension of the potash mineralisation in the Sergiope Basin is considered continuous and is not bound to the formerly and recently defined license areas. The underground operation of Taquari Vassouras mine located 40 km northwest of Aracaju has being producing since 1985, first by PETROMISA and later transferred to VALE in 1991. The numbers below were extracted from the DNPM mineral summary report and are not verified.
In Sergiope, sylvinite deposits with 494.9 Mt of 9.7% of K2O average equivalent occur in the Taquari - Vassouras and Santa Rosa de Lima regions. The UOTV of Rosario do Catete district has reserves of 63 Mt "in situ" corresponding to some 14.7 Mt K2O and has been mined from 1985. To date some 30.1 Mt of ore have been produced that represents about 50.0% of the mineable reserves. The exploitation plan for the deposit foresees a full capacity operation of 800,000 tpa KCl, equivalent to 480,000 tpa of K2O. In the Santa Rosa de Lima region, 16 km west of Taquari/Vassouras 92.4 Mt of reserves in situ are equivalent to 17.26 Mt of K2O.
In Sergiope there are also carnallite deposits that require studies for economic exploitation. The total reserves (measured + indicated + inferred) at 8.31% K2O equivalent content, are about 12.9 Bt. In anticipation of the sylvinite deposit depletion VALE has been investigating a project to develop its larger reserves of carnallite in the area surrounding the existing UOTV. A pilot plant was commissioned in 2008 to test the solution mining with the aim to establish commercial capacity of 1.2 Mtpa KCl to start operations in 2015.
It is not known if the estimates presented above are JORC Code compliant but presentation is considered relevant and of significance.
4.7 Recent Development The original drill hole data were interpreted by PETROBRAS and reinterpreted by TALON for potential potash. These interpretations were based on the geophysical logs for the Ibura Member in these drill holes. A detailed drill core inspection of some of the available drill cores showed differences between the lithological descriptions of the drill cores by PETROBRAS, the reinterpretation by TALON and lithology as observed in the core. As the original interpretation of PETROBRAS could not be verified for all drill holes since only limited core material is available it was decided to classify all available drill hole logs within the database on lithological interpretation basing on geophysical logs. The following classes were defined:
Class 1 Available Logs: γ-Ray, Density, Neutron or ERCOSPLAN’s core description Classonly use personal For 2 Available Logs: γ-Ray, Density Class 3 Available Logs: γ-Ray, Neutron or Resistivity Class 4 Available Logs: γ-Ray Class 5 Available Logs: Geophysical data not available
Since geophysical logging data depends on the quality of the caliper measurement the presence and quality of the calliper measurements were considered paramount; if the calliper measurements were not reliable the classification was reduced by one class. The applied classification has yet to
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 17 Valuation of the Harvest Minerals Limited Brazilian Assets be verified by future exploration so this classification only serves as a guide to the potential mineralisation.
Selection from drill holes with a potential potash mineralisation was a two-step process. The selection procedure two steps are: for potash mineralisation to be present the deposit development model requires a minimum thickness of rock salt to be present i.e. a minimum 10 m of the Ibura Member.
The mineralogical composition of the potash salt rocks and the width of the potash bearing layers formed the second criteria: sylvinite layers ≥ 1m carnallite layers ≥ 3m
The selection procedure considers the thickness and the depth of the occurrence of the deposit for different mining methods: Independent of depth, drill holes with sylvinite ≥ 2m, were considered indicative for a deposit that can be mined conventionally by underground methods for the drill holes with carnallite three different criteria were used to define potential mineable carnallite deposits:
1. For solution mining a large thickness of carnallite is required and the depth of the potential deposit does not influence these considerations. Carnallite layers with a thickness ≥ 15m are amenable for solution mining. 2. A potential deposit consisting of carnallite inter-layered with rock salt with a large overall thickness is also amenable to solution mining at any depth. A drill hole is considered to contain a potential deposit if the thickness across a three layer combination (carnallite - rock salt - carnallite) exceeds 16m and the thickness of the rock salt layer between the carnallite layers is less than 45% of the combined thickness of the carnallite layers. 3. Carnallite in a drill hole in at least two layers, with a thickness of each layer exceeding 5m and at depths less than 1,000 m are in principle suitable for conventional underground mining.
