Watermark Global : Binding HOA to form joint venture to develop the Mpokoto gold project and Directorate Change (28/09/2016)

Armadale Capital Plc / Index: AIM / Epic: ACP / Sector: Investment Company

28 September 2016

Armadale, the AIM quoted investment company focused on natural resource projects, announces it has entered into a binding Heads of Agreement ('HOA') with African Mining Services Pty Ltd ('AMS') to form a joint venture to develop and operate the Mpokoto gold project ('Mpokoto') in Katanga Province, Democratic Republic of Congo ('DRC'). Mpokoto has an established resource of 678,000oz of gold ('Au') from 14.58m tonnes of ore at 1.45 g/t Au to produce circa 25,000oz annually over a nine-year mine life.

Currently, Armadale's subsidiary Kisenge Limited ('Kisenge') is the parent of the DRC entities that own Mpokoto and will be the joint venture vehicle for this transaction. Under the HOA, which will be progressed to a more detailed joint venture agreement between the parties on completion of the due diligence process, AMS could earn an initial 25% interest in Kisenge, through providing funding and services to Mpokoto in two 'earn-in' phases. Provided AMS completes its 'earn-in' obligations, the effect of the HOA and subsequent joint venture is that Mpokoto will be fully funded to commercial gold production, which is targeted for late 2017.

AMS is run by an experienced mining group with a track record of successfully developing mining projects in Africa. Their geological team will conduct a detailed on site review in the coming weeks with a goal of fast tracking Mpokoto towards production. It should be noted that AMS is a completely different and unrelated entity to Africa Mining Contracting Services (A-MCS), which has hitherto been in funding negotiations with Armadale.

With a joint venture partner in place to manage activity at Mpokoto, Armadale is able to focus on the high grade Mahenge Liandu graphite project in Tanzania ('Mahenge Liandu') where drilling has recently commenced to support the development of an initial JORC compliant resource in the near future.

As part of this re-focused strategy, Peter Marks and Justin Lewis have decided to step down as directors of the Company with immediate effect. The Company anticipates adding to the Board in the near future.

William Frewen, Chairman of Armadale, said:

"This is a significant agreement for the future of Mpokoto, bringing on board a very experienced mining partner with knowledge of the DRC and, crucially, access to funding. With an established resource, a nine- year mine life at 25,000oz per annum, and favourable economics, we have proven Mpokoto's commercial

viability. AMS has the requisite skill set and experience to advance Mpokoto into production and ultimately realise the value of the project. Consequently, the Board is delighted to announce this agreement with AMS, which will see us retain an important interest in the project without the burden of funding development costs. This means we can concentrate on developing the Mahenge Liandu graphite project in Tanzania where drilling has already commenced. We are very excited by both these developments and look forward to updating shareholders further in due course.

"As part of the changing emphasis of Armadale, both Peter and Justin have decided to resign from the Board to which they have both given such committed service. I wish them both well in their future endeavours."

• An exclusive due diligence period of up to 90-days, during which AMS will have management input and be generally responsible for all project-related expenses.

• An initial 'earn-in' phase ('Phase 1') pursuant to which AMS can earn a 25% interest in Kisenge, by providing funding and project-related services to the value of US$1.25m.

• A second 'earn-in' phase ('Phase 2') to apply, if AMS wishes to proceed, and Armadale does not source third-party funding for Mpokoto, pursuant to which AMS could earn a further 60% interest in Kisenge (total aggregate interest 85%) by funding the project through to commercial production. The definitive feasibility study (DFS) estimated this cost at US$25m toinclude all associated expenditure and managing the conduct of activities to reach the production stage.

• Phase 1 will focus on optimising the DFS, with a focus on reducing capital costs, accelerating

  the timeline to production and expanding the existing JORC resource.

• Phase 2 will focus on the construction and bringing Mpokoto into commercial production.

  As a consequence of forming this joint venture, Armadale will have no further operational or funding responsibilities in relation to Mpokoto, other than retaining at least a 15% interest in Kisenge.

  Terms of the HOA:

  The key terms of the HOA, relating to forming a joint venture to develop and operate the Mpokoto project, are set out in further detail below:

• Upon signing the HOA:

  • AMS will be granted an exclusive 90-day period within which to undertake due diligence in relation to Mpokoto, Kisenge and the local DRC entities which own and manage the project.

  • During the due diligence period, AMS will have input into the management of the project and be responsible for meeting all project-related costs and expenses (including, without limitation, in relation to any applicable rents, rates and minimum expenditure amounts) which arise for payment within that period.