Within the full database 303 holes were studied of which 51 were considered outside the area of interest and in total only 74 did not intersect the Ibura Member. Within the Ibura Member 63 holes recorded rock salt and 11 recorded potash (Table 3). Interpretation of this data identified:
depth of the top of the evaporitic Ibura Member; depth of the base of the Ibura Member; Isopach map showing the thickness of soluble salt (rock salt, sylvinite, carnallite and tachyhydrite) (e.g. Fig 6 that provides important constraints on the delineation of potential potash bearing sub basins); Re-processing of seismic lines allowed the more exact delineation of potential faults affecting the sedimentary sequence and the Ibura Member (e.g. Fig 6) and provides further constraints on the delineation of potential potash bearing sub basins; Re-processing of gravity data allowed the delineation of gravity lows that could be correlated with known potash bearing sub basins; Re-processing of regional magnetic data, which did not result in a better understanding about For personal use only use personal For the structure and the distribution of the Ibura Member in the Sergiope Basin.
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Table 3: Drill Holes with Potential Potash Mineralisation.
4.8 Resources and Exploration Potential The Coffey JORC Code compliant (2012) resource estimate for the Sergio Deposits is based on data collected since 2008 including diamond drilling and geophysical surveying that includes magnetometry, gravimetry and 2D and 3D seismics.
In addition, historical data from all 303 oil exploration wells from Petrobras Petróleo Brasileiro S/A were obtained through the Brazilian National Petroleum Agency.
Recently a total of four exploration drill holes for 5,347.5 m were drilled and logged. One hole was sampled and had 140 samples assayed up to March 2012. Of the local historical oil wells, five are located within the Sergio Potash Deposit Project area (Figs 7 & 8).
Geophysical profiling was conducted at three locations. Additional geophysical data comprised 273.4 km of aeromagnetic and gravimetric lines plus 169.8 km in ten 2D seismic sections and 42.9 km3 of 3D seismic survey.
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Figure 7: Sergio Project 2012 Drillholes. For personal use only use personal For
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Figure 8: Isopach Map for Ibura Member Thickness with Sergio Project Outline.
Geostatistical analysis was not considered due the large uncertainties in the database regarding the lack of assay and lithological data. Accordingly it was considered that only an Inferred category of mineral resources, not extending beyond 1,200 m of the single mineralised drill hole was possible. The cut-off grade for the resource declaration was determined at 13% of KCl based on the deposit intercepts and information of other KCl projects in Sergiope State.
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Figure 9: Inferred JORC Category Area from Seven Available Drillholes.
Table 4: Sergio Project Complete Drillhole Data.
The quality control program developed and adopted for the Sergio Potash Project comprised checks of sampling and assaying procedures. Harvest Minerals prepared field duplicates for assessment of samplingonly use personal For and assaying error. The drill core duplicates were produced over 25% of the total drill core and the results of QA/QC analysis are within the acceptance limits for the resource classification at a low to moderate level of confidence.
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Table 5: Sergio Project Drillhole assays.
The modelled mineralisation zone was based on two drillholes intersections, one of which had only the geophysical survey data from Petrobras. This made the confidence level of geological model low to moderate based on the lack of data to check the continuity of the mineralised zone. The interpretation used for this single drillhole intercept was as horizontal layers. It is possible that there is a low dip angle to the SE but under 15°. The effect of this alternative interpretation would affect any proposed in mine planning.
Two types of mineralised zones were interpreted: Two layers of sylvinite; Two layers of carnallite.
The mineral resource model was based on the results of 3D seismic survey interpretations, excluding the influence area of the negative drillholes. The solids (wireframes) were constructed from triangulation of potash layers (upper and lower sylvinite and carnallite), with a guarantee of snapping to the lithological contacts. The limit of the 3D seismic survey interpretations in a circular area with a 1,200m radius around the drillhole was applied. This was used to estimate the volume of each potash-bearing layer considering the thickness of the unit. The external content of this radius on the influence of drillhole interceptions of sylvinite and carnallite was classified as Exploration Target potential. The mineralised zone occurs between depths of 1,180 to 1,320 m below surface.
The density values were obtained from geophysical borehole survey, with measurements at 0.20 m intervals. The average densities estimated for the mineralized zones are appropriate for the type and style of mineralisation with sylvinite having a density of 2.0 g/cm3 and carnallite a density of 1.84 g/cm3.
The weighted average grade of density data and KCl content was completed using Surpac software. The tonnage and grade were estimated based on a wireframe model volume using average density and weighted average KCl grade of each drillhole interception. All estimation was completed within individual mineralised units using “hard” boundaries. The limited number of samples inside this mineralised model does not allow the application of outlier treatment. The 3D mineralisation wireframe model was Classified Mineral Resource within an influence area with radius of 1,200 m from drilling interception and limits of 3D seismic survey interpretations. AM&A concurs that the Mineral Resource estimate for the Sergio Potash Project has been classified by Coffey, from an assessment of the confidence level in the data quality and spatial distribution in accordance with the JORC Code 2012, in the Inferred Resource category due to the sparse drillhole data.
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Table 6: Sergio Deposits Summary of Resources by Status.
Table 7: Sergio Deposit - Mineral Resource Statement at Effective Date 10 June 2015. Equivalent K2O was Calculated by the formulae: Equivalent K2O = 0.63177 * KCl (%). Exploration Potential is estimated as 32.0 to 32.9 Mt at 24.0 to 25.0% KCl of sylvinite and 22.0 to 23.0 Mt at 14.9 to15.9% KCl of carnallite. Exploration Target is estimated with a further 28.0 to 32 Mt at 22 to 28% KCl of sylvinite and 22.0 to 23.0 Mt at 14.9 to15.9% KCl of carnallite. The potential quantity and grade is conceptual in nature and there has been insufficient exploration to estimate mineral resources; it is uncertain if further exploration will result in the estimation of a mineral resource.
Although underground mining is generally only considered at depths <1,000 m Coffey recommended underground room and pillar mining of these deposits with a 46% extraction rate at a depth of 1,338m ; AM&A does however accept the extraction rate in principal for use in its worksheet. Coffey then used this to justify a mineable reserve however AM&A believes this step is too optimistic. More drill intersections are required to raise the confidence level of the resources to the Measured category before an attempt to quantify mining resources can be undertaken. Accordingly the Coffey mining reserves are not quoted.
There is insufficient data to attempt any form of resource estimates for the Capela Project yet.
5.0 Arapua Project
5.1 Introduction
The Arapua Project is based on the concept of using local source rocks associated with Kamafugitic volcanic rocks that are associated with weathered capped Carbonatite Breccia found in Minas Gerais State in Brazil. The material also has a significant component of potentially recoverable heavy minerals including iron, titanium, vanadium and REE. This provides an opportunity to mechanically separate a high value saleable "non-fertilizer" by-product and in the process, upgrade the remaining "fertilizer" or nutrient component.
5.2 Location and Access
The Arapua Fertilizer Project is located in the State of Minas Gerais, approximately 400 km SE of the capitalonly use personal For city, Brasilia and 300 km NW of Bela Horizonte (Fig 11). The Property comprises eight staked claim units totalling 14,996 ha and is centrally located within one the main agricultural centres of Brazil (Fig 12). The area is serviced from a number of nearby population centres and is totally accessible by paved and country roads.
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Figure 10: Arapua Project Location map.
Name Concession Number Area (ha) Maxixe 831275/2010 1996.42 Arapua 83144/2010 1381.82 Arapua 831145/2010 1936.53 Arapua 831146/2010 1912.84 Arapua 832451/2009 1974.31 Arapua (Pimenta) 832447/2009 1810.35 Arapua (Pimenta) 832448/2009 1985.28 Totals 7 12997.6
For personal use only use personal For Table 7: Arapua Concessions.
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Figure 11: Arapua Tenements on Google Image.
5.3 Regional Geological Setting
The Arapua Project is located on the southwestern part of the Mid to Late Archean Sao Francisco 2.72 Ga craton (Fig 13). The concessions are situated north of the Alto Paranaiba Arch where Lower Cretaceous Areado Fm clastic sediments unconformably overlie shales and arkosic metasediments of the Bambui Group. The Areado has been subdivided into three sedimentary members, the Quirico (lacustrine; siltstones and argillites), Tres Barras (fluvial, arenites) and Abaete (alluvial fan; conglomeratic). Areado deposition within the project area appears to have been strongly influenced by periods of regional uplift apparently controlled by pre-existing structures.
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Figure 12: Arapua Project, Geologic Setting.
The Upper Cretaceous volcanic rocks of the Mata da Corda Group overlie the Early Cretaceous rocks of the Areado Group. Outcrop geology consists of intrusions, flows, pyroclastic and epiclastic deposits of alkaline ultramafic/mafic composition. Exposures are intensely weathered and fresh outcrops are rare. The rocks of the Mata da Corda Group include the largest known occurrence of extrusive Kamafugite. Kamafugites are characterized by silica under-saturated kalsilite-bearing lavas, which have olivine, clinopyroxene, phlogopite, melilite and kalsilite (silica depleted feldspar) as the major phases. Leucite and augite appear with increasing silica.