• Should AMS elect to proceed with the creation of the joint venture following its due diligence investigations, Phase 1 will commence, in respect of which:

  • AMS will have the right to earn a 25% interest in Kisenge, in consideration of providing cash and project-related services to the value of US$1.25m.

  • AMS may withdraw from the proposed joint venture prior to the completion of Phase 1, in which case it must give Armadale two-months notice, ensure the minimum expenditure conditions applicable to the project have been met (and the project tenements are in good standing) as at the date of withdrawal and pay to Armadale an amount which equates to the minimum expenditure required to be spent on the project over the three-months following that date of withdrawal.

• Upon completion of Phase 1, AMS must elect within 30 days whether to proceed with Phase 2. Under Phase 2, AMS may earn a further 60% interest in Kisenge by assuming responsibility for all relevant expenditure required to bring the Mpokoto into commercial production. If AMS makes an election to proceed with Phase 2, then:

  • Armadale has a period of 21 days within which to notify AMS that it is able at that time to introduce a third party which is willing and capable to provide funding required to support the Mpokoto project through to the commencement of commercial production. If Armadale does so, the parties' interests in the joint venture will remain; Armadale 75% and AMS 25%, and they will each thereafter be responsible for meeting any shortfall in project funding in proportion to their interests in Kisenge, or be diluted on a straight-line basis.

  • Otherwise, Phase 2 commences and AMS will be responsible for managing and implementing the work required to achieve commercial production (and, following delivery to Armadale of reasonable evidence of the commencement of commercial production at Mpokoto, will be entitled to a further 60% interest in Kisenge for a total aggregate interest of 85%).

    AMS may withdraw from the joint venture prior to the completion of Phase 2, in which case it must give Armadale two months notice and will be entitled to retain the 25% interest in Kisenge previously earned. Thereafter, AMS must meet its percentage interest share of project expenses or be subject to straight-line dilution (and should it dilute to less than 10%, AMS must transfer its interest in Kisenge to Armadale in exchange for a 2% net smelter return in relation to gold production, which is subject to an overall cap of US$5,000,000).

• Upon completion of Phase 2 of the joint venture, Armadale will have no further operational or funding responsibilities (post-commencement of commercial production) and will maintain its 15% interest in Kisenge.

• Should Armadale thereafter wish to dispose of its 15% interest in Kisenge, AMS will have a first right to acquire it for an agreed price or, failing agreement, at market value as determined by an independent valuer.

  Proposed Development Programme: Phase 1

• Initial work is expected to include infill drilling on the current resource;

• Additional metallurgical test work;

• Definition of a reserve statement;

• Refining the current mine plan and DFS to allow financing of the project into production; and

• Initial capital works.

  Phase 2

• Project funding;

• Capital works;

• Infrastructure; and

• Production.

The entering into of the Heads of Agreement by AMS is considered a related party transaction under the AIM Rules for Companies on the basis that Kabunga Holdings Pty Ltd, a substantial shareholder in the Company, is the ultimate controlling shareholder of AMS.

The independent directors (being William Frewen, Justin Lewis and Peter Marks) consider, having consulted with finnCap Ltd, that the terms of the Heads of Agreement are fair and reasonable insofar as independent shareholders of the Company are concerned.

Mpokoto has a current total mineral resource of 678,000oz Au from 14.58m tonnes @ 1.45g/t Au at a cut-off grade of 0.5g/t to produce approximately 25,000oz per annum over a nine-year mine life. The results of an expanded scoping study demonstrated a post-tax net present value of US$55.3 million based upon a discount rate of 8% and a gold price of US$1,250/oz.

Results from a DFS, announced February 2016, set out various parameters for Mpokoto, identifying phased processing routes for the project to support low capex development (Phase one concentrates on the shallower oxide portion of the resource which will be prioritised for exploitation in advance of the deeper unweathered sulphide ore designated for Phase two). The technical financial model shows solid economic fundamentals coming from annual mine throughput of 720,000 tonnes of ore over a four and half year mine life from which an average 24,900 oz gold per annum could be produced. At a gold price of US$1,250 per oz, the revenue is US$138.6 million from Phase one alone. Capital costs are estimated to be of the order of US$25 million, with cash operating costs of US$792 per oz.

The Mpokoto project comprises four mining licences, which are valid for an initial term of 30 years from 30 September 2014. Significant further upside is anticipated with an exploration target of 2.4- 3.0m tonnes grading 1.25-1.5 g/t Au which the Board estimate should yield an additional 120,000- 150,000 oz Au to the project. Furthermore, the project is part of a substantial 800,000 hectares of exploration licences yet to be explored.

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