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Figure 13: Lithostratigraphic Setting, Mota da Corda Formation.
The Mata da Corda volcanics cover an area of some 4,500 km2. In areas where volcanic
For personal use only use personal For feeders have intruded the Areado Group Tres Barras Fm arenites, the sandstones are disrupted, brecciated, fluidised and silicified. The fluidisation of the Areado sandstones by the Mata da Corda volcanics suggest that the Areado sediments were only semi-consolidated at the time of Mata da Corda volcanism. Literature ages for Mata da Corda volcanics are in the range of 75 to 85 Ma.
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The Mata da Corda volcanics form part of the Altao Paranaiba Igneous Province (APIP). The APIP includes kimberlites, possible lamproites, kamafugites, and carbonatites that stretch from Bambui City in the SE to Rio Verde city in the NW.
The Arapua Concessions are located within an extensive area of volcanic flows and associated volcaniclastic sediments of the Mata da Corda Formation. These volcanic outpourings produced the current landscape that is dominated by flat plateau areas and marginal incised drainage valleys. The volcanic units have a rather unique chemistry in that they contain significant amounts of potassium (K) and phosphorous (P) as well as calcium (Ca) and magnesium (Mg) and other plant nutrient trace elements. There is a second group of minerals that contribute to the make-up of the volcanic units that are particularly rich in iron and titanium. Because of this unique bedrock chemistry, the soils developed in this area are very fertile and this in combination with the flat topography has led to the development of a significant agro business with the main crops being soya, corn, coffee and vegetables for the markets in Sao Paulo, and for international export.
5.4 Local Geology For personal use only use personal For
Figure 14: Arapua Stratigraphy.
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Arapua kamafugites as a potash source have a rock composition that reflects:
• High content of K2O >4% up to 10% • Low content of Na2O <1% (indicates no Na-nepheline) • Low content of SiO2 at +/- 33%
Samples of the Arapua kamafugites reported up to 16% K2O in portable XRF readings. Potassic minerals of Arapua kamafugites include:
• Main minerals (Felspathoids) • Leucite • Kalsilite • and possibly rare Wadeite • accessory micas - phlogopite
P2O5 occurrences at Arapua include: • Phosphate mineralisation associated with Cretaceous Kamafugites of Mata da Corda Group; • P2O5 in fine secondary apatite disseminated in tuffs and lapilli structures; • P2O5 in white fine apatite filling joints and fractures in lava flows; • Capacete Conglomerate on top and carbonate breccias at the base performs an important role in P2O5 enrichment in kamafugites in the middle of both units; • P2O5 from Capacete conglomerate leaches down into the kamafugites; • Carbonate Breccia as the basal volcanic unit "protects" kamafugite feeders to loose P2O5 to wallrock; • In Patos de Minas, 100 km to north (no Capacete and Carbonate Breccia) P2O5 averages from 3.5% to 3.8% in kamafugites; • Expectation of P2O5 average in Arapua to 5.5%; • On surface, 111 samples returned 7% P2O5 average at Arapua and with local areas of +20% P2O5; • Potential150-350 Mt of mineralised kamafugites; • Main targets are away from the plateau areas that hosts extensive coffee/soya bean crops.
Adjacent to the plateau areas are some relatively large areas with hummocky to hilly to ridge- like terrain. The hummocks-hills-ridges (HHR) are comprised of the same volcanic units that constitute the plateau areas but because of their topography, are used mainly as grazing lands. These HHR areas are the target areas for potassium, phosphate and other plant
nutrient rich organic soil enhancing fertiliser For personal use only use personal For
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Figure 15: Contact between Capacete and Kamafugite, Arapua Concession. For personal use only use personal For
Figure16: P205-K mineralisation in Kamafugite and Carbonate Breccia.
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5.5 Exploration History
To assess the potential, a number of preliminary studies were conducted as follows:
• Surface geological mapping and sampling and chemical analyses (D. Innes data base, Fernando Thomsen data base, Brazil). • Mineralogical studies and chemical analyses (Xstrata Process Support, Sudbury, Canada, QEMSCAN-Mineralogical Studies). • Scoping level mineralogical and metallurgical characterization of some of the volcanic units (Xstrata Process Support, Sudbury, Canada). • Metallurgical studies using the metallurgical products obtained by Nomos Laboratories, Rio de Janeiro. Grow tests supervised by Professor Janine Camargo, Agronomist, University of Brasilia.
To date, four of the volcanic units have been studied on a preliminary basis to a greater or lesser degree (Figure 4):
• Kamafugite volcanic flows that are weathered (altered) to some degree (KMA). • Kamafugite volcanic flows that are relatively fresh (KMF). • Carbonate breccia (CB) - a volcanic unit that has been broken up and then re-cemented with carbonate minerals (CaCo3) and (MgCO3). Due to the high carbonate content this unit would act as a natural soil pH-neutralizing agent. • Capacete conglomerate (CC) - this unit is a sediment that is the accumulation of weathered and eroded fragments of the Kamafugite flows.
A 20 kg representative sample was collected from each of the targeted lithologies and shipped to Xstrata's mineral testing laboratories in Sudbury, Canada. The Xstrata lab work was focused initially on heavy mineral separation and characterization. Additional heavy mineral separation work was also carried out by nomos Laboratorio, Rio de Janeiro, Brazil (Figure 9). This first phase work indicated that approximately 40% of the Capacete and Kamafugite units are composed of very fine grained material mostly clay minerals that are less than 10 microns in size and are collectively referred to as "slimes". Due to this very fine grain size, individual mineral grains cannot be separated effectively by mineral dressing techniques. This determination by Xstrata suggests that in any upgrading work, the initial step would be to "size" the feed material and remove the slimes to a stockpile. The slimes would appear to be dominantly hydroxides or hydrous oxide clays, probably with adsorbed potassium ions plus some of the fine phosphate minerals. These positively charged nutrient rich mineral cations are adsorbed in a concentrated layer, coating the negatively charged soil particles (Figure 10) and are thus more available to plants as nutrients (i.e. enhanced Cation Exchange Capacity).
Soilonly use personal For particle as being clay mineral like chamosite, illite or montmorillonite. Chamosite, as a type of chlorite, is part of the fines in Arapua, KMA (iron-rich). Cation Exchange Capacity is fundamental for soil fertility and it will be a soil fertility improver if the exchange of cations is due to saturation of basic elements (Ca+, Mg+, K+ and NH4+). Finer soils have bigger specific surface and more exposed charges and consequently higher cations exchange capacity.
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The remaining 60% of the rock is coarser grained and more amenable to mineral dressing work (Figure 9) and at this point it would appear that it may be appropriate to take off an apatite (P2O5) flotation concentrate.
This has been done before (MBAC Fertilizer Corp), from the Mata da Corda volcanics, taking material grading 13% P2O5 and making a concentrate of plus 30% P2O5. The flotation process used a simple mixture of cornstarch, soy oil and silicate as depressants. Following this, simple gravity separation techniques can be used to concentrate and separate the heavy mineral component. This would contain the heavy iron, titanium, vanadium and Rare Earth Element (REE-including Ce-La• Nd) minerals etc (Figure 9). The heavies' concentrate would be set aside for additional beneficiation work. The tailings or residual material after the apatite flotation and the heavy mineral separation would be dominantly clay minerals with some carbonates and silicates and could be recombined with the slimes. It may also be possible to further upgrade the potassium content of the heavies concentrate tailings before recombining with the slimes by flotation of some of the minerals that are potassium rich.
At the end of this work there would be the following 3 products:
An apatite concentrate; P205-rich fertilizer component Slimes and gravity tailings, " K+ fertilizer component", clay rich with adsorbed potassium (K2O), plus other micro nutrients and including some residual phosphates. Heavy mineral concentrate with iron, titanium, vanadium and rare earth minerals.
A preliminary flotation test on the fresh Kamafugite (KMF) produced an initial rougher flotation concentrate averaging 38% CaO plus 4.8% MgO. In addition, the K2O content was 3.1%. Following a scavenger flotation step the tailings were subjected to magnetic separation. The non-magnetic tailings from this operation ran 6.1% K2O and 8.4% CaO and 9.6% MgO.
Recent fieldwork on the project has identified a much more extensive Carbonate Breccia (CB) unit, a sample of which was sent to the Nomos Lab in Rio for analysis and met testing. The results were very positive:
Better grinding results with 60% plus greater that 38um and that will allow better heavy mineral recovery (separation) and an up grading of other components as follows: K2O @ 3.7%; CaO @ 11.4% and MgO @ 9.5% for a total CaO + MgO of>20%; Fe203 (magnetite)@ 14%; Ti02 @ 5.0%; and P2O5 @ 1.8%. By separating the heavy mineral component (ie about 20%) what is left would be represented by 4.5-5% K2O, 2.25% P2O5, 25% (CaO + MgO).
A second test completed at the Nomos Laboratorio on non-magnetic heavy mineral separate assayed 20-30% TiO2, 1 to 1.4% Vas Patronite (VS4), REE values of 1-1.4% Xenotime (YP04) and 1% Rubidium. The magnetic fraction assayed 50-60% Fe, 15-20% TiO2 and 0.4-0.6% V2O5.
5.6 Mineralisation Three bulk samples of 50 kg each have been collected: Kamafugite, Capacete and Carbonate Breccia. Each sample was collected to reflect, as best as possible, each lithological composition overonly use personal For an accessible depth section.
Capacete conglomerate is believed to be the most homogeneous lithology of the three sampled, with least element variation with depth.
The kamafugites are clearly enriched in P2O5 at surface which decreases with depth. Similarly with K2O but, occasionally, K2O is richer at depth than P2O5.
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Figure 17: Arapua Deposit Target Areas.
At Pindaibas, 20 surface geochemical samples were collected and analysed returning values of K2O to 7% and P2O5 to 23%. In the 1970s CPRM prospected this ground for potential TiO2 deposits. Ten diamond holes for 496 m and 23 auger holes for 383 m were completed as part of this program. CPRM defined 851 Mt of Kamafugite including 265 Mt of reserves and 586 Mt of resources (full details not available).
TiO2 results were not very encouraging (6% to 8% TiO2) however, P2O5 values varied from 1.55% to 5.5% and K2O values between 1.6% and 5%. These programs also discovered a P2O5 rich cap rock located in the northern part of the Pindaibas concession with assays up to 28% P2O5 and 7% K2O.
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Figure 18: Bedrock Geochemical sampling conducted at the Arapue Concessions.
On the Maxixe Concession, 550 m of drilling was completed by Mbac (two RC holes and four diamond holes) along with 600 geochemical assays. Values up to 7.8% K2O and 22% P2O5 are recorded. Additional bedrock geochemical sampling results for K2O and P2O5 are presented in Figure 20.
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Figure 19: Arapua Auger Niton XRF Phosphate Results.
5.7 Exploration Potential The Arapua drilling is considered sufficient by the Brazilian operators to make first resource approximations for the Kamafugite units. Considering the reconnaissance areas drilled are only at the Pindaibas and Maxixe concessions an Exploration Target mineralisation estimate of 170 to 180 Mt with 6.8 to 7.8% K2O and 21.0 to 22.0% P2O5 is reported with an extrapolation over all of the concessions in the order of 300-400 with 6.8 to 7.8% K2O and 21.0 to 22.0% P2O which they considered a conservative estimate.
The potential quantity and grade is conceptual in nature and there has been insufficient exploration to estimate mineral resources; it is uncertain if further exploration will result in the estimation of a mineral resource.
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6.0 Valuation of the Projects When valuing any mineral asset/project it is important to consider as many factors as possible that may either assist or impinge upon the current cash value estimates of the mineral asset under consideration. In this Report AM&A considers that the primary features to be taken into account are the Tenement Security; Available Infrastructure; Resource Estimates; Relevant Expenditure on development and the general Geological Setting.
Basically, these “Boxes are Ticked” as described above with regards to tenement security, remote scale infrastructure, previous exploration concepts and a favourable geological environment.
6.1 Selection of Valuation Methods The following valuation methods, as described above in section 2, are not considered applicable for the respective reasons provided:
The Discounted Cash Flow method cannot be used for the Project as the lack of mineral reserve estimates precludes a DCF; The Kilburn ‘prospectivity’ method - as the range of values generated is typically too wide to be realistic. Comparable transactions – with the recent general demise of the exploration industry, through lack of ‘high-risk funds’, this has curtailed much activity thus no similar recent relevant transactions could be located for similar projects in the region. Real estate value which is usually based on a value ascribed to varying areas of tenement holdings which may consequently become unrealistic due to the varying areas of projects.
Accordingly, a combination of the Empirical and MEE methods for the tenement package has been adapted as the overriding basis for the estimation of the value. The Empirical method was applied to the Exploration Target estimate ranges for the Sergio project and the MEE method used for both the Capela and Arapua projects with a PEM of 1.7 considered appropriate.
6.2 Valuation – Empirical and MEE Methods The data was collected from ASX announcements and Company sources and deemed applicable. The exploration potential has been estimated using the data provided. The current Exploration Target tonnage and grade range estimates were used for the Sergio Project valuation, with a discount of 99.99% applied to the theoretical insitu commodity values within the ranges; and the MEE method used for both the Capela and Arapua projects with a PEM of 1.7 considered appropriate purposes with all workings summarised in Appendix 1.
6.3 Valuation Conclusions
The summary results of the methods are presented in Table 9. As stated above the Empirical method was selected as the most appropriate for valuation estimate purposes.
A$M Method Low High Preferred Empirical 28.1 32.9 30.5
For personal use only use personal For Table 8: Summary Range of Current Values.
This Report concludes that the cash value of 100% of the Harvest Brazilian tenement portfolio at 24th November, 2015, is ascribed at $30.5M from within the range $28.1M to $32.9M.
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 37 Valuation of the Harvest Minerals Limited Brazilian Assets
Yours faithfully,
Allen J. Maynard Brian J. Varndell BAppSc(Geol), MAIG, MAusIMM. BSc(Spec Hons) FAusIMM.
Competent Persons Statement
The information in this report which relates to Exploration Targets, Exploration Results, Mineral Resources or Ore Reserves is based on information compiled by Mr Allen Maynard, who is a Member of the Australian Institute of Geosciences (“AIG”), a Corporate Member of the Australasian Institute of Mining & Metallurgy (“AusIMM”) and independent consultant to the Company. Mr Maynard is the Director and principal geologist of Al Maynard & Associates Pty Ltd and has over 35 years of exploration and mining experience in a variety of mineral deposit styles. Mr Maynard has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the “Australasian Code for reporting of Exploration Results, Exploration Targets, Mineral Resources and Ore Reserves”.(JORC Code). Mr Maynard consents to inclusion in the report of the matters based on this information in the form and context in which it appears.
Competent Persons Statement
The information in this report which relates to Exploration Targets, Exploration Results, Mineral Resources or Ore Reserves is based on information compiled by Mr Brian Varndell, who is a Fellow of the Australasian Institute of Mining and Metallurgy and independent consultant to the Company. Mr Varndell is an associate of Al Maynard & Associate Pty Ltd and has over 40 years of exploration and mining experience in a variety of mineral deposit styles including iron ore mineralisation. Mr Varndell has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the “Australasian Code for reporting of Exploration Results, Exploration Targets, Mineral Resources and Ore Reserves”.(JORC Code). Mr Varndell consents to inclusion in the report of the matters based on this information in the form and context in which it appears.
7.0 References
AusIMMonly use personal For - JORC Code, 2012. Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserve, prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australasian Institute of Geoscientists and Minerals Council of Australia (JORC), 2012 Edition.
AusIMM. (2005): "Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (the VALMIN Code)" 2005 Edition.
Harvest Minerals Limited Independent Technical Valuation Report – AM&A Page 38 Valuation of the Harvest Minerals Limited Brazilian Assets
ClM, (2003): - "Standards and Guidelines for Valuation of Mineral Properties. Final Version, February 2003". Special Committee of the Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties (CIMVAL).
Coffey July 2015: Sergio Potash Project - JORC (2012) Compliant Mineral Resource Estimate and Reasonable Prospects for Extraction.
Ercosplan Ingenieurgesellschaft Geotechnik und Bergbau mbH, April 2011:RIO VERDE’s Mineral Properties in the Sergiope Basin, Brazil. lane Pitrowsky da Rocha- 2015: Legal Opinion on Harvest's Brazilian subsidiaries. Independent Report on Harvest Mineral’s Brazilian Tenements.
Oxford Dictionary of Current English; for any terms not covered in the Glossary: Oxford University Press.
Rudenno, V. 2009: "The Mining Valuation Handbook" 3rd Edition.
8.0 Glossary of Technical Terms and Abbreviations
Anomaly Value higher or lower than the expected or norm. Base metal Generally a metal inferior in value to the precious metals, eg. copper, lead, zinc, nickel. Complex An assemblage of rocks or minerals intricately mixed or folded together. Diamond drill Rotary drilling using diamond impregnated bits, to produce a solid continuous core sample of the rock. Dip The angle at which a rock layer, fault of any other planar structure is inclined from the horizontal. Fault A fracture in rocks on which there has been movement on one of the sides relative to the other, parallel to the fracture. Felsic Descriptive of an igneous rock which is predominantly of light coloured minerals (antonym: of mafic). Intercept The length of rock or mineralisation traversed by a drillhole. JORC Joint Ore Reserves Committee- Australasian Code for Reporting of Identified Resources and Ore Reserves. Mineralisation In economic geology, the introduction of valuable elements into a rock body. Ore A mixture of minerals, host rock and waste material which is expected to be mineable at a profit. Outcrop The surface expression of a rock layer (verb: to crop out). Primary Mineralisation which has not been affected by near surface mineralisation oxidising process. Proterozoiconly use personal For The geological age after Archaean, approximately 570 to 2400 million years ago. Quartz A very common mineral composed of silicon dioxide-SiO2. RAB Rotary Air Blast (as related to drilling)—A drilling technique in which the sample is returned to the surface outside the rod string by compressed air. RC Reverse Circulation (as relating to drilling)—A drilling technique in which the cuttings are recovered through the drill rods thus minimising sample losses and contamination.
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Reconnaissance A general examination or survey of a region with reference to its main features, usually as a preliminary to a more detailed survey. Remote Sensing Geophysical data obtained by satellites processed and presented Imagery as photographic images in real or false colour combinations. Reserve In-situ mineral occurrence which has had mining parameters applied to it, from which valuable or useful minerals may be recovered. Resource In-situ mineral occurrence from which valuable or useful minerals may be recovered, but from which only a broad knowledge of the geological character of the deposit is based on relatively few samples or measurements. Shear (zone) A zone in which shearing has occurred on a large scale so that the rock is crushed and brecciated. Stratigraphy The succession of superimposition of rock strata. Composition, sequence and correlation of stratified rock in the earth’s crust. Strike The direction or bearing of the outcrop of an inclined bed or structure on a level surface. Syncline A fold where the rock strata dip inwards towards the axis (antonym: anticline). Taquidrite A form of salt (2MgCl2.12H2O), Vein A narrow intrusive mineral body. Volcanic Describes clastic fragments of volcanic origin.
Abbreviations g gram m3 cubic metre kg kilogram mm millimetre km kilometre M million km2 square kilometre oz troy ounce m metre t tonne m2 square metre
For personal use only use personal For
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Appendix 1: Details of Valuation Estimates. Harvest Brazil Tenements Val Nov 2015 Potash – offshore - Brazil
Conventional plants achieve +80% recovery to produce a concentrate at +34% KCl - to be conservative a plant recovery range of 60-70% is Assumptions. Payability to Area approx 50-100% Thick Evap +100m with /10-15m cumulative extractable Sylvinite/Carnallite as stated in report. Primary grades are cf 5- 25% used.
Extraction ratio factor 50% Product $/t 422 Room and Pillar extraction 46% Equivalent K2O = 0.63177 * KCl (%). Segrio uses Resources (MEE A$181,076) Capela uses MEE based on A$939,000 Arapua uses MEE based on A$385,413 Price Discount Value Discount by Sergio Inferred Resource Thickness SG Mt Extract % Grade % Recovery % Saleable Potash Mt $/t Value $M % 99.99% $M Area km2 Payabilty 1.84 46 25 60 65 70 422 Min Pref High 0.01 Min Pref High 62.0 0.46 0.25 0.6 0.65 0.7 4.3 4.6 5.0 422 1805 1956 2106 0.01 18.05 19.56 21.06 43.3 0.46 0.159 0.6 0.65 0.7 1.9 2.1 2.2 422 802 869 936 0.01 8.02 8.69 9.36 KCl price is US$300/71.1 A$422/tonne 26.07 28.24 30.42 421.94 Potash refers to potassium compounds and potassium-bearing materials, the most common being potassium chloride (KCl).
Other main potash products include potassium sulphate (K2SO4) and potassium nitrate (KNO3.) Capela A$ PEM Val A$ M MEE 939,000 1.7 1.60 1.44 1.60 1.76
Arupua A$ PEM Val A$ M MEE 385,413 1.7 0.66 0.59 0.66 0.72 TOTALS 28.10 30.50 32.89
For personal use only use personal For
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